UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2018

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to           

Commission file number: 000-55918

MUSCLE MAKER, INC.

(Exact name of registrant as specified in its charter)

California	47-2555533
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

308 East Renfro Street, Suite 101, Burleson, Texas	76028
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (832) 632-1386

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	[  ]	Accelerated filer	[  ]
Non-accelerated filer	[  ] (Do not check if a smaller reporting company)	Smaller reporting company	[X]
Emerging growth company	[X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes [  ] No [X]

As of July 12, 2019, there were 11,117,637 shares of common stock outstanding.

MUSCLE MAKER, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

TABLE OF CONTENTS

	Page
PART 1 – FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017	1
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017	2
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2017	3
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the Six Months Ended June 30, 2018	4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017	5
Notes to Unaudited Condensed Consolidated Financial Statements	7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	34
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.	47
ITEM 4. Controls and Procedures.	47
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.	49
ITEM 1A. Risk Factors.	50
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.	50
ITEM 3. Defaults Upon Senior Securities.	51
ITEM 4. Mine Safety Disclosures.	51
ITEM 5. Other Information.	51
ITEM 6. Exhibits.	52
SIGNATURES	53

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2018			2017
	(Unaudited)
Assets
Current Assets:
Cash	$	283,903		$	78,683
Accounts receivable, net of allowance for doubtful accounts of $49,500 and $4,500 as of June 30, 2018 and December 31, 2017, respectively		153,493			152,256
Inventory		50,839			92,768
Current portion of loans receivable, net of allowance of $55,000 at June 30, 2018 and December 31, 2017, respectively		23,814			20,146
Current portion of loans receivable from related party, net of allowance of $0 and $45,000 at June 30, 2018 and December 31, 2017, respectively		650			9,704
Prepaid expenses and other current assets		16,745			23,287
Total Current Assets		529,444			376,844
Property and equipment, net		497,905			517,002
Intangible assets, net		3,134,788			3,181,880
Loans receivable - non current		121,835			150,522
Security deposits and other assets		22,587			21,401
Total Assets	$	4,306,559		$	4,247,649
Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable and accrued expenses	$	3,171,399		$	2,710,193
Convertible notes payable		100,000			150,000
Other notes payable		-			20,000
Deferred revenue		1,487,667			1,391,860
Deferred rent, current		13,834			25,620
Payable to Former Parent, current		-			16,995
Other current liabilities		534,497			369,123
Total Current Liabilities		5,307,397			4,683,791
Convertible notes payable, net of debt discount of $1,007,044 and $0 at June 30, 2018 and December 31, 2017, respectively		406,956			1,899,340
Convertible notes payable, related parties, net of debt discount of $383,595 and $0 at June 30, 2018 and December 31, 2017, respectively		566,405			300,000
Convertible notes payable to Former Parent, net of debt discount of $64,945 and $0 at June 30, 2018 and December 31, 2017, respectively		17,513			-
Other notes payable		860,294			200,000
Other notes payable, related parties		335,000			335,000
Deferred rent, non-current		41,947			31,313
Total Liabilities		7,535,512			7,449,444
Commitments and Contingencies
Stockholders’ Deficit:
Common stock, no par value, 100,000,000 shares authorized, 9,226,803 and 7,637,855 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively		14,991,231			13,367,549
Additional paid-in capital		3,963,650			552,670
Accumulated deficit		(22,183,834	)		(17,052,086	)
Total Controlling Interest		(3,228,953	)		(3,131,867	)
Non-controlling interest		-			(69,928	)
Total Stockholders’ Deficit		(3,228,953	)		(3,201,795	)
Total Liabilities and Stockholders’ Deficit	$	4,306,559		$	4,247,649

See Notes to the Condensed Consolidated Financial Statements

1

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATION

(Unaudited)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Revenues:
Company restaurant sales, net of discounts	$	940,484		$	1,427,387		$	2,524,741		$	2,658,015
Franchise royalties and fees		502,918			368,610			805,892			937,217
Other revenues		93,561			129,325			244,633			295,590
Total Revenues		1,536,963			1,925,322			3,575,266			3,890,822
Operating Costs and Expenses:
Restaurant operating expenses:
Food and beverage costs		349,742			554,578			927,230			982,798
Labor		353,614			676,143			1,117,124			1,232,628
Rent		260,502			314,140			579,224			596,806
Other restaurant operating expenses		200,296			267,144			619,613			519,063
Total restaurant operating expenses		1,164,154			1,812,005			3,243,191			3,331,295
Costs of other revenues		46,646			59,618			114,388			113,481
Depreciation and amortization		49,021			87,396			97,952			167,872
General and administrative expenses		1,442,328			1,705,940			2,834,574			3,532,587
Total Costs and Expenses		2,702,149			3,664,959			6,290,105			7,145,235
Loss from Operations		(1,165,186	)		(1,739,637	)		(2,714,839	)		(3,254,413	)
Other (Expense) Income:
Other (expense) income		(6,215	)		85,229			(5,619	)		85,229
Interest (expense) income, net		(88,914	)		477			(731,500	)		760
Loss on sale of CTI		(456,169	)		-			(456,169	)		-
Amortization of debt discounts		(647,251	)		(117,461	)		(1,646,591	)		(3,761,090	)
Total Other Expense, Net		(1,198,549	)		(31,755	)		(2,839,879	)		(3,675,101	)
Net Loss Before Income Tax		(2,363,735	)		(1,771,392	)		(5,554,718	)		(6,929,514	)
Income tax provision		-			(31,820	)		-			(63,641	)
Net (Loss) Income Net Loss		(2,363,735	)		(1,803,212	)		(5,554,718	)		(6,993,155	)
Net loss attributable to the non-controlling interest		5,186			(471,231	)		(2,071	)		(1,818,064	)
Net Loss Attributable to Controlling Interest	$	(2,368,921	)	$	(1,331,981	)	$	(5,552,647	)	$	(5,175,091	)
Net Loss Attributable to Controlling Interest Per Share:
Basic and Diluted	$	(0.29	)	$	(0.25	)	$	(0.68	)	$	(1.00	)
Weighted Average Number of Common Shares Outstanding:
Basic and Diluted		8,307,377			5,337,503			8,140,836			5,166,278

See Notes to the Condensed Consolidated Financial Statements

2

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

	No Par Common Stock				Additional  Paid-in		Accumulated			Total Controlling			Non- Controlling
	Shares		Amount		Capital		Deficit			Interest			Interest			Total
Balance - December 31, 2016		4,604,842	$	5,157,010	$	2,842,343	$	(3,841,638	)	$	4,157,715		$	159,717		$	4,317,432
Issuance of restricted stock		119,721		-		-		-			-			-			-
Conversion of convertible notes payable to Former Parent into common stock		1,197,022		4,685,411		-		-			4,685,411			-			4,685,411
Beneficial conversion feature - First and Second 2017 ARH Note		-		-		1,060,967		-			1,060,967			-			1,060,967
Warrants issued in connection with convertible debt		-		-		145,940		-			145,940			-			145,940
Stock-based compensation: Amortization of restricted common stock		-		270,788		-		-			270,788			-			270,788
Net loss		-		-		-		(5,175,091	)		(5,175,091	)		(1,818,064	)		(6,993,155	)
Balance - June 30, 2017		5,921,585	$	10,113,209	$	4,049,250	$	(9,016,729	)	$	5,145,730		$	(1,658,347	)	$	3,487,383

See Notes to the Condensed Consolidated Financial Statements

3

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(unaudited)

	No Par Common Stock				Additional Paid-in		Accumulated			Total Controlling			Non- Controlling
	Shares		Amount		Capital		Deficit			Interest			Interest			Total
Balance - December 31, 2017		7,637,855	$	13,367,549	$	552,670	$	(17,052,086	)	$	(3,131,867	)	$	(69,928	)	$	(3,201,795	)
Issuance of Restricted stock		26,286		-		-		-			-			-			-
Shares issued for common stock		180,000		180,000		-		-			180,000			-			180,000
Beneficial conversion feature - Convertible Notes		-		-		2,576,080		-			2,576,080			-			2,576,080
Beneficial conversion feature - Convertible Note to Former Parent		-		-		475,000		-			475,000			-			475,000
Warrants issued in connection with common stock and convertible debt		-		-		16,082		-			16,082			-			16,082
Warrants issued and recorded as debt discount in connection with notes payable		-		-		343,818		-			343,818			-			343,818
Initial public offering on March 29, 2018, net of underwriter’s discount and offering cost of $58,798		44,153		85,576		-		-			85,576			-			85,576
Conversion of convertible note payable to Former Parent into common stock		785,084		392,542		-		-			392,542			-			392,542
Conversion of convertible notes payable into common stock		553,425		899,340		-		-			899,340			-			899,340
Stock-based compensation: Amortization of restricted common stock		-		66,224		-		-			66,224			-			66,224
Sale of interest in CTI		-		-		-		420,899			420,899			71,999			492,898
Net loss		-		-		-		(5,552,647	)		(5,552,647	)		(2,071	)		(5,554,718	)
Balance - June 30, 2018		9,226,803	$	14,991,231	$	3,963,650	$	(22,183,834	)	$	(3,228,953	)	$	-		$	(3,228,953	)

See Notes to the Condensed Consolidated Financial Statements

4

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Six Months Ended
	June 30,
	2018			2017
Cash Flows from Operating Activities
Net loss	$	(5,554,718	)	$	(6,993,155	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		97,952			167,872
Accretion of interest expense		234,044			-
Interest expense related to issuances of warrants		305,055			-
Stock-based compensation		66,224			270,788
Loss on sale of CTI		456,169			-
Amortization of debt discounts		1,646,591			3,761,090
Bad debt expense		51,520			11,223
Deferred rent		(1,152	)		103,292
Deferred income tax provision		-			63,641
Expenses paid by Former Parent		617,355			188,642
Changes in operating assets and liabilities:
Accounts receivable		(139,381	)		(60,133	)
Inventory		41,929			(56,243	)
Prepaid expenses and other current assets		6,242			(19,163	)
Security deposits and other assets		(1,186	)		(8,024	)
Accounts payable and accrued expenses		591,207			742,758
Deferred revenue		103,917			268,057
Other current liabilities		165,374			99,811
Total Adjustments		4,241,860			5,533,611
Net Cash Used in Operating Activities		(1,312,858	)		(1,459,544	)
Cash Flows from Investing Activities
Purchases of property and equipment		(43,834	)		(523,225	)
Issuance of loans receivable		(9,689	)		(215,500	)
Issuance of loans receivable - related parties		-			(4,389	)
Collections from loans receivable		34,708			62,239
Collections from loans receivable - related party		6,667			10,000
Net Cash Used in Investing Activities		(12,148	)		(670,875	)
Cash Flows from Financing Activities
Proceeds from issuance of restricted stock		180,000			-
Proceeds from initial public offering, net of underwriter’s discount and offering costs		85,576			-
Repayments to Former Parent, net		(129,350	)		(369,112	)
Repayments of convertible notes payable		(50,000	)		-
Repayments of other note payable		(50,000	)		-
Proceeds from convertible notes payable		384,000			975,000
Proceeds from convertible notes payable - related parties		650,000			100,000
Proceeds from other notes payable		460,000			-
Proceeds from convertible notes payable to Former Parent		-			1,319,783
Net Cash Provided by Financing Activities		1,530,226			2,025,671
Net Increase (Decrease) in Cash		205,220			(104,748	)
Cash - Beginning of Period		78,683			335,724
Cash - End of Period	$	283,903		$	230,976

