S-1/A 1 forms-1a.htm

 

As filed with the U.S. Securities and Exchange Commission on January 24, 2020.

 

Registration No. 333-235283

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

AMENDMENT NO. 5 TO

FORM S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

Muscle Maker, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   5810   47-2555533

(State of other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

 

308 East Renfro Street, Suite 101

Burleson, Texas 76028

(682) 708-8250
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Michael J. Roper

Chief Executive Officer

Muscle Maker, Inc.

308 East Renfro Street, Suite 101

Burleson, Texas 76028

(682) 708-8250

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

With copies to:

 

Stephen M. Fleming, Esq.

Fleming PLLC

30 Wall Street, 8th Floor

New York, New York 10005

Tel. (516) 833-5034

Fax: (516) 977-1209

 

Christopher J. Bellini, Esq.

Cozen O’Connor P.C.

33 South 6th Street, Suite 3800

Minneapolis, MN 55402

Tel: (612) 260-9029

Fax: (612) 260-9091

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the registration statement is declared effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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 (Check one):

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [X]   Smaller reporting company [X]
    Emerging growth company [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to Be Registered  Proposed Maximum Aggregate Offering Price (1)   Amount of
Registration Fee (6)
 
Common Stock, $0.0001 par value per share (2)(3)  $9,200,000   $1,194.16 
Common Stock, $0.0001 par value per share (4)  $

38,152,260

   $4,952.16 
Common Stock Underlying Representative’s Warrants (5)  $768,000   $99.69 
Total  $48,120,260   $6,246.01 

 

* Previously paid. 

 

  (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
     
  (2) Includes the offering price of the shares of common stock that may be sold if the option to purchase additional shares is exercised by the underwriter in full.
     
  (3) Offered pursuant to the Registrant’s public offering.
     
  (4)

Represents 5,326,892 shares of the Registrant’s common stock held by selling stockholders and 2,303,560 shares of common stock issuable upon exercise of common stock purchase warrants.

     
  (5)

Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The warrants are exercisable at a per share exercise price equal to 120% of the public offering price. As estimated solely for the purpose of recalculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed maximum aggregate offering price of the Representative’s Warrant is $768,000, which is equal to 120% multiplied by 8% of $8,000,000 (120% of $640,000).

     
  (6)

The Registrant previously paid $7,032.70 of registration fees in connection with the filing of the Registration Statement.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

  
 

 

EXPLANATORY NOTE

 

This registration statement contains two forms of prospectus, as set forth below.

 

 

Public Offering Prospectus. A prospectus to be used for the initial public offering by the registrant of $8,000,000 of shares of common stock (and an additional $1,200,000  of shares of common stock which may be sold upon exercise of the underwriter’s over-allotment option) through the underwriter named on the cover page of the Public Offering Prospectus.

 

 

Selling Stockholder Prospectus. A prospectus to be used in connection with the potential resale by certain selling stockholders of 5,326,892 shares of common stock and up to 2,303,560 shares of common stock issuable upon exercise of common stock purchase warrants.

 

The Public Offering Prospectus and the Selling Stockholder Prospectus will be identical in all respects except for the following principal points:

 

  they contain different front covers;
     
  they contain different Tables of Contents;
     
  all references in the Public Offering Prospectus to “this offering” or “this initial public offering” will be changed to “the IPO,” defined as the underwritten initial public offering of our common stock, in the Selling Stockholders Prospectus;
     
  all references in the Public Offering Prospectus to “underwriters” will be changed to “underwriters of the IPO” in the Selling Stockholders Prospectus;
     
  they contain different Use of Proceeds sections;
     
  a Shares Registered for Resale section is included in the Selling Stockholder Prospectus;
     
  a Selling Stockholders section is included in the Selling Stockholder Prospectus;
     
  the section “Summary—The Offering” from the Public Offering Prospectus is deleted from the Selling Stockholder Prospectus;
     
  the section “Shares Eligible For Future Sale—Resale Prospectus” from the Public Offering Prospectus is deleted from the Selling Stockholder Resale Prospectus;
     
  the Underwriting section from the Public Offering Prospectus is deleted from the Selling Stockholder Prospectus and a Plan of Distribution section is inserted in its place;
     
  the Legal Matters section in the Selling Stockholder Prospectus deletes the reference to counsel for the underwriter; and
     
  they contain different back covers.

 

The registrant has included in this registration statement, after the financial statements, a set of alternate pages to reflect the foregoing differences between the Selling Stockholder Prospectus and the Public Offering Prospectus.

 

  
 

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

     
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED January 24, 2020
     

 

1,600,000 SHARES

 

 

COMMON STOCK

(PAR VALUE $0.0001)

 

Muscle Maker, Inc. is offering 1,600,000 shares of its common stock. Prior to this offering there has been no public market for our common stock. We anticipate that the initial public offering price will be $5.00 per share.

 

We applied to list our common stock on The Nasdaq Capital Market under the symbol “GRIL”.

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus for a discussion of information that should be considered in connection with an investment in our common stock.

 

We are an “emerging growth company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced reporting requirements for this prospectus and other filings with the Securities and Exchange Commission.

 

   Per Share   Total 
Public offering price  $   $ 
Underwriting discounts and commissions (1)  $        $        
Proceeds to us, before expenses  $   $ 

 

(1) The underwriter will receive compensation in addition to the underwriting discounts and commissions. See “Underwriting” beginning on page 93.

 

The underwriter may also exercise their option to purchase up to 240,000 additional shares of common stock from us at the public offering price, less the underwriting discount, for 45 days after the date of this prospectus to cover over-allotments.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriter expects to deliver the shares of common stock on or about            , 2020.

 

 

The date of this prospectus is            , 2020.

 

  
 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
   
THE OFFERING 6
   
SUMMARY FINANCIAL DATA 7
   
RISK FACTORS 8
   
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 33
   
EXPLANATORY NOTE REGARDING REDOMESTICATION 33
   
USE OF PROCEEDS 33
   
DIVIDEND POLICY 34
   
CAPITALIZATION 34
   
DILUTION 36
   
SELECTED HISTORICAL FINANCIAL DATA 38
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 39
   
BUSINESS 57
   
MANAGEMENT 67
   
EXECUTIVE COMPENSATION 72
   
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 81
   
PRINCIPAL STOCKHOLDERS 86
   
DESCRIPTION OF CAPITAL STOCK 89
   
SHARES ELIGIBLE FOR FUTURE SALE 91
   
UNDERWRITING 93
   
LEGAL MATTERS 97
   
EXPERTS 97
   
WHERE YOU CAN FIND MORE INFORMATION 97
   
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 98
   
INDEX TO FINANCIAL STATEMENTS 99

 

Neither we nor the underwriter has authorized anyone to provide you with information that is different from that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. When you make a decision about whether to invest in our common stock, you should not rely upon any information other than the information in this prospectus or in any free writing prospectus that we may authorize to be delivered or made available to you. Neither the delivery of this prospectus nor the sale of our common stock means that the information contained in this prospectus or any free writing prospectus is correct after the date of this prospectus or such free writing prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy shares of common stock in any circumstances under which the offer or solicitation is unlawful.

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Cautionary Note Regarding Forward-Looking Statements.”

 

This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

 i 
 

 


PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus and the financial statements and related notes appearing at the end of this prospectus before making an investment decision.

 

Unless the context provides otherwise, all references in this prospectus to “Muscle Maker,” “we,” “us,” “our,” the “Company,” or similar terms, refer to Muscle Maker, Inc. and its directly and indirectly owned subsidiaries on a consolidated basis.

 

Overview

 

Muscle Maker is a fast casual restaurant concept that specializes in preparing healthy-inspired, high-quality, fresh, made-to-order lean, protein-based meals featuring chicken, seafood, pasta, hamburgers, wraps and flat breads. In addition, we feature freshly prepared entrée salads and an appealing selection of sides, protein shakes and fruit smoothies. We operate in the fast casual restaurant segment.

 

We believe our healthy-inspired restaurant concept delivers a highly differentiated customer experience. We strive to combine in a healthier way 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 following core values form the foundation of our brand:

 

  Quality. Commitment to provide high quality, healthy-inspired food for a perceived wonderful experience for our guests.
     
  Empowerment and Respect. We seek to empower our employees to take initiative and give their best while respecting themselves and others to maintain an environment for team work and growth.
     
  Service. Provide world class service to achieve excellence each passing day.
     
  Value. Our combination of high-quality, healthy-inspired food, empowerment of our employees, world class service, all delivered at an affordable price, strengthens the value proposition for our customers.

 

In striving for these goals, we aspire to connect with our target market and create a great brand with a strong and loyal customer base.

 

As of September 30, 2019, Muscle Maker and its subsidiaries and franchisees operated 39 Muscle Maker Grill restaurants located in 14 states and Kuwait, eight of which are owned and operated by Muscle Maker, and 31 are franchise restaurants. Our restaurants generated company-operated restaurant revenue of $3,869,758 and $5,215,285 for the years ended December 31, 2018 and 2017, respectively. For the years ended December 31, 2018 and 2017, total company revenues, which includes royalty, franchise fee and rebate revenue derived from franchisees were $6,022,669 and $7,929,137, respectively. For the fiscal years ended December 31, 2018 and 2017, we reported net losses of $7,202,540 and $15,567,751, respectively, and negative cash flows from operating activities of $2,726,737 and $3,676,999, respectively. As of December 31, 2018, we had an aggregate accumulated deficit of $23,833,656. We anticipate that we will continue to report losses and negative cash flow. As a result of the net loss and cash flow deficit for the year ended December 31, 2018 and other factors, our independent auditors issued an audit opinion with respect to our financial statements for the year ended December 31, 2018 that indicated that there is a substantial doubt about our ability to continue as a going concern.

