PART
I
Forward-Looking
Statements
This
Annual Report contains forward-looking statements as that term is defined in the federal securities laws. The events described
in forward-looking statements contained in this Annual Report may not occur. Generally, these statements relate to business plans
or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits
from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating
results. The words “may,” “will,” “expect,” “believe,” “anticipate,”
“project,” “plan,” “forecast,” “model,” “proposal,” “should,”
“may,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions
are intended to identify forward-looking statements. 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 that
may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may affect
our results include, but are not limited to, the risks and uncertainties discussed in Item 7 of this Annual Report under “Management’s
Discussion and Analysis of Financial Condition and Result of Operations”.
Any
one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking
statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially
from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether from new information, future events or otherwise.
This
Annual Report also contains estimates and other statistical data made by independent parties and by us relating to market size
and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned
not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and
the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.
Below
is a summary of material factors that make an investment in our securities speculative or risky. Importantly, this summary does
not address all of the risks and uncertainties that we face. Additional discussion of the risks and uncertainties summarized in
this risk factor summary, as well as other risks and uncertainties that we face, can be found under ‘Risk Factors’
in Part I, Item 1A of this Annual Report on Form 10-K. The below summary is qualified in its entirety by that more complete discussion
of such risks and uncertainties. You should consider carefully the risks and uncertainties described under ‘Risk Factors’
in Part I, Item 1A of this Annual Report on Form 10-K as part of your evaluation of an investment in our securities.
Risks
Related to Our Business and Industry
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The
novel coronavirus (COVID-19) outbreak has disrupted and is expected to continue to disrupt
our business, which has and could continue to materially affect our operations, financial
condition and results of operations for an extended period of time.
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We
have a history of operating losses and our auditors have indicated that there is a substantial
doubt about our ability to continue as a going concern.
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We
will need additional capital to fund our operations, which, if obtained, could result
in substantial dilution or significant debt service obligations. We may not be able to
obtain additional capital on commercially reasonable terms, which could adversely affect
our liquidity and financial position.
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We
face intense competition in our markets, which could negatively impact our business.
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Our
ability to continue to expand our digital business and delivery orders is uncertain,
and these new business lines are subject to risks.
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We
are vulnerable to changes in consumer preferences and economic conditions that could
harm our business, financial condition, results of operations and cash flow.
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Our
growth strategy depends in part on opening new restaurants in existing and new markets,
including non-traditional locations such as universities, office buildings, ghost kitchens,
military bases, airports or casinos and expanding our franchise system. We may be unsuccessful
in opening new company-operated or franchised restaurants or establishing new markets,
which could adversely affect our growth.
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New
restaurants, once opened, may not be profitable or may close.
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Opening
new restaurants in existing markets may negatively impact sales at our and our franchisees’
existing restaurants.
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Our
sales growth and ability to achieve profitability could be adversely affected if comparable
restaurant sales are less than we expect.
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Our
marketing programs may not be successful, and our new menu items, advertising campaigns
and restaurant designs or remodels may not generate increased sales or profits.
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We
rely on only one company to distribute substantially all of our food and supplies to
company-operated and franchised restaurants, and on a limited number of companies, and,
in some cases, a sole company, to supply certain products, supplies and ingredients to
our distributor. Failure to receive timely deliveries of food or other supplies could
result in a loss of revenues and materially and adversely impact our operations.
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Changes
in food and supply costs or failure to receive frequent deliveries of food ingredients
and other supplies could have an adverse effect on our business, financial condition
and results of operations.
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Our
revenue forecasts rely on an aggressive franchise unit sales strategy. In the event the
forecasted numbers are not achieved, we will have a material negative impact on future
revenues.
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The
financial performance of our franchisees can negatively impact our business.
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We
have limited control with respect to the operations of our franchisees, which could have
a negative impact on our business.
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Food
safety and quality concerns may negatively impact our business and profitability, our
internal operational controls and standards may not always be met and our employees may
not always act professionally, responsibly and in our and our customers’ best interests.
Any possible instances of food-borne illness could reduce our restaurant sales.
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Restaurant
companies have been the target of class action lawsuits and other proceedings alleging,
among other things, violations of federal and state workplace and employment laws. Proceedings
of this nature are costly, divert management attention and, if successful, could result
in our payment of substantial damages or settlement costs.
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We
are locked into long-term and non-cancelable leases and may be unable to renew leases
at the end of their terms.
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Pandemics
or disease outbreaks, such as the current novel coronavirus (COVID-19 virus) pandemic
may disrupt our business, which could materially affect our operations and results of
operations.
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Risks
Related to Ownership of Our Common Stock and Lack of Liquidity
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If
we are unable to implement and maintain effective internal control over financial reporting
in the future, investors may lose confidence in the accuracy and completeness of our
financial reports and the market price of our Common Stock may decline.
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As
an emerging growth company, our auditor is not required to attest to the effectiveness
of our internal controls.
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As
a smaller reporting company and will be exempt from certain disclosure requirements,
which could make our Common Stock less attractive to the potential investors.
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Our
Business Overview
Muscle
Maker 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, we feature freshly prepared
entrée salads and an appealing selection of sides, protein shakes and fruit smoothies. We operate in the fast casual restaurant
segment.
We
believe our healthy-inspired restaurant concept delivers a highly differentiated customer experience. We combine the quality and
hospitality that customers commonly associate with our full service and fast casual restaurant competitors with the convenience
and value customers generally expect from traditional fast food restaurants, but in a healthy-inspired way. The following core
values form the foundation of our brand:
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Quality.
Commitment to provide high quality, healthy-inspired food for a perceived wonderful experience for our guests.
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Empowerment
and Respect. We seek to empower our employees to take initiative and give their best while respecting themselves and others
to maintain an environment for team work and growth.
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Service.
Provide world class service to achieve excellence each passing day.
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Value.
Our combination of high-quality, healthy-inspired food, empowerment of our employees, world class service, all delivered at
an affordable price, strengthens the value proposition for our customers.
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In
striving for these goals, we aspire to connect with our target market and create a great brand with a strong and loyal customer
base.
As
of December 31, 2020, Muscle Maker and our subsidiaries and franchisees operated thirty-two Muscle Maker Grill restaurants located
in 15 states and Kuwait, sixteen of which are owned and operated by Muscle Maker, and sixteen are franchise restaurants. Our company
owned and operated restaurants generated company restaurant revenue of $3,672,944 and $3,466,553 for the years ended
December 31, 2020 and 2019, respectively. For the years ended December 31, 2020 and 2019, our total revenues which includes company
restaurant sales, royalty, franchise fee, rebate revenue derived from franchisees and other revenues were $4,473,447 and $4,959,005,
respectively. As of December 31, 2020, we had an aggregate accumulated deficit of $63,193,707. We anticipate that we will
continue to report losses and negative cash flow. As a result of the net loss and cash flow deficit for the year ended December
31, 2020 and other factors, our independent registered public accountants issued an audit opinion with respect to our financial
statements for the year ended December 31, 2020 that indicated that there is a substantial doubt about our ability to continue
as a going concern.
We
are the owner of the trade name and service mark Muscle Maker Grill®, Healthy Joe’s, MMG Burger Bar, Meal Plan AF 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, Muscle Maker Development and Muscle Maker Corp., and to further sublicense them to our franchisees for use in connection
with Muscle Maker Grill® and Healthy Joe’s restaurants.
Seasonal
factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically
lower in the fourth quarter due to reduced November and December traffic and higher traffic in the first, second, and third quarters.
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 were implemented across much of the United States and continue in limited fashion across the
country.
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 year
ended December 31, 2020.
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 campus. As of the date of the
filing of this report the Company re-opened five of the seven temporarily closed locations and permanently closed two underperforming
locations. 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. The Company has not attempted to collect the deferred royalties as of
the date of the filing of this report as we provide time for the franchise locations to fully recover to pre-pandemic conditions.
The executive team deferred a portion of their salaries in 2020 and some members continue to defer salary as of the 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 seven of the franchise locations
have permanently closed.
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.
Our
Industry
We
operate within the Limited-Service Restaurant, or LSR, segment, of the United States restaurant industry, which includes quick
service restaurants, or QSR, and fast-casual restaurants. We offer fast-casual quality food combined with quick-service speed,
convenience and value across multiple dayparts. We believe our differentiated, high-quality healthy-inspired menu delivers great
value all day, every day and positions us to compete against both QSR and fast-casual concepts.
We
expect that the upward trend towards healthier eating will attract and increase consumer demand for fresh and hand-prepared dishes,
which may lead to a positive impact on our sales.
Our
Strategy
While
our 2020 business plan and the restaurant industry in general was interrupted and modified due to Covid-19, we re-positioned the
Company to better support an anticipated change in the restaurant industry. Our revised strategy continues to focus on serving
“healthier for you” meals in non-traditional locations and methods while emphasizing a shift into delivery, ghost
kitchens, direct to consumer meal prep and strategic acquisitions. We believe the restaurant industry has experienced a change
in the way consumers interact with brands. We believe consumers have become more dependent on new technologies, unique locations
and new methodologies to access restaurants. We believe we have positioned the company in a unique way for future growth in a
post-covid environment where consumers rely on new methods to order and access restaurant meals such as third-party delivery services,
ghost kitchens and direct to consumer shipments of meal plans. In implementing our revised business plan, we plan to pursue
the following strategies.
Expand
Our System-Wide Restaurant Base. Our strategy focuses on non-traditional locations. We believe these locations offer somewhat
of a buffer against macro-economic forces. These locations tend to be destination locations, captured audiences or inside other
larger venues. Our current focus is on military bases, college campuses and ghost kitchens while also increasing our consumer
reach through direct to consumer meal plan delivery via UPS or customer pickup.
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Military
Bases: As of December 31, 2020, we had 6 open military locations. These locations are
mostly in food court settings on military bases. These tend to be captured audiences
but also support visitors, base personnel and military member families.
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College
Campuses: As of December 31, 2020, we have built 4 college campus locations with the
Northern Virginia Community College System. These locations were built in anticipation
of students attending classes post-covid and the intent is to re-open these locations
in the summer or fall semester of 2021. In addition to these four locations, we also
have one university location under agreement at the Texas Tech Medical Center in El Paso
Texas. This location is currently in the construction phase.
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Ghost
Kitchens: As of December 31, 2020, we had five free standing ghost kitchen locations
open in Chicago and Philadelphia. We currently have five additional locations
under agreement for New York City, Miami and Providence. The ghost kitchens run multiple
brands out of one location which include Muscle Maker Grill, Healthy Joes, Meal
Plan AF, Muscle Maker Burger Bar, Bowls Deep, Wrap It Up, Salad Vibes and other concepts.
Each location can support 6-8 different concepts all running out of one ghost kitchen.
This creates the appearance of 6-8 different restaurants to consumers for ordering various
entrees but leverages ingredients and infrastructure across all concepts to reduce the
number of ingredients needed for each concept.
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In
addition, in 2020, the Company purchased 2 existing franchise locations and is in the
process of launching additional ghost kitchens out of these locations in addition to
Muscle Maker Grill offerings.
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For
year ended 2020, we opened six new company-operated restaurants of which five locations
are delivery only ghost kitchen locations. In addition, we purchased two franchise locations
that are now company-operated.
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Improve
Comparable Restaurant Sales. We plan to improve comparable restaurant sales growth through the following strategies:
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Menu
Strategy and Evolution. We will continue to adapt our menu to create entrees that
complement our healthy-inspired offerings and that reinforce our differentiated fast
casual positioning. We believe we have opportunities for menu innovation as we look to
provide customers more choices through customization and limited time only alternative
proteins, recipes and other healthy-inspired ingredients. Our marketing and operations
teams collaborate to ensure that the items developed in our test stores can be executed
to our high standards in our restaurants with the speed and value that our customers
have come to expect. To provide added variety, from time to time we introduce limited
time offerings such as our grass-fed hamburger bar menu, smoothie of the month program,
keto your way menu, healthy tacos and other seasonal items. Some of these items have
been permanently added to the menu.
In
November 2019, we opened our first Healthy Joe’s concept. This was formerly a Muscle Maker Grill location located
in Tribeca New York that was converted into the Healthy Joe’s concept. Healthy Joe’s focuses on healthier
for your recipes and products featuring a different menu than a typical Muscle Maker Grill. The concept is designed to
attract a wider audience and features menu items such as wild caught salmon, fresh brewed iced teas, fresh lemonades,
locally baked breads, house made avocado smash, fruits, nuts and other new trending menu items. The menu features hot
topped bowls, salads and oven toasted sandwiches. All protein, cheese and sauces are run though a 500-degree oven to add
a unique approach to serving our products. Due to the temporary Covid related closure of this new concept in 2020, we
plan on relaunching the grand opening in 2021 as the Covid related restrictions are relaxed in New York City.
The
Company is in the process of expanding the menu offerings in most of our non-military company owned and operated locations
through ghost kitchen concepts within the existing Muscle Maker Grill locations. This allows company locations
to leverage existing facilities and labor to launch unique brands without the added infrastructure costs normally associated
with opening a new concept. For example, in our Chelsea Muscle Maker Grill location, we also run several ghost kitchen
concepts out of the same facility. These ghost kitchen concepts include Healthy Joe’s and Muscle Maker Burger
Bar.
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Attract
New Customers Through Expanded Brand Awareness: Our goal is to attract new customers as the Muscle Maker Grill brand becomes
more widely known due to new restaurant openings and marketing efforts focused on broadening the reach and appeal of our brand.
The goal of our marketing efforts is to have consumers become more familiar with Muscle Maker Grill as we continue to penetrate
our markets, which we believe will benefit our existing restaurant base. Our marketing strategy centers on our “Great
Food with Your Health in Mind” campaign, which highlights the desirability of healthy-inspired food and in-house made
or proprietary recipe quality of our food. We utilize various marketing techniques including email, text, social media, print,
influencers, press releases and local store marketing. We believe the restaurant industry has changed over the past year and
consumer preferences have shifted towards an emphasis on convenience, speed and mobility in a safe environment. This has led
to an increase in home delivery and direct to consumer meal prep/plan offerings. We believe Muscle Maker Grill has
the ability to adjust our business strategy to accommodate these consumer trends as we are not locked in to extensive four
wall location leases and are able to transform the business to meet consumer needs.
In
2020, the company expanded its delivery services through third-party delivery companies such as Uber Eats, GrubHub, DoorDash,
Seamless and others.
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Continue
to Grow Dayparts: We currently have multiple dayparts and segments where revenue
is generated in our restaurants. These dayparts and segments include: lunch, dinner,
catering, smoothies/protein shakes and meal prep/plans in all of our locations, and breakfast
in select locations. We expect to drive growth across our dayparts through enhanced menu
offerings, innovative merchandising and marketing campaigns. We plan to continue introducing
and marketing limited time offers to increase occasions across our dayparts as well as
to educate customers on our lunch and dinner offerings. Muscle Maker Grill has the unique
opportunity to grow in the pre-packaged, portion-controlled meal prep/plan category.
Currently, we offer pre-portioned and packaged meal prep/plans for consumers who want
to specifically plan their weekly meals for dietary or nutritional needs. These meal
plans can be delivered to a consumer’s home or picked up at each restaurant location.
Third party delivery services such as Uber Eats, Grub Hub, DoorDash, Seamless and others
offer an expansion beyond the four walls of our restaurants and represents a growing
segment of our overall revenue.
On
November 11, 2020, the Company announced an agreement with Happy Meal Prep to launch an online meal plan/prep direct to
consumer mail delivery service. This agreement allows Muscle Maker Grill to mail pre-made, ready to eat meals direct
to consumers within a 250-mile radius around specific locations. Consumers can currently select from over 40 meal prep
options. The company plans to expand the network of locations offering direct to consumer meal plan shipping throughout
2020 while also emphasizing meal prep in a more significant manner in 2020. The company operates this program under the
musclemakerprep.com website.
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Our
Strengths
Iconic
and Unique Concept: We provide guests healthy-inspired versions of mainstream-favorite dishes that are intended to taste great,
in our effort to make it convenient, affordable and enjoyable to eat healthier. Our diverse menu was created for everyone –
fitness enthusiasts, those starting their journey to a healthier lifestyle, and people trying to eat better while on-the-go.
We
are focused on expanding our presence within new and existing markets by continuing to add franchise partners to our system and
increasing the number of corporate-owned locations. Our corporate-owned restaurants will focus on an expansion in non-traditional
locations such as military bases, universities and ghost kitchens while also offering direct to consumer pre-made meal prep/plan
offerings to consumers within a 250 mile radius around certain locations. We believe our concept is a unique fit with the
military’s “Operation Live Well” campaign and a focus on healthier eating habits.
We
believe ghost kitchens offer a unique way to expand the brand into new and existing markets with lower capital costs yet provide
the ability to make rapid changes to fit consumer needs. We believe consumers are looking for alternate ways to interact with
restaurants and receive meals. Using non-traditional locations, third party delivery, ghost kitchens and direct to consumer meal
plans offers consumers multiple choices on how to access Muscle Maker Grill concepts.
Innovative,
Healthier Menu: Providing “Great Food with Your Health in Mind,” Muscle Maker Grill’s menu features
items with grass-fed steak, all-natural chicken, lean turkey and plant-based products as well as options that satisfy all dietary
preferences – from the carb-free consumer to guests following gluten-free or vegetarian diets. Muscle Maker Grill does not
sacrifice taste to serve healthy-inspired options. We boast superfoods such as avocado, kale, quinoa, broccoli, romaine and spinach,
and use only healthy-inspired carbohydrate options such as cauliflower or brown rice and whole wheat pasta. We develop and source
proprietary sauces and fat free or zero-carb dressings to enhance our unique flavor profiles. Our open style kitchen allows guests
to experience our preparation and cooking methods such as an open flame grill and sauté. In addition to our healthy-inspired
and diverse food platform, Muscle Maker Grill offers 100% real fruit smoothies, boosters and proprietary protein shakes as well
as retail supplements.
Muscle
Maker Grill prides itself on making healthy-inspired versions of the guest’s favorite food, giving them easy access to the
food they seek at our restaurants. This means catering to an array of healthier eating lifestyles. For over 20 years Muscle Maker
Grill has been providing food to gluten-free diners, low-carbohydrate consumers and vegetarians. We offer over 30 versions of
salads, wraps, bowls, sandwiches and flatbreads.
Cook
to Order Preparation: We work to provide our guests their meals prepared in less time than a typical fast casual restaurant.
While our service time may be slightly higher than the QSR fast casual segment, it fits well within the range of the fast-casual
segment.
Daypart
Mix and Revenue Streams: Standard operating hours for a Muscle Maker Grill are from 10:30 AM to 8:30 PM, Monday through Friday,
11:00 AM to 6:00 PM, Saturday and Sunday. However, many of our locations are closed on Sunday. Our daypart mix is typical to the
QSR fast casual segment which is 5% pre-lunch, 45% lunch, 35% dinner and 15% late evening. We have multiple revenue streams including:
dine-in, take-out, delivery, catering, meal plans and retail.
Attractive
Price Point and Perceived Value: Muscle Maker Grill offers meals with free ‘power sides’ beginning at $8.99 per
meal, using only high quality ingredients such as grass-fed beef, all-natural chicken, whole wheat pastas, brown rice and a power
blend of kale, romaine and spinach. Our cook to order method, speed of service, hospitality and the experience of our exhibition
style kitchen creates a great value perception for our customers. Meal Plan meals begin at $6.99 per meal, which we believe make
them not only convenient but affordable too.
Delivery:
A significant differentiator is that Muscle Maker Grill offers delivery at many locations nation-wide. Delivery is an option
through our online ordering platform making it easy and convenient for our guests. Delivery percentages range from 10% up to 75%
of sales in our corporate locations. We strongly believe the delivery segment will continue to grow as our core demographic has
demonstrated the need for online ordering and delivery versus dine-in and take-out. We and our franchise owners leverage employees
for local delivery but also uses third party services such as Uber Eats, GrubHub, DoorDash, Seamless and others to fulfill delivery
orders. Stand alone ghost kitchen locations are 100% delivery.
Catering:
Our diverse menu items are also offered through our catering program making it easy and affordable to feed a large group.
Our boxed lunch program, which includes a wrap, salad, or entrée, a side and a drink for a set price is available within
schools and other organizations.
Meal
Prep/Plans: To make healthy-inspired eating even easier, Muscle Maker Grill’s healthy-inspired nutritionally
focused menu items are available through our Meal Prep/Plan program, allowing pre-orders of meals via phone, online or in-store,
available for pick up or delivered right to their door. Available as five, 10, 15 or 20 meals, guests can choose from over 40
Muscle Maker Grill menu items for each meal. With the partnership with Happy Meal Prep, Muscle Maker Grill is now able to ship
meals direct to consumers within a 250-mile radius of participating locations.
Retail:
All Muscle Maker Grill locations participate in our retail merchandising and supplement program. This is a unique revenue
stream specific to the Muscle Maker Grill brand and is atypical in the QSR fast casual segment. Guests can purchase our propriety
protein in bulk, supplements, boosters, protein and meal replacement bars and cookies. This program gives our guests the opportunity
to manage their healthy lifestyle beyond meals they consume at our locations.
Our
Properties
Rent
Structure: Our restaurants are typically in-line or food court locations. A typical restaurant generally ranges from 1,200
to 2,500 square feet with seating for approximately 40 people. Our leases for company-operated locations generally have terms
of 10 years, with one or two renewal terms of five years. Restaurant leases provide for a specified annual rent, and some leases
call for additional or contingent rent based on revenue above specified levels. Generally, our leases are “net leases”
that require us to pay a pro rata share of taxes, insurance and maintenance costs. New leases for our non-traditional locations
usually have rent calculated as a percentage of net sales and have terms of 10 years. We do not guarantee performance or have
any liability regarding franchise location leases. Stand-alone ghost kitchen locations have short term leases usually
in 1 year duration with several renewal options.
System-Wide
Restaurant Counts: As of December 31, 2020, our restaurant system consisted of 32 restaurants comprised of sixteen company-operated
restaurants and sixteen franchised restaurants located in California, Georgia, Illinois, Maryland, New Jersey, New York, North
Carolina, Oklahoma, Pennsylvania, Texas, Virginia, Washington, Rhode Island and Kuwait. In addition, the Company built four
new location on university campuses but due to Covid-19 restrictions have not yet open these locations but incurred expenses during
the twelve months ended December 31, 2021
Site
Selection Process: We consider the location of a restaurant to be a critical variable in its long-term success, and as such,
we devote significant effort to the investigation and evaluation of potential restaurant locations. Our in-house management team
has extensive experience developing hundreds of locations for various brands. We use a combination of our in-house team and outside
real estate consultants to locate, evaluate and negotiate new sites using various criteria including demographic characteristics,
daytime population thresholds and traffic patterns, along with the potential visibility of, and accessibility to, the restaurant.
The process for selecting locations incorporates management’s and franchisee’s experience and expertise and includes
data collection and analysis. Additionally, we use information and intelligence gathered from managers and other restaurant personnel
that live in or near the neighborhoods we are considering.
A
typical Muscle Maker Grill may be free standing or located in malls, airports, gyms, strip shopping centers, health clubs, military
bases, non-traditional or highly concentrated business and residential demographic areas. Customers order their food at the counter
and food servers deliver the food to the appropriate table. Based on our experience and results, we are currently focused on developing
inline sites for franchising and non-traditional locations such as military bases for company-operated locations.
Stand-alone
ghost kitchen locations offer a unique opportunity to expand the brand into new markets with lower build-out costs than a typical
Muscle Maker Grill location. These locations are usually located away from high rent areas where a typical consumer traffic pattern
is present. These locations rely on a delivery radius and consumer orders are placed using third party delivery apps. As long
as the delivery radius covers densely populated areas for both business and residential areas, we consider the location to be
in an attractive location where we can reach consumers with delivery.
Direct
to consumer meal prep/plan locations can either be through existing Muscle Maker Grill locations or can be set up like a commissary
where meals are prepared in a kitchen space not open to consumer traffic. These locations can be in any area as long as pick up
service via UPS or Fedex is available. This allows the company to build out locations in favorable rent situations while being
able to mail meal prep/plans direct to consumers within a 250 mile radius.
Our
Restaurant Design
After
identifying a lease site, we commence our restaurant buildout. Our typical restaurant is an inline retail space or food court
that ranges in size from 1,200 to 2,500 square feet. Our restaurants are characterized by a unique exterior and interior design,
color schemes, and layout, including specially designed decor and furnishings. Restaurant interiors incorporate modern designs
and rich colors in an effort to provide a clean and inviting environment and fun, family-friendly atmosphere. Each restaurant
is designed in accordance with plans we develop; and constructed with a similar design motif and trade dress. Restaurants are
generally located near other business establishments that will attract customers who desire healthier food at fair prices served
in a casual, fun environment.
Our
new restaurants are typically inline or food court buildouts. We estimate that each inline or food court buildout of a restaurant
will require an average total cash investment of approximately $200,000 to $350,000 net of tenant allowances but these costs can
vary depending upon the location and requirements of specific municipalities or landlords. On average, it takes us approximately
four to six months from identification of the specific site to opening the restaurant. In order to maintain consistency of food
and customer service, as well as our colorful, bright and contemporary restaurant environment, we have set processes and timelines
to follow for all restaurant openings.
Our
restaurants are built-out in approximately 10 weeks and the development and construction of our new sites is the responsibility
of our Development Department. Real estate managers are responsible for locating and leasing potential restaurant sites. Construction
managers are then responsible for building the restaurants, and several staff members manage purchasing, budgeting, scheduling
and other related administrative functions. We leverage in-house personnel as well as consultants and independent contractors
in the real estate, design and construction process.
Stand-alone
ghost kitchens range in size from 200 to 300 square feet. These
locations are not open to the public and rely solely on third party delivery to access consumers. The total cash investment for
a stand-alone ghost kitchen ranges from $50,000 to $100,000 depending on what equipment is required. There is limited leasehold
improvements and the equipment is modular in general. This allows the company to reduce its risk in the event a particular location
isn’t working as we can simply move the equipment to a new location and not have leasehold improvements left behind. Ghost
kitchens have no consumer dining areas, no bathrooms, no furniture, etc which keeps the cost of buildout to a minimum.
Our
Restaurant Management and Operations
Service:
We are extremely focused on customer service. We aim to provide fast, friendly service on a solid foundation of dedicated,
driven team members and managers. Our cashiers are trained on the menu items we offer and provide customers thoughtful suggestions
to enhance the ordering process. Our team members and managers are responsible for our dining room environment, personally visiting
tables to ensure every customer’s satisfaction. In our non-food court locations, meals are brought to the customers table
using actual dishes and customers are free to leave their dishes when finished as team members clear and clean tables as guests
leave the restaurant.
Operations:
We intend to measure the execution of our system standards within each restaurant through an audit program for quality, service
and cleanliness. The goal is to conduct these audits quarterly and may be more or less frequent based upon restaurant performance.
Additionally, we have food safety and quality assurance programs designed to maintain the highest standards for food and food
preparation procedures used by both company-operated and franchised restaurants.
Managers
and Team Members: Each of our restaurants typically has a general manager, and shift leaders. At each location there are between
six and 10 total team members who prepare our food fresh daily and provide customer service.
We
are selective in our hiring processes, aiming to staff our restaurants with team members that are friendly, customer-focused,
and driven to provide high-quality products. Our team members are cross-trained in several disciplines to maximize depth of competency
and efficiency in critical restaurant functions.
Stand
alone ghost kitchen locations typically staff 1-2 employees at any time and are managed by personnel who also oversee multiple
locations.
Training:
The majority of our company-operated restaurant management staff is comprised of former team members who have advanced along
the Muscle Maker Grill career path. Skilled team members who display leadership qualities are encouraged to enter the team leader
training program. Successive steps along the management path add increasing levels of duties and responsibilities. Our Franchisee
training generally consists of 10 to 14 days in a certified training location, and an additional seven to 10 days post opening
training. Our operational team members provide consistent, ongoing training through follow up restaurant visits, inspections,
or email or phone correspondences.
Our
Franchise Program
Overview:
We use a franchising strategy to increase new restaurant growth in certain United States and international markets, leveraging
the ownership of entrepreneurs with specific local market expertise and requiring a relatively minimal capital commitment by us.
We believe the franchise revenue generated from our franchise base has historically served as an important source of stable and
recurring cash flows to us and, as such, we plan to expand our base of franchised restaurants. In existing markets, we encourage
growth from current franchisees. In our expansion markets, we seek highly qualified and experienced new franchisees for multi-unit
development opportunities. We seek franchisees of successful, non-competitive brands operating in our expansion markets. Through
strategic networking and participation in select franchise conferences, we aim to identify highly-qualified prospects. Additionally,
we market our franchise opportunities with the support of a franchising section on our website and printed brochures.
Franchise
Owner Support: We believe creating a foundation of initial and on-going support is important to future success for both our
franchisees and our brand.
We
have a mandatory training program that was designed to ensure that our franchise owners and their managers are equipped with the
knowledge and skills necessary to position themselves for success. The program consists of hands-on training in the operation
and management of the restaurant. Training is conducted by a general training manager who has been certified by us for training.
Instructional materials for the initial training program include our operations manual, crew training system, wall charts, job
aids, recipe books, product build cards, management training materials, food safety book, videos and other materials we may create
from time to time. Training must be successfully completed before a trainee can be assigned to a restaurant as a manager.
We
also provide numerous opportunities for communication and shared feedback between us and franchise owners. Currently, we communicate
on a frequent basis through email and system wide conference calls allowing for questions and answers with all franchisees. In
addition, our operations and marketing teams conduct phone calls and/or on-site visits on a frequent basis with franchisees on
current operational changes, new products, revenue generating ideas, cost savings, and local store marketing.
Franchise
Arrangements: At December 31, 2020, Muscle Maker Development franchises the operation of a total of 16 Muscle Maker Grill
restaurants.
The
franchise agreements currently:
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Have
terms for 15 years, with termination dates ranging from 2023 until 2034. These agreements are generally renewable for
terms ranging from 5 to 10 years.