See Notes to the Condensed Consolidated Financial Statements

5

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

	For the Six Months Ended June 30,
	2018		2017
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	32,363	$	486
Supplemental disclosures of non-cash investing and financing activities
Beneficial conversion feature	$	3,051,080	$	1,060,967
Warrants issued in connection with convertible debt	$	16,082	$	145,940
Conversion of convertible notes payable to Former Parent into common stock	$	392,542	$	4,685,411
Conversion of notes payable into common stock	$	899,340	$	-
Accounts payable associated with purchases of property and equipment	$	-	$	190,000
Warrants issued and recorded as debt discount in connection with notes payable	$	343,818	$	-
Convertible Note issued to Former Parent in exchange for payable to Former Parent	$	475,000	$	-

6

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 1 – BUSINESS ORGANIZATION AND NATURE OF OPERATIONS, GOING CONCERN AND MANAGEMENT’S PLANS

Muscle Maker, Inc. (“MMI”), a former subsidiary of American Restaurant Holdings (“ARH” or “Former Parent”) was incorporated in California on December 8, 2014 and was a majority owner of Muscle Maker Brands, LLC, (“MMB”). MMB’s subsidiaries include Company owned restaurants as well as Custom Technology, Inc, (“CTI”) a technology and point of sale (“POS”) systems dealer and technology consultant. MMB was formed on December 22, 2014 in the state of California for the purpose of acquiring and operating company owned restaurants, as well as franchising its name and business system to qualified franchisees. Muscle Maker Franchising, LLC (“MMF”) was founded in 1995 in order to develop a brand of healthy-option fast food restaurants.

On January 23, 2015 (the “Closing Date”), MMI, MMB and MMF entered into an agreement whereby MMB purchased substantially all of the assets and liabilities of MMF, MMI acquired 74% of the membership units of MMB, and certain members of MMF acquired 26% of the membership units of MMB.

On March 23, 2017, ARH authorized and facilitated the distribution of 5,536,308 shares of Common Stock of MMI held by American Restaurants, LLC, the wholly owned subsidiary of ARH, to the shareholders of the Former Parent (the “Spin-Off”). As a result of the Spin-Off on March 23, 2017, ARH is no longer a majority owner of MMI.

On June 8, 2017, MMB converted from a limited liability company into a California corporation named Muscle Maker Brands Conversion, Inc. (“MMBC”).

On July 18, 2017, MMI formed Muscle Maker Development, LLC (“Muscle Maker Development”) 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. Muscle Maker Development issued 1,000 membership units to its sole member and manager, MMI. MMB assigned all the existing franchise agreements to Muscle Maker Development (“Assignment and Assumption Agreement”) pursuant to the terms of that certain Assignment and Assumption Agreement, dated August 25, 2017, among MMI, MMB and Muscle Maker Development.

On July 18, 2017, MMI formed Muscle Maker Corp., LLC (“Muscle Maker Corp.”) in the state of Nevada for the purpose of developing new corporate stores and operating new and existing corporate stores of MMI. Muscle Maker Corp. issued 1,000 membership units to its sole member and manager, MMI and MMI assigned all the existing corporate stores to Muscle Maker Corp.

On September 15, 2017 (“Effective Merger Date”), pursuant to an Agreement of Merger, MMBC was merged (“Merger”) into MMI, with MMI as the surviving corporation, in a tax-free reorganization. Pursuant to the Merger, each share of common stock of MMBC (the “MMBC Common Stock”) owned by the members of MMF was converted into 796 shares of common stock of MMI, resulting in aggregate consideration of 1,550,964 shares of common stock of MMI to the members of MMF. As a result of the Merger, MMI directly owned 70% of the shares of CTI.

On May 24, 2018, the Company entered into a stock purchase agreement between John Guild, JohnG Solutions LLC and CTI in which the Company agreed to sell their 70% ownership in CTI for a total purchase price of $1.00. See Note 4 -Sale of CTI for more details.

7

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 1 – BUSINESS ORGANIZATION AND NATURE OF OPERATIONS, GOING CONCERN AND MANAGEMENT’S PLANS, Continued

On March 14, 2019, MMI formed Muscle Maker USA, Inc. (“Muscle USA.”) in the state of Texas. Muscle USA issued 1,000 membership units to its sole member and manager, MMI.

MMI and its subsidiaries is the “Company”.

The Company operates under the name Muscle Maker Grill and is a franchisor and owner operator of Muscle Maker Grill restaurants. As of June 30, 2018, the Company’s restaurant system included six company-owned restaurants, and thirty-four franchise restaurants. Two company-owned restaurants were subsequently opened for operation and one company-owned restaurant closed as of the date of the issuance of these condensed consolidated financial statements. 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.

Going Concern and Management’s Plans

As of June 30, 2018, the Company had a cash balance, a working capital deficiency and an accumulated deficit of $283,903, $4,777,953, and $22,183,834, respectively. During the three and six months ended June 30, 2018, the Company incurred a pre-tax net loss of $2,363,735 and $5,554,718, respectively. These conditions indicate that there is substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date of the issuance of these consolidated financial statements.

The Company’s operations have primarily been funded through proceeds from the issuance of equity and debt. Subsequent to June 30, 2018, the Company received an aggregate of $4,731,000 associated with the issuances of convertible promissory notes payable and warrants to various lenders, of which $137,000 was converted into common stock. (See Note 15 – Subsequent Events -15% Senior Secured Convertible Notes). In addition, during April 2019 through the date of the issuance of these condensed consolidated financial statements, Muscle USA. entered into securities purchase agreements (“April 2019 SPA”) with several accredited investors (the “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 $3,000,000 (the “April 2019 Offering”). (See Note 15 – Subsequent Events – 12% Secured Convertible Notes).

Although management believes that the Company has access to capital resources, there are no commitments, other than aforementioned, in place for new financing as of the date of the issuance of these consolidated financial statements 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.

8

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 1 – BUSINESS ORGANIZATION AND NATURE OF OPERATIONS, GOING CONCERN AND MANAGEMENT’S PLANS, Continued

Going Concern and Management’s Plans, continued

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate continuation of the Company as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not necessarily purport to represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

NOTE 2 – REVERSE STOCK SPLITS

Effective January 31, 2018, pursuant to authority granted by the stockholders of the Company, the Company implemented a 3-for-4 reverse split of the Company’s issued common stock (the “Second Reverse Split”). All share and per share information has been retroactively adjusted to reflect the Second Reverse Split for all periods presented.

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of June 30, 2018, and for the three and six months ended June 30, 2018 and 2017. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the operating results for the full year. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2017, included in this filing. The balance sheet as of December 31, 2017 has been derived from the Company’s audited financial statements.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries 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.

9

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed 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 fair value of assets acquired, and liabilities assumed in a business combination;

● 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;

● 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 June 30, 2018 and December 31, 2017.

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.

As of June 30, 2018 and December 31, 2017, the Company did not have any derivative liabilities on its balance sheets.

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

Revenue Recognition

In accordance with the Accounting Standard Codification Topic 605 “Revenue Recognition” (“ASC 605”), the Company recognizes revenue when the following four criteria are met: (1) delivery has occurred or services rendered; (2) persuasive evidence of an arrangement exists; (3) there are no continuing obligations to the customer; and (4) the collection of related accounts receivable is probable.

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.

Franchise Royalties and Fees

Franchise royalties and fees principally consists of royalties and franchise fees. Royalties are based on a percentage of franchisee net sales revenue. Initial franchise fees are recognized upon opening of a restaurant or granting of a new franchise term, which is when the Company has performed substantially all material obligations and initial services required by the franchise agreement. The Company recognizes renewal fees as income when a renewal agreement becomes effective.

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 $192,932 and $209,328 during the three and six months ended June 30, 2018, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. The Company recorded revenue from rebates of $113,152 and $144,457 during the three and six months ended June 30, 2017, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. Rebates earned on purchases by company owned stores are recorded as a reduction of cost of goods sold during the period in which the related food and beverage purchases are made.

Other Revenues

Through its subsidiary CTI which was sold in May 2018, the Company derived revenue from the sale of POS computer systems, cash registers and camera systems, and from the provision of related consulting and support services, which generally include implementation, installation and training services. We recognize revenue when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, the fee is fixed or determinable and collectability is reasonably assured. The Company recorded $93,561 and $244,633 of revenues from these technology sales and services during the three and six months ended June 30, 2018, respectively. The Company recorded $129,325 and $295,590 of revenues from these technology sales and services during the three and six months ended June 30, 2017, respectively.

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

Deferred Revenue

Deferred revenue primarily includes initial franchise fees received by the Company, for which the restaurant has not yet opened, as well as unearned vendor rebates and customer deposits received in connection with technology sales and services by CTI (see Note 10 – Deferred Revenue).

The Company collects initial franchise fees when franchise agreements are signed and recognizes the initial franchise fees as revenue when the store is opened, which is when the Company has performed substantially all initial services required by the franchise agreement. Customer deposits received for technology sales or services are recorded as deferred revenue and recognized when the sale is complete, or the service is performed.

Advertising

Advertising costs are charged to expense as incurred. Advertising costs were approximately $19,599 and $8,932 for the three and six months ended June 30, 2018, respectively, and approximately $224,748 and $41,460 for the three and six months ended June 30, 2017, respectively, and are included in general and administrative expenses in the accompanying condensed consolidated statements of operations. Advertising costs incurred related to our national advertising fund are netted with contributions from our Company-owned stores and our franchisees.

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, and stock options from the conversion of convertible debt, from the conversion of Muscle Maker Brands, LLC (“MMB”) membership units and the vesting of restricted stock.

The following securities are excluded from the calculation of weighted average diluted common shares at June 30, 2018 and 2017, respectively, because their inclusion would have been anti-dilutive:

	June 30,
	2018		2017
Warrants		1,100,511		487,476
Options		33,750		-
Convertible debt		2,025,070		332,879
MMB membership units		-		1,550,964
Total potentially dilutive shares		3,159,331		2,371,319

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

Major Vendor

The Company engages various vendors to distribute food products to their Company-owned restaurants. Purchases from the Company’s largest supplier totaled 80% and 77% of the Company’s purchases for the three and six months ended June 30, 2018, respectively. Purchases from the Company’s largest supplier totaled 85% and 84% of the Company’s purchases for the three and six months ended June 30, 2017, respectively.

Controlling and Non-Controlling Interest

MMI used to own a 74% controlling interest in MMB through the Effective Merger Date and used to own a 70% controlling interest in CTI. The profits and losses of CTI were allocated among the controlling interest and the CTI non-controlling interest in the same proportions as their membership interests. All of the profits and losses of MMB and its subsidiaries were allocated among the controlling interest and MMB non-controlling Interest in proportion to the ownership interests through the Effective Merger Date.