 

We are the owner of the trade name and service mark Muscle Maker Grill® and other trademarks and intellectual property we use in connection with the operation of Muscle Maker Grill® restaurants. We license the right to use the Muscle Maker Grill® trademarks and intellectual property to our wholly-owned subsidiaries, Muscle Maker Development and Muscle Maker Corp., and to further sublicense them to our franchisees for use in connection with Muscle Maker Grill® restaurants.

 

1
 

 

Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the fourth quarter due to reduced November and December traffic and higher traffic in the first, second, and third quarters.

 

Our Strategy

 

In implementing our business plan, we plan to pursue the following strategies:

 

Expand Our System-Wide Restaurant Base. We believe we are in the early stages of executing our turn-around growth strategy with 39 current locations in 14 states and two current locations in Kuwait, as of September 30, 2019.

 

  Our near-term strategy focuses on two areas of unit level growth – company-operated restaurants in non-traditional locations such as universities, office buildings, military bases, and other locations, and franchise growth by expanding in existing markets, especially in the Northeast region of the United States. We believe this market provides an attractive opportunity to leverage our brand awareness and infrastructure.
     
  For year ended 2018, we opened one new company-operated and five new franchise restaurants. We plan to open four to six new company-operated restaurants and four to six franchise operated locations in 2019. In addition to the United States-based franchise locations, our international franchisee in Kuwait plans on opening one or two locations in fiscal 2019.

 

Improve Comparable Restaurant Sales. We plan to improve comparable restaurant sales growth through the following strategies:

 

  Menu Strategy and Evolution. We will continue to adapt our menu to create entrees that complement our health-inspired offerings and that reinforce our differentiated fast casual positioning. We believe we have opportunities for menu innovation as we look to provide customers more choices through customization and limited time alternative proteins, recipes and other healthier ingredients. Our marketing and operations teams collaborate to ensure that the items developed in our test stores can be executed to our high standards in our restaurants with the speed and value that our customers have come to expect. To provide added variety, from time to time we introduce limited time offerings such as our grass-fed hamburger bar menu, “wrappy” new year featuring six new wraps, fish tacos and other seasonal items. Some of these items have been permanently added to the menu.
     
  Attract New Customers Through Expanded Brand Awareness: We expect to attract new customers as the Muscle Maker Grill brand becomes more widely known due to new restaurant openings and marketing efforts focused on broadening the reach and appeal of our brand. We expect consumers will become more familiar with Muscle Maker Grill as we continue to penetrate our markets, which we believe will benefit our existing restaurant base. Our marketing strategy centers on our “Great Food with Your Health in Mind” campaign, which highlights the desirability of healthy-inspired food and in-house made or proprietary recipe quality of our food. We also utilize social media community engagement and public relations to increase the reach of our brand. Additionally, our system will benefit from increased contributions to our franchise marketing and various franchise advertising funds as we continue to grow our restaurant base.
     
  Increase Existing Customer Frequency: We are striving to increase customer frequency by providing a service experience and environment that “complements” the quality of our food and models our culture. We expect to accomplish this by enhancing customer engagement, while also improving throughput, order execution and quality. We not only work to reward our guests with a great value and guest experience, we reward them for their loyalty as well. Frequent Muscle Maker Grill guests can take advantage of our loyalty program, Muscle Maker Grill Rewards, in which points are awarded for every dollar spent towards free or discounted menu items as well as special, members only coupon offers. Members use the Muscle Maker Grill Rewards app to receive notifications announcing new menu items, special events and more. The program is enjoyed by over 55,000 guests as of September 2019.

 

2
 

 

  Continue to Grow Dayparts: We currently have multiple dayparts and segments where revenue is generated in our restaurants. These dayparts and segments include: lunch, dinner, catering, smoothies/protein shakes and meal plans in all of our locations, and breakfast and grab & go in select locations. We expect to drive growth across our dayparts through enhanced menu offerings, innovative merchandising and marketing campaigns. We plan to continue introducing and marketing limited time offers to increase occasions across our dayparts as well as to educate customers on our lunch and dinner offerings. Muscle Maker Grill has the unique opportunity to grow in the pre-packaged, portion-controlled meal plan category. Currently, we offer pre-portioned and packaged meal plans for consumers who want to specifically plan their weekly meals for dietary or nutritional needs. These meal plans can be delivered to a consumer’s home or picked up at each restaurant location. Third party delivery services such as Uber Eats, Grub Hub, DoorDash, Seamless and others offer an expansion beyond the four walls of our restaurants and represents a growing segment of our overall revenue.

 

Our Competitive Strengths

 

Iconic and Unique Concept: We provide guests healthy-inspired versions of mainstream, favorite dishes that are intended to taste great, in our effort to make it convenient, affordable and enjoyable to eat healthier. Our diverse menu was created for everyone – fitness enthusiasts, those starting their journey to a healthier lifestyle, and people trying to eat better while on-the-go. More than just food, our restaurants are a friendly, relaxed and social environment where guests can enjoy great tasting food and engage with fellow health enthusiasts in their area.

 

We are focused on expanding our presence within new and existing markets by continuing to add franchise partners to our system and increasing the number of corporate-owned locations. Our corporate-owned restaurants will focus on an expansion in non-traditional locations such as military bases. We believe our concept is a unique fit with the United States military’s “Operation Live Well” campaign and a focus on healthier eating habits.

 

Innovative, Healthy-Inspired Menu: Providing “Great Food with Your Health in Mind,” Muscle Maker Grill’s menu features items with grass-fed steak, all-natural chicken, lean turkey and plant-based products as well as options that satisfy all dietary preferences – from the carb-free consumer to guests following gluten-free or vegetarian diets. Muscle Maker Grill does not sacrifice taste to serve healthy-inspired options. We boast superfoods such as avocado, kale, quinoa, broccoli, romaine and spinach, and use only healthy-inspired carbohydrate options such as cauliflower or brown rice and whole wheat pasta. We develop and source proprietary sauces and fat free or zero-carb dressings to enhance our unique flavor profiles. Our open style kitchen allows guests to experience our preparation and cooking methods such as an open flame grill and sauté. In addition to our healthy-inspired and diverse food platform, Muscle Maker Grill offers 100% real fruit smoothies, boosters and proprietary protein shakes as well as retail supplements.

 

Muscle Maker Grill prides itself on making healthy-inspired versions of the guest’s favorite food, giving them easy access to the food they seek at our restaurants. This means catering to an array of healthier eating lifestyles. For over 20 years Muscle Maker Grill has been providing food to gluten-free diners, low-carb consumers and vegetarians. We offer over 30 versions of salads, wraps, bowls, sandwiches and flatbreads.

 

Cook to Order Preparation: We work to provide our guests their meals prepared in less time than a typical fast casual restaurant. While our service time may be slightly higher than the quick service restaurant, or QSR, segment, it fits well within the range of the fast-casual segment.

 

Daypart Mix and Revenue Streams: Standard operating hours for a Muscle Maker Grill are from 10:30 AM to 8:30 PM, Monday through Friday, 11:00 AM to 6:00 PM, Saturday and Sunday. However, many of our locations are closed on Sunday. Location hours may vary depending on local operating conditions such as breakfast or late-night operations. Our daypart mix is typical to the QSR fast casual segment which is 5% pre-lunch, 45% lunch, 35% dinner and 15% late evening. We have multiple revenue streams including: dine-in, take-out, delivery, catering, meal plans and retail. We also have locations that leverage grab & go coolers as well as food trucks.

 

Attractive Price Point and Perceived Value: Muscle Maker Grill offers meals with free ‘power sides’ beginning at $8.99 per meal, using only high quality ingredients such as grass-fed beef, all-natural chicken, whole wheat pastas, brown rice and a power blend of kale, romaine and spinach. Our cook-to-order method, speed of service, hospitality and the experience of our exhibition style kitchen creates a great value perception for our customers. Meal Plan meals begin at $8.00 per meal, which we believe makes them not only convenient but affordable too.

 

3
 

 

Delivery: A significant differentiator is that Muscle Maker Grill offers delivery at every location nation-wide. Delivery is an option through our mobile app or online ordering platform, making it easy and convenient for our guests. Delivery percentages range from 10% up to 56% of sales in our corporate locations and up to as high as 80% in some franchises located in urban areas. We strongly believe the delivery segment will continue to grow as our core demographic has demonstrated the need for online ordering and delivery versus dine-in and take-out. We and our franchise owners leverage employees for local delivery but also uses third party services such as Uber Eats, GrubHub, DoorDash, Seamless and others to fulfill delivery orders.