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Provide
for the payment of initial franchise fees of $35,000.
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Require
the payment of on-going royalty payments of 5% of net sales at the franchise location. In addition, franchisees contribute
2% (total) of net sales to the marketing and brand development/advertising fund.
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During
2019 and continuing through 2020, we have undertaken an extensive review of the terms and conditions of our franchise relationships
and have recently finalized the terms of our revised standard franchise agreement and multi-unit development agreement which we
intend to govern the relationship between Muscle Maker Development and its new franchisees. Under this franchise agreement:
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Franchisees
are licensed the right to use the Muscle Maker Grill® trademarks, its confidential operating manual and other intellectual
property in connection with the operation of a Muscle Maker Grill restaurant at a location authorized by us.
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Franchisees
are protected from the establishment of another Muscle Maker Grill restaurant within a geographic territory, the scope of
which is the subject of negotiation between Muscle Make Development and the franchisee.
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The
initial term of a franchise is 15 years, which may be renewed for up to two additional terms of five years each.
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Franchisees
pay Muscle Maker Development an initial franchise fee of $35,000 in a lump sum at the time the Franchise Agreement is signed;
however, we may offer financing assistance under certain circumstances.
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Franchisees
pay Muscle Maker Development an on-going royalty in an amount equal to 5% of Net sales at the franchise location, payable
weekly.
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Franchisees
pay a weekly amount equal to 2% (total) of net sales at the franchise location into a cooperative advertising fund and brand
development/advertising fund. The cooperative advertising fee is used by franchisees for local store marketing efforts and
the brand development/advertising fund is for the benefit of all locations and is administered by Muscle Maker.
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We
have historically required our franchisees to pay a software license fee of $3,500. However as of July 2019, Muscle Maker
has discontinued this arrangement.
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Franchisees
are required to offer only those food products that are authorized by Muscle Maker Development, prepared using our proprietary
recipes; and may obtain most supplies only from suppliers that are approved or designated by Muscle Maker Development. Muscle
Maker receives rebates from various vendors or distributors based on total system wide purchases.
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As
partial consideration for payment of the initial franchise fee and on-going royalties, Muscle Maker Development loans its
franchisees a copy of its confidential operating manual, administers the advertising/brand development fund, and provides
franchisees with pre-opening and on-going assistance including site selection assistance, pre-opening training, and in-term
training
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Multi-Unit
Development Agreements: Franchisees who desire to develop more than one restaurant and who have the financial strength and
managerial capability to develop more than one restaurant may enter into a multi-unit development agreement. Under a multi-unit
development agreement, the franchisee agrees to open a specified number of restaurants, at least two, within a defined geographic
area in accordance with an agreed upon development schedule which could span several months or years. Each restaurant, in accordance
with the development schedule, requires the execution of a separate franchise agreement prior to site approval and construction,
which will be the then current franchise agreement, except that the initial franchise fee, royalty and advertising expenditures
will be those in effect at the time the multi-unit agreement is executed. Multi-unit development agreements require the payment
of a development fee equal to $35,000 for the first restaurant plus $17,500 multiplied by the number of additional restaurants
that must be opened under such development agreement. The entire development fee is payable at the time the multi-unit development
agreement is signed; however, the development fee actually paid for a particular restaurant is credited as a deposit against the
initial franchise fee that is payable when the franchise agreement for the particular franchise is signed.
Area
Representative Agreements: Pursuant to our area representative agreements, the area representatives will identify and refer
prospective franchisee candidates to us, provide franchisees with our site selection criteria and assist franchisees to complete
a site review package, and will advise franchisees concerning our standards and specifications and make on-site visits, but we
retain control of all decision-making authority relative to the franchisees, including franchisee approval, site location approval
and determination whether franchisees are in compliance with their franchise agreements.
Area
representative agreements are generally for a term of 15 years, in consideration for which we generally compensate area representatives
with 1% of net sales of the franchises that are under the area representative for the 15-year term.
Our
Marketing and Advertising
We
promote our restaurants and products through multiple advertising campaigns. The campaigns aim to deliver our message of fresh
and healthy-inspired product offerings. The campaign emphasizes our points of differentiation, from our fresh ingredients and
in-house preparation, to the preparation of our healthy inspired meals.
We
use multiple marketing channels, including social media such as Facebook, Instagram and Twitter, email, text marketing, local
store marketing, public relations/press releases and other methods to broadly drive brand awareness and purchases of our featured
products. We complement this periodically with direct mail.
Our
Purchasing and Distribution
Maintaining
a high degree of quality in our restaurants depends in part on our ability to acquire fresh ingredients and other necessary supplies
that meet our specifications from reliable suppliers. We contract with Sysco, a major foodservice distributor, for substantially
all of our food and supplies. Food and supplies are delivered to most of our restaurants one to two times per week. Our distributor
relationship with Sysco has been in place since 2007. Our franchisees are required to use our primary distributor, or an approved
regional distributor and franchisees must purchase food and supplies from approved suppliers. In our normal course of business,
we evaluate bids from multiple suppliers for various products. Fluctuations in supply and prices can significantly impact our
restaurant service and profit performance.
Our
Intellectual Property
We
have registered Muscle Maker Grill ®, Healthy Joe’s, Muscle Maker AF, MMG Burger Bar and certain other names used by
our restaurants as trademarks or service marks with the United States Patent and Trademark Office and Muscle Maker Grill ®
in approximately one foreign countries. Our brand campaign, Great Food with Your Health in Mind™, has also been approved
for registration with the United States Patent and Trademark Office. In addition, the Muscle Maker Grill and Healthy Joe’s
logo, website name and address and Facebook, Instagram and Twitter accounts are our intellectual property. Our policy is to pursue
and maintain registration of service marks and trademarks in those countries where business strategy requires us to do so and
to oppose vigorously any infringement or dilution of the service marks or trademarks in such countries. We maintain the recipe
for our healthy inspired recipes, as well as certain proprietary standards, specifications and operating procedures, as trade
secrets or confidential proprietary information.
Our
Competition
We
operate in the restaurant industry, which is highly competitive and fragmented. The number, size and strength of competitors vary
by region. Our competition includes a variety of locally owned restaurants and national and regional chains that offer dine-in,
carry-out and delivery services. Our competition in the broadest perspective includes restaurants, pizza parlors, convenience
food stores, delicatessens, supermarkets, third party delivery services and club stores. However, we indirectly compete with fast
casual restaurants, including Chipotle and Panera Bread, among others, and with healthy inspired fast casual restaurants, such
as the Protein Bar, Freshii and Veggie Grill, among others.
We
believe competition within the fast-casual restaurant segment is based primarily on ambience, price, taste, quality and the freshness
of the menu items. We also believe that QSR competition is based primarily on quality, taste, speed of service, value, brand recognition,
restaurant location and customer service. We believe the restaurant industry has changed due to the Covid-19 pandemic and an emphasis
on delivery, ghost kitchens, direct mail and other non-traditional locations and methods are becoming critical to the restaurant
industry and how consumers interact with brands. This changing environment will require flexibility and the ability to rapidly
make adjustments.
As
consumer preferences continue to evolve into healthier eating options, most restaurants are developing healthier menu options.
As more restaurants offer healthier options, the competition for our product offerings becomes more intense and could pose a significant
threat to future revenues. However, we believe our experience, size and flexibility allows Muscle Maker to adapt faster than many
other restaurant chains.
Our
Management Information Systems
All
of our company-operated and franchised restaurants use computerized point-of-sale and back office systems, which we believe are
scalable to support our long-term growth plans. The point-of-sale system provides a touch screen interface and a stand-alone high-speed
credit card and gift card processing terminal. The point-of-sale system is used to collect daily transaction data, which generates
information about daily sales and product mix that we actively analyze.
Our
in-restaurant back office computer system is designed to assist in the management of our restaurants. The system also provides
corporate headquarters and restaurant operations management quick access to detailed business data and reduces the time spent
by our restaurant managers on administrative needs. The system also provides sales, bank deposit and variance data to our accounting
department.
Ghost
kitchens and meal prep/plan sales are ordered using online software with reports generated through various software packages.
Our
Corporate Structure
Overview:
Muscle Maker, Inc. serves as a holding company of the following subsidiaries:
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Muscle
Maker Development, LLC, a directly wholly owned subsidiary, which was formed in Nevada on July 18, 2017 for the purpose of
running our existing franchise operations and continuing to franchise the Muscle Maker Grill name and business system to qualified
franchisees.
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Muscle
Maker Corp. LLC, a directly wholly owned subsidiary, which was formed in Nevada on July 18, 2017 for the purposes of developing
new corporate stores and to also operate these new and existing corporate restaurants.
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Muscle
Maker USA, Inc., a directly wholly owned subsidiary, which was formed in Texas on March 14, 2019 for the purpose of holding
specific assets related to a company financing arrangement.
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Muscle
Maker Development International. LLC, a directly wholly owned subsidiary, which was formed in Nevada on November 13, 2020
to franchise the Muscle Maker Grill name and business system to qualified franchisees internationally.
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ITEM
1A. RISK FACTORS
An
investment in the Company’s Common Stock involves a high degree of risk. You should carefully consider the risks described
below as well as other information provided to you in this Annual Report on Form 10-K, including information in the section of
this document entitled “Information Regarding Forward Looking Statements.” The risks and uncertainties described below
are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently believe are
immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition
or results of operations could be materially adversely affected, the value of our Common Stock could decline, and you may lose
all or part of your investment.
Risks
Related to Our Business and Industry
The
novel coronavirus (COVID-19) outbreak has disrupted and is expected to continue to disrupt our business, which has and could continue
to materially affect our operations, financial condition and results of operations for an extended period of time.
The
pandemic novel coronavirus (COVID-19) outbreak, federal, state and local government responses to COVID-19 and our Company’s
responses to the outbreak have all disrupted and will continue to disrupt our business. In the United States, individuals are
being encouraged to practice social distancing, restricted from gathering in groups and in some areas, have been placed
on complete restriction from non-essential movements outside of their homes. 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 four 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 campus. As of the date of the filing of this report the Company re-opened
three of the nine temporarily closed locations and permanently closed two underperforming locations. 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. The Company has not attempted to collect the deferred royalties as of the date of the filing of this report
as we provide time for the franchise locations to fully recover to pre-pandemic conditions. The executive team deferred a portion
of their salaries in 2020 and some members continue to defer salary as of the 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 seven of the franchise locations have permanently closed.
The COVID-19 outbreak and these responses have affected and will continue to adversely affect our guest traffic, sales and
operating costs and we cannot predict how long the outbreak will last or what other government responses may occur.
The
COVID-19 outbreak has also adversely affected our ability to open new restaurants. Due to the uncertainty in the economy and to
preserve liquidity, we have paused nearly all construction of new restaurants. These changes may materially adversely affect our
ability to grow our business, particularly if these construction pauses are in place for a significant amount of time.
If
the business interruptions caused by COVID-19 last longer than we expect, we will be required to seek other sources of liquidity.
The COVID-19 outbreak is adversely affecting the availability of liquidity generally in the credit and equity markets, and there
can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer
the COVID-19 outbreak lasts.
Our
restaurant operations could be further disrupted if large numbers of our employees are diagnosed with COVID-19. If a significant
percentage of our workforce is unable to work, whether because of illness, quarantine, limitations on travel or other government
restrictions in connection with COVID-19, our operations may be negatively impacted, potentially materially adversely affecting
our liquidity, financial condition or results of operations.
Our
suppliers could be adversely impacted by the COVID-19 outbreak. If our suppliers’ employees are unable to work, whether
because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, we could face
shortages of food items or other supplies at our restaurants and our operations and sales could be adversely impacted by such
supply interruptions.
Additional
government regulations or legislation as a result of COVID-19 in addition to decisions we have made and may make in the future
relating to the compensation of and benefit offerings for our restaurant team members could also have an adverse effect on our
business. We cannot predict the types of additional government regulations or legislation that may be passed relating to employee
compensation as a result of the COVID-19 outbreak. We have implemented paid sick leave, emergency pay policies and taken other
compensation and benefit actions to support our restaurant team members during the COVID-19 business interruption, but those actions
may not be sufficient to compensate our team members for the entire duration of any business interruption resulting from COVID-19.
Those team members might seek and find other employment during that interruption, which could materially adversely affect our
ability to properly staff and reopen our restaurants with experienced team members when the business interruptions caused by COVID-19
abate or end.
We
have a history of operating losses and our auditors have indicated that there is a substantial doubt about our ability to continue
as a going concern.
To
date, we have not been profitable and have incurred significant losses and cash flow deficits. For the years ended December 31,
2020 and 2019, we reported net losses of $10,099,105 and $28,385,044, respectively, and negative cash flow from operating
activities of $7,785,873 and $4,504,226, respectively. As of December 31, 2020, we had an accumulated deficit of $63,193,707.
We anticipate that we will continue to report losses and negative cash flow. As a result of these net losses and cash flow
deficits and other factors, our independent registered public accountants issued an audit opinion with respect to our financial
statements for the two years ended December 31, 2020 that indicated that there is a substantial doubt about our ability to continue
as a going concern.
Our
financial statements do not include any adjustments that might result from the outcome of this uncertainty. These adjustments
would likely include substantial impairment of the carrying amount of our assets and potential contingent liabilities that may
arise if we are unable to fulfill various operational commitments. In addition, the value of our securities would be greatly impaired.
Our ability to continue as a going concern is dependent upon generating sufficient cash flow from operations and obtaining additional
capital and financing. If our ability to generate cash flow from operations is delayed or reduced and we are unable to raise additional
funding from other sources, we may be unable to continue in business. For further discussion about our ability to continue as
a going concern and our plan for future liquidity, see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”
We
will need additional capital to fund our operations, which, if obtained, could result in substantial dilution or significant debt
service obligations. We may not be able to obtain additional capital on commercially reasonable terms, which could adversely affect
our liquidity and financial position.
At
December 31, 2020, Muscle Maker had a cash balance of approximately $4,195,932, a working capital deficit of approximately $1,383,568,
and an accumulated deficit of approximately $63,193,707. In order to satisfy the Company’s monthly expenses and
continue in operation through December 31, 2021, the Company closed on a public offering on February 12, 2020 and September 10,
2020, in which we raised aggregate net proceeds of $11,720,001. 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. Even if we are able to substantially increase revenues
and reduce operating expenses, we may need to raise additional capital. In order to continue operating, we may need to obtain
additional financing, either through borrowings, private placements, public offerings, or some type of business combination, such
as a merger, or buyout, and there can be no assurance that we will be successful in such pursuits. We may be unable to acquire
the additional funding necessary to continue operating. Accordingly, if we are unable to generate adequate cash from operations,
and if we are unable to find sources of funding, it may be necessary for us to sell one or more lines of business or all or a
portion of our assets, enter into a business combination, or reduce or eliminate operations. These possibilities, to the extent
available, may be on terms that result in significant dilution to our shareholders or that result in our shareholders losing all
of their investment in our Company.
If
we are able to raise additional capital, we do not know what the terms of any such capital raising would be. In addition, any
future sale of our equity securities would dilute the ownership and control of your shares and could be at prices substantially
below prices at which our shares currently trade. Our inability to raise capital could require us to significantly curtail or
terminate our operations. We may seek to increase our cash reserves through the sale of additional equity or debt securities.
The sale of convertible debt securities or additional equity securities could result in additional and potentially substantial
dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result
in operating and financing covenants that would restrict our operations and liquidity. In addition, our ability to obtain additional
capital on acceptable terms is subject to a variety of uncertainties. 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.
We
face intense competition in our markets, which could negatively impact our business.
The
restaurant industry is intensely competitive, and we compete with many well-established food service companies on the basis of
product choice, quality, affordability, service and location. We expect competition in each of our markets to continue to be intense
because consumer trends are favoring limited-service restaurants that offer healthy-inspired menu items made with better quality
products, and many limited service restaurants are responding to these trends. With few barriers to entry, our competitors include
a variety of independent local operators, in addition to well-capitalized regional, national and international restaurant chains
and franchises, and new competitors may emerge at any time. Furthermore, delivery aggregators and food delivery services provide
consumers with convenient access to a broad range of competing restaurant chains and food retailers, particularly in urbanized
areas. Each of our brands also competes for qualified franchisees, suitable restaurant locations and management and personnel.
Our ability to compete will depend on the success of our plans to improve existing products, to develop and roll-out new products,
to effectively respond to consumer preferences and to manage the complexity of restaurant operations as well as the impact of
our competitors’ actions. In addition, our long-term success will depend on our ability to strengthen our customers’
digital experience through expanded mobile ordering, delivery and social interaction. Some of our competitors have substantially
greater financial resources, higher revenues and greater economies of scale than we do. These advantages may allow them to implement
their operational strategies more quickly or effectively than we can or benefit from changes in technologies, which could harm
our competitive position. These competitive advantages may be exacerbated in a difficult economy, thereby permitting our competitors
to gain market share. There can be no assurance that we will be able to successfully respond to changing consumer preferences,
including with respect to new technologies and alternative methods of delivery. If we are unable to maintain our competitive position,
we could experience lower demand for products, downward pressure on prices, reduced margins, an inability to take advantage of
new business opportunities, a loss of market share, reduced franchisee profitability and an inability to attract qualified franchisees
in the future. Any of these competitive factors may materially adversely affect our business, financial condition or results of
operations.
Our
ability to continue to expand our digital business and delivery orders is uncertain, and these new business lines are subject
to risks.
Our
digital, delivery and catering/meal plan sales represent a significant portion of sales in many of our restaurants and expanding
in others. Consumer preferences and competitors are relying more and more heavily on digital and third-party delivery services,
especially in urban locations. We rely on third party providers to fulfill delivery orders, and the ordering and payment platforms
used by these third parties, or our mobile app or online ordering system, could be damaged or interrupted by technological failures,
user errors, cyber-attacks or other factors, which may adversely impact our sales through these channels and could negatively
impact our brand. Additionally, our delivery partners are responsible for order fulfillment and may make errors or fail to make
timely deliveries, leading to customer disappointment that may negatively impact our brand. We also incur additional costs associated
with using third party service providers to fulfil these digital orders. Moreover, the third-party restaurant delivery business
is intensely competitive, with a number of players competing for market share, online traffic, capital, and delivery drivers and
other people resources. The third-party delivery services with which we work may struggle to compete effectively, and if they
were to cease or curtail operations or fail to provide timely delivery services in a cost-effective manner, or if they give greater
priority on their platforms to our competitors, our delivery business may be negatively impacted. Digital and delivery offerings
also increase the risk of illnesses associated with our food because the food is transported and/or served by third parties in
conditions we cannot control.
Because
all of these offerings are relatively new, it is difficult for us to anticipate the level of sales they may generate. That may
result in operational challenges, both in fulfilling orders made through these channels and in operating our restaurants as we
balance fulfillment of these orders with service of our traditional in-restaurant guests as well. Any such operational challenges
may negatively impact the customer experience associated with our digital or delivery orders, the guest experience for our traditional
in-restaurant business, or both. These factors may adversely impact our sales and our brand reputation.
We
are vulnerable to changes in consumer preferences and economic conditions that could harm our business, financial condition, results
of operations and cash flow.
Food
service businesses depend on consumer discretionary spending and are often affected by changes in consumer tastes, national, regional
and local economic conditions and demographic trends. Factors such as traffic patterns, weather, fuel prices, local demographics,
troop deployments or base closures specific to our military locations and the type, number and locations of competing restaurants
may adversely affect the performances of individual locations. In addition, economic downturns, wage rates, health insurance costs,
third-party delivery services and fees, inflation or increased food or energy costs could harm the restaurant industry in general
and our locations in particular. Adverse changes in any of these factors could reduce consumer traffic or impose practical limits
on pricing that could harm our business, financial condition, results of operations and cash flow. There can be no assurance that
consumers will continue to regard healthy-inspired fast food favorably or that we will be able to develop new menu items that
appeal to consumer preferences. Our business, financial condition and results of operations depend in part on our ability to anticipate,
identify and respond to changing consumer preferences and economic conditions. In addition, the restaurant industry is currently
under heightened legal and legislative scrutiny related to menu labeling and resulting from the perception that the practices
of restaurant companies have contributed to nutritional, caloric intake, obesity or other health concerns of their guests. If
we are unable to adapt to changes in consumer preferences and trends, we may lose customers and our revenues may decline or our
costs to produce our products could significantly increase.
Our
growth strategy depends in part on opening new restaurants in existing and new markets, including non-traditional locations such
as universities, office buildings, ghost kitchens, military bases, airports or casinos and expanding our franchise system. We
may be unsuccessful in opening new company-operated or franchised restaurants or establishing new markets, which could adversely
affect our growth.
One
of the key means to achieving our growth strategy will be through opening new restaurants and operating those restaurants on a
profitable basis. Our ability to open new restaurants is dependent upon a number of factors, many of which are beyond our control,
including our and our franchisees’ ability to:
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identify
available and suitable restaurant sites;
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compete
for restaurant sites;
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reach
acceptable agreements regarding the lease or purchase of locations;
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obtain
or have available the financing required to acquire and operate a restaurant, including construction and opening costs, which
includes access to build-to-suit leases and equipment financing leases at favorable interest and capitalization rates;
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respond
to unforeseen engineering or environmental problems with leased premises;
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avoid
the impact of inclement weather, natural disasters, the continued impact of the COVID-19 pandemic and other calamities;
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hire,
train and retain the skilled management and other employees necessary to meet staffing needs;
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obtain,
in a timely manner and for an acceptable cost, required licenses, permits and regulatory approvals and respond effectively
to any changes in local, state or federal law and regulations that adversely affect our and our franchisees’ costs or
ability to open new restaurants; and
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control
construction and equipment cost increases for new restaurants.
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There
is no guarantee that a sufficient number of suitable restaurant sites will be available in desirable areas or on terms that are
acceptable to us in order to achieve our growth plan. If we are unable to open new restaurants or sign new franchisees, or if
existing franchisees do not open new restaurants, or if restaurant openings are significantly delayed, our revenues or earnings
growth could be adversely affected, and our business negatively affected.
As
part of our long-term growth strategy, we may enter into geographic markets in which we have little or no prior operating or franchising
experience through company-operated restaurant growth and through franchise development agreements. The challenges of entering
new markets include, but are not limited to: difficulties in hiring experienced personnel; unfamiliarity with local real estate
markets and demographics; food distribution networks; lack of marketing efficiencies; operational support efficiencies; consumer
unfamiliarity with our brand; and different competitive and economic conditions, consumer tastes and discretionary spending patterns
that are more difficult to predict or satisfy than in our existing markets. Consumer recognition of our brand has been important
in the success of company-operated and franchised restaurants in our existing markets. Restaurants we open in new markets may
take longer to reach expected sales and profit levels on a consistent basis and may have higher construction, occupancy and operating
costs than existing restaurants, thereby affecting our overall profitability. Any failure on our part to recognize or respond
to these challenges may adversely affect the success of any new restaurants. Expanding our franchise system could require the
implementation, expense and successful management of enhanced business support systems, management information systems and financial
controls as well as additional staffing, franchise support and capital expenditures and working capital.
Due
to brand recognition and logistical synergies, as part of our growth strategy, we also intend to open new restaurants in areas
where we have existing restaurants. The operating results and comparable restaurant sales for our restaurants could be adversely
affected due to close proximity with our other restaurants and market saturation.
New
restaurants, once opened, may not be profitable or may close.
Some
of our restaurants open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized
levels. In new markets, the length of time before average sales for new restaurants stabilize is less predictable and can be longer
as a result of our limited knowledge of these markets and consumers’ limited awareness of our brand. In addition, our average
restaurant revenues and comparable restaurant sales may not increase at the rates achieved over the past several years. Our ability
to operate new restaurants profitably and increase average restaurant revenues and comparable restaurant sales will depend on
many factors, some of which are beyond our control, including:
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consumer
awareness and understanding of our brand;
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Troop
deployments, reductions or closures of our military base locations;
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general
economic conditions, which can affect restaurant traffic, local labor costs and prices we pay for the food products and other
supplies we use;
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consumption
patterns and food preferences that may differ from region to region;
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changes
in consumer preferences and discretionary spending;
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difficulties
obtaining or maintaining adequate relationships with distributors or suppliers in new markets;
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increases
in prices for commodities, including proteins;
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inefficiency
in our labor costs as the staff gains experience;
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competition,
either from our competitors in the restaurant industry or our own restaurants;
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temporary
and permanent site characteristics of new restaurants;
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changes
in government regulation; and
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other
unanticipated increases in costs, any of which could give rise to delays or cost overruns.
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If
our new restaurants do not perform as planned or close, our business and future prospects could be harmed. In addition, an inability
to achieve our expected average restaurant revenues in both company owned and franchise locations, would have a material adverse
effect on our business, financial condition and results of operations.
Opening
new restaurants in existing markets may negatively impact sales at our and our franchisees’ existing restaurants.
The
consumer target area of our and our franchisees’ restaurants varies by location, depending on a number of factors, including
population density, other local retail and business attractions, area demographics and geography. As a result, the opening of
a new restaurant in or near markets in which we or our franchisees’ already have restaurants could adversely impact sales
at these existing restaurants. Existing restaurants could also make it more difficult to build our and our franchisees’
consumer base for a new restaurant in the same market. Our core business strategy does not entail opening new restaurants that
we believe will materially affect sales at our or our franchisees’ existing restaurants. However, we cannot guarantee there
will not be a significant impact in some cases, and we may selectively open new restaurants in and around areas of existing restaurants
that are operating at or near capacity to effectively serve our customers. Sales cannibalization between our restaurants may become
significant in the future as we continue to expand our operations and could affect our sales growth, which could, in turn, materially
and adversely affect our business, financial condition and results of operations.
Our
sales growth and ability to achieve profitability could be adversely affected if comparable restaurant sales are less than we
expect.
The
level of comparable restaurant sales, which reflect the change in year-over-year sales for restaurants in the fiscal month following
15 months of operation using a mid-month convention, will affect our sales growth and will continue to be a critical factor affecting
our ability to generate profits because the profit margin on comparable restaurant sales is generally higher than the profit margin
on new restaurant sales. While we have experienced negative comparable same store sales of 12% during 2019 and 57% during
2020, we have developed new sales and marketing efforts including new menu strategy/evolution, new marketing initiatives designed
to increase brand awareness, new operating platforms which improve speed of service and other tactics with the goal of providing
positive same store sales in future years. Our ability to increase comparable restaurant sales depends in part on our ability
to successfully implement these initiatives. It is possible such initiatives will not be successful, that we will not achieve
our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause
a decrease in sales growth and ability to achieve profitability that would have a material adverse effect on our business, financial
condition and results of operations.
Our
marketing programs may not be successful, and our new menu items, advertising campaigns and restaurant designs or remodels may
not generate increased sales or profits.
We
incur costs and expend other resources in our marketing efforts on new menu items, advertising campaigns and restaurant designs
and remodels to raise brand awareness and attract and retain customers. These initiatives may not be successful, resulting in
expenses incurred without the benefit of higher revenues. Additionally, some of our competitors have greater financial resources,
which enable them to spend significantly more on marketing and advertising and other initiatives than we are able to. Should our
competitors increase spending on marketing and advertising and other initiatives or our marketing funds decrease for any reason,
or should our advertising, promotions, new menu items and restaurant designs and remodels be less effective than our competitors,
there could be a material adverse effect on our results of operations and financial condition.
We
rely on only one company to distribute substantially all of our food and supplies to company-operated and franchised restaurants,
and on a limited number of companies, and, in some cases, a sole company, to supply certain products, supplies and ingredients
to our distributor. Failure to receive timely deliveries of food or other supplies could result in a loss of revenues and materially
and adversely impact our operations.
Our
company-operated restaurants and franchisees’ ability to maintain consistent quality menu items and prices significantly
depends upon our ability to acquire quality food products from reliable sources in accordance with our specifications on a timely
basis. Shortages or interruptions in the supply of food products caused by unanticipated demand, problems in production or distribution,
contamination of food products, an outbreak of protein-based diseases, inclement weather, fuel supplies, governmental actions
or other conditions could materially adversely affect the availability, quality and cost of ingredients, which would adversely
affect our business, financial condition, results of operations and cash flows. We have contracts with a limited number of suppliers,
and, in some cases, a sole supplier, for certain products, supplies and ingredients. If that distributor or any supplier fails
to perform as anticipated or seeks to terminate agreements with us, or if there is any disruption in any of our supply or distribution
relationships for any reason, our business, financial condition, results of operations and cash flows could be materially adversely
affected. If we or our franchisees temporarily close a restaurant or remove popular items from a restaurant’s menu due to
a supply shortage, that restaurant may experience a significant reduction in revenues during the time affected by the shortage
and thereafter if our customers change their dining habits as a result.
Changes
in food and supply costs or failure to receive frequent deliveries of food ingredients and other supplies could have an adverse
effect on our business, financial condition and results of operations.
Our
profitability depends in part on our ability to anticipate and react to changes in food and supply costs, and our ability to maintain
our menu depends in part on our ability to acquire ingredients that meet specifications from reliable suppliers. Shortages or
interruptions in the availability of certain supplies caused by unanticipated demand, problems in production or distribution,
food contamination, pandemic such as the COVID 19, inclement weather or other conditions could adversely affect the availability,
quality and cost of our ingredients, which could harm our operations. Any increase in the prices of the food products most critical
to our menu, such as chicken, seafood, beef, fresh produce, dairy products, packaging and other proteins, could have a material
adverse effect on our results of operations. Although we try to manage the impact that these fluctuations have on our operating
results, we remain susceptible to increases in food costs as a result of factors beyond our control, such as general economic
conditions, seasonal fluctuations, weather conditions, demand, food safety concerns, generalized infectious diseases, product
recalls, fuel prices and other government regulations. Therefore, material increases in the prices of the ingredients most critical
to our menu could adversely affect our operating results or cause us to consider changes to our product delivery strategy and
adjustments to our menu pricing.