Reclassification

Certain amounts in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net loss.

Subsequent Events

The Company evaluated events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation and transactions, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed in Note 15 – Subsequent Events.

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, 2018, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its condensed consolidated financial statements and disclosures.

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

Recent Accounting Pronouncements, continued

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations”, in April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing” and in May 9, 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”). This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue From Contracts with Customers which is not yet effective. These new standards provide for a single, principles-based model for revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date of ASU 2014-09 for private companies and emerging growth public companies until annual and interim periods beginning on or after December 15, 2018. It will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. The Company will evaluate the effects, if any, that adoption of this guidance will have on its condensed consolidated financial statements.

In December 2016, the FASB issued ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” ASU No. 2016-20 amends certain aspects of ASU No. 2014-09 and clarifies, rather than changes, the core revenue recognition principles in ASU No. 2014-09. It is effective for annual reporting periods beginning after December 15, 2018. We are currently evaluating the effect that adopting this new accounting guidance will have on its condensed consolidated cash flows and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350)” (“ASU 2017-04”) Simplifying the Test for Goodwill Impairment. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. It affects public entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. A public entity that is a U.S. Securities and Exchange Commission (“SEC”) filer should adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are currently reviewing the new standard and assessing the impact of its adoption.

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

Recent Accounting Pronouncements, continued

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815),” which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This guidance is effective for all entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The amendments in ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718),” (“ASU 2018-07”). ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments. Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different. ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity — Equity-Based Payments to Nonemployees. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company is currently evaluating ASU 2018-07 and its impact on the condensed consolidated financial statements.

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

Recent Accounting Pronouncements, continued

In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). These amendments provide clarifications and corrections to certain ASC subtopics including the following: Income Statement - Reporting Comprehensive Income – Overall (Topic 220-10), Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from Equity – Overall (Topic 480-10), Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations - Income Taxes (Topic 805-740), Derivatives and Hedging – Overall (Topic 815-10), and Fair Value Measurement – Overall (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on its condensed 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, 2019, with early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. The Company is currently assessing the impact this guidance will have on its condensed consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” (“ASU 2018-11”). The amendments in ASU 2018-11 related to transition relief on comparative reporting at adoption affect all entities with lease contracts that choose the additional transition method and separating components of a contract affect only lessors whose lease contracts qualify for the practical expedient. The amendments in ASU 2018-11 are effective for emerging growth companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently assessing the impact this guidance will have on its condensed consolidated financial statements.

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 4 – SALE OF CTI

On May 24, 2018, the Company entered into a stock purchase agreement between John Guild, JohnG Solutions LLC and CTI in which the Company agreed to sell their 70% ownership in CTI for a total purchase price of $1.00. During the six months ended June 30, 2018, the Company recorded a loss of $456,169 related to the sale of CTI, as follows:

Cash	$	(1,973	)
Accounts receivable, net		(84,653	)
Accounts receivable from CTI		(429,171	)
Property and equipment, net		(2,912	)
Intangible assets, net		(13,086	)
Loans receivable from related party, net		(2,387	)
Security deposits and other assets		(300	)
Accounts payable and accrued expenses		133,930
Deferred revenue		8,110
Net fair value of assets and liabilities sold		(392,442	)
Accumulated deficit		8,272
Subtotal		(384,170	)
Non-controlling interest		(71,999	)
Loss on sale of CTI	$	(456,169	)

NOTE 5 - LOANS RECEIVABLE

At June 30, 2018 and December 31, 2017, the Company’s loans receivable consists of the following:

	June 30,			December 31,
	2018			2017
Loans receivable, net	$	145,649		$	170,668
Less: current portion		(23,814	)		(20,146	)
Loans receivable, non-current	$	121,835		$	150,522

Loans receivable includes loans to franchisees totaling, in the aggregate, $145,649 and $170,668, net of reserves for uncollectible loans of $55,000 at June 30, 2018 and December 31, 2017. The loans have original terms ranging from 6 months to 5 years, earn interest at rates ranging from 0% to 5%, and are being repaid on a weekly or monthly basis.

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 6 – LOANS RECEIVABLE FROM RELATED PARTIES

At June 30, 2018 and December 31, 2017, the Company’s loans receivable from related parties consist of the following:

	June 30,			December 31,
	2018			2017
Loans receivable from related parties, net	$	650		$	9,704
Less: current portion		(650	)		(9,704	)
Loans receivable from related parties, non-current	$	-		$	-

Included in loans receivable from related parties at June 30, 2018 and December 31, 2017, is $650 and $9,704, net of reserve for uncollectible related party loans of $0 and $45,000, respectively.

NOTE 7 – PROPERTY AND EQUIPMENT, NET

As of June 30, 2018, and December 31, 2017 property and equipment consists of the following:

	June 30,			December 31,
	2018			2017
Furniture and equipment	$	200,401		$	189,401
Leasehold improvements		500,052			472,218
		700,453			661,619
Less: accumulated depreciation and amortization		(202,548	)		(144,617	)
Property and equipment, net	$	497,905		$	517,002

Depreciation expense amounted to $32,226 and $63,946 for the three and six months ended June 30, 2018, respectively. Depreciation expense amounted to $57,672 and $110,892 for the three and six months ended June 30, 2017, respectively.

NOTE 8 – INTANGIBLE ASSETS, NET

The Company’s intangible assets include a trademark with an indefinite useful life as well as franchise agreements and a non-compete agreement, which are amortized over useful lives of thirteen years and five years, respectively.

A summary of the intangible assets is presented below:

Intangible Assets	Trademark		Franchise Agreements			Non-Compete Agreement			Total
Intangible assets, net at December 31, 2017	$	2,524,000	$	642,429		$	15,451		$	3,181,880
Amortization expense		-		(31,641	)		(2,365	)		(34,006	)
Sale of CTI		-		-			(13,086	)		(13,086	)
Intangible assets, net at June 30, 2018	$	2,524,000	$	610,788		$	-		$	3,134,788
Weighted average remaining amortization period at June 30, 2018 (in years)				9.6			0.0

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 8 – INTANGIBLE ASSETS, NET, continued

Amortization expense related to intangible assets amounted to $16,795 and $34,006 for the three and six months ended June 30, 2018, respectively. Amortization expense related to intangible assets amounted to $29,724 and $56,980 for the three and six months ended June 30, 2017, respectively.

NOTE 9 – ACCOUNTS PAYABLES AND ACCRUED EXPENSES

Accounts payables and accrued expenses consist of the following:

	June 30,		December 31,
	2018		2017
Accounts payable	$	912,946	$	1,425,281
Accrued payroll		191,572		150,709
Accrued vacation		62,055		93,477
Accrued professional fees		508,422		318,379
Accrued board members fees		100,500		31,500
Accrued rent expense		667,016		284,999
Sales taxes payable (1)		363,852		355,692
Accrued interest		189,737		24,275
Other accrued expenses		175,299		25,881
	$	3,171,399	$	2,710,193

(1) See Note 13 – Commitments and Contingencies –Taxes for detailed related to delinquent sales taxes.

NOTE 10 – DEFERRED REVENUE

At June 30, 2018 and December 31, 2017, deferred revenue consists of the following:

	June 30,		December 31,
	2018		2017
Customer deposits	$	-	$	18,179
Franchise fees		1,363,607		1,223,608
Unearned vendor rebates		124,060		150,073
	$	1,487,667	$	1,391,860

NOTE 11 – OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

	June 30,		December 31,
	2018		2017
Gift card liability	$	118,192	$	107,568
Marketing and co-op advertising fund liability		416,305		261,555
	$	534,497	$	369,123

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 12 –NOTES PAYABLE

Convertible Notes

On January 4, 2018 the Company issued a $100,000 convertible promissory note. The note bears no stated interest or maturity date. The note as amended and extended on January 29, 2018, will automatically convert into shares of the Company’s common stock upon the earlier of (a) twelve months from the extension date or (b) the approval of the Form 1-A Registration Statement, at a 50% discount to the initial public offering price.

On January 24, 2018 to January 25, 2018, the Company received an aggregate of $150,000 associated with the issuances of convertible promissory notes payable, of which $100,000 were issued to a related party, as amended and extended on or about January 29, 2018, with a stated interest rate of 10% per the original 60-day-term, convertible at the option of the holder into common stock at a price per share of $1.625 (50% of initial public offering price), and, if not converted, will become due and payable along with the principal amount upon the earlier of (a) six months following the extension or (b) the approval of the Form 1-A Registration Statement.

In January 2018, the Company and certain note holders, including related parties, agreed to extend the maturity date of convertible notes payable in the aggregate principal amount of $1,591,800 to be upon the earlier of the closing of the initial public offering, but no later than July 29, 2018.

On February 7, 2018, the Company and a note holder entered into an amendment to a promissory note issued by the Company on May 31, 2017, whereby the parties agreed to (i) extend the term of the note to March 15, 2018, (ii) increase the outstanding balance of the note to $170,000, inclusive of principal and interest and (iii) the Company agreed to payments on the following dates: (a) $70,000 upon entering into the amendment and (b) $100,000 on March 15, 2018. See Note 13 – Litigations, Claims and Assessments for further action taken by the note holder.

During May 8, 2018 to June 30, 2018, the Company received an aggregate of $784,000 associated with the issuances of convertible promissory notes payable, of which $550,000 were issued to a related party. In addition, the Company issued a convertible promissory note of $30,000 for which the proceeds was received by the Former Parent and the Company recorded the corresponding receivable. The notes bear no stated interest or maturity date. The notes are convertible into shares of the Company’s stock upon the earlier of (a) six months from the issue date or (b) the first day the company’s stock is publicly traded or (c) converted at the option of the holder. In connection with the issuances of the convertible promissory notes, the Company issued three-year warrants for the purchase of an aggregate of 407,000 shares of MMI’s common stock at an exercise price of $3.25 per share.

During the six months ended June 30, 2018, convertible notes with an aggregate amount of $899,340 were automatically converted into 553,425 shares of the Company’s common stock pursuant to the terms of the notes.

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 12 –NOTES PAYABLE, continued

Convertible Notes, continued

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 warrant at the date of grant of is also recorded as a debt discount. For the six months ended June 30, 2017 the Company recorded aggregate debt discounts of $145,940 and $1,060,967, related to the warrants and the beneficial conversion feature, respectively, on the convertible notes and for the six months ended June 30, 2018 the Company recorded aggregate debt discounts of $359,900 and $3,051,080, 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.

Convertible Notes 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, in exchange for the payable to Former Parent for services provided and expenses 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 $0.50 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 785,084 shares of the Company’s common stock.

Other Notes Payable

On January 4, 2018 the Company issued a $25,000 promissory note to a related party. The note has a stated interest of 10% over the original term of sixty days. The note as amended and extended on January 29, 2018 becomes due and payable upon the earlier of (a) six month following the date of extension or (b) the approval of the Form 1-A Registration Statement.