 

Catering: Our diverse menu items are also offered through our catering program making it easy and affordable to feed a large group. Each of our locations can cater an order ranging from 10 to 5,000 meals. Our boxed lunch program, which includes a wrap, salad, or entrée, a side and a drink for a set price is available within schools and other organizations.

 

Meal Plans: To make healthy-inspired eating even easier, our healthy-inspired nutritionally focused menu items are available through our Meal Plan program, allowing pre-orders of meals via phone, online or in-store, available for pick up or delivered right to their door. Available as five, 10, 15 or 20 meals, guests can choose from 28 Muscle Maker Grill menu items for each meal.

 

Retail: All Muscle Maker Grill locations participate in our retail merchandising and supplement program. This is a unique revenue stream specific to the Muscle Maker Grill brand and is atypical in the QSR fast casual segment. Guests can purchase our propriety protein in bulk, supplements, boosters, protein and meal replacement bars and cookies. This program gives our guests the opportunity to manage their healthy lifestyle beyond the four walls of our restaurants.

 

Grab-and-Go Kiosks: Muscle Maker Grill, both corporate and franchise locations, can offer grab-and-go kiosks both in the restaurants and non-traditional locations. The kiosks are comprised of 10 to 12 core meal plan menu items. We have positioned the kiosks so that guests can grab a meal on the run. These meals are convenient to guests that chose not to dine in or want additional meals for themselves or family members.

 

Risk Factors

 

Investing in our common stock involves risks. You should carefully consider the risks described in “Risk Factors” beginning on page 8 before making a decision to invest in our common stock. The following is a summary of some of the principal risks we face:

 

  The auditors have expressed substantial doubt about our ability continue as a going concern.
     
  We need additional capital to fund our operations which, if attained, could result in significant dilution or significant debt service obligations.
     
  We face intense competition in our markets, which could negatively impact our business.
     
  We may be unsuccessful in opening new company-operated or franchised restaurants or establishing new markets, which could adversely affect our growth.
     
  Our marketing programs may not be successful, and our new menu items, advertising campaigns and restaurant designs or remodels may not generate increased sales or profits.

 

4
 

 

  As of November 2019, the Company currently has two restaurant locations that have been closed. We are attempting to settle the outstanding lease amounts with the landlord of which there is no guarantee. The outcome on these two leases could have a negative material impact on our cash reserves as well as future earnings.

 

Re-domestication

 

Our Board of Directors has adopted resolutions, subject to stockholder approval, to change the Company’s state of incorporation from California to Nevada, which we refer to as the Re-domicile. The Re-domicile was approved by the Company’s shareholders on October 28, 2019. On November 13, 2019, the Company merged with and into its wholly owned subsidiary, Muscle Maker, Inc., a Nevada corporation pursuant to an Agreement and Plan of Merger. Muscle Maker, Inc. - Nevada continued as the surviving entity of the migratory merger. Pursuant to the migratory merger, the Company changed its state of incorporation from California to Nevada and each share of its common stock converted into one share of common stock of the surviving entity, par value $0.0001 per share, in the migratory merger.

 

 Recent Developments

 

On December 5, 2019, we entered into Conversion Agreements with various convertible note holders (the “Noteholders”) pursuant to which the Noteholders converted $9,488,000 of principal due under such convertible notes into 4,055,683 shares of our common stock (the “Conversion Shares”) in full satisfaction of such obligations. The Conversion Shares represent approximately 71% of our outstanding shares of common stock, giving effect to such issuance. In addition, the Noteholders who have received Conversion Shares also agreed to enter into a Lock-Up Agreement providing that the Conversion Shares will be locked up for a period of one year. The Company has provided the Noteholders with piggyback registration rights. Further, in the event the Company does not close following the date of this prospectus on its underwritten public offering (the “Offering”) within ninety (90) days of the Conversion Agreements, the issuance of the Conversion Shares shall be null and void and the Conversion Agreements and the related addendum thereto shall be of no further force or effect and the parties hereto agree to undertake any necessary actions to ensure that the Conversion Shares are returned to the Company for cancellation and the Convertible Notes are delivered to the Holder upon the Company’s receipt of the certificates representing the Conversion Shares.

 

On December 11, 2019, the Board of Directors of the Company approved a 1-for-7 reverse stock split of the Company’s authorized, issued and outstanding shares of common stock. Any fractional shares of the Company’s common stock resulting from the reverse stock split will be rounded up to the nearest whole share. The Reverse Stock Split is being effected in connection with the Company’s application to list its common stock on the NASDAQ Capital Market and the related proposed public offering. The reverse stock split and the resulting decrease in the number of our authorized shares of common stock is effective on December 11, 2019.

 

Implications of Being an Emerging Growth Company

 

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in Rule 12b-2 of the Securities Exchange Act or 1934, as amended, which we refer to as the Exchange Act. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

  being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;
     
  not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;
     
  reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and
     
  exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended, which we refer to as the Securities Act. However, if certain events occur before the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion or we issue more than $1.07 billion of non-convertible debt in any three-year period, we will cease to be an “emerging growth company” before the end of such five-year period.

 

We have elected to take advantage of certain of the reduced disclosure obligations and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than the information you might receive from other public reporting companies in which you hold equity interests.

 

To the extent that we continue to qualify as a “smaller reporting company,” as such term is defined in Rule 12b-2 under the Exchange Act, after we cease to qualify as an “emerging growth company,” certain of the exemptions available to us as an “emerging growth company” may continue to be available to us as a smaller reporting company, including: (1) not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; (2) scaled executive compensation disclosures; and (3) the ability to provide only two years of audited financial statements, instead of three years.

 

Company Information

 

Our principal executive office is located at 308 East Renfro Street, Suite 101, Burleson, Texas 76028. Our telephone number is (682) 708-8250. Our website address is www.musclemakergrill.com. Information contained in, or accessible through, our website does not constitute a part of this prospectus or any prospectus supplement.

 

5
 

 

THE OFFERING

 

The following summary of the offering contains basic information about the offering and the common stock and is not intended to be complete. It does not contain all the information that is important to you. For a more complete understanding of the common stock, please refer to the section of this prospectus entitled “Description of Capital Stock.”

 

Common stock offered by us   1,600,000 shares of our common stock.
     
Common stock outstanding after this offering  

3,255,032 actual shares outstanding, 7,314,464 as adjusted to reflect the issuance of 4,055,683 shares issued upon the conversion of certain convertible promissory notes on December 5, 2019 and 3,749 shares of common stock issued as compensation to the board of directors.

     
Over-allotment option  

We have granted the underwriter a 45-day option to purchase up to 240,000 additional shares of our common stock from us at the public offering price less underwriting discounts and commissions.

     
Use of proceeds  

We estimate that the net proceeds from our sale of shares of our common stock in this offering will be approximately $6.9 million, or approximately $8.0 million if the underwriter exercises its over-allotment option in full, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We currently expect to use approximately $5.1 million of the net proceeds from this offering as follows:

 

  implementation of our business plan, including but not limited to (i) growth initiatives through opening new corporate stores, launching a franchise sales program and technology improvements, (ii) funding possible acquisition opportunities and (iii) funding a corporate marketing campaign; and
 

the remaining $1.8 million (or approximately $2.9 million if the underwriter exercises its over-allotment option in full) will be used for general corporate purposes including working capital requirements and retiring $550,000 in debt. The debt to be retired consists of $450,000 of 15% convertible notes payable with a maturity date range of March 12, 2020 through August 26, 2020 of which $350,000 was borrowed in third and fourth quarter of 2018 and $100,000 which was borrowed in February 2019, $75,000 of 12% convertible notes payable with a maturity date of March 12, 2020 which was borrowed in September 2019 and a $25,000 10% convertible note payable with a maturity date of February 24, 2020 which was borrowed in July 2017. The debt to be repaid was primarily used to fund new Company-owned store locations.

 

    For additional information please refer to the section entitled “Use of Proceeds” on page 33 of this prospectus.

 

Dividend policy   We do not anticipate paying any cash dividends on our common stock. In addition, we may incur indebtedness in the future that may restrict our ability to pay dividends. See “Dividend Policy” on page 34.

 

Risk Factors   See the section entitled “Risk Factors” beginning on page 8 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
     
Nasdaq Capital Market symbol   “GRIL”

 

The number of shares of our common stock to be outstanding after this offering is based on 1,655,032 shares of common stock actually outstanding as of September 30, 2019, and 5,714,464 shares of our common stock outstanding as of September 30, 2019, as adjusted to reflect the issuance of 4,055,683 conversion shares issued upon conversion of certain convertible promissory notes on December 5, 2019 and 3,749 shares of common stock issued as compensation to the board of directors, and excludes the following:

 

 

4,821 shares of our common stock issuable upon the exercise of stock options as of September 30, 2019, with a weighted average exercise price of $65.31 per share;

     
 

2,450,285 shares of our common stock issuable upon the exercise of outstanding warrants, which includes the modified warrants, as of January 6, 2020 with a weighted average exercise price of $5.51 per share;

     
 

534,546 shares of our common stock issuable upon the conversion of all of the outstanding convertible notes;

     
  129,999 shares of Common Stock to be issued upon the successful completion of an uplisting to a national exchange with a public offering of at least $3,000,000 with an additional 85,714 shares of Common Stock in the event the public offering is at least $5,000,000;
     
 

the issuance of an estimated 128,000 shares of common stock underlying the warrant to be issued to the underwriter in connection with this offering with a per share exercise price of $6.00; and

     
 

214,286 shares of our common stock reserved for future issuance under the 2019 Equity Incentive Plan.