If
any of our distributors or suppliers perform inadequately, or our distribution or supply relationships are disrupted for any reason,
there could be a material adverse effect on our business, financial condition, results of operations or cash flows. Although we
often enter into contracts for the purchase of food products and supplies, we do not have long-term contracts for the purchase
of all such food products and supplies. As a result, we may not be able to anticipate or react to changing food costs by adjusting
our purchasing practices or menu prices, which could cause our operating results to deteriorate. If we cannot replace or engage
distributors or suppliers who meet our specifications in a short period of time, that could increase our expenses and cause shortages
of food and other items at our restaurants, which could cause a restaurant to remove items from its menu. If that were to happen,
affected restaurants could experience significant reductions in sales during the shortage or thereafter, if customers change their
dining habits as a result. In addition, although we provide modestly priced food, we may choose not to, or may be unable to, pass
along commodity price increases to consumers, including price increases with respect to ground beef, chicken, produce, dairy,
packaging or other commodities. These potential changes in food and supply costs could have a material adverse effect on our business,
financial condition and results of operations.
Our
revenue forecasts rely on an aggressive franchise unit sales strategy. In the event the forecasted numbers are not achieved, we
will have a material negative impact on future revenues.
Our
revenue projections consist of both company operated and franchised locations. Our growth plans call for an aggressive approach
to franchise unit level sales and subsequent openings. In the event we cannot meet these forecasts due to the inability to sell
franchise locations in certain states, are prevented from selling franchises due to historical performance, government regulations,
licensing, state registrations, or other factors, we will have a material negative impact on future revenues. Our revenue model
and cash flows rely heavily on initial franchise fees, ongoing 5% royalties of total net sales and vendor rebates on total purchases
and services from franchised locations. A significant reduction in the total number of units sold and subsequently opened would
have a material adverse effect on future revenues.
Failure
to manage our growth effectively could harm our business and operating results.
Our
growth plan includes opening a significant number of new restaurants, both franchised and company-owned. Our existing restaurant
management systems, financial and management controls and information systems may be inadequate to support our planned expansion.
Managing our growth effectively will require us to continue to enhance these systems, procedures and controls and to hire, train
and retain managers and team members. We may not respond quickly enough to the changing demands that our expansion will impose
on our management, restaurant teams and existing infrastructure, which could harm our business, financial condition and results
of operations.
The
planned rapid increase in the number of our restaurants may make our future results unpredictable.
We
intend to continue to increase the number of our company-owned and franchised restaurants in the next several years. This growth
strategy and the substantial investment associated with the development of each new restaurant may cause our operating results
to fluctuate unpredictably or have an adverse effect on our profits. In addition, we may find that our restaurant concept has
limited appeal in new markets or we may experience a decline in the popularity of our restaurant concept in the markets in which
we operate. Newly opened restaurants or our future markets and restaurants may not be successful or our system-wide average restaurant
revenue may not increase, which could have a material adverse effect on our business, financial condition and results of operations.
The
financial performance of our franchisees can negatively impact our business.
As
approximately 47% of our restaurants are franchised as of December 31, 2020, our financial results are dependent in significant
part upon the operational and financial success of our franchisees. We receive royalties, franchise fees, vendor rebates, contributions
to our marketing development fund and local co-op advertising funds and other fees from our franchisees. We also collect rebates
from vendors supplying franchisees for food purchases, services and materials. We have established operational standards and guidelines
for our franchisees; however, we have limited control over how our franchisees’ businesses are run. While we are responsible
for the anticipated success of our entire system of restaurants and for taking a longer-term view with respect to system improvements,
our franchisees have individual business strategies and objectives, which might conflict with our interests. Our franchisees may
not be able to secure adequate financing to open or continue operating their Muscle Maker Grill restaurants. If they incur too
much debt or if economic or sales trends deteriorate such that they are unable to repay existing debt, our franchisees could experience
financial distress or even bankruptcy. If a significant number of franchisees become financially distressed, it could harm our
operating results through reduced royalty revenues and the impact on our profitability could be greater than the percentage decrease
in the royalty revenues. Closure of franchised restaurants would reduce our royalty revenues and other sources of income and could
negatively impact margins, since we may not be able to reduce fixed costs which we continue to incur.
We
have limited control with respect to the operations of our franchisees, which could have a negative impact on our business.
Franchisees
are independent business operators and are not our employees, and we do not exercise control over the day-to-day operations of
their restaurants. We provide training and support to franchisees, and set and monitor operational standards, but the quality
of franchised restaurants may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully
operate restaurants in a manner consistent with our standards and requirements or may not hire and train qualified managers and
other restaurant personnel. If franchisees do not operate to our expectations, our image and reputation, and the image and reputation
of other franchisees, may suffer materially and system-wide sales could decline significantly, which would reduce our royalty
and other revenues, and the impact on profitability could be greater than the percentage decrease in royalties and fees.
The
challenging economic environment may affect our franchisees, with adverse consequences to us.
We
rely in part on our franchisees and the manner in which they operate their locations to develop and promote our business. Due
to the continuing challenging economic environment, it is possible that some franchisees could file for bankruptcy or become delinquent
in their payments to us, which could have a significant adverse impact on our business due to loss or delay in payments of royalties,
contributions to our marketing development fund and brand development/advertising funds and other fees. Bankruptcies by our franchisees
could prevent us from terminating their franchise agreements so that we can offer their territories to other franchisees, negatively
impact our market share and operating results as we may have fewer well-performing restaurants, and adversely impact our ability
to attract new franchisees.
We
cannot be certain that the developers and franchisees we select will have the business acumen or financial resources necessary
to open and operate successful franchises in their franchise areas, and state franchise laws may limit our ability to terminate
or modify these franchise arrangements. Moreover, franchisees may not successfully operate restaurants in a manner consistent
with our standards and requirements or may not hire and train qualified managers and other restaurant personnel. The failure of
developers and franchisees to open and operate franchises successfully could have a material adverse effect on us, our reputation,
our brand and our ability to attract prospective franchisees and could materially adversely affect our business, financial condition,
results of operations and cash flows.
Franchisees
may not have access to the financial or management resources that they need to open the restaurants contemplated by their agreements
with us or be able to find suitable sites on which to develop them. Franchisees may not be able to negotiate acceptable lease
or purchase terms for restaurant sites, obtain the necessary permits and government approvals or meet construction schedules.
Any of these problems could slow our growth and reduce our franchise revenues. Additionally, our franchisees typically depend
on financing from banks and other financial institutions, which may not always be available to them, in order to construct and
open new restaurants. For these reasons, franchisees operating under development agreements may not be able to meet the new restaurant
opening dates required under those agreements.
Our
system-wide restaurant base is geographically concentrated in the Northeastern United States, and we could be negatively affected
by conditions specific to that region.
Our
company-operated and franchised restaurants in the Northeastern United States represent approximately 41% of our system-wide restaurants
as of December 31, 2020. Our company-operated and franchised restaurants in New Jersey and New York represent approximately 31%
of our system-wide restaurants as of December 31, 2020. Adverse changes in demographic, unemployment, economic, regulatory or
weather conditions in the Northeastern United States have had, and may continue to have, material adverse effects on our business.
As a result of our concentration in this market, we have been, and in the future may be, disproportionately affected by these
adverse conditions compared to other chain restaurants with a national footprint.
In
addition, our competitors could open additional restaurants in New Jersey and New York, where we have significant concentration
with 10 of our system restaurants, which could result in reduced market share for us and may adversely impact our profitability.
Negative
publicity could reduce sales at some or all of our restaurants.
We
may, from time to time, be faced with negative publicity relating to food quality, the safety, sanitation and welfare of our restaurant
facilities, customer complaints or litigation alleging illness or injury, health inspection scores, integrity of our or our suppliers’
food processing and other policies, practices and procedures, employee relationships and welfare or other matters at one or more
of our restaurants. Negative publicity may adversely affect us, regardless of whether the allegations are valid or whether we
are held to be responsible. In addition, the negative impact of adverse publicity relating to one restaurant may extend far beyond
the restaurant involved, especially due to the high geographic concentration of many of our restaurants, to affect some or all
of our other restaurants, including our franchised restaurants. The risk of negative publicity is particularly great with respect
to our franchised restaurants because we are limited in the manner in which we can regulate them, especially on a real-time basis
and negative publicity from our franchised restaurants may also significantly impact company-operated restaurants. A similar risk
exists with respect to food service businesses unrelated to us, if customers mistakenly associate such unrelated businesses with
our operations. Employee claims against us based on, among other things, wage and hour violations, discrimination, harassment
or wrongful termination may also create not only legal and financial liability but negative publicity that could adversely affect
us and divert our financial and management resources that would otherwise be used to benefit the future performance of our operations.
These types of employee claims could also be asserted against us, on a co-employer theory, by employees of our franchisees. A
significant increase in the number of these claims or an increase in the number of successful claims could materially adversely
affect our business, financial condition, results of operations and cash flows.
Food
safety and quality concerns may negatively impact our business and profitability, our internal operational controls and standards
may not always be met and our employees may not always act professionally, responsibly and in our and our customers’ best
interests. Any possible instances of food-borne illness could reduce our restaurant sales.
Incidents
or reports of food-borne or water-borne illness or other food safety issues, food contamination or tampering, employee hygiene
and cleanliness failures or improper employee conduct at our restaurants could lead to product liability or other claims. Such
incidents or reports could negatively affect our brand and reputation as well as our business, revenues and profits. Similar incidents
or reports occurring at limited service restaurants unrelated to us could likewise create negative publicity, which could negatively
impact consumer behavior towards us.
We
cannot guarantee to consumers that our internal controls and training will be fully effective in preventing all food-borne illnesses.
Furthermore, our reliance on third-party food processors and distributors makes it difficult to monitor food safety compliance
and may increase the risk that food-borne illness would affect multiple locations rather than single restaurants. Some food-borne
illness incidents could be caused by third-party food suppliers and transporters outside of our control. New illnesses resistant
to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise
to claims or allegations on a retroactive basis. One or more instances of food-borne illness in one of our company-operated or
franchised restaurants could negatively affect sales at all of our restaurants if highly publicized, especially due to the high
geographic concentration of many of our restaurants. This risk exists even if it were later determined that the illness was wrongly
attributed to one of our restaurants. A number of other restaurant chains have experienced incidents related to food-borne illnesses
that have had material adverse impacts on their operations, and we cannot assure you that we could avoid a similar impact upon
the occurrence of a similar incident at one of our restaurants. Additionally, even if food-borne illnesses were not identified
at our restaurants, our restaurant sales could be adversely affected if instances of food-borne illnesses at other restaurant
chains were highly publicized. In addition, our restaurant sales could be adversely affected by publicity regarding other high-profile
illnesses such as avian flu that customers may associate with our food products.
The
volatile credit and capital markets could have a material adverse effect on our financial condition.
Our
ability to manage our debt is dependent on our level of cash flow from company-operated and franchised restaurants, net of costs.
It is anticipated that in 2021 the company will not have positive cash flow and will require additional outside funding to maintain
operations. An economic downturn may negatively impact our cash flows. Credit and capital markets can be volatile, which could
make it more difficult for us to refinance our existing debt or to obtain additional debt or equity financings in the future.
Such constraints could increase our costs of borrowing and could restrict our access to other potential sources of future liquidity.
Our failure to have sufficient liquidity to make interest and other payments required by our debt could result in a default of
such debt and acceleration of our borrowings, which would have a material adverse effect on our business and financial condition.
The lack of availability or access to build-to-suit leases and equipment financing leases could result in a decreased number of
new restaurants and have a negative impact on our growth.
Our
strategy to open a significant amount of company-owned and operated restaurants on non-traditional sites such as universities,
office buildings, ghost kitchens, military bases, airports and casinos could fail.
The
company currently has locations open and in development on military bases through the Army and Air Force Exchange Service, or
AAFES, as well as the Marines. In addition, as of December 31, 2020, the company has four university locations built but not
open due to covid restrictions and one additional lease signed for future development. The company continues to identify
and open ghost kitchen locations and other non-traditional consumer access points. The company will continue to seek non-traditional
locations and consumer access across multiple venues. In the event these locations do not become available in the future or
the Company is not awarded specific sites, the total restaurant count of company-owned and operated locations could be
materially affected. In addition, non-traditional sites tend to have a lower capital investment to build out and more favorable
lease terms. In the event we cannot obtain non-traditional sites, the total outlay of capital expenditures could increase significantly
over time for new locations outside of non-traditional installations.
A
military conflict or large troop deployment could affect our revenue at company and franchise military locations in the future.
Our
current company-operated non-traditional location strategy focuses on building restaurants on non-traditional locations such as
universities, office buildings, military bases, airports and casinos. Our military bases are built in support of “Operation
Live Well” and the desire of the United States military to offer healthier eating options on its bases. In the event of
a large troop deployment or military conflict, the total number of troops present on any given base could be materially reduced
and therefore our total revenues in these locations would likely be reduced accordingly.
The
interests of our franchisees may conflict with ours or yours in the future and we could face liability from our franchisees or
related to our relationship with our franchisees.
Franchisees,
as independent business operators, may from time to time disagree with us and our strategies regarding the business or our interpretation
of our respective rights and obligations under the franchise agreement and the terms and conditions of the franchisee/franchisor
relationship. This may lead to disputes with our franchisees and we expect such disputes to occur from time to time in the future
as we continue to offer franchises. Such disputes may result in legal action against us. To the extent we have such disputes,
the attention, time and financial resources of our management and our franchisees will be diverted from our restaurants, which
could have a material adverse effect on our business, financial condition, results of operations and cash flows even if we have
a successful outcome in the dispute.
In
addition, various state and federal laws govern our relationship with our franchisees and our potential sale of a franchise. A
franchisee and/or a government agency may bring legal action against us based on the franchisee/franchisor relationships that
could result in the award of damages to franchisees and/or the imposition of fines or other penalties against us.
The
personal information that we collect may be vulnerable to breach, theft or loss that could adversely affect our reputation, results
of operation and financial condition.
In
the ordinary course of our business, we collect, process, transmit and retain personal information regarding our employees and
their families, our franchisees, vendors and consumers, which can include social security numbers, social insurance numbers, banking
and tax identification information, health care information and credit card information and our franchisees collect similar information.
Some of this personal information is held and managed by our franchisees and certain of our vendors. A third-party may be able
to circumvent the security and business controls we use to limit access and use of personal information, which could result in
a breach of employee, consumer or franchisee privacy. A major breach, theft or loss of personal information regarding our employees
and their families, our franchisees, vendors or consumers that is held by us or our vendors could result in substantial fines,
penalties, indemnification claims and potential litigation against us which could negatively impact our results of operations
and financial condition. As a result of legislative and regulatory rules, we may be required to notify the owners of the personal
information of any data breaches, which could harm our reputation and financial results, as well as subject us to litigation or
actions by regulatory authorities. Furthermore, media or other reports of existing or perceived security vulnerabilities in our
systems or those of our franchisees or vendors, even if no breach has been attempted or has occurred, can adversely impact our
brand and reputation, and thereby materially impact our business.
Significant
capital investments and other expenditures could be required to remedy a breach and prevent future problems, including costs associated
with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached.
These costs, which could be material, could adversely impact our results of operations during the period in which they are incurred.
The techniques and sophistication used to conduct cyber-attacks and breaches, as well as the sources and targets of these attacks,
change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. Accordingly,
our expenditures to prevent future cyber-attacks or breaches may not be successful.
Information
technology system failures or interruptions or breaches of our network security may interrupt our operations, subject us to increased
operating costs and expose us to litigation.
As
our reliance on technology has increased, so have the risks posed to our systems. We rely heavily on our computer systems and
network infrastructure across operations including, but not limited to, point-of-sale processing at our restaurants, as well as
the systems of our third-party vendors to whom we outsource certain administrative functions. Despite our implementation of security
measures, all of our technology systems are vulnerable to damage, disruption or failures due to physical theft, fire, power loss,
telecommunications failure or other catastrophic events, as well as from problems with transitioning to upgraded or replacement
systems, internal and external security breaches, denial of service attacks, viruses, worms and other disruptive problems caused
by hackers. If any of our technology systems were to fail, and we were unable to recover in a timely way, we could experience
an interruption in our operations. Furthermore, if unauthorized access to or use of our systems were to occur, data related to
our proprietary information could be compromised. The occurrence of any of these incidents could have a material adverse effect
on our future financial condition and results of operations. To the extent that some of our reporting systems require or rely
on manual processes, it could increase the risk of a breach due to human error.
In
addition, we receive and maintain certain personal information about our customers, franchisees and employees, and our franchisees
receive and maintain similar information. For example, in connection with credit card transactions, we and our franchisees collect
and transmit confidential credit card information by way of retail networks. We also maintain important internal data, such as
personally identifiable information about our employees and franchisees and information relating to our operation. Our use of
personally identifiable information is regulated by applicable laws and regulations. If our security and information systems or
those of our franchisees are compromised or our business associates fail to comply with these laws and regulations and this information
is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as our restaurant
operations and results of operations and financial condition. As privacy and information security laws and regulations change,
we may incur additional costs to ensure that we remain in compliance.
Further,
the standards for systems currently used for transmission and approval of electronic payment transactions, and the technology
utilized in electronic payment themselves, all of which can put electronic payment data at risk, are determined and controlled
by the payment card industry, not by us. If someone is able to circumvent our data security measures or that of third parties
with whom we do business, including our franchisees, he or she could destroy or steal valuable information or disrupt our operations.
Any security breach could expose us to risks of data loss, litigation, liability, and could seriously disrupt our operations.
Any resulting negative publicity could significantly harm our reputation and could materially and adversely affect our business
and operating results.
A
number of our systems and processes are not fully integrated and, as a result, require us to manually estimate and consolidate
certain information that we use to manage our business. To the extent that we are not able to obtain transparency into our operations
from our systems, it could impair the ability of our management to react quickly to changes in the business or economic environment.
We
anticipate expanding, upgrading and developing our information technology capabilities. If we are unable to successfully upgrade
or expand our technological capabilities, we may not be able to take advantage of market opportunities, manage our costs and transactional
data effectively, satisfy customer requirements, execute our business plan or respond to competitive pressures.
We
outsource certain aspects of our business to third-party vendors which subjects us to risks, including disruptions in our business
and increased costs.
We
have outsourced certain administrative functions for our business to third-party service providers. We also outsource certain
information technology support services and benefit plan administration. In the future, we may outsource other functions to achieve
cost savings and efficiencies. If the service providers to which we outsource these functions do not perform effectively or are
negatively impacted by the COVID-19 pandemic, we may not be able to achieve the expected cost savings and may have to incur additional
costs in connection with such failure to perform. Depending on the function involved, such failures may also lead to business
disruption, transaction errors, processing inefficiencies, the loss of sales and customers, the loss of or damage to intellectual
property through security breach, and the loss of sensitive data through security breach or otherwise. Any such damage or interruption
could have a material adverse effect on our business, cause us to face significant fines, customer notice obligations or costly
litigation, harm our reputation with our customers or prevent us from paying our collective suppliers or employees or receiving
payments on a timely basis.
The
failure to enforce and maintain our trademarks and protect our other intellectual property could materially adversely affect our
business, including our ability to establish and maintain brand awareness.
We
have registered Muscle Maker Grill®, Healthy Joe’s and certain other names used by our restaurants as trademarks or
service marks with the United States Patent and Trademark Office. The Muscle Maker Grill® trademark is also registered in
some form in one foreign country. Our current brand campaign, “Great Food with Your Health in Mind” has also been
approved for registration with the United States Patent and Trademark Office. In addition, the Muscle Maker Grill logo, website
name and address (www.musclemakergrill.com) and Facebook, Instagram, Twitter and other social media accounts are our intellectual
property. The success of our business strategy depends on our continued ability to use our existing trademarks and service marks
in order to increase brand awareness and develop our branded products. If our efforts to protect our intellectual property are
not adequate, or if any third-party misappropriates or infringes on our intellectual property, whether in print, on the Internet
or through other media, the value of our brands may be harmed, which could have a material adverse effect on our business, including
the failure of our brands and branded products to achieve and maintain market acceptance. There can be no assurance that all of
the steps we have taken to protect our intellectual property in the United States and in foreign countries will be adequate. In
addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of
the United States.
We
or our suppliers maintain the seasonings and additives for our food offerings, as well as certain standards, specifications and
operating procedures, as trade secrets or confidential information. We may not be able to prevent the unauthorized disclosure
or use of our trade secrets or information, despite the existence of confidentiality agreements and other measures. While we try
to ensure that the quality of our brand and branded products is maintained by all of our franchisees, we cannot be certain that
these franchisees will not take actions that adversely affect the value of our intellectual property or reputation. If any of
our trade secrets or information were to be disclosed to or independently developed by a competitor, our business, financial condition
and results of operations could be materially adversely affected.
Third-party
claims with respect to intellectual property assets, if decided against us, may result in competing uses or require adoption of
new, non-infringing intellectual property, which may in turn adversely affect sales and revenues.
There
can be no assurance that third parties will not assert infringement or misappropriation claims against us, or assert claims that
our rights in our trademarks, service marks, trade dress and other intellectual property assets are invalid or unenforceable.
Any such claims could have a material adverse effect on us or our franchisees if such claims were to be decided against us. If
our rights in any intellectual property were invalidated or deemed unenforceable, it could permit competing uses of intellectual
property which, in turn, could lead to a decline in restaurant revenues. If the intellectual property became subject to third-party
infringement, misappropriation or other claims, and such claims were decided against us, we may be forced to pay damages, be required
to develop or adopt non-infringing intellectual property or be obligated to acquire a license to the intellectual property that
is the subject of the asserted claim. There could be significant expenses associated with the defense of any infringement, misappropriation,
or other third-party claims.
We
depend on our executive officers, the loss of whom could materially harm our business.
We
rely upon the accumulated knowledge, skills and experience of our executive officers and significant employees. Our executive
officers and significant employees have cumulative experience of more than 100 years in the food service industry. If they were
to leave us or become incapacitated, we might suffer in our planning and execution of business strategy and operations, impacting
our brand and financial results. We also do not maintain any key man life insurance policies for any of our employees.
Matters
relating to employment and labor law may adversely affect our business.
Various
federal and state labor laws govern our relationships with our employees and affect operating costs. These laws include employee
classifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates,
citizenship requirements and other wage and benefit requirements for employees classified as non-exempt. Significant additional
government regulations and new laws, including mandating increases in minimum wages, changes in exempt and non-exempt status,
or mandated benefits such as health insurance could materially affect our business, financial condition, operating results or
cash flow. Furthermore, if our or our franchisees’ employees unionize, it could materially affect our business, financial
condition, operating results or cash flow.
We
are also subject in the ordinary course of business to employee claims against us based, among other things, on discrimination,
harassment, wrongful termination, or violation of wage and labor laws. Such claims could also be asserted against us by employees
of our franchisees. Moreover, claims asserted against franchisees may at times be made against us as a franchisor. These claims
may divert our financial and management resources that would otherwise be used to benefit our operations. The ongoing expense
of any resulting lawsuits, and any substantial settlement payment or damage award against us, could adversely affect our business,
brand image, employee recruitment, financial condition, operating results or cash flows.
In
addition, various states in which we operate are considering or have already adopted new immigration laws or enforcement programs,
and the United States Congress and Department of Homeland Security from time to time consider and may implement changes to federal
immigration laws, regulations or enforcement programs as well. Some of these changes may increase our obligations for compliance
and oversight, which could subject us to additional costs and make our hiring process more cumbersome or reduce the availability
of potential employees. Although we require all workers to provide us with government-specified documentation evidencing their
employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. Unauthorized workers are subject
to deportation and may subject us to fines or penalties, and if any of our workers are found to be unauthorized, we could experience
adverse publicity that negatively impacts our brand and may make it more difficult to hire and keep qualified employees. Termination
of a significant number of employees who were unauthorized employees may disrupt our operations, cause temporary increases in
our labor costs as we train new employees and result in additional adverse publicity. We could also become subject to fines, penalties
and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration
compliance laws. These factors could have a material adverse effect on our business, financial condition and results of operations.
Restaurant
companies have been the target of class action lawsuits and other proceedings alleging, among other things, violations of federal
and state workplace and employment laws. Proceedings of this nature are costly, divert management attention and, if successful,
could result in our payment of substantial damages or settlement costs.
Our
business is subject to the risk of litigation by employees, consumers, suppliers, franchisees, stockholders or others through
private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation,
particularly class action and regulatory actions, is difficult to assess or quantify. In recent years, restaurant companies, including
us, have been subject to lawsuits, including lawsuits, alleging violations of federal and state laws regarding workplace and employment
conditions, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages
by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage
and hour laws regarding, among other things, employee meal deductions, overtime eligibility of managers and failure to pay for
all hours worked.
Occasionally,
our customers file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered
at or after a visit to one of our restaurants, including actions seeking damages resulting from food-borne illness or accidents
in our restaurants. We are also subject to a variety of other claims from third parties arising in the ordinary course of our
business, including contract claims. The restaurant industry has also been subject to a growing number of claims that the menus
and actions of restaurant chains have led to the obesity of certain of their customers. We may also be subject to lawsuits from
our employees, the U.S. Equal Employment Opportunity Commission or others alleging violations of federal and state laws regarding
workplace and employment conditions, discrimination and similar matters.
Regardless
of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and
money away from our operations and result in increases in our insurance premiums. In addition, they may generate negative publicity,
which could reduce customer traffic and sales. Although we maintain what we believe to have adequate levels of insurance, insurance
may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment
or other liability in excess of our insurance coverage for any claims or any adverse publicity resulting from claims could adversely
affect our business and results of operations.
If
we or our franchisees face labor shortages or increased labor costs, our results of operations and our growth could be adversely
affected.
Labor
is a primary component in the cost of operating our company-operated and franchised restaurants. If we or our franchisees face
labor shortages or increased labor costs because of increased competition for employees, higher employee-turnover rates, unionization
of restaurant workers, or increases in the federally-mandated or state-mandated minimum wage, change in exempt and non-exempt
status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation
insurance), our and our franchisees’ operating expenses could increase and our growth could be adversely affected.
We
have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal or state minimum wage
and increases in the minimum wage will increase our labor costs and the labor costs of our franchisees. The federal minimum wage
has been $7.25 per hour since July 24, 2009. Federally-mandated, state-mandated or locally-mandated minimum wages may be raised
in the future. We may be unable to increase our menu prices in order to pass future increased labor costs on to our customers,
in which case our margins would be negatively affected. Also, reduced margins of franchisees could make it more difficult to sell
franchises. If menu prices are increased by us and our franchisees to cover increased labor costs, the higher prices could adversely
affect transactions which could lower sales and thereby reduce our margins and the royalties that we receive from franchisees.
In
addition, our success depends in part upon our and our franchisees’ ability to attract, motivate and retain a sufficient
number of well-qualified restaurant operators, management personnel and other employees. Qualified individuals needed to fill
these positions can be in short supply in some geographic areas. In addition, limited service restaurants have traditionally experienced
relatively high employee turnover rates. Although we have not yet experienced any significant problems in recruiting employees,
our and our franchisees’ ability to recruit and retain such individuals may delay the planned openings of new restaurants
or result in higher employee turnover in existing restaurants, which could increase our and our franchisees’ labor costs
and have a material adverse effect on our business, financial condition, results of operations or cash flows. If we or our franchisees
are unable to recruit and retain sufficiently qualified individuals, our business and our growth could be adversely affected.
Competition for these employees could require us or our franchisees to pay higher wages, which could also result in higher labor
costs.
We
are locked into long-term and non-cancelable leases and may be unable to renew leases at the end of their terms.
Many
of our restaurant leases are non-cancelable and typically have initial terms up to between 5 and 10 years and 1-3 renewal terms
of 5 years each that we may exercise at our option. Even if we close a restaurant, we are required to perform our obligations
under the applicable lease, which could include, among other things, a provision for a closed restaurant reserve when the restaurant
is closed, which would impact our profitability, and payment of the base rent, property taxes, insurance and maintenance for the
balance of the lease term. In addition, in connection with leases for restaurants that we will continue to operate, we may, at
the end of the lease term and any renewal period for a restaurant, be unable to renew the lease without substantial additional
cost, if at all. As a result, we may close or relocate the restaurant, which could subject us to construction and other costs
and risks. Additionally, the revenues and profit, if any, generated at a relocated restaurant may not equal the revenues and profit
generated at the existing restaurant.
We
and our franchisees are subject to extensive government regulations that could result in claims leading to increased costs and
restrict our ability to operate or sell franchises.
We
and our franchisees are subject to extensive government regulation at the federal, state and local government levels. These include,
but are not limited to, regulations relating to the preparation and sale of food, zoning and building codes, franchising, land
use and employee, health, sanitation and safety matters. We and our franchisees are required to obtain and maintain a wide variety
of governmental licenses, permits and approvals. Difficulty or failure in obtaining them in the future could result in delaying
or canceling the opening of new restaurants. Local authorities may suspend or deny renewal of our governmental licenses if they
determine that our operations do not meet the standards for initial grant or renewal. This risk would be even higher if there
were a major change in the licensing requirements affecting our types of restaurants.
We
are subject to the U.S. Americans with Disabilities Act (the “ADA”) and similar state laws that give civil rights
protections to individuals with disabilities in the context of employment, public accommodations and other areas, including our
restaurants. We may in the future have to modify restaurants, websites or other consumer interaction points by adding access ramps
or redesigning certain architectural fixtures or software programs, for example, to provide service to or make reasonable accommodations
for disabled persons. The expenses associated with these modifications could be material.
Our
operations are also subject to the U.S. Occupational Safety and Health Act, which governs worker health and safety, the U.S. Fair
Labor Standards Act, which governs such matters as minimum wages and overtime, the U.S. Immigration Reform and Control Act of
1986, and a variety of similar federal, state and local laws that govern these and other employment law matters. We and our franchisees
may also be subject to lawsuits from our employees, the U.S. Equal Employment Opportunity Commission or others alleging violations
of federal and state laws regarding workplace and employment matters, discrimination and similar matters, and we have been a party
to such matters in the past. In addition, federal, state and local proposals related to paid sick leave or similar matters could,
if implemented, have a material adverse effect on our business, financial condition and results of operations.