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 12 –NOTES PAYABLE, continued

Other Notes Payable, continued

On January 24, 2018, the Company entered into a promissory note with an unrelated third party in the principal amount of $511,765 with a maturity date of March 30, 2018. The note is issued with a 15% original issue discount of which the Company received cash proceeds of $435,000. In connection with the promissory note, the Company issued three-year warrants for the purchase of an aggregate of 78,733 shares of the Company’s common stock with an exercise price per share at 50% of initial public offering price. The grant date fair value of the warrants of $155,104 has been amortized over the terms of the note and was recorded as interest. The warrant contains a cashless exercise provision and piggyback registration rights as to the common stock underlying the warrants subsequent to the filing and effectiveness of the Form 8-A with the SEC following the closing of the initial public offering. In the event of default, the principal amount of the note is to be increased by 30% of the original principal amount and another three-year warrant for the purchase of an additional 78,333 shares of the Company’s common stock with an exercise price per share at 50% of initial public offering price, which together with the original warrant would constitute 100% warrant coverage. On March 30, 2018, the Company had defaulted on the loan and as a result the principal interest amount of the note has increase by $153,529 and the Company issued the additional three-year warrants for the purchase of an aggregate of 78,733 shares of the Company’s common stock with an exercise price per share at 50% of initial public offering price. The grant date fair value of the warrants of $149,951 has been recorded as interest expense. The Company has since defaulted on the note and the note was subsequently converted into Secured Convertible Promissory Notes (see Note 15 Subsequent Events - 15% Senior Secured 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 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 $1.00 per share.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

Litigations, Claims and Assessments

In 2017, Limestone Associates LLC (“Limestone”) filed a complaint against ARH in the Civil Court of the City of New York, County of New York, #78549/2017 for commercial non-payment of rent for the amount of $25,748 plus cost and disbursements of this proceeding. In May 2018, Limestone filed a complaint against ARH and Mr. Morgan in the Supreme Court of the State of New York, County of New York, index # 154469 seeking $1,357,243 in damages for rent, interest and other expenses.

In May 2018, the Company, Former Parent and Robert E. Morgan (the former CEO of the Company) were listed as defendants to a lawsuit filed by Crownhall Realty, LLC (“Crownhall”) in the Supreme Court of the State of New York county of New York, #154467. Crownhall is seeking $1,034,087 in damages for rent, interest and other expenses.

On October 3, 2018, the Company, ARH and Mr. Morgan entered into a settlement agreement with Crownhall and Limestone agreeing to forfeit all security deposits, pay an upfront amount of $25,000 and an additional $175,000 to be paid over 20 months. This agreement settles litigation surrounding two closed locations, which the plaintiffs were seeking a total of $2,391,330 in past damages for rent, interest and other expenses.

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MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 13 – COMMITMENTS AND CONTINGENCIES, continued

Litigations, Claims and Assessments, continued

On or about December 1, 2017, a landlord commenced legal proceedings in the Supreme Court of New Jersey, Special Civil Part, Union County docket number LT-010222-17 due to the Company’s default under the lease. This was resolved by the Company on January 23, 2018. The Company again defaulted under the terms of the lease and the landlord evicted the Company from the premises.

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. As of June 30, 2018, the Company has accrued for the liability in accounts payable and accrued expenses.

On or about April 5, 2018, the Company and Former Parent, Inc entered into a settlement agreement with 918-924 Belmont, LLC for $100,000 regarding past rents owed, other charges and the termination of its lease at the Belmont location. The settlement calls for monthly payments of $8,333 thru March 2019. As of June 30, 2018, the Company has accrued for the liability in accounts payable and accrued expenses. See details related to settlement above.

In April 2018, the Company and Former Parent was listed as a defendant in a lawsuit filed by a landlord (“Former Landlord”) in the Superior Court of the State of California. The Former Landlord is seeking $531,594 in damages for rent, interest and other expenses. The original lease was for a 5-year period and commenced on or about September 30, 2015. On January 15, 2019, the Company and the Former Landlord entered a settlement and release agreement. Pursuant to the settlement the Company shall pay the amount of $531,594 as follows (i) first payment of $49,815, net of security deposit of $11,185, on or before January 23, 2019, (ii) second payment of $25,000 on or before February 28, 2019 and (iii) thereafter sixty-nine payments of $6,400 on or before the 15^th of each month beginning on March 15, 2019. Conditioned on the Company making twelve timely installment payments of $6,400, the Company would be released of the remaining liability pursuant to the judgement.

On or about May 1, 2018, a suit was filed in the Supreme Court of the State of New York, County of Rockland, by Imperial Bag & Paper seeking $44,585 in past due amounts for goods received. The company entered into a payment plan and as of January 2019 this amount has been paid in full.

On May 4, 2018, Stratford Road Partners, LLC (“Stratford”) filed suit against the Company’s subsidiary for non-payment of rent in the small Claims court in the state of North Carolina. Since then the property has been vacated and the landlord offered a settlement of $10,000 with no further lease obligation. On June 5, 2019 the Company signed the settlement agreement and made the payment to the landlord.

23

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 13 – COMMITMENTS AND CONTINGENCIES, continued

Litigations, Claims and Assessments, continued

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 June 30, 2018, the Company has accrued for the liability in accounts payable and accrued expenses.

On May 25, 2018, the Civil Court of the City of New York, County of New York, entered into a settlement agreement between the Company and a landlord, in the amount of $55,891 for past due rent. The Company agreed to make the following payments (i) $15,000 on or before May 31, 2018, and (ii) $40,891 on or before September 4, 2018. These amounts have been paid in full pursuant to the settlement.

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, 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.

Termination of Offering

On March 29, 2018, the Company decided to terminate its Regulation A+ offering in order to register its common stock with the SEC under the Securities Exchange Act of 1934, as amended, using a Form 8-A12g and become a publicly reporting company. Prior to terminating the Regulation A+ offering, the Company sold 44,153 shares in the offering at $3.25 per share, yielding net proceeds of approximately $85,000.

Employment Agreements

The Company entered into an at-will employment agreement with each of (i) Robert Morgan, as former Chief Executive Officer (the “CEO Agreement”), (ii) Grady Metoyer, as former Chief Financial Officer (the “CFO Agreement”) and (iii) Rodney Silva, as Chief Culture Officer (the “CCO Agreement). The employment agreements are effective as of the date the Company receives at least $5,000,000 in gross proceeds from an SEC qualified offering under the Offering Statement under Regulation A+ under the Securities Act of 1933, as amended. The term of these employment agreements are two years and are automatically extended for successive one-year periods unless either party delivers a 60-day notice of termination. These employment agreements did not become effective since the company terminated its Regulation A+ offering on March 29, 2018.

On January 17, 2018, Grady Metoyer resigned as the Company’s Chief Financial Officer, effective immediately.

24

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 13 – COMMITMENTS AND CONTINGENCIES, continued

Employment Agreements, continued

In connection with the resignation of Grady Metoyer, on January 25, 2018, the Company’s board of directors appointed Ferdinand Groenewald as its Vice President of Finance, Principal Financial Officer and Principal Accounting Officer. The Company entered into an at-will employment agreement with Ferdinand Groenewald for a one-year term that is to commence as of the date the Company successfully receives at least $5,000,000 in gross proceeds from an SEC qualified offering under Offering Statement under

Regulation A+ under the Securities Act of 1933, as amended. The employment agreements did not become effective since the company terminated its Regulation A+ offering on March 29, 2018.

On April 11, 2018, Robert E. Morgan resigned as Chief Executive Officer, President and Director of the Company and all other positions with subsidiaries of the Company.

On April 16, 2018, Kevin Mohan was appointed by the Company to serve as the Interim President of the Company.

On April 30, 2018, Tim M. Betts resigned as a director of the Company for personal reasons.

On May 1, 2018, the Company appointed Michael J. Roper as Chief Executive Officer (“CEO”) of the Company and entered into an Employment Agreement with Mr. Roper. In addition, Mr. Mohan resigned as Interim President of the Company.

On May 29, 2018, Ferdinand Groenewald, the Vice President of Finance, Principal Financial Officer and Principal Accounting Officer, notified Muscle Maker, Inc. (the “Company”) that he is resigning from his positions with the Company and its subsidiaries effective May 29, 2018.

Taxes

The Company failed in certain instances in paying sales taxes collected from customers in specific states that impose a tax on sales of the Company’s products. The Company had accrued $363,852 and $355,692, which includes interest, as of June 30, 2018 and December 31, 2017, respectively, related to this matter.

25

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 14 – EQUITY

Common Stock

During the six months ended June 30, 2018, the Company sold 180,000 shares of common stock of the company to various investors at a purchase price of $1.00 per share providing $180,000 of proceeds to the Company.

Warrant Valuation

The Company has computed the fair value of warrants granted using the Black-Scholes option pricing model. The expected term used for warrants issued to non-employees is the contractual life. The Company is utilizing an expected volatility figure based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.

Restricted Common Stock

At June 30, 2018, the unamortized value of the restricted common stock was $347,535. The unamortized amount will be expensed over a weighted average period of 2.51 years. A summary of the activity related to the restricted common stock for the six months ended June 30, 2018 is presented below:

				Weighted
				Average Grant
	Total			Date Fair Value
Outstanding at January 1, 2018		97,177		$	6.82
Granted		-			-
Forfeited		(27,164	)		9.33
Vested		(26,286	)		9.12
Outstanding at June 30, 2018		43,727		$	7.95

Stock-Based Compensation Expense

Stock-based compensation related to restricted stock issued to employees, directors and consultants amounted to $27,133 and $66,224 for the three and six months ended June 30, 2018, respectively, of which $26,879 and $64,677 was recorded in general and administrative expenses and $254 and $1,547 was recorded in labor expense within restaurant operating expenses. Stock-based compensation related to restricted stock issued to employees, directors and consultants amounted to $270,788 for the three and six months ended June 30, 2017, of which $262,360 was recorded in general and administrative expenses and $8,428 was recorded in labor expense within restaurant operating expenses.

26

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 14 – EQUITY, continued

Warrants

A summary of warrants activity during the six months ended June 30, 2018 is presented below:

					Weighted
			Weighted		Average
			Average		Remaining
	Number of		Exercise		Life
	Warrants		Price		In Years
Outstanding, December 31, 2017		521,045	$	9.52		1.9
Issued		579,466		2.81
Exercised		-		-
Outstanding, June 30, 2018		1,100,511		5.76		2.2
Exercisable, June 30, 2018		1,100,511	$	5.76		2.2

The grant date fair value of warrants granted during the six months ended June 30, 2018 and 2017 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 options 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 stock options. Due to the lack of historical information, the Company determined the expected term of its stock option awards issued using the simplified method. In applying the Black-Scholes option pricing model, the Company used the following assumptions:

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Risk free interest rate		2.51 - 3.13	%		1.57 - 1.59	%		2.20 - 3.13	%		1.57 - 1.59	%
Expected term (years)		3.00			3.00			3.00			3.00
Expected volatility		55.37	%		43.50	%		53.68 - 55.37	%		43.50	%
Expected dividends		0.00	%		0.00	%		0.00	%		0.00	%

NOTE 15 – SUBSEQUENT EVENTS

Company-Owned Restaurants

Subsequent to June 30, 2018 and through the date of the issuance of these condensed consolidated financial statements, the Company opened two additional company-owned restaurants.