 

In addition, unless otherwise noted, the information in this prospectus assumes:

 

  no exercise by the underwriters of their over-allotment option to purchase up to an additional 240,000 shares of our common stock from us; and
     
  no exercise of outstanding stock options or warrants subsequent to September 30, 2019.

 

6
 

 

SUMMARY FINANCIAL DATA

 

The following table sets forth our selected financial data as of the dates and for the periods indicated. We have derived the statement of operations data for the years ended December 31, 2018 and 2017 from our audited financial statements included elsewhere in this prospectus. The statements of operations data for the nine months ended September 30, 2019 and 2018 and the balance sheet data as of September 30, 2019 have been derived from our unaudited financial statements included elsewhere in this prospectus. The following summary financial data should be read with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes and other information included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future and the results for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the full fiscal year.

 

Statement of Operations Data:

 

   For the Nine Months Ended   For the Year Ended 
   September 30,   December 31, 
   2019   2018   2018   2017 
   (unaudited)         
Revenues  $3,681,248   $4,620,646   $6,022,669   $7,929,137 
Operating Costs and Expenses   6,451,638    8,183,873    9,608,515    19,860,161 
(Loss) Income from Operations   (2,770,390)   (3,563,227)   (3,585,846)   (11,931,024)
Total Other (Expense) Income   (2,604,524)   (3,136,048)   (3,618,694)   (3,883,254)
Loss Before Income Tax   (5,374,914)   (6,699,275)   (7,204,540)   (15,814,278)
Income tax provision   -    -    -    246,527 
Net Loss   (5,374,914)   (6,699,275)   (7,204,540)   (15,567,751)
Net loss attributable to the non-controlling interests   -    (2,071)   (2,071)   (2,357,303)
Net Loss Attributable to Controlling Interest  $(5,374,914)  $(6,697,204)  $(7,202,469)  $(13,210,448)
                     
Net Loss Attributable to Controlling Interest Per Share:  $(3.50)  $(5.70)  $(5.66)  $(15.31)

 

(1) See Note 3 to our consolidated financial statements for an explanation of the method used to compute basic and diluted net loss per share.

 

Balance Sheet Data:

 

    As of September 30, 2019  
Balance Sheet Data:   Actual     Pro Forma (1)     Pro Forma As Adjusted (2)  
                   
Cash and cash equivalents   $ 1,983,306     $ 1,983,306     $ 8,335,631  
Working capital (deficit)/surplus     (5,484,122    

(1,202,269

   

5,700,056

 
Total assets     6,985,106       6,985,106       13,337,431  
Total liabilities     13,470,999      

3,950,196

      3,400,196  
Accumulated deficit     (29,777,110 )    

(31,029,239

)    

(31,106,818

)
Stockholders’ (deficit) equity   $ (6,485,893 )   $

1,783,593

    $

8,608,339

 

 

(1)

Pro forma basis to give effect to the (i) issuance of 3,749 shares of common stock as compensation to the board of directors and (ii) issuance of 4,055,683 shares of common stock issued in connection with conversion of various convertible notes.

   
(2)

Pro forma as adjusted basis, to give effect to our sale of 1,600,000 shares of common stock in this offering, at an assumed public offering price of $5.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and retiring $550,000 in debt. The debt to be retired consists of $450,000 of 15% convertible notes payable with a maturity date range of March 12, 2020 through August 26, 2020 of which $350,000 was borrowed in third and fourth quarter of 2018 and $100,000 which was borrowed in February 2019, $75,000 of 12% convertible notes payable with a maturity date of March 12, 2020 which was borrowed in September 2019 and a $25,000 10% convertible note payable with a maturity date of February 24, 2020 which was borrowed in July 2017. The debt to be repaid was primarily used to fund new Company-owned store locations. Each $1.00 increase (decrease) in the assumed initial public offering price of $5.00 per share would increase (decrease) the pro forma amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $1,600,000, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price per share would increase (decrease) the pro forma amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $5,000,000.

 

7
 

 

RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. If any of the following risks actually occur, we may be unable to conduct our business as currently planned and our financial condition and results of operations could be seriously harmed. In addition, the trading price of our common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment. The risks and uncertainties discussed below are not the only ones we face. Our business, results of operations, financial condition or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. In assessing the risks and uncertainties described below, you should also consider carefully the other information contained in this prospectus before making a decision to invest in our common stock.

 

Risks Related to Our Business and Industry

 

We have a history of operating losses and our auditors have indicated that there is a substantial doubt about our ability to continue as a going concern.

 

To date, we have not been profitable and have incurred significant losses and cash flow deficits. For the years ended December 31, 2018 and 2017, we reported net losses of $7,204,540 and $15,814,278, respectively, and negative cash flow from operating activities of $2,726,737 and $3,676,999, respectively. As of September 30, 2019, we had an accumulated deficit of $29,777,110. We anticipate that we will continue to report losses and negative cash flow. As a result of these net losses and cash flow deficits and other factors, our independent auditors issued an audit opinion with respect to our financial statements for the two years ended December 31, 2018 that indicated that there is a substantial doubt about our ability to continue as a going concern.

 

Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. These adjustments would likely include substantial impairment of the carrying amount of our assets and potential contingent liabilities that may arise if we are unable to fulfill various operational commitments. In addition, the value of our securities would be greatly impaired. Our ability to continue as a going concern is dependent upon generating sufficient cash flow from operations and obtaining additional capital and financing. If our ability to generate cash flow from operations is delayed or reduced and we are unable to raise additional funding from other sources, we may be unable to continue in business. For further discussion about our ability to continue as a going concern and our plan for future liquidity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

 

We will need additional capital to fund our operations, which, if obtained, could result in substantial dilution or significant debt service obligations. We may not be able to obtain additional capital on commercially reasonable terms, which could adversely affect our liquidity and financial position.

 

At September 30, 2019, Muscle Maker had a cash balance of approximately $1,983,306, a working capital deficit of approximately $5,484,122, and an accumulated deficit of approximately $29,777,110. Even if we are able to substantially increase revenues and reduce operating expenses, we may need to raise additional capital. In order to continue operating, we may need to obtain additional financing, either through borrowings, private placements, public offerings, or some type of business combination, such as a merger, or buyout, and there can be no assurance that we will be successful in such pursuits. We may be unable to acquire the additional funding necessary to continue operating. Accordingly, if we are unable to generate adequate cash from operations, and if we are unable to find sources of funding, it may be necessary for us to sell one or more lines of business or all or a portion of our assets, enter into a business combination, or reduce or eliminate operations. These possibilities, to the extent available, may be on terms that result in significant dilution to our shareholders or that result in our shareholders losing all of their investment in our Company. In order to satisfy the Company’s monthly expenses and continue in operation through December 31, 2019 as well as fully implement our business plan for 2019, the Company will need to raise a minimum of $350,000. In order to fully implement our business plan for 2020, the Company will need to raise a minimum of $5,750,000.

 

8
 

 

If we are able to raise additional capital, we do not know what the terms of any such capital raising would be. In addition, any future sale of our equity securities would dilute the ownership and control of your shares and could be at prices substantially below prices at which our shares currently trade. Our inability to raise capital could require us to significantly curtail or terminate our operations. We may seek to increase our cash reserves through the sale of additional equity or debt securities. The sale of convertible debt securities or additional equity securities could result in additional and potentially substantial dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Any failure to raise additional funds on favorable terms could have a material adverse effect on our liquidity and financial condition.

 

We face intense competition in our markets, which could negatively impact our business.

 

The restaurant industry is intensely competitive and we compete with many well-established food service companies on the basis of product choice, quality, affordability, service and location. We expect competition in each of our markets to continue to be intense because consumer trends are favoring limited service restaurants that offer healthy-inspired menu items made with better quality products, and many limited service restaurants are responding to these trends. With few barriers to entry, our competitors include a variety of independent local operators, in addition to well-capitalized regional, national and international restaurant chains and franchises, and new competitors may emerge at any time. Furthermore, delivery aggregators and food delivery services provide consumers with convenient access to a broad range of competing restaurant chains and food retailers, particularly in urbanized areas. Each of our brands also competes for qualified franchisees, suitable restaurant locations and management and personnel. Our ability to compete will depend on the success of our plans to improve existing products, to develop and roll-out new products, to effectively respond to consumer preferences and to manage the complexity of restaurant operations as well as the impact of our competitors’ actions. In addition, our long-term success will depend on our ability to strengthen our customers’ digital experience through expanded mobile ordering, delivery and social interaction. Some of our competitors have substantially greater financial resources, higher revenues and greater economies of scale than we do. These advantages may allow them to implement their operational strategies more quickly or effectively than we can or benefit from changes in technologies, which could harm our competitive position. These competitive advantages may be exacerbated in a difficult economy, thereby permitting our competitors to gain market share. There can be no assurance that we will be able to successfully respond to changing consumer preferences, including with respect to new technologies and alternative methods of delivery. If we are unable to maintain our competitive position, we could experience lower demand for products, downward pressure on prices, reduced margins, an inability to take advantage of new business opportunities, a loss of market share, reduced franchisee profitability and an inability to attract qualified franchisees in the future. Any of these competitive factors may materially adversely affect our business, financial condition or results of operations.