The
Patient Protection and Affordable Care Act of 2010 (the “PPACA”) requires employers such as us to provide adequate
and affordable health insurance for all qualifying employees or pay a monthly per-employee fee or penalty for non-compliance beginning
in fiscal 2015. We began to offer such health insurance benefits on January 1, 2015 to all eligible employees and may incur substantial
additional expense due to organizing and maintaining the plan which we anticipate will be more expensive on a per person basis
and for an increased number of employees who we anticipate at other times may elect to obtain coverage through a healthcare plan
that we partially subsidize. If we fail to offer such benefits, or the benefits that we elect to offer do not meet the applicable
requirements, we may incur penalties. Since the PPACA also requires individuals to obtain coverage or face individual penalties,
employees who are currently eligible but elect not to participate in our healthcare plans may find it more advantageous to do
so when such individual penalties increase in size. It is also possible that by making changes or failing to make changes in the
healthcare plans offered by us, we will become less competitive in the market for our labor. Finally, implementing the requirements
of the PPACA is likely to impose additional administrative costs. The costs and other effects of these new healthcare requirements
cannot be determined with certainty, but they may significantly increase our healthcare coverage costs and could have a material
adverse effect on our business, financial condition and results of operations.
There
is also a potential for increased regulation of certain food establishments in the United States, where compliance with a Hazard
Analysis and Critical Control Points (“HACCP”) approach would be required. HACCP refers to a management system in
which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling,
to manufacturing, distribution and consumption of the finished product. Many states have required restaurants to develop and implement
HACCP Systems, and the United States government continues to expand the sectors of the food industry that must adopt and implement
HACCP programs. For example, the Food Safety Modernization Act (the “FSMA”), signed into law in January 2011, granted
the U.S. Food and Drug Administration (the “FDA”) new authority regarding the safety of the entire food system, including
through increased inspections and mandatory food recalls. Although restaurants are specifically exempted from or not directly
implicated by some of these new requirements, we anticipate that the new requirements may impact our industry. Additionally, our
suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in
adverse publicity or require us to take actions that could be costly for us or otherwise impact our business.
We
are also subject to regulation by the Federal Trade Commission and subject to state laws that govern the offer, sale, renewal
and termination of franchises and our relationship with our franchisees. The failure to comply with these laws and regulations
in any jurisdiction or to obtain required approvals could result in a ban or temporary suspension on franchise sales, fines or
the requirement that we make a rescission offer to franchisees, any of which could affect our ability to open new restaurants
in the future and thus could materially adversely affect our business and operating results. Any such failure could also subject
us to liability to our franchisees.
Federal,
State and Local Regulation and Compliance
We
are subject to extensive federal, state and local government regulation, including those relating to, among others, public health
and safety, zoning and fire codes, and franchising. Failure to obtain or retain food or other licenses and registrations or exemptions
would adversely affect the operations of restaurants. Although we have not experienced and do not anticipate any significant problems
in obtaining required licenses, permits or approvals, any difficulties, delays or failures in obtaining such licenses, permits,
registrations, exemptions, or approvals could delay or prevent the opening of, or adversely impact the viability of, a restaurant
in a particular area.
The
development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental
regulations. We believe federal and state environmental regulations have not had a material effect on operations, but more stringent
and varied requirements of local government bodies with respect to zoning, land use and environmental factors could delay construction
and increase development costs for new restaurants.
We
are also subject to the Fair Labor Standards Act, the Immigration Reform and Control Act of 1986 and various federal and state
laws governing such matters as minimum wages, overtime, unemployment tax rates, workers’ compensation rates, citizenship
requirements and other working conditions. A significant portion of the hourly staff is paid at rates consistent with the applicable
federal or state minimum wage and, accordingly, increases in the minimum wage will increase labor costs. In addition, the PPACA
increased medical costs beginning in fiscal 2015. We are also subject to the Americans With Disabilities Act, which prohibits
discrimination on the basis of disability in public accommodations and employment, which may require us to design or modify our
restaurants to make reasonable accommodations for disabled persons.
In
addition, we must comply with regulations adopted by the Federal Trade Commission, or the FTC, and with several state laws that
regulate the offer and sale of franchises. The FTC’s Trade Regulation Rule on Franchising, or the FTC Rule, and certain
state laws require that we furnish prospective franchisees with a franchise offering circular or Franchise Disclosure Document
containing information prescribed by the FTC Rule and applicable state laws and regulations.
We
also must comply with a number of state laws that regulate some substantive aspects of the franchisor-franchisee relationship.
These laws may limit a franchisor’s ability to: terminate or not renew a franchise without good cause; prohibit interference
with the right of free association among franchisees; alter franchise agreements; disapprove the transfer of a franchise; discriminate
among franchisees with regard to charges, royalties and other fees; and place new stores near existing franchises. Bills intended
to regulate certain aspects of franchise relationships have been introduced into Congress on several occasions during the last
decade, but none have been enacted.
We
may become subject to liabilities arising from environmental laws that could likely increase our operating expenses and materially
and adversely affect our business and results of operations.
We
are subject to federal, state and local laws and regulations, including those concerning waste disposal, pollution, protection
of the environment, and the presence, discharge, storage, handling, release and disposal of, and exposure to, hazardous or toxic
substances. These environmental laws provide for significant fines and penalties for non-compliance and liabilities for remediation,
sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence
of hazardous toxic substances. Third parties may also make claims against owners or operators of properties for personal injuries
and property damage associated with releases of, or actual or alleged exposure to, such hazardous or toxic substances at, on or
from our restaurants. Environmental conditions relating to the presence of hazardous substances at prior, existing or future restaurant
sites could materially adversely affect our business, financial condition and results of operations. Further, environmental laws
and regulations, and the administration, interpretation and enforcement thereof, are subject to change and may become more stringent
in the future, each of which could materially adversely affect our business, financial condition and results of operations.
We
are subject to federal, state and local laws and regulations relating to environmental protection, including regulation of discharges
into the air and water, storage and disposal of waste and clean-up of contaminated soil and groundwater. Under various federal,
state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of hazardous or
toxic substances on, in or emanating from such property. Such liability may be imposed without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or toxic substances, and in some cases, we may have obligations
imposed by indemnity provisions in our leases.
No
assurance can be given that we have identified all of the potential environmental liabilities at our properties or that such liabilities
will not have a material adverse effect on our financial condition.
Legislation
and regulations requiring the display and provision of nutritional information for our menu offerings, and new information or
attitudes regarding diet and health or adverse opinions about the health effects of consuming our menu offerings, could affect
consumer preferences and negatively impact our results of operations.
Government
regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or
new information regarding the health effects of consuming our menu offerings. These changes have resulted in, and may continue
to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings,
or laws and regulations requiring us to disclose the nutritional content of our food offerings.
The
PPACA establishes a uniform, federal requirement for certain restaurants to post certain nutritional information on their menus.
Specifically, the PPACA amended the Federal Food, Drug and Cosmetic Act to, as of December 1, 2015, require chain restaurants
with 20 or more locations operating under the same name and offering substantially the same menus to publish the total number
of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the
context of a total daily calorie intake. The PPACA also requires covered restaurants to, as of December 1, 2015, provide to consumers,
upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on
menus and menu boards about the availability of this information. The PPACA further permits the United States Food and Drug Administration
to require covered restaurants to make additional nutrient disclosures, such as disclosure of trans-fat content. An unfavorable
report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively
influence the demand for our offerings.
Furthermore,
a number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose
certain nutritional information to customers or have enacted legislation restricting the use of certain types of ingredients,
portion sizes or packaging materials in restaurants.
Compliance
with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly
and time-consuming. Additionally, if consumer health regulations or consumer eating habits change significantly, we may be required
to modify or discontinue certain menu items, and we may experience higher costs associated with the implementation of those changes.
Additionally, some government authorities are increasing regulations regarding trans-fats and sodium, which may require us to
limit or eliminate trans-fats and sodium in our menu offerings or switch to higher cost ingredients or may hinder our ability
to operate in certain markets. Some jurisdictions have banned certain cooking ingredients, such as trans-fats, which a limited
number of our menu products contain in small, but measurable amounts, or have discussed banning certain products, such as large
sodas. Removal of these products and ingredients from our menus could affect product tastes, customer satisfaction levels, and
sales volumes, whereas if we fail to comply with these laws or regulations, our business could experience a material adverse effect.
We
cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions or our ability
to successfully implement the nutrient content disclosure requirements and to adapt our menu offerings to trends in eating habits.
The imposition of additional menu-labeling laws could have an adverse effect on our results of operations and financial position,
as well as on the restaurant industry in general.
We
are exposed to the risk of natural disasters, unusual weather conditions, pandemic outbreaks, political events, war and terrorism
that could disrupt business and result in lower sales, increased operating costs and capital expenditures.
Our
headquarters, company-operated and franchised restaurant locations, third-party sole distributor and its facilities, as well as
certain of our vendors and customers, are located in areas which have been and could be subject to natural disasters such as floods,
hurricanes, tornadoes, fires or earthquakes. Adverse weather conditions or other extreme changes in the weather, including resulting
electrical and technological failures, especially such events which occur in New Jersey and New York, as a result of the concentration
of our restaurants, may disrupt our and our franchisees’ business and may adversely affect our and our franchisees’
ability to obtain food and supplies and sell menu items. Our business may be harmed if our or our franchisees’ ability to
obtain food and supplies and sell menu items is impacted by any such events, any of which could influence customer trends and
purchases and may negatively impact our and our franchisees’ revenues, properties or operations. Such events could result
in physical damage to one or more of our or our franchisees’ properties, the temporary closure of some or all of our company-operated
restaurants, franchised restaurants and third-party distributor, the temporary lack of an adequate work force in a market, temporary
or long-term disruption in the transport of goods, delay in the delivery of goods and supplies to our company-operated and franchised
restaurants and third-party distributor, disruption of our technology support or information systems, or fuel shortages or dramatic
increases in fuel prices, all of which would increase the cost of doing business. These events also could have indirect consequences
such as increases in the costs of insurance if they result in significant loss of property or other insurable damage. Any of these
factors, or any combination thereof, could adversely affect our operations. Some of our restaurants are located on military bases.
Our strategy as of July 2019 is to continue to build corporately owned and operated non-traditional restaurants, including on
military bases, which in the event of a significant troop deployment, our total revenue and operating profits could be materially
adversely affected.
Upon
the expansion of our operations internationally, we could be adversely affected by violations of the U.S. Foreign Corrupt Practices
Act and similar worldwide anti-bribery and anti-kickback laws.
We
anticipate developing franchised locations located outside the United States. The U.S. Foreign Corrupt Practices Act, and other
similar anti-bribery and anti-kickback laws and regulations, generally prohibit companies and their intermediaries from making
improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We cannot assure you that we will
be successful in preventing our franchisees or other agents from taking actions in violation of these laws or regulations. Such
violations, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial
condition, results of operations and cash flows. We currently have two franchise locations in Kuwait.
Members
of our board of directors and our executive officers will have other business interests and obligations to other entities.
Neither
our directors nor our executive officers will be required to manage the Company as their sole and exclusive function and they
may have other business interests and may engage in other activities in addition to those relating to the Company, provided that
such activities do not compete with the business of the Company or otherwise breach their agreements with the Company. We are
dependent on our directors and executive officers to successfully operate our Company. Their other business interests and activities
could divert time and attention from operating our business
Pandemics
or disease outbreaks, such as the current novel coronavirus (COVID-19 virus) pandemic may disrupt our business, which could materially
affect our operations and results of operations.
Pandemics
or disease outbreaks such as the current novel coronavirus (COVID-19 virus) pandemic, have and may continue to impact customer
traffic at our restaurants, may make it more difficult to staff our restaurants and, in more severe cases, may cause a temporary
inability to obtain supplies, increase commodity costs or cause full and partial temporary closures of our affected restaurants,
sometimes for prolonged periods of time. We have temporarily shifted to a “take-out, curbside pickup or delivery”
only operating model across all our company and franchise restaurants, temporarily suspending sit-down dining. We and our franchisees
have also implemented temporary closures, modified hours of operation or reduced on-site staff, resulting in cancelled shifts
for some of our employees. COVID-19 may also materially adversely affect the timing to implement our growth plans as certain states
and cities temporarily restrict business operations and implement social distancing programs. These changes and any additional
changes may materially adversely affect our business or results of operations particularly if these changes are in place for a
significant amount of time. In addition, our operations could be disrupted if any of our employees or employees of our business
partners were or are suspected of having COVID-19 or other illnesses since this could require us or our business partners to quarantine
some or all such employees or close and disinfect our restaurant facilities. If a significant percentage of our workforce or the
workforce of our business partners are unable to work, including because of illness or travel or government restrictions in connection
with pandemics or disease outbreaks (including the current COVID-19 pandemic), our operations and financial condition may be negatively
impacted. We could also be adversely affected if government authorities impose additional restrictions on public gatherings, human
interactions, operations of restaurants or mandatory closures, seek voluntary closures, restrict hours of operations or impose
curfews, restrict the import or export of products or if suppliers issue mass recalls of products.
Risks
Related to Ownership of Our Common Stock and Lack of Liquidity
If
we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose
confidence in the accuracy and completeness of our financial reports and the market price of our Common Stock may decline.
As
a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses
in such internal control. Further, we are required to report any changes in internal controls on a quarterly basis. In addition,
we must furnish a report by management on the effectiveness of internal control over financial reporting pursuant to Section 404
of the Sarbanes-Oxley Act. As of December 31, 2020, we had material weakness in our internal controls. We need to improve the
design, implementation, and testing of the internal controls over financial reporting required to comply with these obligations.
If we continue to identify material weaknesses in our internal control over financial reporting or are unable to remedy our existing
material weaknesses, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal
control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an
opinion as to the effectiveness of its internal control over financial reporting when required, investors may lose confidence
in the accuracy and completeness of our financial reports and the market price of the Common Stock could be negatively affected.
We also could become subject to investigations by the stock exchange on an exchange, Securities and Exchange Commission, or the
Commission, or other regulatory authorities, which could require additional financial and management resources. In connection
with management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley
Act of 2002, we identified the following material weaknesses in our internal control over financial reporting as of December 31,
2020:
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do not have written documentation of our internal control policies and procedures.
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We
do not have sufficient resources in our accounting function, which restricts our ability to gather, analyze and properly review
information related to financial reporting in a timely manner. In addition, due to our size and nature, segregation of all
conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation
of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.
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We
have inadequate controls to ensure that information necessary to properly record transactions is adequately communicated on
a timely basis from non-financial personnel to those responsible for financial reporting.
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We
have significant deficiencies in the design and implementation of IT controls, specifically in the following areas: data center
and network operations, access security and change management.
|
As
an emerging growth company, our auditor is not required to attest to the effectiveness of our internal controls.
Our
independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial
reporting while we are an emerging growth company. This means that the effectiveness of our financial operations may differ from
our peer companies in that they may be required to obtain independent registered public accounting firm attestations as to the
effectiveness of their internal controls over financial reporting and we are not. While our management will be required to attest
to internal control over financial reporting and we will be required to detail changes to our internal controls on a quarterly
basis, we cannot provide assurance that the independent registered public accounting firm’s review process in assessing
the effectiveness of our internal controls over financial reporting, if obtained, would not find one or more material weaknesses
or significant deficiencies. Further, once we cease to be an emerging growth company we will be subject to independent registered
public accounting firm attestation regarding the effectiveness of our internal controls over financial reporting. Even if management
finds such controls to be effective, our independent registered public accounting firm may decline to attest to the effectiveness
of such internal controls and issue a qualified report.
As
a smaller reporting company and will be exempt from certain disclosure requirements, which could make our Common Stock less attractive
to the potential investors.
Rule
12b-2 of the Exchange Act defines a “smaller reporting company” as an issuer that is not an investment company, an
asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that:
●
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had
a public float of less than $250 million as of the last business day of its most recently completed second fiscal quarter,
computed by multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates
by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the
principal market for the common equity; or
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in
the case of an initial registration statement under the Securities Act, or the Exchange Act of 1934, as amended, which we
refer to as the Exchange Act, for shares of its common equity, had a public float of less than $250 million as of a date within
30 days of the date of the filing of the registration statement, computed by multiplying the aggregate worldwide number of
such shares held by non-affiliates before the registration plus, in the case of a Securities Act registration statement, the
number of such shares included in the registration statement by the estimated public offering price of the shares; or
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in
the case of an issuer whose public float as calculated under paragraph (1) or (2) of this definition was zero, had annual
revenues of less than $100 million during the most recently completed fiscal year for which audited financial statements are
available.
|
As
a smaller reporting company, we will not be required and may not include a Compensation Discussion and Analysis section in our
proxy statements; we will provide only two years of financial statements; and we need not provide the table of selected financial
data. We also will have other “scaled” disclosure requirements that are less comprehensive than issuers that are not
smaller reporting companies which could make our Common Stock less attractive to potential investors, which could make it more
difficult for our stockholders to sell their shares.
As
a public company, we will incur significant increased costs as a result of operating as a public company, and our management will
be required to devote substantial time to new compliance initiatives.
As
a public company, we have incurred significant legal, accounting and other expenses that we did not incur as a private company.
In addition, the Sarbanes-Oxley Act, and rules of the SEC and those of the NASDAQ Capital Market has imposed various requirements
on public companies including requiring establishment and maintenance of effective disclosure and financial controls. Our management
and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and
regulations have increased and will continue to increase our legal and financial compliance costs and will make some activities
more time-consuming and costlier. For example, we expect that these rules and regulations may make it more difficult and more
expensive for us to obtain directors’ and officers’ liability insurance, which could make it more difficult for us
to attract and retain qualified members of our board of directors. We cannot predict or estimate the amount of additional costs
we will incur as a public company or the timing of such costs.
The
Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure
controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over
financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act. In addition, we will be required to have our independent registered public accounting
firm attest to the effectiveness of our internal control over financial reporting the later of our second annual report on Form
10-K or the first annual report on Form 10-K following the date on which we are no longer an emerging growth company. Our compliance
with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant management
efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff
with appropriate public company experience and technical accounting knowledge. If we are not able to comply with the requirements
of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our
internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline
and we could be subject to sanctions or investigations by the exchange we are listed on, the SEC or other regulatory authorities,
which would require additional financial and management resources.
Our
ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate
financial statements. We expect that we will need to continue to improve existing, and implement new operational and financial
systems, procedures and controls to manage our business effectively. Any delay in the implementation of, or disruption in the
transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude
that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from
our auditors as required under Section 404 of the Sarbanes-Oxley Act. This, in turn, could have an adverse impact on trading prices
for our common stock, and could adversely affect our ability to access the capital markets.
We
are an emerging growth company and subject to less rigorous public reporting requirements and cannot be certain if the reduced
reporting requirements applicable to emerging growth companies will make our Common Stock less attractive to investors.
We
are a public reporting company under the Exchange Act, and thereafter publicly report on an ongoing basis as an “emerging
growth company” (as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act) under
the reporting rules set forth under the Exchange Act. For so long as we remain an “emerging growth company”, we may
take advantage of certain exemptions from various reporting requirements that are applicable to other Exchange Act reporting companies
that are not “emerging growth companies”, including but not limited to:
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●
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Not
being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
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|
|
|
|
●
|
Taking
advantage of extensions of time to comply with certain new or revised financial accounting standards;
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|
|
|
|
●
|
Being
permitted to comply with reduced disclosure obligations regarding executive compensation in our periodic reports and proxy
statements; and
|
|
|
|
|
●
|
Being
exempt from the requirement to hold a non-binding advisory vote on executive compensations and stockholder approval of a golden
parachute payments not previously approved.
|
We
expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We could be an emerging
growth company for up to five years, circumstances could cause us to lose that status earlier, including if the market value of
our Common Stock held by non-affiliates exceeds $700 million, if we issue $1 billion or more in non-convertible debt during a
three-year period, or if our annual gross revenues exceed $1 billion. We would cease to be an emerging growth company on the last
day of the fiscal year following the date of the fifth anniversary of our first sale of common equity securities under an effective
registration statement or a fiscal year in which we have $1 billion in gross revenues. Finally, at any time we may choose to opt-out
of the emerging growth company reporting requirements. If we choose to opt out, we will be unable to opt back in to being an emerging
growth company.
We
cannot predict if investors will find our Common Stock less attractive because we may rely on these exemptions. If some investors
find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and our stock
price may be more volatile.
If
our shares of Common Stock become subject to the penny stock rules, it would become more difficult to trade our shares.
The
Commission has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks
are generally equity securities with a price per share of less than $5.00, other than securities registered on certain national
securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume
information with respect to transactions in such securities is provided by the exchange or system. If we do not obtain or retain
a listing on the NYSE American or NASDAQ Capital Market and if the price of our Common Stock is less than $5.00 per share, our
Common Stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before effecting a transaction in a
penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information.
In addition, the penny stock rules require that, before effecting any such transaction in a penny stock not otherwise exempt from
those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser
and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement
to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure
requirements may have the effect of reducing the trading activity in the secondary market for our Common Stock, and therefore
stockholders may have difficulty selling their shares.
FINRA
sales practice requirements may limit a stockholder’s ability to buy and sell our stock.
In
addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other
information. The FINRA requirements may make it more difficult for broker-dealers to recommend that their customers buy our Common
Stock, which may have the effect of reducing the level of trading activity in our Common Stock. As a result, fewer broker-dealers
may be willing to make a market in our common stock, reducing a stockholder’s ability to resell shares of our Common Stock.
Our
stock price may be volatile.
The
market price of our Common Stock has been highly volatile and could fluctuate widely in price in response to various potential
factors, many of which will be beyond the Company’s control, including the following:
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●
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services
by the Company or its competitors;
|
|
●
|
additions
or departures of key personnel;
|
|
●
|
the
Company’s ability to execute its business plan;
|
|
●
|
operating
results that fall below expectations;
|
|
●
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loss
of any strategic relationship;
|
|
●
|
industry
developments;
|
|
●
|
economic
and other external factors; and
|
|
●
|
period-to-period
fluctuations in the Company’s financial results.
|
In
addition, the securities markets have from time-to-time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of the Company’s common stock.
If
securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business,
our share price and trading volume could decline.
The
trading market for our common stock will, to some extent, depends on the research and reports that securities or industry analysts
publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us
downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts
cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could
cause our share price or trading volume to decline.
We
do not intend to pay dividends for the foreseeable future, which could reduce the attractiveness of our stock to some investors.
We
currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to
declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our common
stock if the market price of our common stock increases. In addition, we may incur debt financing to further finance our operations,
the governing documents of which may contain restrictions on our ability to pay dividends.
Provisions
in our articles of incorporation and bylaws and Nevada law may discourage, delay or prevent a change of control of our company
and, therefore, may depress the trading price of our stock.
Our
articles of incorporation and bylaws contain certain provisions that may discourage, delay or prevent a change of control that
our stockholders may consider favorable. These provisions:
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●
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prohibit
stockholder action to elect or remove directors by majority written consent;
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●
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provide
that the board of directors is expressly authorized to make, alter or repeal our bylaws;
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●
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prohibit
our stockholders from calling a special meeting of stockholders; and
|
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●
|
establish
advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted
upon by stockholders at stockholder meetings.
|
We
may be subject to securities litigation, which is expensive and could divert management attention.
In
the past companies that have experienced volatility in the market price of their stock have been subject to securities class action
litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial
costs and diversion of management’s attention and resources, which could seriously hurt our business. Any adverse determination
in litigation could also subject us to significant liabilities.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
Not
applicable.
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. We believe our current office space is suitable and adequate
for its intended purposes and our near-term expansion plans.
Currently
Operating System-Wide Restaurants
As
of April 15, 2021, company-operated, franchised and total system-wide restaurants by jurisdiction are:
State
|
|
Company-Owned
Restaurants
|
|
|
Franchised
Restaurants
|
|
|
Total
Restaurants
|
|
California
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Georgia
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Illinois
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
Maryland
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
New Jersey
|
|
|
-
|
|
|
|
5
|
|
|
|
5
|
|
New York
|
|
|
4
|
|
|
|
1
|
|
|
|
5
|
|
North Carolina
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Oklahoma
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Rhode Island
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Pennsylvania
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Texas
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
Virginia
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Washington
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Kuwait
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
TOTAL
|
|
|
17
|
|
|
|
15
|
|
|
|
32
|
|
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
From
time to time, we are a defendant or plaintiff in various legal actions that arise in the normal course of business. We record
legal costs associated with loss contingencies as incurred and have accrued for all probable and estimable settlements.
We
are not currently involved in any material disputes and do not have any material litigation matters pending except:
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 December 31, 2020, the Company has accrued for the liability in convertible notes payable in the amount of $100,000
and accrued interest of $23,056 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 December 31, 2020, the Company has accrued for the liability in accounts payable and
accrued expenses.
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 December 31, 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 December 31, 2020, the Company has accrued for the liability
in accounts payable and accrued expenses.
In
March 2021, the Company participated in a mediation concerning an investor who invested with American Restaurant
Holdings, Inc and/or American Restaurants, LLC, our former parent company, from 2013 through 2015 in the total amount of $531,250.
The Company does not believe the dispute concerns Muscle Maker, Inc. and intends to defend itself vigorously if the
matter is not settled. As of the filing of this report, the company has not accrued for any potential liability pending the outcome
of continued mediation.
Muscle
Maker or its subsidiaries failed in certain instances in paying past state and local sales taxes collected from customers in specific
states that impose a tax on sales of the Company’s products during 2017 and 2018. The Company had accrued
a liability for approximately $231,177 as of December 31, 2020 related to this matter. All current state and local sales taxes
from January 1, 2018 for open company owned locations have been fully paid and in a timely manner. The Company has completed or
is in discussions on payment plans with the various state or local entities for these past owed amounts.
ITEM
4.
|
MINE
SAFETY DISCLOSURES.
|
Not
applicable.
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
Board
of Directors and Executive Officers
Our
directors hold office until their successors are elected and qualified, or until their deaths, resignations or removals. Our executive
officers hold office at the pleasure of our board of directors, or until their deaths, resignations or removals.
As
of April 15, 2021, our current directors and executive officers and their ages are:
Name
|
|
Age
|
|
Principal
Positions Held With Us
|
Kevin Mohan
|
|
47
|
|
Chief Investment Officer
and Chairman of the Board
|
Michael J. Roper
|
|
56
|
|
Chief Executive Officer, Secretary
|
Kenneth Miller
|
|
51
|
|
Chief Operating Officer
|
Ferdinand Groenewald
|
|
36
|
|
Chief Financial Officer
|
Aimee Infantee
|
|
33
|
|
Chief Marketing Officer
|
Stephen A. Spanos*
|
|
58
|
|
Director
|
A.B. Southall III
|
|
59
|
|
Director
|
Paul L. Menchik
|
|
73
|
|
Director
|
Peter S. Petrosian
|
|
68
|
|
Director
|
Jeff Carl
|
|
65
|
|
Director
|
Major General (Ret) Malcolm B.
Frost+
|
|
54
|
|
Director
|
Philip Balatsos+
|
|
43
|
|
Director
|
*Appointed
to the Board of Directors on February 6, 2020
+Appointed
to the Board of Directors on October 27, 2020
Executive
Officers
Kevin
Mohan. Mr. Mohan has served as Chairman of the Board and a director of Muscle Maker, Inc. since April, 2018. From April,
2018 through May, 2018, he also served as our Interim President. He has also served as the Chief Investment Officer since May,
2018. From June 2012 through January, 2018, Mr. Mohan served as the VP of Capital Markets for American Restaurant Holdings, Inc.,
a company focused on acquiring and expanding fast casual restaurant brands.
Based
on his experience we have deemed Mr. Mohan fit to serve on the Board and as Chairman of the Board.
Michael
J. Roper. Mr. Roper has served as Chief Executive Officer, of Muscle Maker, Inc. since May 1, 2018. Mr. Roper has unique
experience ranging from owning and operating several franchise locations through the corporate executive levels. From May 2015
through October 2017, Mr. Roper served as Chief Executive Officer of Taco Bueno where he was responsible for defining strategy
and providing leadership to 162 company-owned and operated locations along with 23 franchised locations. From March 2014 through
May 2015, Mr. Roper served as the Chief Operating Officer of Taco Bueno and from July 2013 through March 2014 as the Chief Development
and Technology Officer of Taco Bueno. Prior to joining Taco Bueno, Mr. Roper was a franchise owner and operator of a IMS Barter
franchise and held several roles with Quiznos Sub from 2000 to 2012 starting as a franchise owner and culminating in his appointment
as the Chief Operating Officer/Executive Vice President of Operations in 2009. Mr. Roper received a Bachelor of Science in Business
and General Management from Northern Illinois University.
Based
on his education and extensive experience in the restaurant/franchise industry, we have deemed Mr. Roper fit to serve as our principal
executive officer.
Kenneth
Miller. Mr. Miller has served as Chief Operating Officer of Muscle Maker, Inc. since September 2018. Mr. Miller has served
in the restaurant business for an extensive portion of his career. Prior to joining us as Chief Operating Officer in September,
2018, Mr. Miller served as the Senior Vice President of Operations for Dickey’s BBQ Restaurant from April 2018 through September
2018 and in various capacities with Taco Bueno Restaurants, LP from October 2013 through April 2018 culminating in the position
of Senior Vice President of Operations. Mr. Miller received a Bachelor of Arts in Business/Exercise Science from Tabor College
in 1991.
Based
on his education and extensive experience in the restaurant/franchise industry, we have deemed Mr. Miller fit to serve as our
Chief Operating Officer.