27

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 15 – SUBSEQUENT EVENTS, continued

Convertible Notes

During July 2018, the Company received an aggregate of $137,000 associated with the issuances of convertible promissory notes payable. The notes bear no stated interest or maturity date. The notes are convertible into shares of the Company’s stock upon the earlier of (a) six months from the issue date or (b) the first day the company’s stock is publicly traded or (c) converted at the option of the holder. In connection with the issuances of the convertible promissory notes, the Company issued three-year warrants for the purchase of an aggregate of 68,500 shares of MMI’s common stock at an exercise price of $3.25 per share.

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 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.

Subsequent to June 30, 2018, other convertible promissory notes with an aggregate principal amount of $951,000 were automatically converted into 951,000 shares of the Company’s common stock pursuant to the terms of the notes.

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 $1.00 per share.

During April 2019, the Company repaid other notes payable in the aggregate principal amount of $710,000, of which $435,000 belong to related parties. In addition, the company issued 590,989 of the company’s 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, 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.

15% Senior Secured Convertible Notes

From September 12, 2018 through the date of the issuance of these condensed consolidated financial statements, the Company entered into Securities Purchase Agreements (“SPA”) with several accredited investors (the “Investors”) providing for the sale by the Company to the investors of 15% Senior Secured Convertible Promissory Notes (the “SPA Notes”) in the aggregate amount of $5,138,000, which included $635,000 in convertible notes converted into SPA Notes (the “September 2018 Offering”). The Notes bear interest at 15% per annum paid quarterly and mature 18 months from issuance. Following the initial closing, there shall be two additional closings in the amount of $1,000,000 each provided the Company achieves certain business milestones outlined in the Securities Purchase Agreement.

28

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 15 – SUBSEQUENT EVENTS, continued

15% Senior Secured Convertible Notes, continued

The Investors may elect to convert all or part of the Notes, plus accrued interest, at any time into shares of common stock of the Company at a conversion price of $1.00 (the “Fixed Conversion Price”); provided, however, in the event the per share price of a public offering multiplied by sixty percent (60%) at the time of the listing of the shares of common stock on an exchange (the “Listing Event”) is less than $1.00 (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 $0.75 and the Discounted Public Offering Price shall be the public offering multiplied by forty five percent (45%) 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.

In addition to the SPA Notes, the Investors also received 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 $1.20. In the event 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 Listing Event, Catalytic Capital LLC 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 Catalytic Capital LLC 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 piggy back registration rights with respect to the shares of common stock underlying the Notes and the Warrants.

On April 10, 2019, the Company and the investors that participated in its September 2018 Offering entered into an amendment pursuant to which the conversion price of the 15% Senior Secured Convertible Promissory Notes was amended to equal 25% of the per share offering price paid by investors in the public offering in conjunction with an uplisting to a national exchange. However, in the event the holder is required to sign a Lock-Up Agreement as part of the public offering in conjunction with an uplisting to a national exchange, then the conversion price shall be 17.5% of the per share offering price paid by investors in the public offering in conjunction with an uplisting to a national exchange.

29

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 15 – SUBSEQUENT EVENTS, continued

Employment Agreements

On September 26, 2018, Muscle Maker, Inc. (the “Company”) appointed 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 10,000 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 25,000 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.

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 is eligible for a discretionary performance cash and equity bonuses which will include cash of $50,000 and 75,000 shares of common stock upon completion of the Public Offering, which may be increased to 125,000 shares in the event $5 million is raised. Mr. Miller 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 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 “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 will be increased to $275,000 upon achieving various milestones required by the Investors that participated in the September 2018 Offering and again to $350,000 upon the Company 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 is entitled to $100,000 bonus upon closing of the IPO. In addition to 350,000 restricted stock units previously granted, the Company agreed to issue Mr. Roper up to 250,000 additional restricted stock units. In the event the Company raises $3 million or $5 million, then Mr. Roper will receive 150,000 restricted stock units or 250,000 restricted stock units, respectively. In addition, Mr. Roper will receive 100,000 restricted stock units upon the one- and two-year anniversaries of his employment.

30

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 15 – SUBSEQUENT EVENTS, continued

Employment Agreements, continued

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 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 is entitled to $50,000 bonus upon closing of the IPO. The Company agreed to issue Mr. Mohan up to 200,000 additional restricted stock units. In the event the Company raises $3 million or $5 million, then Mr. Mohan will receive 100,000 restricted stock units or 200,000 restricted stock units, respectively.

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 will receive an 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. The Company agreed to issue Ms. Infante 5,000 restricted stock units upon closing of the Public Offering, which may be increased to 10,000 restricted stock units if the Public Offering is in excess of $5 million. Ms. Infante 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 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 IPO. 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 IPO. 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.

12% Secured Convertible Notes

During April 2019 through the date of the issuance of these condensed consolidated financial statements, Muscle USA entered into April 2019 SPA with the April 2019 Investors providing for the sale by the Company to the investors of April 2019 Notes in the aggregate amount of $3,000,000 (the “April 2019 Offering”).

31

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 15 – SUBSEQUENT EVENTS, continued

12% Secured Convertible Notes, continued

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 $2.00 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 “Discounted Public Offering Price”) is less than $2.00 then the April 2019 Conversion Price shall be reset to equal the lesser of (i) 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 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 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 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, Muscle USA 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 Investors piggyback registration rights with respect to the shares of common stock underlying the Notes and the Warrants.

Litigations, Claims and Assessments

On September 25, 2018, the Supreme Court of the State of New York, County of Rockland, entered into a judgement in favor of a creditor, in the amount of $69,367. The Company worked with legal counsel and on October 22, 2018, the Company entered into a settlement agreement with the creditor in the amount of $36,000 that was payable on or before November 16, 2018. The amount has been paid in full pursuant to the settlement agreement.

On January 18, 2019, the Company entered into an expense reimbursement agreement with an employee in connection with unreimbursed expenses incurred on behalf of the Company in the amount of $81,140 recorded in accounts payable and accrued expenses as of September 30, 2018. The Company shall pay the employee as follows (a) $1,750 upon execution of the agreement, (b) $1,000 a month commencing on January 25, 2019 ending May 24, 2019, (c) a one time payment of $40,000 on the earlier of March 31, 2019 or when the Company fully received the anticipated funding from the a traunch of the 15% Senior Secured Convertible Notes and (d) on the earlier of May 31, 2019 or when the Company has fully received the anticipated funding from the second traunch of the 15% Senior Secured Convertible Notes. As of the date of the issuance of these condensed consolidated financial statements the full amount has been repaid.

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.

32

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 15 – SUBSEQUENT EVENTS, continued

Litigations, Claims and Assessments, continued

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 June 30, 2018, the Company accrued for the liability in accrued expenses.

On May 6, 2019, the Company entered into a commission's payment agreement in the aggregate amount of $45,894 in connection with past due commission recorded in accounts payable and accrued expenses as of September 30, 2018. The Company shall pay the employee the outstanding commission balance as follows (a) $10,894 upon execution of the agreement and (b) $7,000 per month for five months start on May 31, 2019. As of the date of the issuance of these condensed consolidated financial statements the full amount has been repaid.

Consulting Agreement

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 will issue 290,000 restricted shares of common stock on or before July 15, 2019, and agree to pay a cash fee of $75,000 upon signing the agreement.

33

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of the results of operations and financial condition of Muscle Maker, Inc. (“Muscle Maker”), together with its subsidiaries (collectively, the “Company”) as of June 30, 2018 and 2017 and for the three and six months ended June 30, 2018 and 2017 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in Quarterly Report on Form 10-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us,” “we,” “our,” and similar terms refer to Muscle Maker. “Muscle Maker Grill” refers to the name under which our corporate and franchised restaurants do business. 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, which may influence the accuracy of the statements and the projections upon which the statements are based. Reference is made to “Factors That May Affect Future Results and Financial Condition” in this Item 7 for a discussion of some of the uncertainties, risks and assumptions associated with these statements.

OVERVIEW

We operate under the name Muscle Maker Grill as a franchisor and owner-operator of Muscle Maker Grill restaurants. As of June 30, 2018, our restaurant system included six Company-owned restaurants and thirty-four franchised restaurants.

Muscle Maker Grill 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, burgers, 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 approximately $47 billion fast casual restaurant segment, which we believe has created significant recent disruption in the restaurant industry and is rapidly gaining market share from adjacent restaurant segments, resulting in significant growth opportunities for healthier restaurant concepts such as Muscle Maker Grill.

We believe our healthier restaurant concept delivers a highly differentiated customer experience by combining 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. The foundation of our brand is based on our core values of quality, empowerment, respect, service and value.

As of June 30, 2018, we had an accumulated deficit of $22,183,834 and expect to continue to incur substantial operating and net losses for the foreseeable future. In its report on our consolidated financial statements for the fiscal year ended December 31, 2017, our independent registered public accounting firm included an explanatory paragraph relating to our ability to continue as a going concern. See “Liquidity and Capital Resources – Availability of Additional Funds and Going Concern” and Note 1 – Business Organization and Nature of Operations, Going Concern and Management’s Plans to Notes to Consolidated Financial Statements for additional information describing the circumstances that led to the inclusion of this explanatory paragraph.

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Key Financial Definitions

Total Revenues

Our revenues are derived from three primary sources: company restaurant sales, franchise revenues and vendor rebates. Franchise revenues are comprised of franchise royalty revenues collected based on 5% of franchisee net sales and, to a lesser extent, other franchise revenues which include initial and renewal franchisee fees. Vendor rebates are received based on volume purchases or services from both company owned and franchise owned locations.

Food and Beverage Costs

Food and beverage costs include the direct costs associated with food, beverage and packaging of our menu items at company-operated restaurants. The components of food, beverages and supplies are variable in nature, change with sales volume, are affected by menu mix and are subject to fluctuations in commodity costs. The current management team in place since May 2018 has the opinion that food and beverage costs for 2017 and 2018 are too high and has begun implementing multiple operational changes to lower food and paper costs.

Labor

Restaurant labor costs, including preopening labor, consists of company-operated restaurant-level management and hourly labor costs, including salaries, wages, payroll taxes, workers’ compensation expense, benefits and bonuses paid to our company-operated restaurant-level team members. Like other cost items, we expect restaurant labor costs at our company-operated restaurants to increase due to inflation and as our company restaurant revenues grows. Factors that influence labor costs include minimum wage and employer payroll tax legislation, mandated health care costs and operational productivity established by the management team. The current management team in place since May 2018 has the opinion that labor costs for 2017 and 2018 are too high and has begun implementing operational changes to lower restaurant level labor costs overall.

Rent

Restaurant rent, including preopening rental charges, consist of company-operated restaurant-level rental or lease payments applicable to executed rental or lease agreements. In many cases these rental payments may include payments for common area maintenance as well as property tax assessments. The current management team in place since May 2018 has the opinion that rent costs for 2017 and 2018 as a percentage of total restaurant sales are too high. Our rent strategy moving forward consists of a variable rent structure calculated on net sales of the restaurant. While this can have a negative effect on higher volume locations where we cannot leverage a fixed rent, it provides a downside protection for lower volume locations. While we cannot guarantee a favorable variable rent expense in all future leases, it is in our forecasts at an 8% average level.