 

Our ability to continue to expand our digital business and delivery orders is uncertain, and these new business lines are subject to risks.

 

Our digital, delivery and catering/meal plan sales represent a significant portion of sales in many of our restaurants and expanding in others. Consumer preferences and competitors are relying more and more heavily on digital and third-party delivery services, especially in urban locations. We rely on third party providers to fulfill delivery orders, and the ordering and payment platforms used by these third parties, or our mobile app or online ordering system, could be damaged or interrupted by technological failures, user errors, cyber-attacks or other factors, which may adversely impact our sales through these channels and could negatively impact our brand. Additionally, our delivery partners are responsible for order fulfillment and may make errors or fail to make timely deliveries, leading to customer disappointment that may negatively impact our brand. We also incur additional costs associated with using third party service providers to fulfil these digital orders. Moreover, the third-party restaurant delivery business is intensely competitive, with a number of players competing for market share, online traffic, capital, and delivery drivers and other people resources. The third-party delivery services with which we work may struggle to compete effectively, and if they were to cease or curtail operations or fail to provide timely delivery services in a cost-effective manner, or if they give greater priority on their platforms to our competitors, our delivery business may be negatively impacted. Digital and delivery offerings also increase the risk of illnesses associated with our food because the food is transported and/or served by third parties in conditions we cannot control.

 

9
 

 

Because all of these offerings are relatively new, it is difficult for us to anticipate the level of sales they may generate. That may result in operational challenges, both in fulfilling orders made through these channels and in operating our restaurants as we balance fulfillment of these orders with service of our traditional in-restaurant guests as well. Any such operational challenges may negatively impact the customer experience associated with our digital or delivery orders, the guest experience for our traditional in-restaurant business, or both. These factors may adversely impact our sales and our brand reputation.

 

We are vulnerable to changes in consumer preferences and economic conditions that could harm our business, financial condition, results of operations and cash flow.

 

Food service businesses depend on consumer discretionary spending and are often affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends. Factors such as traffic patterns, weather, fuel prices, local demographics, troop deployments or base closures specific to our military locations and the type, number and locations of competing restaurants may adversely affect the performances of individual locations. In addition, economic downturns, wage rates, health insurance costs, third-party delivery services and fees, inflation or increased food or energy costs could harm the restaurant industry in general and our locations in particular. Adverse changes in any of these factors could reduce consumer traffic or impose practical limits on pricing that could harm our business, financial condition, results of operations and cash flow. There can be no assurance that consumers will continue to regard healthy-inspired fast food favorably or that we will be able to develop new menu items that appeal to consumer preferences. Our business, financial condition and results of operations depend in part on our ability to anticipate, identify and respond to changing consumer preferences and economic conditions. In addition, the restaurant industry is currently under heightened legal and legislative scrutiny related to menu labeling and resulting from the perception that the practices of restaurant companies have contributed to nutritional, caloric intake, obesity or other health concerns of their guests. If we are unable to adapt to changes in consumer preferences and trends, we may lose customers and our revenues may decline or our costs to produce our products could significantly increase.

 

Our growth strategy depends in part on opening new restaurants in existing and new markets, including non-traditional locations such as universities, office buildings, military bases, airports or casinos and expanding our franchise system. We may be unsuccessful in opening new company-operated or franchised restaurants or establishing new markets, which could adversely affect our growth.

 

One of the key means to achieving our growth strategy will be through opening new restaurants and operating those restaurants on a profitable basis. Our ability to open new restaurants is dependent upon a number of factors, many of which are beyond our control, including our and our franchisees’ ability to:

 

  identify available and suitable restaurant sites;
  compete for restaurant sites;
  reach acceptable agreements regarding the lease or purchase of locations;
 

obtain or have available the financing required to acquire and operate a restaurant, including construction and opening costs, which includes access to build-to-suit leases and equipment financing leases at favorable interest and capitalization rates;

  respond to unforeseen engineering or environmental problems with leased premises;
  avoid the impact of inclement weather, natural disasters and other calamities;
  hire, train and retain the skilled management and other employees necessary to meet staffing needs;
  obtain, in a timely manner and for an acceptable cost, required licenses, permits and regulatory approvals and respond effectively to any changes in local, state or federal law and regulations that adversely affect our and our franchisees’ costs or ability to open new restaurants; and
  control construction and equipment cost increases for new restaurants.

 

There is no guarantee that a sufficient number of suitable restaurant sites will be available in desirable areas or on terms that are acceptable to us in order to achieve our growth plan. If we are unable to open new restaurants or sign new franchisees, or if existing franchisees do not open new restaurants, or if restaurant openings are significantly delayed, our revenues or earnings growth could be adversely affected and our business negatively affected.

 

10
 

 

As part of our long-term growth strategy, we may enter into geographic markets in which we have little or no prior operating or franchising experience through company-operated restaurant growth and through franchise development agreements. The challenges of entering new markets include, but are not limited to: difficulties in hiring experienced personnel; unfamiliarity with local real estate markets and demographics; food distribution networks; lack of marketing efficiencies; operational support efficiencies; consumer unfamiliarity with our brand; and different competitive and economic conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than in our existing markets. Consumer recognition of our brand has been important in the success of company-operated and franchised restaurants in our existing markets. Restaurants we open in new markets may take longer to reach expected sales and profit levels on a consistent basis and may have higher construction, occupancy and operating costs than existing restaurants, thereby affecting our overall profitability. Any failure on our part to recognize or respond to these challenges may adversely affect the success of any new restaurants. Expanding our franchise system could require the implementation, expense and successful management of enhanced business support systems, management information systems and financial controls as well as additional staffing, franchise support and capital expenditures and working capital.

 

Due to brand recognition and logistical synergies, as part of our growth strategy, we also intend to open new restaurants in areas where we have existing restaurants. The operating results and comparable restaurant sales for our restaurants could be adversely affected due to close proximity with our other restaurants and market saturation.

 

New restaurants, once opened, may not be profitable or may close.

 

Some of our restaurants open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized levels. In new markets, the length of time before average sales for new restaurants stabilize is less predictable and can be longer as a result of our limited knowledge of these markets and consumers’ limited awareness of our brand. In addition, our average restaurant revenues and comparable restaurant sales may not increase at the rates achieved over the past several years. Our ability to operate new restaurants profitably and increase average restaurant revenues and comparable restaurant sales will depend on many factors, some of which are beyond our control, including:

 

  consumer awareness and understanding of our brand;
  military troop deployments, reductions or closures of our military base locations;
  general economic conditions, which can affect restaurant traffic, local labor costs and prices we pay for the food products and other supplies we use;
  consumption patterns and food preferences that may differ from region to region;
  changes in consumer preferences and discretionary spending;
  difficulties obtaining or maintaining adequate relationships with distributors or suppliers in new markets;
  increases in prices for commodities, including proteins;
  inefficiency in our labor costs as the staff gains experience;
  competition, either from our competitors in the restaurant industry or our own restaurants;
  temporary and permanent site characteristics of new restaurants;
  changes in government regulation; and
  other unanticipated increases in costs, any of which could give rise to delays or cost overruns.

 

If our new restaurants do not perform as planned or close, our business and future prospects could be harmed. In addition, an inability to achieve our expected average restaurant revenues in both company owned and franchise locations, would have a material adverse effect on our business, financial condition and results of operations.

 

11
 

 

Opening new restaurants in existing markets may negatively impact sales at our and our franchisees’ existing restaurants.

 

The consumer target area of our and our franchisees’ restaurants varies by location, depending on a number of factors, including population density, other local retail and business attractions, area demographics and geography. As a result, the opening of a new restaurant in or near markets in which we or our franchisees’ already have restaurants could adversely impact sales at these existing restaurants. Existing restaurants could also make it more difficult to build our and our franchisees’ consumer base for a new restaurant in the same market. Our core business strategy does not entail opening new restaurants that we believe will materially affect sales at our or our franchisees’ existing restaurants. However, we cannot guarantee there will not be a significant impact in some cases, and we may selectively open new restaurants in and around areas of existing restaurants that are operating at or near capacity to effectively serve our customers. Sales cannibalization between our restaurants may become significant in the future as we continue to expand our operations and could affect our sales growth, which could, in turn, materially and adversely affect our business, financial condition and results of operations.

 

Our sales growth and ability to achieve profitability could be adversely affected if comparable restaurant sales are less than we expect.

 

The level of comparable restaurant sales, which reflect the change in year-over-year sales for restaurants in the fiscal month following 15 months of operation using a mid-month convention, will affect our sales growth and will continue to be a critical factor affecting our ability to generate profits because the profit margin on comparable restaurant sales is generally higher than the profit margin on new restaurant sales. While we have experienced negative comparable same store sales of 8% during 2018 and 12% during year-to-date 2019, we have developed new sales and marketing efforts including new menu strategy/evolution, new marketing initiatives designed to increase brand awareness, new operating platforms which improve speed of service and other tactics with the goal of providing positive same store sales in future years. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement these initiatives. It is possible such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in sales growth and ability to achieve profitability that would have a material adverse effect on our business, financial condition and results of operations.