Ferdinand
Groenewald. Mr. Groenewald has served as the Chief Financial Officer of Muscle Maker, Inc. since September 2018. Mr. Groenewald
had previously served as our Vice President of Finance, Principal Financial Officer and Principal Accounting Officer, Muscle Maker
Development, LLC and Muscle Maker Corp., LLC from January 25, 2018 through May 29, 2018. In addition, Mr. Groenewald has served
as our controller from October 2017 through May 29, 2018. Mr. Groenewald is a certified public accountant with significant experience
in finance and accounting. From July 2018 through August 2018, Mr. Groenewald serves as senior financial reporting accountant
of Wrinkle Gardner & Company, a full service tax, accounting and business consulting firm. From February 2017 to October 2017,
Mr. Groenewald served as Senior Financial Accounting Consultant at Pharos Advisors, Inc. serving a broad range of industries.
From November 2013 to February 2017, he served as a Senior Staff Accountant at Financial Consulting Strategies, LLC where he provided
a broad range of accounting, financial reporting, and pre-auditing services to various industries. From August 2015 to December
2015, Mr. Groenewald served as a Financial Reporting Analyst at Valley National Bank. Mr. Groenewald holds a Bachelor of Science
in accounting from the University of South Africa.
Based
on his education and extensive experience in the financial and accounting industries, we have deemed Mr. Groenewald fit to serve
as our Chief Financial Officer.
Aimee
Infante. Ms. Infante has served in various roles with us since 2014 starting as Marketing and Communications Manager in
October 2014 and then as a Marketing Director from February 2015 through April 2016. Ms. Infante was then promoted to Vice President
of Marketing in April 2016 prior to her appointment as Chief Marketing Officer in May 2019. Prior to joining us, Ms. Infante served
in various marketing roles including Regional Marketing Manager for Qdoba Mexican Grill from November 2010 through April 2014.
Ms. Infante holds a Bachelor of Science in Marketing from Rider University.
Stephen
A. Spanos. Mr. Spanos has served as director of Muscle Maker, Inc. since February 2020. Since 2013, Mr. Spanos has provided
financial and accounting consulting services for both privately held and public companies. From 2009 to 2013, Mr. Spanos served
as the Chief Financial Officer of Orion Seafood International, Inc., a marketer of frozen lobster products, and as the Controller
of Reef Point Systems, a provider of security solutions for converged wireless and wireline networks in the United States, from
2005 to 2013. Mr. Spanos served as an audit manager for BDO USA, LLP and as an auditor for Ernst & Young. Mr. Spanos received
his MBA and BS in Business Administration, Accounting and Financing in 1995 and 1985, respectively, from Boston University.
Based
on his education and extensive experience in financial and accounting matters, we have deemed that Mr. Spanos is fit to serve
on the Board.
A.B.
Southall III. Mr. Southall has served as director of Muscle Maker, Inc. since February 2017. He has over 35 years of experience
managing construction and land developing businesses. From December 1997 until December 2017 he was the President of a custom
home building company. From March 2011 to current, Mr. Southall has been the President of Third Generation Builders, Inc. In addition,
since 2001, Mr. Southall has been the President of Southall Landings Marina, Inc., a 189 boat slip marina complex. His involvement
in the marina business led him to co-found a local Waterway Association. He has diversely invested across multiple sectors including
private placements, oil & gas, real estate, restaurant businesses and commodities. Mr. Southall is an advocate of a healthy
approach to the food industry and the restaurant business.
Based
on his vast business and financial experience with real estate and restaurants, we have deemed Mr. Southall fit to serve on the
Board.
Paul
L. Menchik. Mr. Menchik has served as director of Muscle Maker, Inc. since February 2017. Since 1986, Mr. Menchik has
been Professor of Economics at Michigan State University where he has been Department chairperson and Director of Graduate Programs.
He has served as Senior Economist for Economic Policy for the White House Office of Management and Budget (where among other matters
he worked on Social Security solvency issues) and served as Visiting Scholar at the Tax Analysis Division of the Congressional
Budget Office. Menchik has also been on the faculty of Rutgers University and the University of Wisconsin and has served as visiting
faculty at University of Pennsylvania, London School of Economics, University College London, and Victoria University in Wellington
New Zealand. Over the years he has advised three state governments and five United States government agencies. He holds a Ph.D.
from the Wharton School of Finance and Commerce at the University of Pennsylvania. He has over 40 publications including a book
on household and family economics, made over 85 paper presentations at other universities and conferences around the world and
has refereed for over 20 academic journals and is currently a member of the editorial board for the Journal of Income Distribution.
He is a member of Who’s Who in Economics and Who’s Who in America.
Based
on his education and extensive experience in economic and financial matters, we have deemed Mr. Menchik fit to serve on the Board.
Peter
S. Petrosian. Mr. Petrosian has served as director of Muscle Maker, Inc. since May 2018. Mr. Petrosian is a senior level
food service executive with diversified leadership experience in casual dining, contract management, quick service and quick casual
segments with a background in growth and turnaround situations, demonstrated expertise in operations, mergers and acquisitions,
profit improvement, strategic planning and business development. Since 2005 to the present, Mr. Petrosian owned and operated PSP
Management Consulting providing interim executive support in areas of organizational development, business, franchise and operational
planning and valuation assistance to private equity firms in the restaurant industry. From November 2013 to January 2017, Mr.
Petrosian served as the Chief Development Officer of Franchise Sports Concepts, LLC, a franchisor of Beef ‘O’ Brady’s
and the Brass Tap. From April, 2007 to November, 2013, Mr. Petrosian was the Chief Operation Officer of Steak-Out Franchising,
Inc., a franchisor of a char-broiled steak and full meal delivery concept. Prior to 2007, Mr. Petrosian held various positions
with McAlister’s Corporation, AFC Enterprises (Church’s Chicken), Service America Corporation (wholly owned subsidiary
of GE Capital) and Marriott Corporation.
Based
on his experience with various restaurant concepts and senior executive level positions, we have deemed Mr. Petrosian fit to serve
on the Board.
Jeff
Carl. Mr. Carl has served as director of Muscle Maker, Inc. since September 3, 2019. Since February, 2017, Mr. Carl has
served as Executive Director of Nice & Company, an ad agency with a focus on print, TV, digital, experiential and mobile,
and as an independent consultant to the restaurant industry. From June, 2013 to January, 2017, Mr. Carl served as the Chief Marketing
Officer for Taco Bueno Restaurants and from 2009 to 2013 as the Chief Marketing Officer of Tavistock Restaurants LLC. Mr. Carl
received a BA from Wake Forest University in 1977 and a MBA from University of North Carolina Chapel Hill in 1979.
Based
on his experience within the restaurant industry and due to the fact that he has held senior level executive positions with a
focus on advertising and marketing, we have deemed Mr. Carl a fit to serve on the Board.
Major
General (Ret) Malcolm B. Frost. Maj. Gen (Ret) Frost has 31 years of military experience providing
large-scale strategic and operational leadership and oversight in the Indo-Asia-Pacific, Middle East, Europe, and the United States
for the United States Army - successfully leading the evolution of soldier training programs in peace and war from platoon through
2-star command level. Maj. Gen. (Ret) Frost has been deployed to combat several times in a variety of leadership and command positions.
Since 2019, Maj. Gen. (Ret) Frost served as Executive Consultant for Fortune 500 and larger corporations through Malcolm Frost
and Associates LLC. From 2015 through 2019, Maj. Gen. (Ret) Frost served as the Commanding General for the US Army Training and
Doctrine Command located at Fort Eustis, Virginia and as the Chief of Public Affairs for the US Army Headquarters based in Washington,
DC. Maj. Gen. (Ret) Frost also served as the Deputy Commanding General for Support for the US Army, Deputy Director of Operations
for the US Department of Defense and the Director of Operations for the US Army Pacific Headquarters. He deployed to Bosnia-Hercegovina
as a company commander in 1995 and deployed twice to Iraq as commander of an 800 person Cavalry Squadron operating in Tal Afar
during the Surge in 2006-7, and as commander of a 5K person Stryker Brigade Combat Team operating in Diyala, Salah ad Din, and
Kirkuk provinces in 2010-11. Additionally, he deployed as Director of Operations of a 4,000 person airborne brigade task force
in Afghanistan in 2002-3. In addition to a Bachelor of Science Degree in Human Resources Management from the United States Military
Academy at West Point, Maj. Gen. (Ret) Frost holds advanced degrees from Webster University and the U.S. Army War College in Human
Resources Development and National Security Strategy, respectively. He is the recipient of the Distinguished Service Medal x2,
Defense Superior Service Medal, Legion of Merit x3, Bronze Star Medal x3, Air Medal, Army Commendation Medal x6 including one
for Valor, Combat Infantryman Badge, Master Parachutist Badge and Ranger Tab. He is a Certified Project Director and is the recipient
of the U.S. Department of State Meritorious Honor Award for reconstruction, civic and humanitarian achievements while serving
in Iraq.
Based
on his vast business and financial experience with the military as well as his business experience, we have deemed Maj. Gen (Ret)
Frost a fit to serve on the Board.
Philip
Balatsos. Since 2016, Mr. Balatsos has worked in the restaurant and hospitality industries. In 2018, Mr. Balatsos
founded and has served as the owner operator of LAPH Hospitality which operates a café/catering business and also serves
as a consultant providing financial, purchasing and usage analysis as well as rollout services pertaining to ordering, invoicing
and inventorying systems. From 2016 through 2018, Mr. Balatsos held various positions with Barteca Restaurant Group including
Assistant General Manager and Purchasing Manager. Prior to 2016, Mr. Balatsos held various position on Wall Street for 16 years
including Vice President, Foreign Exchange Sales/Trading for Credit Suisse, Director, Foreign Exchange Hedge Fund Sales for Barclays
Capital and Financial Advisor for Stifel Nicolaus & Co. Mr. Balatsos graduated from Skidmore College in 1999 with a Bachelor
of Science in Business Administration and from Institute of Culinary Education in 2016.
Family
Relationships
There
are no family relationships among any of our executive officers and directors.
Corporate
Governance
Board
of Directors and Board Committees
Our
stock (symbol: GRIL) is listed on the NASDAQ capital market. Under the rules of Nasdaq, “independent” directors must
make up a majority of a listed company’s board of directors. In addition, applicable Nasdaq rules require that, subject
to specified exceptions, each member of a listed company’s audit and compensation committees be independent within the meaning
of the applicable Nasdaq rules. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under
the Exchange Act.
Our
board of directors currently consists of eight (8) members. Our board of directors has determined that Stephen Spanos, A.B. Southall
III, Paul L. Menchik, Peter S. Petrosian, Malcolm Frost, Philip Baltasos and Jeff Carl, qualify as independent directors in accordance
with the Nasdaq Capital Market, or Nasdaq listing requirements. Kevin Mohan is not considered independent. Nasdaq’s independence
definition includes a series of objective tests, such as that the director is not, and has not been for at least three (3) years,
one of our employees and that neither the director nor any of his or her family members has engaged in various types of business
dealings with us. In addition, as required by Nasdaq rules, our board of directors has made a subjective determination as to each
independent director that no relationships exist that, in the opinion of our board of directors, would interfere with the exercise
of independent judgment in carrying out the responsibilities of a director. In making these determinations, our board of directors
reviewed and discussed information provided by the directors and us with regard to each director’s business and personal
activities and relationships as they may relate to us and our management. There are no family relationships among any of our directors
or executive officers.
As
required under Nasdaq rules and regulations and in expectation of listing on Nasdaq, our independent directors meet in regularly
scheduled executive sessions at which only independent directors are present.
Board
Leadership Structure and Board’s Role in Risk Oversight
Kevin
Mohan is the Chairman of the Board. The Chairman has authority, among other things, to preside over the Board meetings and set
the agenda for the Board meetings. Accordingly, the Chairman has substantial ability to shape the work of our Board. We currently
believe that separation of the roles of Chairman and Chief Executive Officer ensures appropriate oversight by the Board of our
business and affairs. However, no single leadership model is right for all companies and at all times. The Board recognizes that
depending on the circumstances, other leadership models, such as the appointment of a lead independent director, might be appropriate.
Accordingly, the Board may periodically review its leadership structure. In addition, following the qualification of the offering,
the Board will hold executive sessions in which only independent directors are present.
Our
Board is generally responsible for the oversight of corporate risk in its review and deliberations relating to our activities.
Our principal source of risk falls into two categories, financial and product commercialization. The audit committee oversees
management of financial risks; our Board regularly reviews information regarding our cash position, liquidity and operations,
as well as the risks associated with each. The Board regularly reviews plans, results and potential risks related to our system-wide
restaurant growth, brand awareness and menu offerings. Our Compensation Committee is expected to oversee risk management as it
relates to our compensation plans, policies and practices for all employees including executives and directors, particularly whether
our compensation programs may create incentives for our employees to take excessive or inappropriate risks which could have a
material adverse effect on the Company.
Committees
of the Board of Directors
The
Board of Directors has already established an audit committee (the “Audit Committee”), a Compensation Committee (the
“Compensation Committee”) and a Nominating and Corporate Governance Committee (“Governance Committee”).
The composition and function of each committee are described below.
Audit
Committee
The
Audit Committee has three members, including Messrs. Spanos, Balatsos and Petrosian. Mr. Spanos serves as the chairman of the
Audit Committee and satisfies the definition of “audit committee financial expert”.
Our
audit committee is authorized to:
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●
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approve
and retain the independent auditors to conduct the annual audit of our financial statements;
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●
|
review
the proposed scope and results of the audit;
|
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●
|
review
and pre-approve audit and non-audit fees and services;
|
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●
|
review
accounting and financial controls with the independent auditors and our financial and accounting staff;
|
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●
|
review
and approve transactions between us and our directors, officers and affiliates;
|
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●
|
recognize
and prevent prohibited non-audit services; and
|
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●
|
establish
procedures for complaints received by us regarding accounting matters; oversee internal audit functions, if any.
|
Compensation
Committee
The
Compensation Committee has two members, including Messrs. Carl and Southall. Mr. Carl serves as the chairman of the Compensation
Committee.
Our
Compensation Committee is authorized to:
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●
|
review
and determine the compensation arrangements for management;
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|
|
|
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●
|
establish
and review general compensation policies with the objective to attract and retain superior talent, to reward individual performance
and to achieve our financial goals;
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|
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●
|
administer
our stock incentive and purchase plans; and
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●
|
review
the independence of any compensation advisers.
|
Nominating
and Corporate Governance Committee
The
Governance Committee has three members, including Messrs. Menchik, Southall and Carl. Mr. Menchik serves as the chairman of the
Governance Committee.
The
functions of our Governance Committee, among other things, include:
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●
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identifying
individuals qualified to become board members and recommending director;
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●
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nominees
and board members for committee membership;
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●
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developing
and recommending to our board corporate governance guidelines;
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●
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review
and determine the compensation arrangements for directors; and
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●
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overseeing
the evaluation of our board of directors and its committees and management.
|
Our
goal is to assemble a Board that brings together a variety of skills derived from high quality business and professional experience.
Compensation
Committee Interlocks and Insider Participation
None
of the members of our Compensation Committee, at any time, has been one of our officers or employees. None of our executive officers
currently serves, or in the past year has served, as a member of the Board of Directors or Compensation Committee of any entity
that has one or more executive officers on our Board of Directors or Compensation Committee. For a description of transactions
between us and members of our Compensation Committee and affiliates of such members, please see “Certain Relationships and
Related Party Transactions”.
Code
of Business Conduct and Ethics
We
have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those
officers responsible for financial reporting.
Section
16(a) Beneficial Ownership Reporting Compliance
Our
directors, executive officers, and any persons holding more than ten percent of our Common Stock became obligated to comply with
such rules upon the March 29, 2018 filing of our Form 8-A12B registering our class of Common Stock.
ITEM
11.
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EXECUTIVE
COMPENSATION.
|
Summary
Compensation Table
The
following Summary Compensation Table sets forth all compensation earned in all capacities during the fiscal years ended December
31, 2020 and 2019 by (i) our principal executive officer, (ii) our two most highly compensated executive officers, other than
our principal executive officer, who were serving as executive officers as of December 31, 2020 and whose total compensation for
the 2020 fiscal year, as determined by Regulation S-K, Item 402, exceeded $100,000, (iii) a person who would have been included
as one of our two most highly compensated executive officers, other than our principal executive officer, but for the fact that
he was not serving as one of our executive officers as of December 31, 2020 (the individuals falling within categories (i), (ii)
and (iii) are collectively referred to as the “Named Executive Officers”):
Summary
Compensation Table
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|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Stock
Award
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan
Compensation
|
|
|
Non-Qualified
Deferred
Compensation
Earnings
|
|
|
All
Other Compensation
|
|
|
Total
|
|
Michael J. Roper
|
|
|
2020
|
|
|
$
|
360,503
|
|
|
$
|
180,288
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
540,791
|
|
Chief Executive
Officer of Muscle Maker, Inc.
|
|
|
2019
|
|
|
$
|
271,946
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
271,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ferdinand Groenewald
|
|
|
2020
|
|
|
$
|
171,634
|
|
|
$
|
77,885
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
249,519
|
|
Chief Financial
Officer of Muscle Maker, Inc.
|
|
|
2019
|
|
|
$
|
151,749
|
|
|
$
|
10,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
161,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth Miller
|
|
|
2020
|
|
|
$
|
256,442
|
|
|
$
|
53,846
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
310,288
|
|
Chief Operating
Officer of Muscle Maker, Inc.
|
|
|
2019
|
|
|
$
|
202,298
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
202,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Mohan
|
|
|
2020
|
|
|
$
|
185,077
|
|
|
$
|
78,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
72,327
|
|
|
$
|
335,404
|
|
Chief Operating
Officer of Muscle Maker, Inc.
|
|
|
2019
|
|
|
$
|
142,940
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
142,940
|
|
Employment
Agreements
Michael
Roper
On
October 26, 2018, the Company entered into an Employment Agreement with Michael Roper, which replaced his employment agreement
from May 2018. Pursuant to the Employment Agreement, Mr. Roper will continue to be employed as Chief Executive Officer of the
Company for a period of two years unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will
be automatically extended upon listing the Company on a national exchange and raising $3,000,000 (the “Public Offering”).
During the term of the Employment Agreement, Mr. Roper will be entitled to a base salary at the annualized rate of $250,000, which
was increased to $275,000 upon achieving various milestones required by the Investors that participated in the September 2018
Offering and will be increased to $350,000 upon the Company completing the Public Offering. Mr. Roper will be eligible for a discretionary
performance bonus to be paid in cash or equity, provided, however, no cash bonus will be paid until the closing of the Public
Offering. Mr. Roper was paid a $100,000 bonus upon closing of the Public Offering. Mr. Roper was also issued 14,285 shares of
our common stock upon the closing of the Public Offering. In addition, pursuant to board approval on June 29, 2019, Mr. Roper
was issued 35,714 shares of our restricted common stock awards upon closing of the Public Offering. In addition, upon the closing
of the Public Offering Mr. Roper received 14,285 shares of common stock pursuant to his employment agreement. Mr. Roper was issued
an additional 35,714 pursuant to his employment agreement upon the closing of the Public Offering of at least $5 million. Mr.
Roper’s common stock was issued on February 18, 2020 and his bonus was paid, subsequent to completing our Public Offering.
On August 11, 2020, Mr. Roper agreed to cancel 100,000 shares of common stock previously issued to him and waived all rights to
equity compensation provided under his employment agreement.
.
Ferdinand
Groenewald
On
September 26, 2018, the Company rehired Ferdinand Groenewald as Chief Financial Officer of the Company and entered into an Employment
Agreement with Mr. Groenewald. Pursuant to the agreement, Mr. Groenewald will be employed as Chief Financial Officer of the Company
for a period of two years unless earlier terminated pursuant to the terms of the agreement. During the term of the agreement,
Mr. Groenewald will be entitled to a base salary at the annualized rate of $150,000 and will be eligible for a discretionary performance
cash bonuses which will include $10,000 upon completion of the audit for the year ended December 31, 2017 and $25,000 and up to
1,428 shares of common stock upon completion of a public offering of not less than $3 million together with listing on a national
exchange (the “Public Offering”), which may be increased to 3,571 in the event $5 million is raised. Mr. Groenewald’s
salary will increase to $175,000 upon closing of the Public Offering. Mr. Groenewald is also eligible to participate in employee
benefits plans as the Company may institute from time to time that are available for full-time employees. Mr. Groenewald was paid
a discretionary performance cash and equity bonuses including cash of $25,000 and 19,285 upon completion of the Public Offering.
On August 11, 2020, Mr. Groenewald agreed to cancel 19,285 shares of the Company’s common stock previously issued and waved
all rights to the equity compensation provided under his employment agreement.
Kenneth
Miller
On
September 26, 2018, the Company appointed Kenneth Miller as Chief Operating Officer of the Company and entered into an Employment
Agreement with Mr. Miller. Pursuant to the agreement, Mr. Miller will be employed as Chief Operating Officer of the Company for
a period of two years unless earlier terminated pursuant to the terms of the agreement. During the term of the agreement, Mr.
Miller will be entitled to a base salary at the annualized rate of $200,000, which will be increased to $275,000 upon successful
closing of the Public Offering. Mr. Miller was issued 14,285 shares of the Company’s common stock upon closing of the Public
Offering. In addition, Mr. Miller was paid a discretionary performance cash and equity bonuses including cash of $50,000 and 17,857
shares of common stock upon completion of the Public Offering. Mr. Miller is also eligible to participate in employee benefits
plans as we may institute from time to time that are available for full-time employees. On August 11, 2020, Mr. Miller agreed
to cancel 32,142 shares of common stock previously issued to him and waived all rights to equity compensation provided under his
employment agreement.
Kevin
Mohan
On
October 26, 2018, we entered into an Employment Agreement with Kevin Mohan. Pursuant to the Employment Agreement, Mr. Mohan will
be engaged as our Chief Investment Officer for a period of two years unless earlier terminated pursuant to the terms of the agreement.
The Employment Agreement will be automatically extended upon the IPO. During the term of the Employment Agreement, Mr. Mohan will
be entitled to a base salary at the annualized rate of $156,000, which will be increased to $175,000 upon the IPO. Mr. Mohan will
be eligible for a discretionary performance bonus to be paid in cash following the closing of the IPO. Mr. Mohan was paid $50,000
bonus upon closing of the IPO. Mr. Mohan was also issued 28,571 shares of our common stock upon the closing of the IPO. In addition,
pursuant to board approval on June 29, 2019, Mr. Mohan was issued 35,714 shares of our restricted common stock awards upon closing
of the IPO. Mr. Mohan’s common stock was issued on February 18, 2020 and his bonus was paid, subsequent to completing our
IPO. On August 11, 2020, Mr. Mohan agreed to cancel 64,285 shares of common stock previously issued to him and waived all rights
to equity compensation provided under his employment agreement.
Elements
of Compensation
Base
Salary
Messrs.
Roper, Groenewald, Miller and Mohan received a fixed base salary in an amount determined in accordance with their then employment
agreement with Muscle Maker Inc., and based on a number of factors, including:
|
●
|
The
nature, responsibilities and duties of the officer’s position;
|
|
●
|
The
officer’s expertise, demonstrated leadership ability and prior performance;
|
|
●
|
The
officer’s salary history and total compensation, including annual cash bonuses and long-term incentive compensation;
and
|
|
●
|
The
competitiveness of the market for the officer’s services.
|
Bonus
Messrs.
Roper, Groenewald, Miller and Mohan received a bonus in connection with completing our IPO pursuant to their employment agreement.
In addition, discretionary performance based bonus was paid to Messrs. Roper, Groenewald, Miller and Mohan.
Stock
Award
In
fiscal 2019 we did not issue any restricted shares of our common stock to our named executive officers.
In
fiscal 2020, we issued an aggregate of 216,783 shares of our restricted common stock, with an aggregate value fair value of $1,083,915,
to our 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 us to cancel an aggregate of 216,783 vested shares of our
restricted common stock previously issued in the first quarter of 2020 and acknowledge that no further compensation is due under
their employment agreements.
Equity
Incentive Plans
2017
Plan
Our
board of directors and shareholders approved the 2017 Stock Option and Stock Issuance Plan or the 2017 Plan on July 27, 2017 and
September 21, 2017, respectively. Upon the adoption of our 2019 Equity Incentive Plan, we will no longer issue awards under the
2017 Plan, but any existing awards granted to our management team and Board of Directors will remain outstanding under the 2017
Plan. The 2017 Plan provides incentives to eligible employees, officers, directors and consultants in the form of incentive stock
options and non-qualified stock options. We no longer utilize the 2017 Plan. Of these shares, approximately 4,591 shares
were issued to the directors (765 shares per director) under the 2017 Plan by the Board of Directors on September 21, 2017.
2019
Plan
Our
board of directors and shareholders approved the 2019 Equity Incentive Plan or the 2019 Plan. Our shareholders approved the plan
on October 28, 2019. The 2019 Plan provides incentives to eligible employees, officers, directors 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.
We have reserved a total of 214,286 shares of common stock for issuance under the 2019 Plan. As of the date of the issuance of
these consolidated financial statements 188,527 shares have been issued under the 2019 Plan. Upon the adoption of our 2020 Equity
Incentive Plan, we no longer issue awards under the 2019 Plan, but any existing awards granted to our management team and Board
of Directors will remain outstanding under the 2019.
2020
Plan
Our
board of directors and shareholders approved and adopted on September 16, 2020 the 2020 Equity Incentive Plan (“2020 Plan”),
effective on September 16, 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 we reserved 1,750,000 shares of common stock for issuance. As of the date of the issuance
of these consolidated financial statements 178,333 shares have been issued under the 2020 Plan.
The
administrator, which is the Compensation Committee or another committee of at least two persons or the Board, has the authority,
without limitation (i) to designate participants to receive awards, (ii) determine the types of awards to be granted to participants,
(iii) determine the number of shares of common stock to be covered by awards, (iv) determine the terms and conditions of any awards
granted under the 2020 Plan, (v) determine to what extent and under what circumstances awards may be settled in cash, shares of
common stock, other securities, other awards or other property, or cancelled, forfeited or suspended, (vi) determine whether,
to what extent, and under what circumstances the delivery of cash, common stock, other securities, other awards or other property
and other amounts payable with respect to an award shall be made; (vii) interpret, administer, reconcile any inconsistency in,
settle any controversy regarding, correct any defect in and/or complete any omission in the 2020 Plan and any instrument or agreement
relating to, or award granted under, the 2019 Plan; (viii) establish, amend, suspend, or waive any rules and regulations and appoint
such agents as the administrator shall deem appropriate for the proper administration of the 2020 Plan; (ix) accelerate the vesting
or exercisability of, payment for or lapse of restrictions on, awards; (x) reprice existing awards with shareholder approval or
to grant awards in connection with or in consideration of the cancellation of an outstanding award with a higher price; and (xi)
make any other determination and take any other action that the administrator deems necessary or desirable for the administration
of the 2020 Plan. The administrator will have full discretion to administer and interpret the 2019 Plan and to adopt such rules,
regulations and procedures as it deems necessary or advisable and to determine, among other things, the time or times at which
the awards may be exercised and whether and under what circumstances an award may be exercised.
The
administrator will be authorized to grant options to purchase Common Stock that are either “qualified,” meaning they
satisfy the requirements of Code Section 422 for Incentive Stock Options, or “non-qualified,” meaning they do not
satisfy the requirements of Section 422 of the Code. Options granted under the 2020 Plan will be subject to the terms and conditions
established by the administrator. Under the terms of the 2020 Plan, unless the administrator determines otherwise in the case
of an option substituted for another option in connection with a corporate transaction, the exercise price of the Options will
not be less than the fair market value (as determined under the 2020 Plan) of the shares of common stock on the date of grant.
Options granted under the 2020 Plan will be subject to such terms, including the exercise price and the conditions and timing
of exercise, as may be determined by the administrator and specified in the applicable award agreement. The maximum term of an
option granted under the 2019 Plan will be ten years from the date of grant (or five years in the case of an Incentive Stock Option
granted to a 10% stockholder). Payment in respect of the exercise of an option may be made in cash or by check, by surrender of
unrestricted shares of Common Stock (at their fair market value on the date of exercise) that have been held by the participant
for any period deemed necessary by us to avoid an additional compensation charge or have been purchased on the open market, or
the administrator may, in its discretion and to the extent permitted by law, allow such payment to be made through a broker-assisted
cashless exercise mechanism, a net exercise method, or by such other method as the administrator may determine to be appropriate.
The
administrator will be authorized to award Stock Appreciation Rights (or SARs) under the 2020 Plan. SARs will be subject to such
terms and conditions as established by the administrator. A SAR is a contractual right that allows a participant to receive, either
in the form of cash, shares or any combination of cash and shares, the appreciation, if any, in the value of a share over a certain
period of time. A SAR granted under the 2020 Plan may be granted in tandem with an option and SARs may also be awarded to a participant
independent of the grant of an Option. SARs granted in connection with an Option shall be subject to terms similar to the Option
which corresponds to such SARs. SARs shall be subject to terms established by the administrator and reflected in the award agreement.
The
administrator will be authorized to award Restricted Stock under the 2020 Plan. Unless otherwise provided by the administrator
and specified in an award agreement, restrictions on Restricted Stock will lapse after three years of service with us. The administrator
will determine the terms of such Restricted Stock awards. Restricted Stock are shares of common stock that generally are non-transferable
and subject to other restrictions determined by the administrator for a specified period. Unless the administrator determines
otherwise or specifies otherwise in an award agreement, if the participant terminates employment or services during the restricted
period, then any unvested restricted stock will be forfeited.
The
administrator will be authorized to award Restricted Stock Unit awards. Unless otherwise provided by the administrator and specified
in an award agreement, Restricted Stock Units will vest after three years of service with us. The administrator will determine
the terms of such Restricted Stock Units. Unless the administrator determines otherwise or specifies otherwise in an award agreement,
if the participant terminates employment or services during the period of time over which all or a portion of the units are to
be earned, then any unvested units will be forfeited. At the election of the administrator, the participant will receive a number
of shares of common stock equal to the number of units earned or an amount in cash equal to the fair market value of that number
of shares at the expiration of the period over which the units are to be earned or at a later date selected by the administrator.
The
administrator will be authorized to grant Awards of unrestricted shares of common stock or other Awards denominated in shares
of common stock, either alone or in tandem with other Awards, under such terms and conditions as the administrator may determine.