Other restaurant operating expenses

Other restaurant operating expenses, including preopening operating expenses, consist of company-operated restaurant-level ancillary expenses not inclusive of food and beverage, labor and rent expense. These expenses are generally marketing, advertising, merchant and bank fees, utilities, leasehold and equipment repairs and maintenance. A portion of these costs are associated with third party delivery services such as Uber Eats, Grub Hub, DoorDash, Seamless, etc. The fees associated with these third-party delivery services can range up to 25% of the total order being delivered. Management believes delivery is a critical component of our business model and industry trends will continue to push consumers towards delivery. Our cost structure will need to be adjusted to reflect a different pricing model, portion sizes, menu offerings, etc to potentially offset these rising costs of delivery.

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Depreciation and Amortization

Depreciation and amortization primarily consist of the depreciation of property and equipment and amortization of intangible assets at the restaurant level.

General and Administrative Expenses

General and administrative expenses include expenses associated with corporate and administrative functions that support our operations, including wages, benefits, travel expense, stock-based compensation expense, legal and professional fees, training, and other corporate costs. This expense item also includes national advertising and marketing campaigns to promote brand awareness which includes, but is not limited to, television, radio, social media, billboards, point-of-sale materials, sponsorships, and multi-media. We expect we will incur incremental general and administrative expenses as a result of this offering and as a public company. A certain portion of these expenses are related to the preparation of an initial stock offering and should be considered one-time expenses.

Other (Expense) Income

Other (expenses) income primarily consists of amortization of debt discounts on the convertible notes payable to Former Parent and interest expense related to convertible notes payable.

Income Taxes

Income taxes represent federal, state, and local current and deferred income tax expense.

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Consolidated Results of Operations

Three Months Ended June 30, 2018 Compared with Three Months Ended June 30, 2017

The following table represents selected items in our condensed consolidated statements of operations for the three months ended June 30, 2018 and 2017, respectively:

	For the Three Months Ended
	June 30,
	2018			2017
Revenues:
Company restaurant sales, net of discounts	$	940,484		$	1,427,387
Franchise royalties and fees		502,918			368,610
Other revenues		93,561			129,325
Total Revenues		1,536,963			1,925,322
Operating Costs and Expenses:
Restaurant operating expenses:
Food and beverage costs		349,742			554,578
Labor		353,614			676,143
Rent		260,502			314,140
Other restaurant operating expenses		200,296			267,144
Total restaurant operating expenses		1,164,154			1,812,005
Costs of other revenues		46,646			59,618
Depreciation and amortization		49,021			87,396
General and administrative expenses		1,442,328			1,705,940
Total Costs and Expenses		2,702,149			3,664,959
Loss from Operations		(1,165,186	)		(1,739,637	)
Other (Expense) Income:
Other (expense) income		(6,215	)		85,229
Interest (expense) income, net		(88,914	)		477
Loss on sale of CTI		(456,169	)		-
Amortization of debt discount		(647,251	)		(117,461	)
Total Other Expense, net		(1,198,549	)		(31,755	)
Net Loss Before Income Tax		(2,363,735	)		(1,771,392	)
Income tax provision		-			(31,820	)
Net Loss		(2,363,735	)		(1,803,212	)
Net loss attributable to the non-controlling interest		5,186			(471,231	)
Net Loss Attributable to Controlling Interest	$	(2,368,921	)	$	(1,331,981	)

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Revenues

Company total revenues totaled $1,536,963 for the three months ended June 30, 2018 compared to $1,925,322 for the three months ended June 30, 2017. The 20.2% decrease was primarily attributable to four stores that closed prior to and four stores during the quarter, offset by an increase in recognition of deferred initial franchise fees.

We generated restaurant sales, net of discounts, of $940,484 for the three months ended June 30, 2018 compared to $1,427,387, for the three months ended June 30, 2017. This represented a decrease of $486,903, or 34.1%, which resulted primarily attributable to four stores that closed prior to and four stores during the quarter.

Franchise royalties and fees for the three months ended June 30, 2018 and June 30, 2017 totaled $502,918 compared to $368,610, respectively. The $134,308 increase is primarily attributable to recognitions of deferred revenue for franchise agreements due to franchisee store openings and increase vendor rebates as compared to prior period, offset by a decrease in royalties.

Other revenues decreased from $129,325 for the three months ended June 30, 2017 to $93,561 for the three months ended June 30, 2018, representing a decrease of $35,764 or 27.7%. The decrease is primarily attributed to the sale of CTI in May 2018.

Operating Costs and Expenses

Restaurant food and beverage costs for the three months ended June 30, 2018 and June 30, 2017 totaled $349,742, or 37.2%, as a percentage of restaurant sales, and $554,578, or 38.9%, as a percentage of restaurant sales, respectively. The $204,836 decrease results primarily from store closures prior to and during the quarter.

Restaurant labor for the three months ended June 30, 2018 and June 30, 2017 totaled $353,614, or 37.6%, as a percentage of restaurant sales, and $676,143, or 47.4%, as a percentage of restaurant sales, respectively. The $322,529 decrease results primarily from store closures prior to and during the quarter. The decrease as a percentage of restaurant sales is primarily attributable to improved efficiencies.

Restaurant rent expense for the three months ended June 30, 2018 and June 30, 2017 totaled $260,502, or 27.7%, as a percentage of restaurant sales, and $314,140, or 22.0%, as a percentage of restaurant sales, respectively. The decrease in rent expense is primarily due to store closures prior to and during the quarter.

Other restaurant operating expenses for the three months ended June 30, 2018 and June 30, 2017 totaled $200,296, or 21.3% as a percentage of restaurant sales, and $267,144, or 18.7% as a percentage of restaurant sales, respectively. The $66,848 decrease is primarily due to store closures prior to and during the quarter.

Cost of other revenues for the three months ended June 30, 2018 and June 30, 2017 totaled $46,646, or 49.9%, as a percentage of other revenues, and $59,618, or 46.1%, as a percentage of other revenues, respectively. The $12,972 decrease is primarily due to the sale of CTI during the period.

Depreciation and amortization expense for the three months ended June 30, 2018 and June 30, 2017 totaled $49,021 and $87,396, respectively. The $38,375 decrease is primarily attributable to lower depreciation expense of property and equipment due to store closures and impairment of property and equipment taken in the latter part of 2017.

General and administrative expenses for the three months ended June 30, 2018 and June 30, 2017 totaled $1,442,328, or 93.8% of total revenues, and $1,705,940, or 88.6% of total revenues, respectively. The $263,612 decreases is primarily attributable to less expenses incurred for developing the company’s corporate infrastructure. The decrease is also attributed to a decrease in third party accounting and legal fees of approximately $132,000 as the company used less temporary accounting services and incurred fewer legal reorganizational research to facilitate SEC financial statement preparation. In addition, there were decreases of approximately $232,000 in salaries, wages and benefits, approximately $236,000 in stock-based compensation for restricted stock issued in the prior period as compared to the current period, approximately $91,000 in CTI expenses due to the sale of CTI, approximately $33,000 in marketing expenses, and approximately $97,000 in travel expenses, offset by an increase of approximately $511,000 in consulting expenses.

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Loss from Operations

Our loss from operations for the three months ended June 30, 2018 and June 30, 2017 totaled $1,165,186 or 75.8% of total revenues and $1,739,637, or 90.4% of total revenues, respectively. This resulted in a decrease of $574,451 in loss from operations which is primarily attributable to a decrease in total costs and expenses of approximately $963,000, partially offset by the decrease in total revenues of approximately $388,000,

Other (Expense) Income

Other (expense) income for the three months ended June 30, 2018 and June 30, 2017 totaled $(1,198,549) and $(31,755), respectively. The $1,166,794 increase in expense was primarily attributable to an increase in amortization of debt discounts of $529,790 in connection with convertible notes payable and a loss on sale of CTI of $456,169.

Net Loss

Our net loss for the three months ended June 30, 2018 increased by $560,523 to $2,363,735 as compared to $1,803,212 for the three months ended June 30, 2017, resulting primarily from a significant increase in other (expenses) income as discussed above, partially offset by a decrease in loss of operations as discussed above. Our net loss attributable to the controlling interest was $2,368,921 and $1,331,981 for the three months ended June 30, 2018 and June 30, 2017, respectively.

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Six Months Ended June 30, 2018 Compared with Six Months Ended June 30, 2017

The following table represents selected items in our condensed consolidated statements of operations for the six months ended June 30, 2018 and 2017, respectively:

	For the Six Months Ended
	June 30,
	2018			2017
Revenues:
Company restaurant sales, net of discounts	$	2,524,741		$	2,658,015
Franchise royalties and fees		805,892			937,217
Other revenues		244,633			295,590
Total Revenues		3,575,266			3,890,822
Operating Costs and Expenses:
Restaurant operating expenses:
Food and beverage costs		927,230			982,798
Labor		1,117,124			1,232,628
Rent		579,224			596,806
Other restaurant operating expenses		619,613			519,063
Total restaurant operating expenses		3,243,191			3,331,295
Costs of other revenues		114,388			113,481
Depreciation and amortization		97,952			167,872
General and administrative expenses		2,834,574			3,532,587
Total Costs and Expenses		6,290,105			7,145,235
Loss from Operations		(2,714,839	)		(3,254,413	)
Other (Expense) Income:
Other (expense) income		(5,619	)		85,229
Interest (expense) income, net		(731,500	)		760
Loss on sale of CTI		(456,169	)		-
Amortization of debt discount		(1,646,591	)		(3,761,090	)
Total Other Expense, net		(2,839,879	)		(3,675,101	)
Net Loss Before Income Tax		(5,554,718	)		(6,929,514	)
Income tax provision		-			(63,641	)
Net Loss		(5,554,718	)		(6,993,155	)
Net loss attributable to the non-controlling interest		(2,071	)		(1,818,064	)
Net Loss Attributable to Controlling Interest	$	(5,552,647	)	$	(5,175,091	)

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Revenues

Company total revenues totaled $3,575,266 for the six months ended June 30, 2018 compared to $3,890,822 for the six months ended June 30, 2017. The 8.1% decrease was primarily attributable to the eight store closures during the six months ended June 30. 2018.

We generated restaurant sales, net of discounts, of $2,524,741 for the six months ended June 30, 2018 compared to $2,658,015, for the six months ended June 30, 2017. This represented a decrease of $133,274, or 5.0%, which resulted primarily from the eight store closures during the six months ended June 30, 2018.

Franchise royalties and fees for the six months ended June 30, 2018 and June 30, 2017 totaled $805,892 compared to $937,217, respectively. The $131,325 decrease is primarily attributable to lower recognitions of deferred revenue for franchise agreements as fewer locations opened and/or terminated as compared to prior period, partially offset by an increase in vendor rebates of $64,871.