 

Our marketing programs may not be successful, and our new menu items, advertising campaigns and restaurant designs or remodels may not generate increased sales or profits.

 

We incur costs and expend other resources in our marketing efforts on new menu items, advertising campaigns and restaurant designs and remodels to raise brand awareness and attract and retain customers. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues. Additionally, some of our competitors have greater financial resources, which enable them to spend significantly more on marketing and advertising and other initiatives than we are able to. Should our competitors increase spending on marketing and advertising and other initiatives or our marketing funds decrease for any reason, or should our advertising, promotions, new menu items and restaurant designs and remodels be less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition.

 

We rely on only one company to distribute substantially all of our food and supplies to company-operated and franchised restaurants, and on a limited number of companies, and, in some cases, a sole company, to supply certain products, supplies and ingredients to our distributor. Failure to receive timely deliveries of food or other supplies could result in a loss of revenues and materially and adversely impact our operations.

 

Our company-operated restaurants and franchisees’ ability to maintain consistent quality menu items and prices significantly depends upon our ability to acquire quality food products from reliable sources in accordance with our specifications on a timely basis. Shortages or interruptions in the supply of food products caused by unanticipated demand, problems in production or distribution, contamination of food products, an outbreak of protein-based diseases, inclement weather, fuel supplies, governmental actions or other conditions could materially adversely affect the availability, quality and cost of ingredients, which would adversely affect our business, financial condition, results of operations and cash flows. We have contracts with a limited number of suppliers, and, in some cases, a sole supplier, for certain products, supplies and ingredients. If that distributor or any supplier fails to perform as anticipated or seeks to terminate agreements with us, or if there is any disruption in any of our supply or distribution relationships for any reason, our business, financial condition, results of operations and cash flows could be materially adversely affected. If we or our franchisees temporarily close a restaurant or remove popular items from a restaurant’s menu due to a supply shortage, that restaurant may experience a significant reduction in revenues during the time affected by the shortage and thereafter if our customers change their dining habits as a result.

 

12
 

 

Changes in food and supply costs or failure to receive frequent deliveries of food ingredients and other supplies could have an adverse effect on our business, financial condition and results of operations.

 

Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs, and our ability to maintain our menu depends in part on our ability to acquire ingredients that meet specifications from reliable suppliers. Shortages or interruptions in the availability of certain supplies caused by unanticipated demand, problems in production or distribution, food contamination, inclement weather or other conditions could adversely affect the availability, quality and cost of our ingredients, which could harm our operations. Any increase in the prices of the food products most critical to our menu, such as chicken, seafood, beef, fresh produce, dairy products, packaging and other proteins, could have a material adverse effect on our results of operations. Although we try to manage the impact that these fluctuations have on our operating results, we remain susceptible to increases in food costs as a result of factors beyond our control, such as general economic conditions, seasonal fluctuations, weather conditions, demand, food safety concerns, generalized infectious diseases, product recalls, fuel prices and other government regulations. Therefore, material increases in the prices of the ingredients most critical to our menu could adversely affect our operating results or cause us to consider changes to our product delivery strategy and adjustments to our menu pricing.

 

If any of our distributors or suppliers perform inadequately, or our distribution or supply relationships are disrupted for any reason, there could be a material adverse effect on our business, financial condition, results of operations or cash flows. Although we often enter into contracts for the purchase of food products and supplies, we do not have long-term contracts for the purchase of all such food products and supplies. As a result, we may not be able to anticipate or react to changing food costs by adjusting our purchasing practices or menu prices, which could cause our operating results to deteriorate. If we cannot replace or engage distributors or suppliers who meet our specifications in a short period of time, that could increase our expenses and cause shortages of food and other items at our restaurants, which could cause a restaurant to remove items from its menu. If that were to happen, affected restaurants could experience significant reductions in sales during the shortage or thereafter, if customers change their dining habits as a result. In addition, although we provide modestly priced food, we may choose not to, or may be unable to, pass along commodity price increases to consumers, including price increases with respect to ground beef, chicken, produce, dairy, packaging or other commodities. These potential changes in food and supply costs could have a material adverse effect on our business, financial condition and results of operations.

 

Our revenue forecasts rely on an aggressive franchise unit sales strategy. In the event the forecasted numbers are not achieved, we will have a material negative impact on future revenues.

 

Our revenue projections consist of both company operated and franchised locations. Our growth plans call for an aggressive approach to franchise unit level sales and subsequent openings. In the event we cannot meet these forecasts due to the inability to sell franchise locations in certain states, are prevented from selling franchises due to historical performance, government regulations, licensing, state registrations, or other factors, we will have a material negative impact on future revenues. Our revenue model and cash flows rely heavily on initial franchise fees, ongoing 5% royalties of total net sales and vendor rebates on total purchases and services from franchised locations. A significant reduction in the total number of units sold and subsequently opened would have a material adverse effect on future revenues.

 

Failure to manage our growth effectively could harm our business and operating results.

 

Our growth plan includes opening a significant number of new restaurants, both franchised and company -owned. Our existing restaurant management systems, financial and management controls and information systems may be inadequate to support our planned expansion. Managing our growth effectively will require us to continue to enhance these systems, procedures and controls and to hire, train and retain managers and team members. We may not respond quickly enough to the changing demands that our expansion will impose on our management, restaurant teams and existing infrastructure, which could harm our business, financial condition and results of operations.

 

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The planned rapid increase in the number of our restaurants may make our future results unpredictable.

 

We intend to continue to increase the number of our company-owned and franchised restaurants in the next several years. This growth strategy and the substantial investment associated with the development of each new restaurant may cause our operating results to fluctuate unpredictably or have an adverse effect on our profits. In addition, we may find that our restaurant concept has limited appeal in new markets or we may experience a decline in the popularity of our restaurant concept in the markets in which we operate. Newly opened restaurants or our future markets and restaurants may not be successful or our system-wide average restaurant revenue may not increase, which could have a material adverse effect on our business, financial condition and results of operations.

 

The financial performance of our franchisees can negatively impact our business.

 

As approximately 83% of our restaurants are franchised as of December 31, 2018, our financial results are dependent in significant part upon the operational and financial success of our franchisees. We receive royalties, franchise fees, vendor rebates, contributions to our marketing development fund and contributions to our national and local co-op advertising funds and other fees from our franchisees. We also collect rebates from vendors supplying franchisees for food purchases, services and materials. We have established operational standards and guidelines for our franchisees; however, we have limited control over how our franchisees’ businesses are run. While we are responsible for the anticipated success of our entire system of restaurants and for taking a longer-term view with respect to system improvements, our franchisees have individual business strategies and objectives, which might conflict with our interests. Our franchisees may not be able to secure adequate financing to open or continue operating their Muscle Maker Grill restaurants. If they incur too much debt or if economic or sales trends deteriorate such that they are unable to repay existing debt, our franchisees could experience financial distress or even bankruptcy. If a significant number of franchisees become financially distressed, it could harm our operating results through reduced royalty revenues and the impact on our profitability could be greater than the percentage decrease in the royalty revenues. Closure of franchised restaurants would reduce our royalty revenues and other sources of income and could negatively impact margins, since we may not be able to reduce fixed costs which we continue to incur.

 

We have limited control with respect to the operations of our franchisees, which could have a negative impact on our business.

 

Franchisees are independent business operators and are not our employees, and we do not exercise control over the day-to-day operations of their restaurants. We provide training and support to franchisees, and set and monitor operational standards, but the quality of franchised restaurants may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements or may not hire and train qualified managers and other restaurant personnel. If franchisees do not operate to our expectations, our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could decline significantly, which would reduce our royalty and other revenues, and the impact on profitability could be greater than the percentage decrease in royalties and fees.

 

The challenging economic environment may affect our franchisees, with adverse consequences to us.

 

We rely in part on our franchisees and the manner in which they operate their locations to develop and promote our business. Due to the continuing challenging economic environment, it is possible that some franchisees could file for bankruptcy or become delinquent in their payments to us, which could have a significant adverse impact on our business due to loss or delay in payments of royalties, contributions to our marketing development fund and brand development/advertising funds and other fees. Bankruptcies by our franchisees could prevent us from terminating their franchise agreements so that we can offer their territories to other franchisees, negatively impact our market share and operating results as we may have fewer well-performing restaurants, and adversely impact our ability to attract new franchisees.

 

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We cannot be certain that the developers and franchisees we select will have the business acumen or financial resources necessary to open and operate successful franchises in their franchise areas, and state franchise laws may limit our ability to terminate or modify these franchise arrangements. Moreover, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements or may not hire and train qualified managers and other restaurant personnel. The failure of developers and franchisees to open and operate franchises successfully could have a material adverse effect on us, our reputation, our brand and our ability to attract prospective franchisees and could materially adversely affect our business, financial condition, results of operations and cash flows.

 

Franchisees may not have access to the financial or management resources that they need to open the restaurants contemplated by their agreements with us or be able to find suitable sites on which to develop them. Franchisees may not be able to negotiate acceptable lease or purchase terms for restaurant sites, obtain the necessary permits and government approvals or meet construction schedules. Any of these problems could slow our growth and reduce our franchise revenues. Additionally, our franchisees typically depend on financing from banks and other financial institutions, which may not always be available to them, in order to construct and open new restaurants. For these reasons, franchisees operating under development agreements may not be able to meet the new restaurant opening dates required under those agreements.