Equity
Compensation Plan Information
The
following table provides information, as of December 31, 2020, with respect to equity securities authorized for issuance under
compensation plans:
Plan
Category
|
|
Number
of
Securities to be
Issued Upon
Exercise of
Outstanding Options
under
the Plan
(a)
|
|
|
Weighted-Average
Exercise Price of
Outstanding Options
under
The
Plan
(b)
|
|
|
Number
of
Securities
Remaining
Available
for Future
Issuance Under
Equity
Compensation
Plans
(excluding securities
reflected in
Column (a))
(c)
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
approved by security holders
|
|
|
0
|
|
|
$
|
-
|
|
|
|
1,607,793
|
|
Equity compensation
plans not approved by security holders
|
|
|
0
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
0
|
|
|
$
|
-
|
|
|
|
1,607,793
|
|
Director
Compensation
On
September 21, 2017, Muscle Maker granted 765 shares of common stock under our Muscle Maker 2017 Stock Option and Stock Issuance
Plan to each of our six directors of Muscle Maker (4,591 shares of common stock in the aggregate) at a value of $65.31 per share.
Such share grants are subject to graduated vesting in the following installments on each of the following dates: (i) 66.666% as
of the date of grant and (ii) 8.333% as of (a) October 1, 2017, (b) November 1, 2017, (c) December 1, 2017, and (d) January 1,
2018
During
2018, the directors did not receive any compensation.
On
July 16, 2019, the board of directors approved a board compensation plan that would compensate the board members for their deferred
compensation for 2019, 2018 and 2017. The board members are eligible for cash compensation of $4,500 or $9,000 per year. To be
paid as follows: (i) directors serving on the board during 2018 and 2017, will be granted shares is lieu of payment as the letter
agreements set forth certain terms pursuant to which the directors will serve as directors of the Company.
In
addition, on an ongoing basis pursuant to the approved board compensation plan each director will receive 1,428 shares of common
stock per year for service as director, 185 shares of common stock per year for service on each committee and 142 shares of common
stock per year for service as chair for such committee. The shares of common stock for committee service will be limited to two
committees.
The
Company issued shares of common stock upon the occurrence of the public offering and up listing on a national exchange as follows,
which was prorated for a partial year: (i) directors that served as directors during the year ended December 31, 2017 each received
714 shares of common stock, (ii) directors that served as directors during the year ended December 31, 2018 each received 1,428
shares of common stock and (iii) directors that served as directors during the year ended December 31, 2019 each received 1,428
shares of common stock.
The
directors did not received compensation for services prior to the Company being up listed on a national exchange, the Company
agreed to provide equity in lieu of cash compensation and equity compensation for services rendered during 2017, 2018 and 2019.
For past director services in lieu of cash unpaid to date: (i) directors that served as directors during the year ended December
31, 2017 each received shares of common stock valued at $4,500 priced at the price per share of the Company’s public offering
in connection with its uplisting (the “Uplisting Offering”), (ii) directors that served as directors during the year
ended December 31, 2018 each received shares of common stock valued at $9,000, which was prorated for a partial year of service,
and priced at the price per share of the Uplisting Offering and (iii) directors that served as directors during the year ended
December 31, 2019 through the date of the Uplisting Offering each received shares of common stock valued at $9,000, which was
prorated for a partial year of service, priced at the price per share of the Uplisting Offering.
On
December 4, 2020, the board of directors approved a new board compensation plan that would compensate the board members for their
deferred compensation for the fourth quarter 2020 through the third quarter of 2021. The board members are eligible for cash compensation
of $12,000 per year to be paid quarterly within 30 days of the close of each quarter.
In
addition, on an ongoing basis pursuant to the approved board compensation plan each director will receive $8,000 in value of common
stock per year for service as director, $6,000 in value of shares of common stock per year for service on each committee and $4,000
in value of shares of common stock per year for service as chair for such committee. The number of shares to be issued would be
based upon the closing price of the last trading date of each calendar quarter. The shares of common stock for committee service
will be limited to two committees.
Kevin
Mohan is an employee-director and does not receive compensation for serving in his role as a director.
Executive
Compensation Philosophy
Our
Board of Directors determines the compensation given to our executive officers in their sole determination. Our Board of Directors
reserves the right to pay our executives or any future executives a salary, and/or issue them shares of common stock issued in
consideration for services rendered and/or to award incentive bonuses which are linked to our performance, as well as to the individual
executive officer’s performance. This package may also include long-term stock-based compensation to certain executives,
which is intended to align the performance of our executives with our long-term business strategies. Additionally, while our Board
of Directors has not granted any performance base stock options to date, the Board of Directors reserves the right to grant such
options in the future, if the Board in its sole determination believes such grants would be in the best interests of the Company.
Incentive
Bonus
The
Board of Directors may grant incentive bonuses to our executive officers and/or future executive officers in its sole discretion,
if the Board of Directors believes such bonuses are in the Company’s best interest, after analyzing our current business
objectives and growth, if any, and the amount of revenue we are able to generate each month, which revenue is a direct result
of the actions and ability of such executives.
Long-Term,
Stock Based Compensation
In
order to attract, retain and motivate executive talent necessary to support the Company’s long-term business strategy we
may award our executives and any future executives with long-term, stock-based compensation in the future, at the sole discretion
of our Board of Directors.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|
The
following table sets forth information about the beneficial ownership of our common stock at April 15, 2021, for:
|
●
|
each
person, or group of affiliated persons, whom we know to beneficially own more than 5% of our common stock;
|
|
|
|
|
●
|
each
of our named executive officers;
|
|
|
|
|
●
|
each
of our directors; and
|
|
|
|
|
●
|
all
of our executive officers and directors as a group.
|
We
have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission. These rules generally
attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect
to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options
or warrants or upon conversion of a security that are either exercisable or convertible on or before a date that is 60 days after
April 15, 2021. These shares are deemed to be outstanding and beneficially owned by the person holding those options or
warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons or entities identified
in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to
applicable community property laws.
Except
as otherwise noted below, the address for persons listed in the table is c/o Muscle Maker, Inc., 2600 South Shore Blvd., Suite
300, League City, Texas 77573.
The
percentage ownership information shown in the column labeled “Percentage of Shares Outstanding” is based upon 13,826,734
shares of common stock outstanding as of April 15, 2021.
Name
of Beneficial Owner
|
|
Number
of Shares
Beneficially Owned (1)
|
|
|
Percentage
of Shares
Outstanding Prior to
Offering (1)
|
|
|
|
|
|
|
|
|
5% Stockholders:
|
|
|
|
|
|
|
|
|
Catalytic
Holdings 1 LLC (2)
|
|
|
1,996,638
|
|
|
|
13.60
|
%
|
Thoroughbred Diagnostics,
LLC (2)
|
|
|
1,709,000
|
|
|
|
11.85
|
%
|
Armistice Capital Master
Fund LTD (3)
|
|
|
1,395,588
|
|
|
|
9.99
|
%
|
Directors and Named Executive
Officers:
|
|
|
|
|
|
|
|
|
Kevin Mohan (4)
|
|
|
147,251
|
|
|
|
1.06
|
%
|
Michael J. Roper (5)
|
|
|
100,000
|
|
|
|
*
|
|
Ferdinand Groenewald
(6)
|
|
|
19,285
|
|
|
|
*
|
|
Kenneth Miller (7)
|
|
|
32,142
|
|
|
|
*
|
|
Stephen Spanos (8)
|
|
|
6,701
|
|
|
|
*
|
|
A.B. Southall, III
(9)
|
|
|
114,095
|
|
|
|
*
|
|
Paul L. Menchik (10)
|
|
|
62,930
|
|
|
|
*
|
|
Peter S. Petrosian
(11)
|
|
|
10,022
|
|
|
|
*
|
|
Jeff Carl (12)
|
|
|
8,713
|
|
|
|
*
|
|
Major General (ret)
Malcolm Frost (13)
|
|
|
1,692
|
|
|
|
*
|
|
Philip Balatsos (14)
|
|
|
3,206
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors
as a group (12 persons)
|
|
|
508,639
|
|
|
|
3.68
|
%
|
*
denotes less than 1%
(1)
|
Beneficial
ownership as reported in the above table has been determined in accordance with Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended, and is not necessarily indicative of beneficial ownership for any other purpose. The number
of shares of common stock shown as beneficially owned includes shares of common stock issuable upon (i) the exercise of stock
options that will become exercisable within sixty (60) days of April 15, 2021, (ii) the conversion of the convertible
promissory notes into shares of our common stock, and (iii) the exercise of warrants that will become exercisable within sixty
(60) days of April 15, 2021. Shares of common stock issuable pursuant to the foregoing methods are deemed outstanding
for purposes of calculating the percentage of beneficial ownership of the person or entity holding such securities. Accordingly,
the total percentages of beneficial ownership are in excess of one hundred percent (100%).
|
|
|
(2)
|
Catalytic
Holdings, LLC beneficially owns (i) 1,145,888 shares of common stock of the Company (ii) 850,750 shares of Common
Stock of the Company which are subject to presently exercisable purchase warrants. The natural person with voting and
investment control for Catalytic Holdings, LLC is Dmitriy Shapiro. Thoroughbred Diagnostics, LLC beneficially owns (i) 1,109,000
shares of Common Stock of Muscle Maker (ii) 600,000 shares of Common Stock of Muscle Maker which are subject to presently
exercisable purchase warrants. The natural person with voting and investment control for Thoroughbred Diagnostics, LLC is
Joey Giamichael.
|
|
|
(3)
|
Armistice
Capital Master Fund LTD beneficial owns (i) 1,250,000 shares of the common stock of the Company (ii) 4,115,227 shares of common
stock of the Company which are subject to presently exercisable purchase warrants and (iii) 2,865,227 shares of common stock
of the Company which are subject to presently exercisable pre-funded purchase warrants. There is a beneficial ownership limitation
on the warrants and prefunded warrants owned by the holder that limits beneficial ownership of the holder to 9.99% of the
number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable
upon exercise of the warrant at any time. The beneficial ownership limitation can be increase by the holder by giving written
notice to the Company, but this will not take effect until 61 days after the delivery of the notice to the Company. Armistice
Capital Master Fund LTD is managed by Armistice Capital, LLC, its investment manager. Steven Boyd, the managing member of Armistice Capital, LLC
has the sole voting and investment power over the securities held by Armistice Capital Master Fund LTD.
|
|
|
(4)
|
Kevin
Mohan beneficially owns (i) indirectly 5,574 shares of Common Stock of Muscle Maker through various family members that reside
in the same household as Kevin Mohan and (ii) directly 130,963 shares of common stock of Muscle Maker of which 10,714
are subject to presently exercisable purchase warrants issued to Kevin Mohan.
|
|
|
(5)
|
Michael
J. Roper beneficial owns directly 100,000 shares of common stock of the Company for serving as the Chief Executive Officer
of the Company.
|
|
|
(6)
|
Ferdinand
Groenewald beneficial owns directly 19,285 shares of common stock of the Company for serving as the Chief Financial Officer
of the Company.
|
|
|
(7)
|
Kenneth
Miller beneficial owns directly 32,142 shares of common stock of the Company for serving as Chief Operating Officer of the
Company.
|
|
|
(8)
|
Stephen
Spanos beneficially owns directly 6,701 shares of common stock of the Company for serving as a director through the
second quarter of 2020.
|
(9)
|
A.B.
Southall III beneficially owns (i) directly 104,095 shares of Common Stock of Muscle Maker, and (ii) directly 10,000
shares of Common Stock of Muscle Maker subject to presently exercisable purchase warrants issued to A.B. Southall.
|
|
|
(10)
|
Paul
L. Menchik beneficially owns (i) directly 52,930 shares of Common Stock of Muscle Maker, and (ii) directly 10,000 shares
of Common Stock of Muscle Maker subject to presently exercisable purchase warrants issued to Paul L. Menchik.
|
|
|
(11)
|
Peter
S. Petrosian beneficially owns directly 10,022 shares of Common Stock of Muscle Maker issued for services rendered
as a board of director.
|
|
|
(12)
|
Jeff
Carl beneficially owns directly 8,713 shares of Common Stock of Muscle Maker for services rendered as a board of director.
|
|
|
(13)
|
Major
General (ret) Malcolm Frost beneficially owns directly 1,692 shares of Common Stock of Muscle Maker for services rendered
as a board of director.
|
|
|
(14)
|
Philip
Balatsos beneficially owns directly 3,206 shares of Common Stock of Muscle Maker for services rendered as a board of
director.
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
Policies
and Procedures for Related Party Transactions
Following
this offering, pursuant to the written charter of our Audit Committee, the Audit Committee will be responsible for reviewing and
approving, prior to our entry into any such transaction, all related party transactions and potential conflict of interest situations
involving:
|
●
|
any
of our directors, director nominees or executive officers;
|
|
●
|
any
beneficial owner of more than 5% of our outstanding stock; and
|
|
●
|
any
immediate family member of any of the foregoing.
|
Our
Audit Committee will review any financial transaction, arrangement or relationship that:
|
●
|
involves
or will involve, directly or indirectly, any related party identified above and is in an amount greater than $0;
|
|
●
|
would
cast doubt on the independence of a director;
|
|
●
|
would
present the appearance of a conflict of interest between us and the related party; or
|
|
●
|
is
otherwise prohibited by law, rule or regulation.
|
The
Audit Committee will review each such transaction, arrangement or relationship to determine whether a related party has, has had
or expects to have a direct or indirect material interest. Following its review, the Audit Committee will take such action as
it deems necessary and appropriate under the circumstances, including approving, disapproving, ratifying, canceling or recommending
to management how to proceed if it determines a related party has a direct or indirect material interest in a transaction, arrangement
or relationship with us. Any member of the Audit Committee who is a related party with respect to a transaction under review will
not be permitted to participate in the discussions or evaluations of the transaction; however, the Audit Committee member will
provide all material information concerning the transaction to the Audit Committee. The Audit Committee will report its action
with respect to any related party transaction to the board of directors.
Transactions
with American Restaurants, LLC or American Restaurant Holdings, Inc.
On
January 23, 2015, in connection with the acquisition of Muscle Maker Brands, we issued two promissory notes payable in the amount
of $400,000 (“MM Note”) and $204,000 (“MMB Note”), respectively. MM Note includes interest imputed at
the rate of 0.41% per annum and is payable in three installments with the final installment due eighteen months after the closing
date of the Acquisition of Muscle Maker Brands. MMB Note was secured by the assets of Colonia, bore no stated interest and was
due on March 9, 2015.
On
January 23, 2015, Muscle Maker issued 619,897 shares of Common Stock to American Restaurant Holdings in exchange for cash of $3,645,000
and an obligation to repay an aggregate of $604,000 of principal due under MM Note and MMB Note.
On
March 9, 2015, the American Restaurant Holdings repaid MMB Note in full. On July 21, 2015, January 23, 2016 and July 23, 2016,
installments of $100,000, $150,000 and $150,000 were repaid on the balance of MM Note by the American Restaurant Holdings. As
of July 23, 2016, there is no balance outstanding related to MM Note.
On
December 31, 2015, we issued a promissory note in the amount of $1,082,620 to American Restaurant (the “2015 ARH Note”).
The note bore no stated interest or maturity date and was convertible into shares of Common Stock of Muscle Maker at a conversion
price of $32.69 per share. On March 14, 2017, American Restaurant Holdings elected to convert the 2015 ARH Note in the principal
amount of $1,082,620 into 33,141 shares of Common Stock of Muscle Maker at a conversion price of $32.69 per share.
During
the period from January 1 through December 15, 2016, we received $2,621,842 of advances from the American Restaurant Holdings.
The payable due to the American Restaurant Holdings as a result of these advances was exchanged for a convertible promissory note
in the amount of $2,621,842 (the “2016 ARH Note”). The 2016 ARH Note had no stated interest rate or maturity date
and was convertible into shares of the Common Stock of Muscle Maker at a conversion price of $26.11 per share at a time to be
determined by the lender. The 2016 American Restaurant Holdings Note included a three-year warrant for the purchase of 35,113
shares of our common stock at an exercise price of $65.31 per share. On March 14, 2017, the American Restaurant Holdings elected
to convert the 2016 ARH Note into 100,325 shares of Common Stock of Muscle Maker.
On
February 15, 2017, we issued a promissory note in the amount of $980,949 (the “First 2017 ARH Note”) and on March
15, 2017, MMI issued a promissory note in the amount of $338,834 (the “Second 2017 ARH Note”), both to ARH. The First
2017 ARH Note and the Second 2017 ARH Note bear no stated interest rate or maturity date and are convertible into 37,536 and 10,372
shares of our common stock at a conversion price of $26.11 per share and $32.69 per share, respectively, at a time to be determined
by the Former Parent. On March 14, 2017, the American Restaurant Holdings elected to convert the First 2017 ARH Note into 37,536
shares of our common stock.
The
First 2017 ARH Note and the Second 2017 ARH note include a three-year warrant for the purchase of 13,137 and 2,256 shares, respectively,
of Muscle Maker common stock at an exercise price of $65.31 per share. The warrants issued in connection with the First 2017 ARH
Note and the Second 2017 ARH note had a grant date value of $122,820 and $23,120, respectively. Muscle Maker allocated the proceeds
to the First 2017 ARH Note and the Second 2017 ARH and related warrants based on the relative fair values at the time of issuance,
resulting in an effective conversion price of $22.89 and $30.45 per share, respectively. The fair value of Muscle Maker common
stock on the dates the notes were issued was $50.05 per share, creating an intrinsic value of $27.16 and $19.60 per share, respectively.
On
March 14, 2017, American Restaurant Holdings elected to convert aggregate principal of $4,685,411 under the 2015 ARH Note, the
2016 ARH Note and the First 2017 ARH Note into an aggregate 171,003 shares of Muscle Makers common stock.
On
July 18, 2017, we issued a convertible promissory note (the “Third 2017 ARH Note”) to American Restaurant Holdings
in exchange for cash proceeds of $336,932. The Third 2017 ARH Note has no stated interest rate or maturity date and is convertible
into shares of our common stock at a conversion price of $52.29 per share at a time to be determined by the lender. The Third
2017 ARH Note includes a three-year warrant for the purchase of 2,256 shares of our common stock at an exercise price of $65.31
per share.
On
September 19, 2017, American Restaurant Holdings elected to convert aggregate principal of $675,766 under the Second 2017 ARH
Note and the Third 2017 Note into an aggregate 16,818 shares of Muscle Makers common stock.
On
April 6, 2018, we issued a $475,000 convertible promissory note (the “2018 ARH Note”) to American Restaurant Holdings.
The 2018 ARH Note has no stated interest rate or maturity date and is convertible into shares of Muscle Makers common stock at
a conversion price of $3.50 per share at a time to be determined by the lender.
On
April 11, 2018, American Restaurant Holdings elected to partially convert the 2018 ARHI Note for the principal of $392,542 into
112,154 shares of our common stock.
The
2015 ARH Note, 2016 ARH Note, First 2017 ARH Note, Second 2017 ARH Note, Third 2017 ARH Note and 2018 ARH Note are together, the
“ARH Notes”.
Transactions
with Officers, Directors and Executives of Muscle Maker
On
September 21, 2017, we granted 765 shares of common stock under our Muscle Maker 2017 Stock Option and Stock Issuance Plan to
each of our six directors of Muscle Maker (4,591 shares of common stock in the aggregate) at a value of $65.31 per share. Such
share grants are subject to graduated vesting in the following installments on each of the following dates: (i) 66.666% as of
the date of grant and (ii) 8.333% as of (a) October 1, 2017, (b) November 1, 2017, (c) December 1, 2017, and (d) January 1, 2018.
On
May 1, 2018, Muscle Maker board of directors agreed to issue 14,285 shares of common stock upon a Public Offering of at least
$3,000,000, to Michael Roper, our Chief Executive Officer, as part of his initial employment agreement. Mr. Roper is also eligible
to receive 14,285 restricted common stock awards on each anniversary of his employment date during the employment contract period
as well as up to 35,714 additional restricted common stock awards upon the successful completion of an initial public offering
of at least $5,000,000. In addition, pursuant to board approval on June 29, 2019, Mr. Roper is entitled to 35,714 shares of our
common stock that will be issued upon a Public Offering of at least $3,000,000.
During
April 2019, we repaid other notes payable in the aggregate principal amount of $710,000, of which $435,000 belong to related parties.
In addition, we issued 84,427 of our common stock as payment for the interest incurred on the other notes payable repaid in the
aggregate amount of $590,989.
On
May 14, 2019, we 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 our common stock trades publicly
on an exchange.
On
June 29, 2018, Muscle Maker board of directors agreed to issue Kevin Mohan and Michael Roper an additional 35,714 restricted common
stock awards. These stock awards was issued upon the successful completion of an initial public offering.
On
September 26, 2018, we rehired Ferdinand Groenewald as our Chief Financial Officer and entered into an Employment Agreement with
Mr. Groenewald. Pursuant to the agreement, Mr. Groenewald will be employed as our Chief Financial Officer for a period of two
years unless earlier terminated pursuant to the terms of the agreement. During the term of the agreement, Mr. Groenewald will
be entitled to a base salary at the annualized rate of $150,000 and will be eligible for a discretionary performance cash bonuses
which will include $10,000 upon completion of the audit for the year ended December 31, 2017 and $25,000 and up to 1,428 shares
of common stock upon completion of a public offering of not less than $3 million together with listing on a national exchange
(the “Public Offering”), which may be increased to 3,571 shares of common stock in the event $5 million is raised.
Mr. Groenewald’s salary will increase to $175,000 upon closing of the Public Offering. Mr. Groenewald is also eligible to
participate in employee benefits plans as we may institute from time to time that are available for full-time employees. In addition,
pursuant to board approval, Mr. Groenewald was issued 15,714 shares of our common stock upon closing of the IPO. On August 11,
2020, Mr. Groenewald agreed to cancel 19,285 shares of common stock previously issued to him and waived all rights to equity compensation
provided under his employment agreement.
On
September 26, 2018, we appointed Kenneth Miller as our Chief Operating Officer and entered into an Employment Agreement with Mr.
Miller. Pursuant to the agreement, Mr. Miller will be employed as our Chief Operating Officer for a period of two years unless
earlier terminated pursuant to the terms of the agreement. During the term of the agreement, Mr. Miller will be entitled to a
base salary at the annualized rate of $200,000, which will be increased to $275,000 upon successful closing of the Public Offering.
Mr. Miller is also entitled to 14,285 shares of our common stock that will be issued upon a Public offering of at least $3,000,000.
Mr. Miller is eligible for a discretionary performance cash and equity bonuses which will include cash of $50,000. Mr. Miller
was issued 14,285 shares of our common stock upon closing of the IPO. In addition, Mr. Miller was paid a discretionary performance
cash and equity bonuses including cash of $50,000 and 17,857 shares of common stock upon completion of the IPO. Mr. Miller is
also eligible to participate in employee benefits plans as we may institute from time to time that are available for full-time
employees. On August 11, 2020, Mr. Miller agreed to cancel 32,142 shares of common stock previously issued to him and waived all
rights to equity compensation provided under his employment agreement
On
October 26, 2018, we entered into an Employment Agreement with Michael Roper, which replaced his employment agreement from May
2018. Pursuant to the Employment Agreement, Mr. Roper will continue to be employed as our Chief Executive Officer for a period
of two years unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically
extended upon listing our common stock on a national exchange and raising $3,000,000 (the “IPO”). During the term
of the Employment Agreement, Mr. Roper will be entitled to a base salary at the annualized rate of $250,000, which was increased
to $275,000 upon achieving various milestones required by the Investors that participated in the September 2018 Offering and will
be increased to $350,000 upon our completing the IPO. Mr. Roper will be eligible for a discretionary performance bonus to be paid
in cash or equity, provided, however, no cash bonus will be paid until the closing of the IPO. Mr. Roper was paid $100,000 bonus
upon closing of the IPO. Mr. Roper was also issued 14,285 shares of our common stock upon the closing of the IPO. In addition,
pursuant to board approval on June 29, 2019, Mr. Roper was issued 35,714 shares of our restricted common stock awards upon closing
of the IPO. In addition, upon the closing of the IPO Mr. Roper received 14,285 shares of common stock pursuant to his employment
agreement. Mr. Roper was issued an additional 35,714 pursuant to his employment agreement upon the closing of the IPO of at least
$5 million. Mr. Roper’s common stock was issued on February 18, 2020 and his bonus was paid, subsequent to completing our
IPO. On August 11, 2020, Mr. Roper agreed to cancel 100,000 shares of common stock previously issued to him and waived all rights
to equity compensation provided under his employment agreement.
On
October 26, 2018, we entered into an Employment Agreement with Kevin Mohan. Pursuant to the Employment Agreement, Mr. Mohan will
be engaged as our Chief Investment Officer for a period of two years unless earlier terminated pursuant to the terms of the agreement.
The Employment Agreement will be automatically extended upon the IPO. During the term of the Employment Agreement, Mr. Mohan will
be entitled to a base salary at the annualized rate of $156,000, which will be increased to $175,000 upon the IPO. Mr. Mohan will
be eligible for a discretionary performance bonus to be paid in cash following the closing of the IPO. Mr. Mohan was paid $50,000
bonus upon closing of the IPO. Mr. Mohan was also issued 28,571 shares of our common stock upon the closing of the IPO. In addition,
pursuant to board approval on June 29, 2019, Mr. Mohan was issued 35,714 shares of our restricted common stock awards upon closing
of the IPO. Mr. Mohan’s common stock was issued on February 18, 2020 and his bonus was paid, subsequent to completing our
IPO. On August 11, 2020, Mr. Mohan agreed to cancel 64,285 shares of common stock previously issued to him and waived all rights
to equity compensation provided under his employment agreement.
We
have entered into indemnification agreements with each of our directors and entered into such agreements with certain of our executive
officers. These agreements require us, among other things, to indemnify these individuals for certain expenses (including attorneys’
fees), judgments, fines and settlement amounts reasonably incurred by such person in any action or proceeding, including any action
by or in our right, on account of any services undertaken by such person on behalf of our company or that person’s status
as a member of our Board of Directors to the maximum extent allowed under Nevada law.
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES. [OPEN]
|
Marcum
LLP has served as our independent registered public accountants for the years ended December 31, 2020 and 2019.
The
following is a summary of the fees billed or expected to be billed to us by Marcum LLP, our independent registered public accountants,
for professional services rendered with respect to the fiscal years ended December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Audit fees (1)
|
|
$
|
312,390
|
|
|
$
|
238,075
|
|
Audit-related fees (2)
|
|
|
-
|
|
|
|
-
|
|
Tax fees (3)
|
|
|
-
|
|
|
|
-
|
|
All other fees
(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
312,390
|
|
|
$
|
238,075
|
|
(1)
|
Audit
Fees consist of fees billed and expected to be billed for services rendered for the audit of our consolidated financial statements
for the fiscal years ended December 31, 2020 and 2019 and in connection with the filing of multiple Forms S-1.
|
(2)
|
Audit-Related
Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit
of our financial statements and are not reported under “Audit Fees.”
|
(3)
|
Tax
Fees consist of fees billed for professional services related to preparation of our U.S. federal and state income tax returns
and tax advice.
|
(4)
|
All
Other Fees consist of fees billed for products and services provided by our independent registered public accountants, other
than those disclosed above.
|
The
Audit Committee is responsible for the appointment, compensation and oversight of the work of the independent registered public
accountants and approves in advance any services to be performed by the independent registered public accountants, whether audit-related
or not. The Audit Committee reviews each proposed engagement to determine whether the provision of services is compatible with
maintaining the independence of the independent registered public accountants. The fees shown above were pre-approved either by
our Board or our Audit Committee.
Notes
to 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. Muscle Maker Development International.
LLC, a directly wholly owned subsidiary, which was formed in Nevada on November 13, 2020 to franchise the Muscle Maker Grill name
and business system to qualified franchisees internationally.
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 December 31, 2020, the Company’s restaurant system included sixteen company-owned restaurants, and sixteen
franchise restaurants. In addition, the Company built four new locations on university campuses but due to Covid-19 restrictions
have not yet opened these locations but incurred expenses during the twelve months ended December 31, 2020. Four 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 year
ended December 31, 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. As of the date of the
filing of this report the Company re-opened five of the seven temporarily closed locations and permanently closed two underperforming
locations. Commencing in the second quarter of 2020 the Company provided royalty relief to its franchisee locations
by deferring half of their royalties earned by the Company through July 2020. The Company has not attempted to collect
the deferred royalties as of the date of the filing of this report as we provide time for franchise location to fully recover
to pre-pandemic conditions. The executive team deferred a portion of their salaries in 2020 and some members continue to
defer salary as of the 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 seven of the franchise locations have permanently closed.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to 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 December 31, 2020, the Company had a cash balance, a working capital surplus and an accumulated deficit of $4,195,932, $1,383,568, and $63,193,707,
respectively. During the year ended December 31, 2020, the Company incurred a pre-tax net loss of $10,099,105 and net cash used in operations of $7,785,873. 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 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 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 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 consolidated financial statements do not necessarily purport to represent realizable or settlement
values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
NOTE
2 – REVERSE STOCK SPLITS
Effective
December 11, 2019, pursuant to authority granted by the stockholders 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. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and majority-owned
subsidiary. 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.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Use
of Estimates, continued
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.
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 December 31, 2020 or 2019.
Inventory
Inventories,
which are stated at the lower of cost or net realizable value, consist primarily of perishable food items and supplies. Cost is
determined using the first-in, first out method.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized, and minor
replacements, maintenance and repairs are charged to expense as incurred. Depreciation and amortization are calculated on the
straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the
estimated useful life or the lease term of the related asset. The estimated useful lives are as follows:
Furniture
and equipment
|
5
- 7 years
|
Leasehold
improvements
|
1
– 10.33 years
|
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Intangible
Assets
The
Company accounts for recorded intangible assets in accordance with ASC 350 “Intangibles - Goodwill and Other”. In
accordance with ASC 350, the Company does not amortize intangible assets having indefinite useful lives. The Company’s goodwill
and trademarks are deemed to have indefinite lives, and accordingly are not amortized, but are evaluated for impairment at least
annually, or more often whenever changes in facts and circumstances may indicate that the carrying value may not be recoverable.