Other revenues decreased from $295,590 for the six months ended June 30, 2017 to $244,633 for the six months ended June 30, 2018, representing a decrease of $50,957 or 17.2%. The decrease is primarily attributed to the sale of CTI during the six months ended June 30, 2018.

Operating Costs and Expenses

Restaurant food and beverage costs for the six months ended June 30, 2018 and June 30, 2017 totaled $927,230, or 36.7%, as a percentage of restaurant sales, and $982,798, or 37.0%, as a percentage of restaurant sales, respectively. The $55,568 decrease results primarily from the eight store closures during the six months ended June 30, 2018.

Restaurant labor for the six months ended June 30, 2018 and June 30, 2017 totaled $1,117,124, or 44.2%, as a percentage of restaurant sales, and $1,232,628, or 46.4%, as a percentage of restaurant sales, respectively. The $115,504 decrease results primarily from store closures during the six months ended June 30, 2018. The decrease as a percentage of sales is primarily attributable to improved efficiencies.

Restaurant rent expense for the six months ended June 30, 2018 and June 30, 2017 totaled $579,224, or 22.9%, as a percentage of restaurant sales, and $596,806, or 22.5%, as a percentage of restaurant sales, respectively. The decrease in rent expense is primarily due to the eight store closures during the six months ended June 30, 2018.

Other restaurant operating expenses for the six months ended June 30, 2018 and June 30, 2017 totaled $619,613, or 24.5% as a percentage of restaurant sales, and $519,063, or 19.5% as a percentage of restaurant sales, respectively. The $100,550 increase is primarily attributed to increased costs associated with operating expenses and an increase in merchant card fees due to increase sales using third party delivery services.

Cost of other revenues for the six months ended June 30, 2018 and June 30, 2017 totaled $114,388, or 46.8%, as a percentage of other revenue, and $113,481, or 38.4%, as a percentage of other revenue, respectively. The increase in percentage of other revenues results primarily from increase in hardware and software costs compared to the prior period.

Depreciation and amortization expense for the six months ended June 30, 2018 and June 30, 2017 totaled $97,952 and $167,872, respectively. The $69,920 decrease is primarily attributable to lower depreciation expense of property and equipment due to store closures and impairment of property and equipment taken in the latter part of 2017.

General and administrative expenses for the six months ended June 30, 2018 and June 30, 2017 totaled $2,834,574, or 79.3% of total revenues, and $3,532,587, or 90.8% of total revenues, respectively. The $698,013 decrease is primarily attributable to less expenses incurred for developing the company’s corporate infrastructure The decrease is also attributed to a decrease in third party accounting and legal fees of approximately $398,000 as the company used less temporary accounting services and incurred fewer legal reorganizational research to facilitate SEC financial statement preparation. In addition, there were decreases of approximately $232,000 in salaries, wages and benefits, approximately $198,000 in stock-based compensation for restricted stock issued in the prior period as compared to the current period, approximately $138,000 in CTI expenses due to the sale of CTI and approximately $205,000 in marketing expenses. Partially offset by an increase of approximately $509,000 in consulting expenses.

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Loss from Operations

Our loss from operations for the six months ended June 30, 2018 and June 30, 2017 totaled $2,714,839 or 75.9% of total revenues and $3,254,413, or 83.6% of total revenues, respectively. This resulted in a decrease of $539,574 in loss from operations which is primarily attributable to a decrease in general and administrative expenses of approximately $698,000.

Other (Expense) Income

Other (expense) income for the six months ended June 30, 2018 and June 30, 2017 totaled $(2,839,879) and $(3,675,101), respectively. The $835,222 decrease in expense was primarily attributable to a decrease in amortization of debt discount of approximately $2,114,000 in connection with convertible notes payable as compared to the prior period, partially offset by an increase in interest expense of $732,260 incurred in connection with the default of a notes payable, accrued interest on notes and interest expense incurred in connection with warrants and the loss on sale of CTI of approximately $456,000.

Net Loss

Our net loss for the six months ended June 30, 2018 decreased by $1,438,437 to $5,554,718 as compared to $6,993,155 for the six months ended June 30, 2017, resulting primarily from significant decrease in loss of operations and in other (expense) income as discussed above. Our net loss attributable to the controlling interest was $5,552,647 and $5,175,091 for the six months ended June 30, 2018 and June 30, 2017, respectively.

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Liquidity and Capital Resources

Liquidity.

We measure our liquidity in a number of ways, including the following:

	June 30, 2018			December 31, 2017
Cash	$	283,903		$	78,683
Working Capital Deficiency	$	(4,777,953	)	$	(4,306,947	)
Convertible notes payable, including related parties and Former Parent, net of debt discount of $1,551,355 and $0, respectively	$	1,090,874		$	2,349,340
Other notes payable, including related parties	$	1,195,294		$	555,000

Availability of Additional Funds and Going Concern

Based upon our working capital deficiency and accumulated deficit of $4,777,953 and $22,183,834, respectively, as of June 30, 2018, plus our use of $1,312,858 of cash in operating activities during the six months ended June 30, 2018, we require additional equity and/or debt financing to continue our operations. These conditions raise substantial doubt about our ability to continue as a going concern for at least one year from the date of this filing.

During prior periods, our operations have primarily been funded through proceeds from American Restaurant Holdings in exchange for equity and debt.

Our principal source of liquidity to date has been provided from American Restaurant Holdings, who is a private equity restaurant group, by loans from related and unrelated third parties and the sale of common stock through private placements. More specifically, American Restaurant Holdings has invested approximately $5 million in growth capital into Muscle Maker to date.

We expect 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, we may be required to raise additional funds through equity or debt financing. However, there can be no assurance that we will be successful in securing additional capital. If we are unsuccessful, we may need to (a) initiate cost reductions; (b) forego business development opportunities; (c) seek extensions of time to fund our liabilities, or (d) seek protection from creditors.

In addition, 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.

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Our condensed consolidated financial statements included elsewhere in this 10-Q document have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate our continuation 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.

Sources and Uses of Cash for the six months ended June 30, 2018 and June 30, 2017

During the six months ended June 30, 2018 and 2017, we used cash of $1,312,858 and $1,459,544, respectively, in operations. Our net cash used in operating activities for the six months ended June 30, 2018 was primarily attributable to our net loss of $5,554,718, adjusted for net non-cash items in the aggregate amount of $3,473,758, partially offset by $768,102 of net cash provided by changes in the levels of operating assets and liabilities. Our net cash used in operating activities for the six months ended June 30, 2017 was primarily attributable to our net loss of $6,993,155, adjusted for net non-cash items in the aggregate amount of $4,566,548, partially offset by $967,063 of net cash provided by changes in the levels of operating assets and liabilities.

During the six months ended June 30, 2018, net cash used in investing activities was $12,148, of which $43,834 was used to purchase property and equipment and to issue loans to franchisees in the amount of $9,689, partially offset by $41,375 of loans repayments by franchisees and a related party. During the six months ended June 30, 2017, cash used in investing activities was $670,875, which was used to purchase property and equipment of $523,225 and to issue loans to franchisees and a related party in the net amount of $219,889, partially offset by $72,239 of loans repayments by franchisees and a related party.

Net cash provided by financing activities for the six months ended June 30, 2018 was $1,530,226 of which $650,000 proceeds from convertible notes from other related parties, $384,000 proceeds from convertible notes to various parties, $460,000 proceeds from other notes payables, $85,576 net proceeds from initial public offering and $180,000 proceeds from the sale of restricted common stock, offset by $100,000 repayments of convertible notes payable and other notes payable and $129,350 net repayments of advances to Former Parent. Net cash provided by financing activities for the six months ended June 30, 2017 was $2,025,671, of which, $1,319,783 was proceeds from convertible notes to Former Parent, partially offset by $369,122 of repayments made to Former Parent. Additionally, the company received proceeds from the issuance for convertible debt to 3rd parties totaling $1,075,000.

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Critical Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant estimates include:

● the fair value of assets acquired, and liabilities assumed in a business combination;

● 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;

● 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.

Intangible Assets

We account for recorded intangible assets in accordance with ASC 350 “Intangibles - Goodwill and Other”. In accordance with ASC 350, we do not amortize intangible assets with indefinite useful lives. Our 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 and a non-compete agreement which are amortized on a straight-line basis over their estimated useful lives of 13 years and 5 years, respectively.

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, we perform 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.

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Deferred Revenue

Deferred revenue consists of initial franchise fees received by us, for which the restaurant has not yet opened, as well as unearned vendor rebates and customer deposits accrued in connection with technology sales and services by CTI. We collect initial franchise fees when franchise agreements are signed and recognize the initial franchise fees as revenue when the store is opened, which is when we have performed substantially all initial services required by the franchise agreement.

Revenue Recognition

In accordance with the Accounting Standard Codification Topic 605 “Revenue Recognition” (“ASC 605”), We recognizes revenue when the following four criteria are met: (1) delivery has occurred or services rendered; (2) persuasive evidence of an arrangement exists; (3) there are no continuing obligations to the customer; and (4) the collection of related accounts receivable is probable.

Restaurant Sales

Retail store revenue at our operated restaurants are recognized when payment is tendered at the point of sale, net of sales tax and other sales related taxes.

Franchise Royalties and Fees

Royalties and franchise fees principally consist of royalties and franchise fees. Royalties are based on a percentage of franchisee revenue. Initial franchise fees are recognized upon opening of a restaurant or granting of a new franchise term, which is when we performed substantially all material obligations and initial services required by the franchise agreement. We recognize renewal fees in income when a renewal agreement becomes effective.

We have supply agreements with certain food and beverage vendors. Pursuant to the terms of these agreements, rebates are provided to us based upon the dollar volume of purchases for all our owned and franchised restaurants from these vendors. Rebates, net of rebates attributable to company owned stores, are recorded as revenue during the period in which the related food and beverage purchases are made. Company owned store rebates are recorded net of cost of goods sold.

Other Revenues

Through our subsidiary, CTI, we derive revenue from the sale of POS computer systems, cash registers, digital menu boards and camera systems, and from the provision of related consulting and support services, which generally include implementation, installation and training services. We recognize revenue when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, the fee is fixed or determinable and collectability is reasonably assured.

Income Taxes

We account 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.

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Tax benefits claimed or expected to be claimed on a tax return are recorded in our 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.

Our 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.

Recently Issued Accounting Pronouncements

See Note 3 to our condensed consolidated financial statements for the six months ended June 30, 2018.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of June 30, 2018. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were not effective because of a material weakness in our internal control over financial reporting as discussed below.

Notwithstanding this material weakness, our Chief Executive Officer and Chief Financial Officer have concluded that the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the financial position of the Company at June 30, 2018 and December 31, 2017 and the consolidated results of operations and cash flows for the three and six months ended June 30, 2018 and 2017 presented herein in conformity with U.S. generally accepted accounting principles.

(b) Management’s Annual Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as required by Sarbanes-Oxley (SOX) Section 404(a). The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Principal Executive Officer and Principal Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with United States generally accepted accounting principles.

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Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with US GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. 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 June 30, 2018:

● The Company does not have written documentation of our internal control policies and procedures.