 

Our system-wide restaurant base is geographically concentrated in the Northeastern United States, and we could be negatively affected by conditions specific to that region.

 

Our company-operated and franchised restaurants in the Northeastern United States represent approximately 39% of our system-wide restaurants as of December 31, 2018. Our company-operated and franchised restaurants in New Jersey and New York represent approximately 25% of our system-wide restaurants as of December 31, 2018. Adverse changes in demographic, unemployment, economic, regulatory or weather conditions in the Northeastern United States have had, and may continue to have, material adverse effects on our business. As a result of our concentration in this market, we have been, and in the future may be, disproportionately affected by these adverse conditions compared to other chain restaurants with a national footprint.

 

In addition, our competitors could open additional restaurants in New Jersey and New York, where we have significant concentration with 11 of our system restaurants, which could result in reduced market share for us and may adversely impact our profitability.

 

Negative publicity could reduce sales at some or all of our restaurants.

 

We may, from time to time, be faced with negative publicity relating to food quality, the safety, sanitation and welfare of our restaurant facilities, customer complaints or litigation alleging illness or injury, health inspection scores, integrity of our or our suppliers’ food processing and other policies, practices and procedures, employee relationships and welfare or other matters at one or more of our restaurants. Negative publicity may adversely affect us, regardless of whether the allegations are valid or whether we are held to be responsible. In addition, the negative impact of adverse publicity relating to one restaurant may extend far beyond the restaurant involved, especially due to the high geographic concentration of many of our restaurants, to affect some or all of our other restaurants, including our franchised restaurants. The risk of negative publicity is particularly great with respect to our franchised restaurants because we are limited in the manner in which we can regulate them, especially on a real-time basis and negative publicity from our franchised restaurants may also significantly impact company-operated restaurants. A similar risk exists with respect to food service businesses unrelated to us, if customers mistakenly associate such unrelated businesses with our operations. Employee claims against us based on, among other things, wage and hour violations, discrimination, harassment or wrongful termination may also create not only legal and financial liability but negative publicity that could adversely affect us and divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. These types of employee claims could also be asserted against us, on a co-employer theory, by employees of our franchisees. A significant increase in the number of these claims or an increase in the number of successful claims could materially adversely affect our business, financial condition, results of operations and cash flows.

 

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Food safety and quality concerns may negatively impact our business and profitability, our internal operational controls and standards may not always be met and our employees may not always act professionally, responsibly and in our and our customers’ best interests. Any possible instances of food-borne illness could reduce our restaurant sales.

 

Incidents or reports of food-borne or water-borne illness or other food safety issues, food contamination or tampering, employee hygiene and cleanliness failures or improper employee conduct at our restaurants could lead to product liability or other claims. Such incidents or reports could negatively affect our brand and reputation as well as our business, revenues and profits. Similar incidents or reports occurring at limited service restaurants unrelated to us could likewise create negative publicity, which could negatively impact consumer behavior towards us.

 

We cannot guarantee to consumers that our internal controls and training will be fully effective in preventing all food-borne illnesses. Furthermore, our reliance on third-party food processors and distributors makes it difficult to monitor food safety compliance and may increase the risk that food-borne illness would affect multiple locations rather than single restaurants. Some food-borne illness incidents could be caused by third-party food suppliers and transporters outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of food-borne illness in one of our company-operated or franchised restaurants could negatively affect sales at all of our restaurants if highly publicized, especially due to the high geographic concentration of many of our restaurants. This risk exists even if it were later determined that the illness was wrongly attributed to one of our restaurants. A number of other restaurant chains have experienced incidents related to food-borne illnesses that have had material adverse impacts on their operations, and we cannot assure you that we could avoid a similar impact upon the occurrence of a similar incident at one of our restaurants. Additionally, even if food-borne illnesses were not identified at our restaurants, our restaurant sales could be adversely affected if instances of food-borne illnesses at other restaurant chains were highly publicized. In addition, our restaurant sales could be adversely affected by publicity regarding other high-profile illnesses such as avian flu that customers may associate with our food products.

 

The volatile credit and capital markets could have a material adverse effect on our financial condition.

 

Our ability to manage our debt is dependent on our level of cash flow from company-operated and franchised restaurants, net of costs. It is anticipated that in 2019 the company will not have positive cash flow and will require additional outside funding to maintain operations. An economic downturn may negatively impact our cash flows. Credit and capital markets can be volatile, which could make it more difficult for us to refinance our existing debt or to obtain additional debt or equity financings in the future. Such constraints could increase our costs of borrowing and could restrict our access to other potential sources of future liquidity. Our failure to have sufficient liquidity to make interest and other payments required by our debt could result in a default of such debt and acceleration of our borrowings, which would have a material adverse effect on our business and financial condition. The lack of availability or access to build-to-suit leases and equipment financing leases could result in a decreased number of new restaurants and have a negative impact on our growth.

 

Our strategy to open a significant amount of company-owned and operated restaurants on non-traditional sites such as universities, office buildings, military bases, airports and casinos could fail.

 

The company currently has locations open and in development on military bases through the Army and Air Force Exchange Service, or AAFES. In addition, as of August 2019, the company has multiple requests for proposals, or RFPs, outstanding for other non-traditional locations beyond military locations. In the event these locations do not become available in the future or the company is not awarded specific sites, the total restaurant count of company-owned and operated locations could be materially affected. In addition, non-traditional sites tend to have a lower capital investment to build out and more favorable lease terms. In the event we cannot obtain non-traditional sites, the total outlay of capital expenditures could increase significantly over time for new locations outside of non-traditional installations.

 

A prolonged economic downturn could materially affect us in the future.

 

The restaurant industry is dependent upon consumer discretionary spending. The recession from late 2007 to mid-2009 reduced consumer confidence to historic lows, impacting the public’s ability and desire to spend discretionary dollars as a result of job losses, home foreclosures, significantly reduced home values, investment losses, bankruptcies and reduced access to credit, resulting in lower levels of customer traffic and lower average check sizes in fast casual restaurants, similar to ours. If the economy experiences another significant decline, our business and results of operations could be materially adversely affected and may result in a deceleration of the number and timing of new restaurant openings by us and our franchisees. Deterioration in customer traffic or a reduction in average check size would negatively impact our revenues and profitability and could result in reductions in staff levels, additional impairment charges and potential restaurant closures.

 

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A military conflict or large troop deployment could affect our revenue at company and franchise military locations in the future.

 

Our current company-operated non-traditional location strategy focuses on building restaurants on non-traditional locations such as universities, office buildings, military bases, airports and casinos. Our military bases are built in support of “Operation Live Well” and the desire of the United States military to offer healthier eating options on its bases. In the event of a large troop deployment or military conflict, the total number of troops present on any given base could be materially reduced and therefore our total revenues in these locations would likely be reduced accordingly.

 

The interests of our franchisees may conflict with ours or yours in the future and we could face liability from our franchisees or related to our relationship with our franchisees.

 

Franchisees, as independent business operators, may from time to time disagree with us and our strategies regarding the business or our interpretation of our respective rights and obligations under the franchise agreement and the terms and conditions of the franchisee/franchisor relationship. This may lead to disputes with our franchisees and we expect such disputes to occur from time to time in the future as we continue to offer franchises. Such disputes may result in legal action against us. To the extent we have such disputes, the attention, time and financial resources of our management and our franchisees will be diverted from our restaurants, which could have a material adverse effect on our business, financial condition, results of operations and cash flows even if we have a successful outcome in the dispute.

 

In addition, various state and federal laws govern our relationship with our franchisees and our potential sale of a franchise. A franchisee and/or a government agency may bring legal action against us based on the franchisee/franchisor relationships that could result in the award of damages to franchisees and/or the imposition of fines or other penalties against us.

 

The personal information that we collect may be vulnerable to breach, theft or loss that could adversely affect our reputation, results of operation and financial condition.

 

In the ordinary course of our business, we collect, process, transmit and retain personal information regarding our employees and their families, our franchisees, vendors and consumers, which can include social security numbers, social insurance numbers, banking and tax identification information, health care information and credit card information and our franchisees collect similar information. Some of this personal information is held and managed by our franchisees and certain of our vendors. A third-party may be able to circumvent the security and business controls we use to limit access and use of personal information, which could result in a breach of employee, consumer or franchisee privacy. A major breach, theft or loss of personal information regarding our employees and their families, our franchisees, vendors or consumers that is held by us or our vendors could result in substantial fines, penalties, indemnification claims and potential litigation against us which could negatively impact our results of operations and financial condition. As a result of legislative and regulatory rules, we may be required to notify the owners of the personal information of any data breaches, which could harm our reputation and financial results, as well as subject us to litigation or actions by regulatory authorities. Furthermore, media or other reports of existing or perceived security vulnerabilities in our systems or those of our franchisees or vendors, even if no breach has been attempted or has occurred, can adversely impact our brand and reputation, and thereby materially impact our business.