The Accounting Standards Codification (“ASC”) requires that goodwill be tested for impairment at the reporting unit
level (operating segment or one level below an operating segment). Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting
units, and determining the fair value. Significant judgment is required to estimate the fair value of reporting units which includes
estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions
could materially affect the determination of fair value and/or goodwill impairment.
Other
intangible assets include franchise agreements which are amortized on a straight-line basis over their estimated useful lives
of 13 years.
Impairment
of Long-Lived Assets
When
circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, the
Company performs an analysis to review the recoverability of the asset’s carrying value, which includes estimating the undiscounted
cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors such
as expected future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors.
If the analysis indicates that the carrying value is not recoverable from future cash flows, an impairment loss is recognized
to the extent that the carrying value exceeds the estimated fair value. Any impairment losses are recorded as operating expenses,
which reduce net income.
Convertible
Instruments
The
Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify
as derivative financial instruments to be separately accounted for in accordance with Topic 815 of the Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”). The accounting treatment of derivative financial
instruments requires that the Company record embedded conversion options and any related freestanding instruments at their fair
values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair
value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company
reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result
of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Embedded
conversion options and any related freestanding instruments are recorded as a discount to the host instrument.
If
the instrument is determined not to be a derivative liability, the Company then evaluates for the existence of a beneficial conversion
feature by comparing the market price of the Company’s common stock as of the commitment date to the effective conversion
price of the instrument.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Convertible
Instruments, continued
As
of December 31, 2020 and December 31, 2019, the Company did not have any derivative liabilities on its balance sheets.
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 as of January 1, 2019.
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
|
|
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 $3,672,944 and $3,466,553 during the years ended
December 31, 2020 and 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 $331,694 and
$688,308 during the years ended December 31, 2020 and 2019, respectively, which is included in franchise royalties and fees on
the accompanying consolidated statements of operations.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to 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
revenue from franchise fees of $277,255 and $390,606 during the years ended December 31, 2020 and 2019, respectively, which is
included in franchise royalties and fees on the accompanying 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 $130,501 and $274,030 during the years ended December 31, 2020
and 2019, respectively, which is included in franchise royalties and fees on the accompanying 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 consolidated balance sheet. For the years ended December 31,
2020 and 2019, 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.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES, continued
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 $61,053 and $139,508, respectively, during the years
ended December 31, 2020 and 2019, which are included in franchise advertising fund contributions on the accompanying consolidated
statements of operations.
Advertising
Advertising
costs are charged to expense as incurred. Advertising costs were approximately $175,378 and $34,119 for the years ended December
31, 2020 and 2019, are included in general and administrative expenses in the accompanying consolidated statements of operations.
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.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Net
Loss per Share, continued
The
following securities are excluded from the calculation of weighted average diluted common shares at December 31, 2020 and 2019,
respectively, because their inclusion would have been anti-dilutive:
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Warrants
|
|
|
2,582,857
|
|
|
|
2,450,287
|
|
Options
|
|
|
300,000
|
|
|
|
4,821
|
|
Convertible debt
|
|
|
32,350
|
|
|
|
95,400
|
|
Total
potentially dilutive shares
|
|
|
2,915,207
|
|
|
|
2,550,508
|
|
Major
Vendor
The
Company engages various vendors to distribute food products to their Company-owned restaurants. Purchases from the Company’s
largest supplier totaled 87% and 83% of the Company’s purchases for the years ended December 31, 2020 and 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 15 – Equity – Warrant and Options Valuation for details related to accrued compensation liability being fair
valued using Level 1 inputs.
Income
Taxes
The
Company accounts for income taxes under Accounting Standards Codification (“ASC”) 740 Income Taxes (“ASC 740”).
Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial reporting and
tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the
year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
ASC
740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and
prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Income
Taxes, continued
Tax
benefits claimed or expected to be claimed on a tax return are recorded in the Company’s financial statements. A tax benefit
from an uncertain tax position is only recognized if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized
upon ultimate resolution. Uncertain tax positions have had no impact on the Company’s financial condition, results of operations
or cash flows. The Company does not expect any significant changes in its unrecognized tax benefits within years of the reporting
date.
The
Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general
and administrative expenses in the consolidated statements of operations.
Reclassifications
Certain
prior year balances have been reclassified in order to conform to current year presentation. These reclassifications have no effect
on the previously reported results of operations or loss per share.
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.
For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of
the award is generally recorded on the grant date and re-measured on financial reporting dates and vesting dates until the service
period is complete. The fair value amount of the award is then recognized over the period services are required to be provided
in exchange for the award, usually the vesting period.
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, 2021, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its consolidated financial
statements and disclosures.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Recent
Accounting Pronouncements, continued
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, 2021. 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 consolidated financial statements.
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, 2021, 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 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, 2021, and interim periods within those fiscal years. The Company is currently assessing the
impact this guidance will have on its 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, 2021 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 consolidated financial
statements and financial statement disclosures.
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 17 – Subsequent Events.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
4 – ACQUISITIONS
Midtown
Acquisition
On
August 22, 2019, the Company acquired a franchisee store in Midtown, New York, as a corporate store (the “Midtown Acquisition”).
The purchase price of the store was $121,464, of which $35,116 related to equipment purchased and the remaining $86,348 was accounted
for as goodwill. The Company paid cash of approximately $35,000 and also assumed a liability of approximately $86,000 which was
recorded in accounts payable and accrued expenses. During the year ended December 31, 2019, the Company recorded sales revenues
from this location of approximately $299,000 in company restaurant sales, net of discounts on the consolidated statement of operations.
The
unaudited pro-forma financial information in the table below summarizes the consolidated results of operations of the Company
and the Midtown franchisee store as though the acquisition had occurred as of January 1, 2019. The pro forma financial information
as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would
have been achieved if the acquisition had taken place at the beginning of the earliest period presented, nor does it intend to
be a projection of future results.
|
|
Pro
Forma
(Unaudited)
For
the Year Ended
December 31,
|
|
|
|
2019
|
|
Revenues
|
|
$
|
5,822,310
|
|
Restaurant operating expenses
|
|
|
4,740,650
|
|
Total cost and expenses
|
|
|
9,405,961
|
|
Loss from Operations
|
|
|
(3,583,651
|
)
|
Bronx
Acquisition
On
October 10, 2019, the Company acquired a former franchisee location in the Bronx, New York, as a corporate store (the “Bronx
Acquisition”). The purchase price of the store was $600,000, of which $30,000 related to equipment purchased and the remaining
$570,000 was accounted for as goodwill. The purchase price is payable as follows: $300,000 that was paid at closing and the remaining
$300,000 is payable pursuant to a five-year promissory note with an eight percent interest rate. During the year ended December
31, 2019, the Company recorded sales revenues from this location of approximately $223,000 in company restaurant sales, net of
discounts on the consolidated statement of operations.
The
unaudited pro-forma financial information in the table below summarizes the consolidated results of operations of the Company
and the Bronx franchisee store as though the acquisition had occurred as of January 1, 2019. The pro forma financial information
as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would
have been achieved if the acquisition had taken place at the beginning of the earliest period presented, nor does it intend to
be a projection of future results.
|
|
Pro
Forma
(Unaudited)
For
the Year Ended
December 31,
|
|
|
|
2019
|
|
Revenues
|
|
$
|
6,045,035
|
|
Restaurant operating expenses
|
|
|
4,912,302
|
|
Total cost and expenses
|
|
|
9,577,613
|
|
Loss from Operations
|
|
|
(3,532,578
|
)
|
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
4 – ACQUISITIONS, continued
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 that was owed from the franchisee
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 this lease agreement range from $11,000 to $16,105 with a straight
line rent expense of $13,431 per month.
The
unaudited pro-forma financial information in the table below summarizes the consolidated results of operations of the Company
and the Chelsea franchisee store as though the acquisition had occurred as of January 1, 2019. The pro forma financial information
as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would
have been achieved if the acquisition had taken place at the beginning of the earliest period presented, nor does it intend to
be a projection of future results.
|
|
Pro
Forma
(Unaudited)
For
the Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
4,723,815
|
|
|
$
|
6,099,929
|
|
Restaurant operating expenses
|
|
|
5,440,040
|
|
|
|
4,974,531
|
|
Total cost and expenses
|
|
|
14,650,196
|
|
|
|
9,639,842
|
|
Loss from Operations
|
|
|
(9,926,382
|
)
|
|
|
(3,539,913
|
)
|
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 the remaining commitment under the lease upon the closing
date.
The
unaudited pro-forma financial information in the table below summarizes the combined results of operations of the Company and
the Philadelphia franchisee store as though the acquisition had occurred as of January 1, 2019. The pro forma financial information
as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would
have been achieved if the acquisition had taken place at the beginning of the earliest period presented, nor does it intend to
be a projection of future results.
|
|
Pro
Forma
(Unaudited)
For
the Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
4,877,003
|
|
|
$
|
5,571,792
|
|
Restaurant operating expenses
|
|
|
5,548,238
|
|
|
|
4,499,207
|
|
Total cost and expenses
|
|
|
14,758,430
|
|
|
|
9,164,518
|
|
Loss from Operations
|
|
|
(9,881,427
|
)
|
|
|
(3,592,726
|
)
|
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
5 - LOANS RECEIVABLE
At
December 31, 2020 and 2019, the Company’s loans receivable consists of the following:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Loans receivable, net
|
|
$
|
3,390
|
|
|
$
|
137,389
|
|
Less:
current portion
|
|
|
(2,394
|
)
|
|
|
(38,712
|
)
|
Loans
receivable, non-current
|
|
$
|
996
|
|
|
$
|
98,677
|
|
During
August 2019, the company advanced money to a former franchisee and issued a loan receivable in the amount of $60,186. The loan
is payable in 120 monthly payments consisting of principal and interest of 12%, with the payments commencing as of December 1,
2019.
Loans
receivable includes loans to franchisees totaling, in the aggregate, $3,390 and $137,389, net of reserves for uncollectible loans
of $106,900 and $55,000 at December 31, 2020 and December 31, 2019. 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
6 – PROPERTY AND EQUIPMENT, NET
As
of December 31, 2020, and 2019, property and equipment consist of the following:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
1,143,320
|
|
|
$
|
617,712
|
|
Leasehold improvements
|
|
|
1,940,907
|
|
|
|
1,518,293
|
|
|
|
|
3,084,227
|
|
|
|
2,136,005
|
|
Less:
accumulated depreciation and amortization
|
|
|
(741,504
|
)
|
|
|
(489,126
|
)
|
Property
and equipment, net
|
|
$
|
2,342,723
|
|
|
$
|
1,646,879
|
|
Depreciation
expense amounted to $362,009 and $134,712 for the years ended December 31, 2020 and 2019, respectively. During the year ended
December 31, 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 consolidated statement of operations.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
7 – 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, 2018
|
|
$
|
2,524,000
|
|
|
$
|
578,621
|
|
|
$
|
3,102,621
|
|
Amortization expense
|
|
|
-
|
|
|
|
(63,806
|
)
|
|
|
(63,806
|
)
|
Intangible assets,
net at December 31, 2019
|
|
|
2,524,000
|
|
|
$
|
514,815
|
|
|
$
|
3,038,815
|
|
Amortization expense
|
|
|
-
|
|
|
|
(60,537
|
)
|
|
|
(60,537
|
)
|
Impairment of intangible
asset
|
|
|
-
|
|
|
|
(100,000
|
)
|
|
|
(100,000
|
)
|
Intangible assets,
net at December 31, 2020
|
|
$
|
2,524,000
|
|
|
$
|
354,278
|
|
|
$
|
2,878,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining amortization period
at December 31, 2020 (in years)
|
|
|
|
|
|
|
7.1
|
|
|
|
|
|
Amortization
expense related to intangible assets was $60,537 and $63,806 for the years ended December 31, 2020 and 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 $100,000 during the year ended December 31,
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.
The
estimated future amortization expense is as follows:
For
the Year Ended December 31,
|
|
Franchise
Agreements
|
|
2021
|
|
$
|
50,140
|
|
2022
|
|
|
50,140
|
|
2023
|
|
|
50,140
|
|
2024
|
|
|
50,140
|
|
2025
|
|
|
50,140
|
|
Thereafter
|
|
|
103,441
|
|
|
|
$
|
354,141
|
|
As
of December 31, 2020 and 2019, the Company performed the annual assessment for goodwill and determined that there was no
impairment of Goodwill.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
8 – ACCOUNTS PAYABLES AND ACCRUED EXPENSES
Accounts
payables and accrued expenses consist of the following:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Accounts payable
|
|
$
|
692,966
|
|
|
$
|
857,846
|
|
Accrued payroll
|
|
|
78,667
|
|
|
|
139,320
|
|
Accrued professional fees
|
|
|
224,028
|
|
|
|
329,826
|
|
Accrued board members fees
|
|
|
36,697
|
|
|
|
59,864
|
|
Accrued rent expense
|
|
|
171,266
|
|
|
|
269,644
|
|
Sales taxes payable
(1)
|
|
|
231,177
|
|
|
|
329,089
|
|
Accrued interest
|
|
|
25,222
|
|
|
|
520,682
|
|
Accrued interest, related parties
|
|
|
-
|
|
|
|
79,523
|
|
Other accrued
expenses
|
|
|
40,912
|
|
|
|
45,154
|
|
|
|
$
|
1,500,935
|
|
|
$
|
2,630,948
|
|
|
(1)
|
See
Note 14 – Commitments and Contingencies –Taxes for detailed related to delinquent sales taxes.
|
NOTE
9 – CONVERTIBLE NOTE PAYABLE TO FORMER PARENT
On
April 6, 2018, the Company issued a $475,000 convertible promissory note (the “2018 ARH Note”) to the Former Parent
for services rendered and expense paid on behalf of the Company. The 2018 ARH Note has no stated interest rate or maturity date
and is convertible into shares of the Company’s common stock at a conversion price of $3.50 per share at a time to be determined
by the lender.
On
April 11, 2018, the Former Parent elected to partially convert the 2018 ARH Note for the principal of $392,542 into 112,154 shares
of the Company’s common stock.
The
Company had an aggregate gross amount of $82,458, as of December 31, 2020 and 2019, respectively, in convertible notes payable
to Former Parent outstanding.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
10 –NOTES PAYABLE
15%
Senior Secured Convertible Promissory Notes
From
September 12, 2018 through December 31, 2018, the Company entered into Securities Purchase Agreements (“SPAs”) with
several accredited investors (the “Investors”) providing for the sale by the Company to the investors of 15% Senior
Secured Convertible Promissory Notes (the “15% Notes”) in the aggregate amount of $2,165,000, which included $635,000
in other notes payable that were converted into 15% Notes. The Notes bear interest at 15% per annum paid quarterly and mature
18 months from issuance. In addition to the 15% Notes, the Investors also received 154,643 five year warrants to purchase common
stock of the Company (the “Warrants”) that entitles the holder to purchase a number of shares equal to 50% of the
conversion shares of common stock of the Company at an exercise price of $8.40.
From
January 1, 2019 through May 24, 2019, the Company entered into SPAs with several accredited Investors providing for the sale by
the Company to the Investors of 15% Notes in the aggregate amount of $2,973,000, of which a $100,000 was to related parties. In
addition to the 15% Notes, the Investors also received 212,354 five year warrants to purchase common stock of the Company (the
“Warrants”) that entitles the holder to purchase a number of shares equal to 50% of the conversion shares of common
stock of the Company at an exercise price of $8.40.
The
Investors may elect to convert all or part of the 15% Notes, plus accrued interest, at any time into shares of common stock of
the Company at a conversion price of $7.00 (the “Fixed Conversion Price”); provided, however, in the event the per
share price of a public offering multiplied by twenty-five percent (25%), as amended on April 10, 2019, at the time of the listing
of the shares of common stock on an exchange (the “Listing Event”) is less than $7.00 (the “Discounted Public
Offering Price”) then the conversion price shall be reset to equal the Discounted Public Offering Price. In the event the
Investors are required to execute a Lock Up Agreement concurrent with a public offering at the time of the Listing Event, then
the Fixed Conversion Price shall be $5.25 and the Discounted Public Offering Price shall be the public offering multiplied by
seventeen and a half percent (17.50%), as amended on April 10, 2019, at the time of the Listing Event. Upon the occurrence
of a Listing Event or the sale or license of all or substantially all of the Company’s assets (a “Liquidity Event”),
the entire unpaid and outstanding principal amount and any accrued interest thereon under this Note shall automatically convert
in whole without any further action by the Holder.
The
Investors to the 15% Notes, received an aggregate of 366,997 warrants (“Original Warrants”) to purchase common stock
of the Company (the “Warrants”) that entitles the holder to purchase a number of shares equal to 50% of the conversion
shares of common stock of the Company. The Warrants are exercisable for five years at an exercise price of $8.40. In the event
the conversion price is adjusted as contemplated above, then the exercise price shall adjust to equal 120% of the adjusted conversion
price. The Investors may exercise the Warrants on a cashless basis.
The
Securities Purchase Agreements require that until the Company’s stock is listed on a public exchange (“Listing Event”),
a note holder holds the right to designate one member and one observer to the board of directors of the Company and that the Company
shall engage an investor relations firm mutually agreed to by the Company and a note holder from the time of the Listing Event
until six months after the Listing Event. The Company is also required to engage Insight Advisory as a consultant to provide business
and financial advice.
The
Company granted the Investors piggyback registration rights with respect to the shares of common stock underlying the Notes and
the Warrants.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
10 –NOTES PAYABLE, continued
15%
Senior Secured Convertible Promissory Notes, continued
On
December 5, 2019, an aggregate of $4,343,000 SPA Notes, were amended and converted, into 2,171,500 shares of our common stock
with an amended conversion price of $2.00. In addition, per the amendments the Company modified the Original Warrants issued
of 303,071 with an exercise price of $8.40 to warrants to acquire an aggregate of 1,085,750 shares of common stock of the Company
with an exercise price of $2.40.
On
December 5, 2019, a $345,000 SPA Note, was amended and converted, into 138,000 shares of our common stock with an amended conversion
price of $2.50. In addition, per the amendments the Company modified the Original Warrants issued of 24,643 with an exercise price
of $8.40 to warrants to acquire an aggregate of 69,000 shares of common stock of the Company with an exercise price of $3.00.
During
the year ended December 31, 2020, the Company repaid an aggregate of $450,000 in 15% senior secured convertible promissory notes.
12%
Secured Convertible Notes
During
April 2019, Muscle USA entered into security purchase agreement (“April 2019 SPA”) with the several accredited investors
(“April 2019 Investors”) providing for the sale by the Company to the investors of 12% secured convertible notes (“April
2019 Notes”) in the aggregate amount of $3,500,000 (the “April 2019 Offering”).
The
April 2019 Notes bear interest at 12% per annum, paid quarterly, and mature 18 months from issuance. The April 2019 Investors
may elect to convert all or part of the April 2019 Notes, plus accrued interest, at any time into shares of common stock of the
Company at a conversion price of $14.00 per share (the “April 2019 Conversion Price”); provided, however, in the event
the per share price of a public offering multiplied by fifty percent (50%) at the time of the Company listing on a national exchange
(the “April 2019 Discounted Public Offering Price”) is less than $14.00 then the April 2019 Conversion Price shall
be reset to equal the lesser of (i) April 2019 Discounted Public Offering Price or (ii) a price per share equal to a $20 million
valuation.
In
addition to the April 2019 Notes, the Investors also received 125,000 warrants to purchase common stock of the Company (the “April
2019 Warrants”) that entitle the holders to purchase a number of shares equal to 50% of the conversion shares of common
stock of the Company. The April 2019 Warrants are exercisable for five years at an exercise price of 115% of the conversion price.
Upon
the occurrence of the listing of the Company’s common stock on a national securities exchange, the sale of all or substantially
all of the Company’s stock, the sale or licensing of all or substantially all of the Company’s assets or any combination
of the foregoing, the entire unpaid and outstanding principal amount and any accrued interest thereon under the April 2019 Notes
shall automatically convert in whole without any further action by the holders.
As
long as the April 2019 Notes remain outstanding, the Company has agreed that, among other items, it will only use proceeds from
the sale of the April 2019 Notes and exercise of the April 2019 Warrants for specific corporate purposes as set forth in the April
2019 SPA, will not incur or permit indebtedness or liens unless permitted and will not enter into variable priced transactions.
The Company and the April 2019 Investors entered into Security and Pledge Agreements providing that the obligations to the April
2019 Investors are secured by substantially all of Muscle USA’s assets.
The
Company granted the April 2019 Investors piggyback registration rights with respect to the shares of common stock underlying the
April 2019 Notes and the April 2019 Warrants.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
10 –NOTES PAYABLE, continued
12%
Secured Convertible Notes, continued
On
December 5, 2019, an aggregate of $3,175,000 April 2019 Notes, were amended and converted, into 1,270,000 shares of our common
stock with an amended conversion price of $2.50. In addition, per the amendments the Company modified the original warrants issued
of 113,393 with an exercise price of $16.10 to warrants to acquire an aggregate of 635,000 shares of common stock of the Company
with an exercise price of $2.88.
On
December 5, 2019, a $250,000 April 2019 Notes, was amended and converted, into 83,333 shares of our common stock with an amended
conversion price of $3.00. In addition, per the amendment the Company modified the original warrants issued of 8,929 with an exercise
price of $16.10 to warrants to acquire an aggregate of 41,667 shares of common stock of the Company with an exercise price of
$3.45.
During
the year ended December 31, 2020, the Company repaid the $75,000 12% secured convertible promissory note.
Other
Convertible Notes
On
or about January 23, 2019, the Company and certain note holders, including related parties, agreed to extend the maturity date
of the convertible notes payable, as amended and extended on or about August 2018, in the aggregate principal amount of $1,550,000,
of which $400,000 was to related parties, to be upon the earlier of (a) January 24, 2020 or (b) the first day the company’s
stock is publicly traded. All interest due and payable on the notes, shall be converted into shares of common stock at a conversion
price of $1.00 per share. The Company reclassified $12,972 of convertible notes payable at December 31, 2018 to convertible notes
payable related parties during the quarter ended September 30, 2019.
During
April 2019, the Company repaid convertible notes payable in the aggregate principal amount of $150,000, of which $100,000 belong
to related parties. In addition, the company issued 15,952 of the company’s common stock as payment for the interest incurred
on the convertible notes payable repaid in the aggregate amount of $111,666.
On
December 5, 2019, an aggregate of $1,375,000 of our original other covertible notes, were amended and converted, into 392,850
shares of our common stock with an amended conversion price of $3.50. In addition, per the amendments the Company modified the
original warrants issued of 10,713 with an exercise price of $65.31 to warrants to acquire an aggregate of 200,000 shares of common
stock of the Company with an exercise price of $3.50.
During
the year ended December 31, 2019, as discussed throughout this footnote, various convertible notes were amended and the note holders
were induced to convert their notes and the Company incurred inducement expense related to the convertible notes of $15,102,206.
The modification was a one time event that only applied to holders willing to convert and therefore was recorded as inducement
expense.
During
the year ended December 31, 2019, as discussed throughout this footnote, various warrants terms where modified. As a result, the
Company recorded warrant modification expense of $5,405,770. In applying the Black-Scholes option pricing model to value the warrants
that where modified, the Company used the following assumptions:
|
|
For
the Year Ended
|
|
|
|
December
31,
|
|
|
|
2019
|
|
Risk
free interest rate
|
|
|
1.55
– 1.62
|
%
|
Expected
term (years)
|
|
|
0.28
– 4.79
|
|
Expected
volatility
|
|
|
46.69-
52.54
|
%
|
Expected
dividends
|
|
|
0.00
|
%
|
In
accordance with ASC 470-20 “Debt with Conversion and other Options”, the intrinsic value related to the convertible
notes results in a beneficial conversion feature which is recorded as a debt discount with a corresponding credit to additional
paid in capital. The relative fair value of the warrants at the date of grant is also recorded as a debt discount. As of December
31, 2019, the Company has aggregate debt discounts on the convertible notes and convertible notes, related parties of $38,918
and $0, net of amortization expenses, related to the warrants and the beneficial conversion feature, respectively. For the year
ended December 31, 2019, the Company recorded aggregate debt discounts of $548,354 and $548,020, related to the
warrants and the beneficial conversion feature, respectively, on the convertible notes, which were amortized over the expected
terms of the respective notes.
During
the year ended December 31, 2020, the Company repaid a $25,000 other convertible note payable.
As
of December 31, 2020 and 2019, the Company has another convertible note payable in the amount of $100,000 which is included
within convertible notes payable. See Note 14 – Commitments and Contingencies – Litigation, Claims and Assessments
for details related to the $100,000 other convertible note payable.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
10 –NOTES PAYABLE, continued
Other
Notes Payable
On
or about January 23, 2019, the Company and certain note holders, including related parties, agreed to extend the maturity date
of the notes payable, as amended and extended on or about August 2018, in the aggregate principal amount of $560,000 to be upon
the earlier of (a) January 24, 2020 or (b) the first day the company’s stock is publicly traded. All interest due and payable
on the notes, shall be converted into shares of common stock at a conversion price of $7.00 per share.
During
April 2019, the Company repaid other notes payable in the aggregate principal amount of $560,000, of which $335,000 belong to
related parties. In addition, the company issued 68,475 of the company’s common stock as payment for the interest incurred
on the other notes payable repaid in the aggregate amount of $479,323.
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. The note has been repaid during the year ended December 31, 2020.
On
October 10, 2019, the Company issued a note payable in connection with the acquisition of the franchisee location in the amount
of $300,000. The note has a stated interest rate of 8% with monthly payments payable over 5 years. See Note 4 – Acquisitions
– Bronx Acquisition for details regarding a note payable.
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 becomes due in full on or before February 21, 2020. The note has been repaid during the year ended December 31,
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 year ended December 31,
2020.
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 if the Company did not apply for forgiveness on the PPP Loan. Since the Company applied for
loan forgiveness during the first ten months of the term, payments are deferred until the U.S. Small Business Administration determines
the Company’s loan forgiveness amount. 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.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
10 –NOTES PAYABLE, continued
As
of December 31, 2020, the Company had an aggregate gross amount of $182,458 in convertible notes payable outstanding, (net
of debt discount in the amount of $0 and a net balance of $182,458 included within convertible notes payable, net of debt
discount). As of December 31, 2019, the Company had an aggregate gross amount of $732,458 in convertible notes payable
outstanding (net of debt discount in the amount of $38,918 with a net balance of $693,540 included within convertible notes payable,
net of debt discount).
As
of December 31, 2020, the Company had an aggregate amount of $1,276,692 and $0 in other notes payable and other notes payable,
related party, respectively. As of December 31, 2019, the Company had an aggregate amount of $591,807 and $91,000 in other notes
payable and other notes payable, related party , respectively.
The
maturities of other notes payable as of December 31, 2020, are as follows:
|
|
Principal
|
|
Repayments
due as of
|
|
Amount
|
|
12/31/2021
|
|
$
|
701,552
|
|
12/31/2022
|
|
|
341,635
|
|
12/31/2023
|
|
|
100,466
|
|
12/31/2024
|
|
|
96,223
|
|
12/31/2025
|
|
|
36,816
|
|
|
|
$
|
1,276,692
|
|
NOTE
11 – DEFERRED REVENUE
At
December 31, 2020 and 2019, deferred revenue consists of the following:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Franchise fees
|
|
$
|
983,958
|
|
|
$
|
1,210,719
|
|
Unearned vendor rebates
|
|
|
23,171
|
|
|
|
64,953
|
|
Less: Unearned vendor
rebates, current
|
|
|
(23,171
|
)
|
|
|
(64,953
|
)
|
Less:
Franchise fees, current
|
|
|
(39,687
|
)
|
|
|
(57,744
|
)
|
Deferred revenues,
non-current
|
|
$
|
944,271
|
|
|
$
|
1,152,975
|
|
Deferred
revenue of $277,255 at December 31, 2019 was recognized in revenue in 2020 within franchise royalties and fees on the consolidated
statement of operations. Deferred revenue of $39,687 at December 31, 2020 is expected to be recognized during 2021.
NOTE
12 – OTHER CURRENT LIABILITIES
Other
current liabilities consist of the following:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Gift card liability
|
|
$
|
91,034
|
|
|
$
|
88,673
|
|
Co-op advertising fund liability
|
|
|
299,490
|
|
|
|
298,662
|
|
Advertising fund liability
|
|
|
250,894
|
|
|
|
265,308
|
|
|
|
$
|
641,418
|
|
|
$
|
652,643
|
|
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
13 – INCOME TAXES
The
tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2020 and 2019 are
presented below:
|
|
For
the Years Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
7,692,505
|
|
|
$
|
4,792,519
|
|
Stock-based compensation
|
|
|
289,758
|
|
|
|
267,226
|
|
Accounts receivables
allowance
|
|
|
22,932
|
|
|
|
21,000
|
|
Accruals
|
|
|
16,266
|
|
|
|
48,502
|
|
Intangible assets
|
|
|
269,562
|
|
|
|
357,188
|
|
Property and equipment
|
|
|
10,292
|
|
|
|
2,858
|
|
Deferred Rent
|
|
|
5,746
|
|
|
|
-
|
|
Deferred
revenues
|
|
|
267,996
|
|
|
|
356,992
|
|
Gross
deferred tax asset
|
|
|
8,575,057
|
|
|
|
5,846,285
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Beneficial conversion
feature
|
|
|
-
|
|
|
|
(10,897
|
)
|
Deferred
Rent
|
|
|
-
|
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
Gross
deferred tax liabilities
|
|
|
-
|
|
|
|
(11,157
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
8,575,057
|
|
|
|
5,835,128
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(8,575,057
|
)
|
|
|
(5,835,128
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred
tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
The
income tax (provision) benefit for the periods shown consist of the following:
|
|
For
the Years Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
2,054,947
|
|
|
|
1,995,774
|
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
684,982
|
|
|
|
665,258
|
|
|
|
|
2,739,929
|
|
|
|
2,661,032
|
|
Change in valuation
allowance
|
|
|
(2,739,929
|
)
|
|
|
(2,661,032
|
)
|
Income tax (provision)
benefit
|
|
$
|
-
|
|
|
$
|
-
|
|
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
13 – INCOME TAXES, continued
A
reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the periods shown, are as
follows:
|
|
For
the Years Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Federal income tax benefit
at statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State income tax benefit, net of federal
impact
|
|
|
7.0
|
%
|
|
|
7.0
|
%
|
Permanent differences
|
|
|
(0.0
|
)%
|
|
|
(20.6
|
)%
|
Income passed through to non-controlling
interests
|
|
|
(0.0
|
)%
|
|
|
(0.0
|
)%
|
Other
|
|
|
(0.4
|
)%
|
|
|
(1.2
|
)%
|
Change in valuation
allowance
|
|
|
(27.6
|
)%
|
|
|
(6.2
|
)%
|
|
|
|
|
|
|
|
|
|
Effective income
tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The
Company has filing obligations in what it considers its U.S. major tax jurisdictions as follows: Nevada, California, New Jersey,
Texas, New York State and New York City. The Company’s tax returns filed for the years ending December 31, 2019, 2018, 2017
and 2016 remain subject to examination.