● The Company does not have sufficient resources in its accounting function, which restricts the Company’s ability to gather, analyze and properly review information related to financial reporting in a timely manner. As a result, the Company has not completed our ASC 606 implementation process and, thus, cannot disclose the quantitative impact of adoption on our financial statements. 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.

● The Company has 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.

Remediation of Material Weaknesses in Internal Control over Financial Reporting

As a company with limited capital resources, the Company does not have the resources to install a dedicated staff with deep expertise in all facets of SEC disclosure and US GAAP compliance. As a response, the Company believes the following measures will adequately address the weakness:

● Future Audit Committee meetings will specifically include reviews over the implementation of accounting principles.

● Replaced and/or appointed, in addition to a new Chief Executive Officer and Chief Financial Officer, certain accounting positions with experienced accountants in the corporate office

● Implementing standardized accounting policies

● Restructuring accounting processes, centralized certain accounting functions, and revised organizational structures to enhance accurate accounting and appropriate reporting.

● Strengthened interim and annual financial review controls to function with a sufficient level of precision to detect and correct accounting errors on a timely basis

● Expanding the accounting function responsibilities to include monitoring or performing the collection and maintenance of documentation supporting accounting entries.

● As a small company, we do not have the resources to have dedicated staff with deep expertise in all facets of SEC disclosure and GAAP compliance. As is the case with many small companies, we will continue to work with our external auditors and attorneys as it relates to financial statement and disclosure review.

As a company with limited resources, the Company does not have the resources to fund sufficient staff to ensure a complete segregation of responsibilities within the accounting function. However, Company management does review, and will increase the review of the financial statements. This action, in addition to the improvements identified above, will minimize any risk of a potential material misstatement occurring.

(c) Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the second quarter of the six months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. 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:

In April 2018, Muscle Maker and ARH was listed as a defendant in a lawsuit filed by a landlord in the Superior Court of the State of California. The landlord is seeking $531,594 in damages for rent, interest and other expenses. The original lease was for a 5-year period and commenced on or about September 30, 2015. On January 18, 2019, the Company successfully worked out a settlement and payment plan with the Plaintiff pursuant to a confidential settlement agreement.

On May 4, 2018, Stratford Road Partners, LLC (“Stafford”) filed suit against us and our subsidiary for non-payment of rent in the small Claims court in the state of North Carolina. Since then the property has been vacated and the landlord offered a settlement of $10,000 with no further lease obligation On June 5, 2019 the Company signed the settlement agreement and made the payment to the landlord.

In May 2018, Muscle Maker, ARH and Robert E. Morgan (the former CEO of the Company) were listed as defendants to a lawsuit filed by Crownhall Realty, LLC (“Crownhall”) in the Supreme Court of the State of New York county of New York, #154467. Crownhall is seeking $1,034,087 in damages for rent, interest and other expenses. The original lease was for a 10-year period of time and commenced on January 1, 2016. In 2017, Limestone Associates LLC (“Limestone”) filed a complaint against ARH in the Civil Court of the City of New York, County of New York, #78549/2017 for commercial non-payment of rent for the amount of $25,748 plus cost and disbursements of this proceeding. In May 2018, Limestone filed a complaint against ARH and Mr. Morgan in the Supreme Court of the State of New York, County of New York, index # 154469 seeking $1,357,243 in damages for rent, interest and other expenses. On October 3, 2018, the Company, ARH and Robert E. Morgan entered into a settlement agreement with Crownhall and Limestone agreeing to forfeit all security deposits in the amount of $87,093, pay an upfront amount of $25,000 and an additional $175,000 to be paid over 20 months. This agreement settles litigation surrounding two closed locations, which the plaintiffs were seeking a total of $2,391,330 in past damages for rent, interest and other expenses.

On May 25, 2018, the Civil Court of the City of New York, County of New York, entered into a settlement agreement between the Company and a landlord, in the amount of $55,891 for past due rent. The Company agreed to make the following payments (i) $15,000 on or before May 31, 2018, and (ii) $40,891 on or before September 4,2018. These amounts have been paid in full.

On December 12, 2018, Muscle Maker was listed as a defendant to a lawsuit filed by a landlord in the Superior Court of the State of California. The landlord 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.

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 $98,005.22.

On or about May 1, 2018, a suit was filed in the Supreme Court of the State of New York, County of Rockland, by Imperial Bag & Paper seeking $44,585 in past due amounts for goods received. The company entered into a payment plan and as of January 2019 this amount has been paid in full.

On or about April 5, 2018, American Restaurant Holdings, Inc entered into a settlement agreement with 918-924 Belmont, LLC for $100,000 regarding past rents owed, other charges and the termination of its lease at this location. The settlement calls for monthly payments of $8,333 thru March 2019.

On or about June 29, 2018, an arbitrator ruled all claims denied from a previous suit filed in 2013. The original suit was titled John Marques and J. Crown, Inc., Cross-Claim and Third-Party Plaintiffs v. Muscle Maker Franchising, LLC, Cross-Claim Defendant, and Rodney Silva and Robert Morgan, Third Party Defendants, Docket No. MID-L-4223-13, Superior Court of New Jersey Law Division: Middlesex County.

On January 18, 2019, the Company entered into an expense reimbursement agreement with an employee in connection with unreimbursed expenses incurred on behalf of the Company in the amount of $81,140 recorded in accounts payable and accrued expenses as of September 30, 2018. The Company shall pay the employee as follows (a) $1,750 upon execution of the agreement, (b) $1,000 a month commencing on January 25, 2019 ending May 24, 2019, (c) a one time payment of $40,000 on the earlier of March 31, 2019 or when the Company fully received the anticipated funding from the a traunch of the 15% Senior Secured Convertible Notes and (d) on the earlier of May 31, 2019 or when the Company has fully received the anticipated funding from the second traunch of the 15% Senior Secured Convertible Notes. As of the date of the issuance of these condensed consolidated financial statements the full amount has been repaid.

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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 June 30, 2018, the Company accrued for the liability in accrued expenses.

On May 6, 2019, the Company entered into a commission's payment agreement in the aggregate amount of $45,894 in connection with past due commission recorded in accounts payable and accrued expenses as of September 30, 2018. The Company shall pay the employee the outstanding commission balance as follows (a) $10,894 upon execution of the agreement and (b) $7,000 per month for five months start on May 31, 2019. As of the date of the issuance of these condensed consolidated financial statements the full amount has been repaid.

A convertible note holder filed a complaint in the Iowa District Court for Polk County #CVCV056029 against MMB, LLC, a subsidiary of 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 are $171,035. A default judgement was entered against MMB, LLC.

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 $363,852 as of June 30, 2018 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 1A. Risk Factors.

Not applicable. See, however, Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Results and Financial Condition”) of our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 27, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On January 23, 2015, in connection with original capitalization of the Company, MMI issued 4,339,285 shares of its common stock to ARH in exchange for cash of $3,645,000 and an obligation to repay an aggregate of $604,000 of principal due under Note I and Note II issued to MMF in connection with the acquisition of 74% of MMB.

On January 23, 2015, MMI issued 53,571 shares of common stock valued at $1.31 per share, or an aggregate of $70,000, to former members of MMF, in connection with the acquisition of 74% of MMB.

On January 24, 2015, MMI granted 21,428 shares of its common stock valued at $1.31 per share to its Director of Brand Development, in connection with the DBD Agreement. The shares vested immediately and MMI recorded stock-based compensation of $28,000 in connection with issuance of these shares.

On January 24, 2015, the Company issued 45,918 shares of its common stock to the Director of Brand Development in exchange for cash proceeds of $1.31 per share, or $60,000.

On July 23, 2015 and August 28, 2015, the Company issued 80,356 and 53,571 shares of its common stock, and 3-year warrants for the purchase of 40,178 and 26,785 shares of common stock respectively, for aggregate cash proceeds of $750,000. The warrants are exercisable at $7.00 per share.

On December 15, 2016, the Company granted a three-year warrant for the purchase of 245,797 shares of MMI common stock at an exercise price of $9.33 to the Parent, in connection with the issuance of the 2016 ARH Note.

On April 21, 2016, the Company granted a three-year warrant for the purchase of 5,356 shares of the Company’s common stock at an exercise price of $9.33 per share to a franchisee and developer of the Company in exchange for services.

On December 15, 2016, the Company granted a three-year warrant for the purchase of 245,797 shares of MMI common stock at an exercise price of $9.33 to the Parent, in connection with the issuance of the 2016 ARH Note.

In May 2017, Muscle Maker granted 119,709 shares of its restricted common stock to its employees and consultants, with an aggregate grant date value of $1,117,403 or $9.33 per share.

On July 21, 2017, the Company issued 6,696 shares of common stock of the company to an investor at a purchase price of $7.47 per share providing $50,000 of proceeds to the Company.

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On July 25, 2017, a warrant was exercised for the 5,356 shares of common stock of the Company at an exercise price of $9.33 per share for gross proceeds of $50,000.

On July 27, 2017, the Company issued stand-alone non-qualified stock options, not pursuant to a plan, to purchase an aggregate of 33,750 shares of the Company’s common stock to its franchisees.

On August 25, 2017, the Company issued an aggregate of 42,856 shares of common stock of the company to investors at a purchase price of $7.47 per share providing $320,000 of proceeds to the Company.

On September 1, 2017, the Company issued 6,698 shares of common stock of the company to an investor at a purchase price of $7.47 per share providing $50,000 of proceeds to the Company.

On September 21, 2017, the Company granted an aggregate amount of 32,136 shares of its restricted common stock at a price of $9.33 per share to its directors.

During the year ended December 31, 2017, the Company issued three-year warrants for the purchase of an aggregate of 380,483 shares of the Company’s common stock exercisable at $9.33.

During the year ended December 31, 2017, the Company issued 1,314,753 shares of its common stock upon conversion of various ARH Notes in the aggregate principal amount of $5,361,177.

On April 11, 2018, the Former Parent elected to partially convert the 2018 ARH Note for the principal of $392,542 into 785,085 shares of the Company’s common stock.

During the year ended December 31, 2017, the Company issued in connection with the issuances of the convertible promissory notes, three-year warrants for the purchase of an aggregate of 84,736 shares of the Company’s common stock exercisable at the Conversion Price

During the six months ended June 30, 2018, the Company issued 553,425 shares of its common stock upon automatic conversion of various convertible notes in the aggregate principal amount of $899,340 and 180,000 shares of common stock of the company to various investors at a purchase price of $1.00 per share providing $180,000 of proceeds to the Company.

The offers, sales, and issuances of the securities described above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited or sophisticated person and had adequate access, through employment, business or other relationships, to information about us.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

Exhibit No.	Exhibit Description
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document*
101.SCH	XBRL Schema Document*
101.CAL	XBRL Calculation Linkbase Document*
101.DEF	XBRL Definition Linkbase Document*
101.LAB	XBRL Label Linkbase Document*
101.PRE	XBRL Presentation Linkbase Document*

† Includes management contracts and compensation plans and arrangements

*Filed herewith.

+Previously filed.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: July 12, 2019	MUSCLE MAKER, INC.
	By:	/s/ Michael J. Roper
		Michael J. Roper
		Chief Executive Officer
		(Principal Executive Officer)

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