The
Company is in the process of amending its U.S. Federal and State tax returns for the years ended December 31, 2019, 2018, 2017,
2016 and 2015. As a result of the Company amending its Federal and State tax returns, the Company cannot, with certainty, determine
the exact Federal and State NOLs available as of December 31, 2020. The Company estimates that upon completing the filing of the
amended returns and the returns for year-end December 31, 2020 that the Company would have approximately $27.5 million of Federal
and State NOLs available to offset future taxable income. The net operating loss carryforwards, if not utilized, will expire from
2031 to 2037 for federal and state purposes. Approximately $100,000 of NOL expired during year end December 31, 2020 and approximately
$36,000 is projected to expire during year end December 31, 2021.
In
accordance with Section 382 of the Internal Revenue Code, the utilization of the Company’s net operating loss carryforwards
could be subject to annual limitations if there has been greater than 50% ownership change. As such, the Company completed a Section
382 analysis and determined that none of its net operating losses would be limited as of December 31, 2020.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
14 – COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
leases are subject to certain annual escalations as defined in the agreements. The Company recognizes rent on a straight-line
basis. The cumulative difference between the rent payments and the rent expense since the inception of the leases was $99,859
at December 31, 2020.
On
August 1, 2019, the Company entered into a settlement agreement with a landlord in connection with the prior executive office
in Houston, Texas as the Company vacated the property on April 30, 2018. The Company owed the landlord the sum of $58,522. The
landlord agreed to accept $32,283 as full payment of the damages. Pursuant to the settlement we will make three equal payments
of $10,761 with the first payment to be made on August 2, 2019, the second payment is to be made on September 1, 2019 and the
final payment is to be made on October 1, 2019. As of December 31, 2019, the Company has met all their obligations and the full
amount has been paid.
On
August 22, 2019, the Company entered into a sublease with sublandlord, in connection with the acquisition of the Midtown location,
for a lease with a term ending on August 31, 2022. The Company may terminate this sublease with the sublandlord with 30-day notice.
The lease calls for annual base rent during the remaining term ranging between $10,448 an $11,417.
On
October 10, 2019, the Company entered into a lease agreement for five years with a landlord in connection with the acquisition
of the Bronx location. The lease calls for an annual base rent of $6,500 per month for the first twenty-four months, with annual
three percent rent increase thereafter. The lease has the option of two five-year extensions with an annual three percent rent
increase.
During
the year ended December 31, 2019, the Company became obligated for payments pursuant to two new lease agreements for restaurant
spaces with lease terms of 10 years, exclusive of options to renew. These lease agreements have a monthly rent expense based on
a percentage fee of eight percent of gross sales for each year of the agreement. One of the lease states that the percentage fee
will be ten percent for gross sales equal or greater than $1,000,000 for an agreement year.
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.
Due
to the economic effect of COVID-19 the Company made the decision to close one of their Company owned stores permanently during
the third quarter of 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.
On
October 19, 2020, the Company entered into a lease agreement for five years with a landlord in connection with the acquisition
of the Chelsea location. The lease calls for an annual base rent of $11,000 per month for the first twelve months, with annual
nine percent rent increase thereafter. The lease has the option of two five-year extensions with an annual three percent rent
increase.
On
November 2, 2020 the Company agreed to a lease assignment for the remaining term of a five years with a landlord, that was entered
into on January 1, 2020, in connection with the acquisition of the Philadelphia location. The lease calls for an annual base rent
of $43,992 per month. The lease has the option of one five-year extensions with an annual base rent of $48,396 per month.
The
Company has recorded security deposits, totaling, in the aggregate, approximately $131,790 and $37,000 as of December 31,
2020 and 2019, respectively.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
14 – COMMITMENTS AND CONTINGENCIES, continued
Operating
Leases, continued
Future
aggregate minimum lease payments for these leases and others as of December 31, 2020 are:
Future
Minimum Lease Payments
|
|
|
|
|
2021
|
|
$
|
595,788
|
|
2022
|
|
|
569,724
|
|
2023
|
|
|
484,442
|
|
2024
|
|
|
485,351
|
|
2025
|
|
|
345,804
|
|
Thereafter
|
|
|
274,190
|
|
|
|
$
|
2,755,299
|
|
Total
rent expense was $726,242 and $467,106 for the years ended December 31, 2020 and 2019, respectively. Of which $691,986 is recognized
as rent expense under operating costs and expenses on the consolidated statement of operations and the remaining $34,256 is recognized
within general and administrative expenses on the consolidated statement of operations. Included within rent expense for the
year ended December 31,2020, under operating cost and expense on the consolidated statement of operation is monthly license
fees of approximately $78,000 incurred in connection with our delivery only kitchens.
Employment
Agreements
On
September 26, 2018, the Company rehired Ferdinand Groenewald as Chief Financial Officer of the Company and entered into an Employment
Agreement with Mr. Groenewald. Pursuant to the agreement, Mr. Groenewald will be employed as Chief Financial Officer of the Company
for a period of two years unless earlier terminated pursuant to the terms of the agreement. During the term of the agreement,
Mr. Groenewald will be entitled to a base salary at the annualized rate of $150,000 and will be eligible for a discretionary performance
cash bonuses which will include $10,000 upon completion of the audit for the year ended December 31, 2017 and $25,000 and up to
1,428 shares of common stock upon completion of a public offering of not less than $3 million together with listing on a national
exchange (the “Public Offering”), which may be increased to 3,571 in the event $5 million is raised. Mr. Groenewald’s
salary will increase to $175,000 upon closing of the Public Offering. Mr. Groenewald is also eligible to participate in employee
benefits plans as the Company may institute from time to time that are available for full-time employees. Mr. Groenewald was paid
a discretionary performance cash and equity bonuses including cash of $25,000 and 19,285 shares upon completion of the
Public Offering. On August 11, 2020, Mr. Groenewald agreed to cancel 19,285 shares of the Company’s common stock previously
issued and waved all rights to the equity compensation provided under his employment agreement.
On
September 26, 2018, the Company appointed Kenneth Miller as Chief Operating Officer of the Company and entered into an Employment
Agreement with Mr. Miller. Pursuant to the agreement, Mr. Miller will be employed as Chief Operating Officer of the Company for
a period of two years unless earlier terminated pursuant to the terms of the agreement. During the term of the agreement, Mr.
Miller will be entitled to a base salary at the annualized rate of $200,000, which will be increased to $275,000 upon successful
closing of the Public Offering. Mr. Miller was issued 14,285 shares of the Company’s common stock upon closing of the Public
Offering. In addition, Mr. Miller was paid a discretionary performance cash and equity bonuses including cash of $50,000 and 17,857
shares of common stock upon completion of the Public Offering. Mr. Miller is also eligible to participate in employee benefits
plans as we may institute from time to time that are available for full-time employees. On August 11, 2020, Mr. Miller agreed
to cancel 32,142 shares of common stock previously issued to him and waived all rights to equity compensation provided under his
employment agreement.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
14 – COMMITMENTS AND CONTINGENCIES, continued
Employment
Agreements, continued
On
October 26, 2018, the Company entered into an Employment Agreement with Michael Roper, which replaced his employment agreement
from May 2018. Pursuant to the Employment Agreement, Mr. Roper will continue to be employed as Chief Executive Officer of the
Company for a period of two years unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will
be automatically extended upon listing the Company on a national exchange and raising $3,000,000 (the “Public Offering”).
During the term of the Employment Agreement, Mr. Roper will be entitled to a base salary at the annualized rate of $250,000, which
was increased to $275,000 upon achieving various milestones required by the Investors that participated in the September 2018
Offering and will be increased to $350,000 upon the Company completing the Public Offering. Mr. Roper will be eligible for a discretionary
performance bonus to be paid in cash or equity, provided, however, no cash bonus will be paid until the closing of the Public
Offering. Mr. Roper was paid a $100,000 bonus upon closing of the Public Offering. Mr. Roper was also issued 14,285 shares of
our common stock upon the closing of the Public Offering. In addition, pursuant to board approval on June 29, 2019, Mr. Roper
was issued 35,714 shares of our restricted common stock awards upon closing of the Public Offering. In addition, upon the closing
of the Public Offering Mr. Roper received 14,285 shares of common stock pursuant to his employment agreement. Mr. Roper was issued
an additional 35,714 pursuant to his employment agreement upon the closing of the Public Offering of at least $5 million. Mr.
Roper’s common stock was issued on February 18, 2020 and his bonus was paid, subsequent to completing our Public Offering.
On August 11, 2020, Mr. Roper agreed to cancel 100,000 shares of common stock previously issued to him and waived all rights to
equity compensation provided under his employment agreement.
On
October 26, 2018, the Company entered into an Employment Agreement with Kevin Mohan. Pursuant to the Employment Agreement, Mr.
Mohan will be engaged as Chief Investment Officer of the Company for a period of two years unless earlier terminated pursuant
to the terms of the agreement. The Employment Agreement will be automatically extended upon the Public Offering. During the term
of the Employment Agreement, Mr. Mohan will be entitled to a base salary at the annualized rate of $156,000, which will be increased
to $175,000 upon the Public Offering. Mr. Mohan will be eligible for a discretionary performance bonus to be paid in cash following
the closing of the Public Offering. Mr. Mohan was paid $50,000 bonus upon closing of the Public Offering. Mr. Mohan was also issued
28,571 shares of our common stock upon the closing of the Public Offering. In addition, pursuant to board approval on June 29,
2019, Mr. Mohan was issued 35,714 shares of our restricted common stock awards upon closing of the Public Offering. Mr. Mohan’s
common stock was issued on February 18, 2020 and his bonus was paid, subsequent to completing our Public Offering. On August 11,
2020, Mr. Mohan agreed to cancel 64,285 shares of common stock previously issued to him and waived all rights to equity compensation
provided under his employment agreement.
On
May 5, 2019, the Company entered into an Employment Agreement with Rodney Silva. Pursuant to the Employment Agreement, Mr. Silva
will be engaged as Vice President of Brand Development/Franchise Sales of the Company for a period of eighteen months unless earlier
terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon the Public Offering.
During the term of the Employment Agreement, Mr. Silva will be entitled to a base salary at the annualized rate of $150,000. Mr.
Silva will be eligible for a discretionary performance bonus to be paid in cash following the closing of the Public Offering.
Mr. Silva is also eligible to participate in employee benefits plans as the Company may institute from time to time that are available
for full-time employees.
On
May 6, 2019, the Company appointed Aimee Infante as Chief Marketing Officer of the Company and entered into an Employment Agreement
with Ms. Infante. Pursuant to the Employment Agreement, Ms. Infante will be employed as Chief Marketing Officer of the Company
for a period of two years unless earlier terminated pursuant to the terms of the Employment Agreement. During the term of the
Employment Agreement, Ms. Infante will be entitled to a base salary at the annualized rate of $125,000, which will be increased
to $150,000 upon the completion of a public offering of not less than $3 million together with listing on a national exchange
(the “Public Offering”). Following the closing of the Public Offering, Ms. Infante receive a one-time $10,000 cash
bonus and will be entitled to an annual cash bonus based on 25% of her base salary subject to satisfying specific written criteria.
See
Note 15 – Equity – Restricted Common Stock for details related the restricted stock issuance.
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.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
14 – COMMITMENTS AND CONTINGENCIES, continued
Consulting
Agreements
During
July 2019, the Company entered into a Consulting Agreement, effective as of July 1, 2019, with an advisory group to provide strategic
business services in connection with a future offering. The term of the agreement is for one year. Pursuant to the terms of the
agreement, the Company issued 41,426 restricted shares of common stock and agreed to pay a cash fee of $75,000 upon signing the
agreement.
During
July 2019, the Company entered into a Consulting Agreement with a consultant with a background in menu and recipe development
to develop a new menu and recipes for a new healthy restaurant concept called Healthy Joe’s. The Company will issue an aggregate
of 1,642 shares of common stock as payment pursuant to the terms of the agreement and reimburse the consultant for any out-of-pocket
expenses in connection with the services provided pursuant to the agreement. As of December 31, 2020, the Company issued 500 shares
to the consultant pursuant to the agreement.
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 issued 100,000 stock options upon the approval of the
2020 Equity Incentive Plan with a grant date fair value of $187,000. See Note 15 – Equity – Options for more
details related to the issuance of the stock options.
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 December 31, 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. As of December 31, 2020 as part of the Settlement Agreement the Company issued the 200,000
stock options upon the approval of the 2020 Equity Incentive Plan with a grant date fair value of $60,000. See Note 15 –
Equity – Options for more details related to the issuance of the stock options.
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 December 31, 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.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
14 – COMMITMENTS AND CONTINGENCIES, continued
Board
Compensation
On
July 16, 2019, the board of directors approved a board compensation plan that would compensate the board members for their deferred
compensation for 2019, 2018 and 2017. The board members are eligible for cash compensation of $4,500 or $9,000 per year. To be
paid as follows: (i) directors serving on the board during 2018 and 2017, will be granted shares is lieu of payment as the letter
agreements set forth certain terms pursuant to which the directors will serve as directors of the Company.
In
addition, on an ongoing basis pursuant to the approved board compensation plan each director will receive 1,428 shares of common
stock per year for service as director, 185 shares of common stock per year for service on each committee and 142 shares of common
stock per year for service as chair for such committee. The shares of common stock for committee service will be limited to two
committees.
The
Company issued shares of common stock upon the occurrence of the public offering and up listing on a national exchange as follows,
which was prorated for a partial year: (i) directors that served as directors during the year ended December 31, 2017 each received
714 shares of common stock, (ii) directors that served as directors during the year ended December 31, 2018 each received 1,428
shares of common stock and (iii) directors that served as directors during the year ended December 31, 2019 each received 1,428
shares of common stock.
The
directors did not received compensation for services prior to the Company being up listed on a national exchange, the Company
agreed to provide equity in lieu of cash compensation and equity compensation for services rendered during 2017, 2018 and 2019.
For past director services in lieu of cash unpaid to date: (i) directors that served as directors during the year ended December
31, 2017 each received shares of common stock valued at $4,500 priced at the price per share of the Company’s public offering
in connection with its uplisting (the “Uplisting Offering”), (ii) directors that served as directors during the year
ended December 31, 2018 each received shares of common stock valued at $9,000, which was prorated for a partial year of service,
and priced at the price per share of the Uplisting Offering and (iii) directors that served as directors during the year ended
December 31, 2019 through the date of the Uplisting Offering each received shares of common stock valued at $9,000, which was
prorated for a partial year of service, priced at the price per share of the Uplisting Offering.
On
August 5, 2019 the Company authorized the issuances of an aggregate of 17,005 shares of common stock, valued at a $7.00 per share,
to the members of the board of directors.
On
October 19, 2019 the Company authorized the issuances of an aggregate of 3,748 share of common stock to the members of the board
of directors.
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
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
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
On
December 4, 2020, the board of directors approved a new board compensation plan that would compensate the board members for their
deferred compensation for the fourth quarter 2020 through the third quarter of 2021. The board members are eligible for cash compensation
of $12,000 per year to be paid quarterly within 30 days of the close of each quarter.
In
addition, on an ongoing basis pursuant to the approved board compensation plan each director will receive $8,000 in value of common
stock per year for service as director, $6,000 in value of shares of common stock per year for service on each committee and $4,000
in value of shares of common stock per year for service as chair for such committee. The number of shares to be issued would be
based upon the closing price of the last trading date of each calendar quarter. The shares of common stock for committee service
will be limited to two committees.
As
of December 31, 2020, the Company accrued a total of $36,697 related to board compensation.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
14 – COMMITMENTS AND CONTINGENCIES, continued
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 during 2018 and 2019. The Company had accrued for approximate $231,177 and $329,089, which
includes interest as of December 31, 2020 and December 31, 2019 related to this matter.
Litigations,
Claims and Assessments
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 December 31, 2020, the Company has accrued for the liability in convertible notes payable in the amount of $100,000
and accrued interest of $23,056 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 December 31, 2020, the Company has accrued for the liability in accounts payable and accrued
expenses.
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 December 31, 2020, the Company accrued $30,000
for the liability in accounts payable and accrued expenses.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
14 – COMMITMENTS AND CONTINGENCIES, continued
Litigations,
Claims and Assessments, continued
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 December 31, 2020, the Company has accrued for the liability
in accounts payable and accrued expenses.
In
March 2021, the Company participated in a mediation concerning an investor who invested with American Restaurant Holdings, Inc
and/or American Restaurants, LLC, our former parent company, from 2013 through 2015 in the total amount of $531,250. The Company
does not believe the dispute concerns Muscle Maker, Inc. and intends to defend itself vigorously if the matter is not settled.
As of the filing of this report, the company has not accrued for any potential liability pending the outcome of continued mediation.
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.
Trademark
During
July 2019 the Company filed an application to register a trade name and service mark for “Healthy Joe’s” that
will be used in connection with the development and operating of potential Healthy Joe’s restaurants. If the trademark is
approved, the Company will license the rights to use the Healthy Joe’s trademark and intellectual property to its wholly-owned
subsidiaries, Muscle Maker Development and Muscle Maker Corp., and to further sublicense them to our franchisees for use in connection
with Healthy Joe’s restaurants.
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 ten locations in total with four initial locations starting in the Chicago market, two locations
in the Philadelphia market, one location in the Providence market, two locations in the Miami market and one
location in the New York market. 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 locations range from $3,000 to $6,000. 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 seven of the ten locations
with the Miami and New York locations anticipated to be opened in 2021.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
15 – EQUITY
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. As of December 31, 2020,
the Company was authorized to issue 25,000,000 shares of $0.0001 par value per share common stock. The holders of the Company’s
common stock are entitled to one vote per share.
Stock
Option and Stock Issuance Plan
2019
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 the
date of the issuance of these consolidated financial statements 188,527 shares have been issued under the 2019 Plan. Upon the
adoption of our 2020 Equity Incentive Plan, we will no longer issue awards under the 2019 Plan, but any existing awards granted
to our management team and Board of Directors will remain outstanding under the 2019 Plan.
2020
Plan
The
Company’s board of directors and shareholders approved and adopted on September 16, 2020 the 2020 Equity Incentive Plan
(“2020 Plan”), effective on September 16, 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 178,333 shares have been issued under the 2020 Plan.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
15 – EQUITY, continued
Common
Stock Issuances
See
Note 10 – Notes Payable – 15% Senior Secured Convertible Promissory Notes, 12% Secured Convertible Notes, and Other
Convertible for details related to stock issuances in connection with conversions of notes for the year ended December 31, 2019.
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.
On
November 5, 2020, the Company issued 53,763 shares of common stock of the Company to a consultant with a fair value of $100,000.
On
November 30, 2020, the Company issued 82,500 shares of common stock of the Company to a consultant with a fair value of $176,138.
See
Note 14 – Commitments and Contingencies – Consulting Agreements and Board Compensation for details related to additional
stock issuances for the year ended December 31, 2020 and 2019. See Note 15 – Equity – Closing of Offerings for shares
issued in the offerings and over-allotment.
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. 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 and the Company issued the 494,177 shares of common stock.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
15 – EQUITY, continued
Warrant
and Option 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 term 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 $14,000 on the statement of operations during the years ended December 31, 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 0.34 -1 year, expected dividends of
0%, and stock price of $1.42 – 2.71. See Note 15 – Equity – Options for the issuance of the stock option during
the fourth quarter of 2020.
Restricted
Common Stock
During
the year ended December 31, 2019, the Company issued an aggregate of 61,426 restricted common stock of the Company to consultants
with an aggregate fair value of $430,000.
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 consolidated statement of operations.
At
December 31, 2020, the unamortized value of the restricted common stock was $426. The unamortized amount will be expensed over
a weighted average period of 0.003 years. A summary of the activity related to the restricted common stock for the years ended
December 31, 2020 and December 31, 2019 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
Grant
|
|
|
|
Total
|
|
|
Date
Fair Value
|
|
Outstanding
at January 1, 2018
|
|
|
6,063
|
|
|
|
44.38
|
|
Granted
|
|
|
61,426
|
|
|
|
7.00
|
|
Forfeited
|
|
|
(1,649
|
)
|
|
|
65.33
|
|
Vested
|
|
|
(63,414
|
)
|
|
|
8.83
|
|
Outstanding
at December 31, 2019
|
|
|
2,426
|
|
|
|
65.33
|
|
Granted
|
|
|
216,783
|
|
|
|
5.00
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(218,009
|
)
|
|
|
5.34
|
|
Outstanding
at December 31, 2020
|
|
|
1,200
|
|
|
$
|
65.33
|
|
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
15 – EQUITY, continued
Options
A
summary of option activity during the years ended December 31, 2020 and 2019 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Options
|
|
|
Price
|
|
|
In
Years
|
|
Outstanding,
December 31, 2018
|
|
|
33,750
|
|
|
$
|
9.33
|
|
|
|
1.6
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding,
December 31, 2019
|
|
|
33,750
|
|
|
$
|
9.33
|
|
|
|
0.6
|
|
Issued
|
|
|
300,000
|
|
|
|
2.15
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(33,750
|
)
|
|
|
9.33
|
|
|
|
|
|
Outstanding,
December 31, 2020
|
|
|
300,000
|
|
|
$
|
2.15
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2020
|
|
|
300,000
|
|
|
$
|
2.15
|
|
|
|
1.8
|
|
On
November 27, 2020, the Company issued an aggregate of 300,000 fully vested stock options to consultants with an aggregate fair
value of $118,000. See Note 14 – Commitments and Contingencies – Consulting Agreements for details related
to the stock options issued for the year ended December 31, 2020.
The
Company has estimated the fair value of the options using the Black-Scholes model using the following assumptions:
|
|
For
the Year Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
|
Risk
free interest rate
|
|
|
0.10
– 0.23
|
%
|
Expected
term (years)
|
|
|
0.34
- 5.00
|
|
Expected
volatility
|
|
|
66.77-
112.17
|
%
|
Expected
dividends
|
|
|
0.00
|
%
|
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
16 – EQUITY, continued
Warrants
A
summary of warrants activity during the years ended December 31, 2020 and 2019 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In
Years
|
|
Outstanding,
December 31, 2018
|
|
|
312,078
|
|
|
$
|
23.66
|
|
|
|
3.3
|
|
Issued
|
|
|
2,138,209
|
|
|
|
4.88
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding,
December 31, 2019
|
|
|
2,450,287
|
|
|
$
|
5.51
|
|
|
|
3.7
|
|
Issued
|
|
|
486,729
|
|
|
|
3.65
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(354,159
|
)
|
|
|
6.74
|
|
|
|
|
|
Outstanding,
December 31, 2020
|
|
|
2,582,857
|
|
|
$
|
4.08
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2020
|
|
|
2,582,857
|
|
|
$
|
4.08
|
|
|
|
3.3
|
|
The
grant date fair value of warrants granted during the years ended December 31, 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 Years Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Risk
free interest rate
|
|
|
1.37
|
%
|
|
|
1.55
– 2.62
|
%
|
Expected
term (years)
|
|
|
3.00
|
|
|
|
0.28
- 5.00
|
|
Expected
volatility
|
|
|
55.33
|
%
|
|
|
46.69-
88.10
|
%
|
Expected
dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Stock-Based
Compensation Expense
Stock-based
compensation related to restricted stock issued to employees, directors and consultants, warrants and options issued to consultants
amounted to $2,806,336 and $666,504 for the years ended December 31, 2020 and 2019, respectively, of which $2,803,716
and $663,804, respectively, was recorded in general and administrative expenses and $2,620 and $2,700, respectively, was recorded
in labor expense within restaurant operating expenses.
MUSCLE
MAKER, INC. & SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
17 – SUBSEQUENT EVENTS
Company-Owned
Restaurants
Subsequent
to December 31, 2020 and through the date of the issuance of these consolidated financial statements, the Company opened one additional
company-owned restaurant.
Common
Stock
On
February 3, 2021, the Company issued an aggregate of 20,000 shares of common stock of the Company to a digital marketing consultant
with an aggregate fair value of $42,600.
On
February 3, 2021, the Company issued an aggregate of 16,126 shares of common stock of the Company to the members of the board
of directors as compensation earned through the end of the fourth quarter of 2020.
On
February 11, 2021, the Company issued an aggregate of 221,783 shares of common stock of the Company to various executives and
an employee.
On
March 31, 2021, the Company authorized the issuance of an aggregate of 12,711 shares of common stock to the members of the board
of directors as compensation earned during the first quarter of 2021.
Consulting
Agreements
On
February 7, 2021, the Company entered into a Consulting Agreement with consultants as a strategy business consultants to provide
the Company with business and marketing advice as needed. The term of the agreement is for five months from the effective date
on February 7, 2021. Pursuant to the terms of the agreement the Company agreed to pay the consultant a total of 100,000 shares
of the Company’s common stock. The Company issued 60,000 shares of common stock upon the effective date of the agreement
with the remaining 40,000 to be issued upon the successful completion of the agreement.
On
March 8, 2021, the Company entered into a Consulting Agreement with consultants as a strategy business consultants to provide
the Company with financial and business. The term of the agreement is for five months from the effective date on March 8, 2021.
Pursuant to the terms of the agreement the Company agreed to pay the consultant a total of 100,000 shares of the Company’s
common stock. The Company issued 70,000 shares of common stock upon the effective date of the agreement with the remaining 30,000
to be issued upon the successful completion of the agreement.
On
March 22, 2021, the Company entered into a Consulting Agreement with consultants with experience in the area of investor relations
and capital introductions. The term of the agreement is for six months from the effective date on March 22, 2021. Pursuant to
the terms of the agreement the Company agreed to pay $250,000 in cash for ancillary marketing, to be paid out at the Company’s
discretion. In addition, the Company issued 150,000 shares of the Company’s common stock as a commencement incentive which
is fully earned by entering into the agreement.
Acquisition
of Superfit Foods
On
March 25, 2021, the Company entered into an asset purchase agreement with Superfit Foods, LLC, a Florida limited liability company
and Superfit Foods, LLC, a Nevada limited liability company (the “Superfit Acquisition”). The purchase price of the
assets and rights was $1,150,000. The purchase price is payable as follows: $475,000 that was paid at closing and the remaining
$625,000 paid in 268,240 shares of common stock to be held for six months before being registered.
Private
Placement
On
April 7, 2021, the Company entered into a Securities Purchase Agreement with an accredited investor (the “Securities Purchase
Agreement”) for a private placement (the “Private Placement”) pursuant to which the investor agreed to purchase
from the Company for an aggregate purchase price of approximately $10,000,000 (i) 1,250,000 shares of common stock of the Company
(ii) a common stock purchase warrant to purchase up to 4,115,227 shares of Common Stock (the “Common Warrant”) and
(iii) a pre-funded common stock purchase warrant to purchase up to 2,865,227 shares of Common Stock (the “Pre-Funded Warrant”).
Each share and accompanying Common Warrant is being sold together at a combined offering price of $2.43 per share and Common Warrant,
and each Pre-Funded Warrant and accompanying Common Warrant is being sold together at a combined offering price of $2.42 per Pre-Funded
Warrant and accompanying Common Warrant. The Pre-Funded Warrant is immediately exercisable, at a nominal exercise price of $0.01
per share, and may be exercised at any time until the Pre-Funded Warrant is fully exercised. The Common Warrant will have an exercise
price of $2.43 per share, are immediately exercisable and will expire five and one-half (5.5) years from the date of issuance.
The Private Placement closed on April 9, 2021.
The
Securities Purchase Agreement contains customary representations, warranties and agreements of the Company and the Purchaser and
customary indemnification rights and obligations of the parties thereto. Pursuant to the Securities Purchase Agreement, the Company
is required to register the resale of the Shares and the shares issuable upon exercise of the Common Warrant and the Pre-Funded
Warrant. The Company is required to prepare and file a registration statement with the Securities and Exchange Commission within
30 days of the date of the Securities Purchase Agreement and to use commercially reasonable efforts to have the registration statement
declared effective within 90 days of the closing of the Private Placement.
Pursuant
to a placement agency agreement, dated April 6, 2021, between the Company and A.G.P./Alliance Global Partners (the “Placement
Agent”) entered into in connection with the Private Offering, the Placement Agent acted as the sole placement agent for
the Private Placement and the Company has paid customary placement fees to the Placement Agent, including a cash fee equal to
8% of the gross proceeds raised in the Private Placement and a common stock purchase warrant to purchase shares of Common Stock
in an amount equal to 4% of the Shares and shares of Common Stock issuable upon exercise of the Warrants sold in the Private Placement,
the warrant has an exercise price of $2.916 per share and is exercisable commencing six months from the date of the pricing of
the Private Placement for a period of five years after such date. Pursuant to the Placement Agency Agreement, the Company has
also agreed to reimburse certain expenses of the placement agent incurred in connection with the Private Placement.