 

Significant capital investments and other expenditures could be required to remedy a breach and prevent future problems, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. These costs, which could be material, could adversely impact our results of operations during the period in which they are incurred. The techniques and sophistication used to conduct cyber-attacks and breaches, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. Accordingly, our expenditures to prevent future cyber-attacks or breaches may not be successful.

 

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Information technology system failures or interruptions or breaches of our network security may interrupt our operations, subject us to increased operating costs and expose us to litigation.

 

As our reliance on technology has increased, so have the risks posed to our systems. We rely heavily on our computer systems and network infrastructure across operations including, but not limited to, point-of-sale processing at our restaurants, as well as the systems of our third-party vendors to whom we outsource certain administrative functions. Despite our implementation of security measures, all of our technology systems are vulnerable to damage, disruption or failures due to physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from problems with transitioning to upgraded or replacement systems, internal and external security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. If any of our technology systems were to fail, and we were unable to recover in a timely way, we could experience an interruption in our operations. Furthermore, if unauthorized access to or use of our systems were to occur, data related to our proprietary information could be compromised. The occurrence of any of these incidents could have a material adverse effect on our future financial condition and results of operations. To the extent that some of our reporting systems require or rely on manual processes, it could increase the risk of a breach due to human error.

 

In addition, we receive and maintain certain personal information about our customers, franchisees and employees, and our franchisees receive and maintain similar information. For example, in connection with credit card transactions, we and our franchisees collect and transmit confidential credit card information by way of retail networks. We also maintain important internal data, such as personally identifiable information about our employees and franchisees and information relating to our operation. Our use of personally identifiable information is regulated by applicable laws and regulations. If our security and information systems or those of our franchisees are compromised or our business associates fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as our restaurant operations and results of operations and financial condition. As privacy and information security laws and regulations change, we may incur additional costs to ensure that we remain in compliance.

 

Further, the standards for systems currently used for transmission and approval of electronic payment transactions, and the technology utilized in electronic payment themselves, all of which can put electronic payment data at risk, are determined and controlled by the payment card industry, not by us. If someone is able to circumvent our data security measures or that of third parties with whom we do business, including our franchisees, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation, liability, and could seriously disrupt our operations. Any resulting negative publicity could significantly harm our reputation and could materially and adversely affect our business and operating results.

 

A number of our systems and processes are not fully integrated and, as a result, require us to manually estimate and consolidate certain information that we use to manage our business. To the extent that we are not able to obtain transparency into our operations from our systems, it could impair the ability of our management to react quickly to changes in the business or economic environment.

 

We anticipate expanding, upgrading and developing our information technology capabilities. If we are unable to successfully upgrade or expand our technological capabilities, we may not be able to take advantage of market opportunities, manage our costs and transactional data effectively, satisfy customer requirements, execute our business plan or respond to competitive pressures.

 

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We outsource certain aspects of our business to third-party vendors which subjects us to risks, including disruptions in our business and increased costs.

 

We have outsourced certain administrative functions for our business to third-party service providers. We also outsource certain information technology support services and benefit plan administration. In the future, we may outsource other functions to achieve cost savings and efficiencies. If the service providers to which we outsource these functions do not perform effectively, we may not be able to achieve the expected cost savings and may have to incur additional costs in connection with such failure to perform. Depending on the function involved, such failures may also lead to business disruption, transaction errors, processing inefficiencies, the loss of sales and customers, the loss of or damage to intellectual property through security breach, and the loss of sensitive data through security breach or otherwise. Any such damage or interruption could have a material adverse effect on our business, cause us to face significant fines, customer notice obligations or costly litigation, harm our reputation with our customers or prevent us from paying our collective suppliers or employees or receiving payments on a timely basis.

 

The failure to enforce and maintain our trademarks and protect our other intellectual property could materially adversely affect our business, including our ability to establish and maintain brand awareness.

 

We have registered Muscle Maker Grill® and certain other names used by our restaurants as trademarks or service marks with the United States Patent and Trademark Office. The Muscle Maker Grill® trademark is also registered in some form in one foreign country. Our current brand campaign, “Great Food with Your Health in Mind” has also been approved for registration with the United States Patent and Trademark Office. In addition, the Muscle Maker Grill logo, website name and address (www.musclemakergrill.com) and Facebook, Instagram, Twitter and other social media accounts are our intellectual property. The success of our business strategy depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and develop our branded products. If our efforts to protect our intellectual property are not adequate, or if any third-party misappropriates or infringes on our intellectual property, whether in print, on the Internet or through other media, the value of our brands may be harmed, which could have a material adverse effect on our business, including the failure of our brands and branded products to achieve and maintain market acceptance. There can be no assurance that all of the steps we have taken to protect our intellectual property in the United States and in foreign countries will be adequate. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States.

 

We or our suppliers maintain the seasonings and additives for our food offerings, as well as certain standards, specifications and operating procedures, as trade secrets or confidential information. We may not be able to prevent the unauthorized disclosure or use of our trade secrets or information, despite the existence of confidentiality agreements and other measures. While we try to ensure that the quality of our brand and branded products is maintained by all of our franchisees, we cannot be certain that these franchisees will not take actions that adversely affect the value of our intellectual property or reputation. If any of our trade secrets or information were to be disclosed to or independently developed by a competitor, our business, financial condition and results of operations could be materially adversely affected.

 

Third-party claims with respect to intellectual property assets, if decided against us, may result in competing uses or require adoption of new, non-infringing intellectual property, which may in turn adversely affect sales and revenues.

 

There can be no assurance that third parties will not assert infringement or misappropriation claims against us, or assert claims that our rights in our trademarks, service marks, trade dress and other intellectual property assets are invalid or unenforceable. Any such claims could have a material adverse effect on us or our franchisees if such claims were to be decided against us. If our rights in any intellectual property were invalidated or deemed unenforceable, it could permit competing uses of intellectual property which, in turn, could lead to a decline in restaurant revenues. If the intellectual property became subject to third-party infringement, misappropriation or other claims, and such claims were decided against us, we may be forced to pay damages, be required to develop or adopt non-infringing intellectual property or be obligated to acquire a license to the intellectual property that is the subject of the asserted claim. There could be significant expenses associated with the defense of any infringement, misappropriation, or other third-party claims.

 

We depend on our executive officers, the loss of whom could materially harm our business.

 

We rely upon the accumulated knowledge, skills and experience of our executive officers and significant employees. Our executive officers and significant employees have cumulative experience of more than 100 years in the food service industry. If they were to leave us or become incapacitated, we might suffer in our planning and execution of business strategy and operations, impacting our brand and financial results. We also do not maintain any key man life insurance policies for any of our employees.

 

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Matters relating to employment and labor law may adversely affect our business.

 

Various federal and state labor laws govern our relationships with our employees and affect operating costs. These laws include employee classifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates, citizenship requirements and other wage and benefit requirements for employees classified as non-exempt. Significant additional government regulations and new laws, including mandating increases in minimum wages, changes in exempt and non-exempt status, or mandated benefits such as health insurance could materially affect our business, financial condition, operating results or cash flow. Furthermore, if our or our franchisees’ employees unionize, it could materially affect our business, financial condition, operating results or cash flow.

 

We are also subject in the ordinary course of business to employee claims against us based, among other things, on discrimination, harassment, wrongful termination, or violation of wage and labor laws. Such claims could also be asserted against us by employees of our franchisees. Moreover, claims asserted against franchisees may at times be made against us as a franchisor. These claims may divert our financial and management resources that would otherwise be used to benefit our operations. The ongoing expense of any resulting lawsuits, and any substantial settlement payment or damage award against us, could adversely affect our business, brand image, employee recruitment, financial condition, operating results or cash flows.

 

In addition, various states in which we operate are considering or have already adopted new immigration laws or enforcement programs, and the United States Congress and Department of Homeland Security from time to time consider and may implement changes to federal immigration laws, regulations or enforcement programs as well. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome or reduce the availability of potential employees. Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our workers are found to be unauthorized, we could experience adverse publicity that negatively impacts our brand and may make it more difficult to hire and keep qualified employees. Termination of a significant number of employees who were unauthorized employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in additional adverse publicity. We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws. These factors could have a material adverse effect on our business, financial condition and results of operations.

 

Restaurant companies have been the target of class action lawsuits and other proceedings alleging, among other things, violations of federal and state workplace and employment laws. Proceedings of this nature are costly, divert management attention and, if successful, could result in our payment of substantial damages or settlement costs.

 

Our business is subject to the risk of litigation by employees, consumers, suppliers, franchisees, stockholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action and regulatory actions, is difficult to assess or quantify. In recent years, restaurant companies, including us, have been subject to lawsuits, including lawsuits, alleging violations of federal and state laws regarding workplace and employment conditions, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, overtime eligibility of managers and failure to pay for all hours worked.

 

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Occasionally, our customers file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to one of our restaurants, including actions seeking damages resulting from food-borne illness or accidents in our restaurants. We are also subject to a variety of other claims from third parties arising in the ordinary course of our business, including contract claims. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their customers. We may also be subject to lawsuits from our employees, the U.S. Equal Employment Opportunity Commission or others alleging violations of federal and state laws regarding workplace and employment conditions, discrimination and similar matters.

 

Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations and result in increases in our insurance premiums. In addition, they may generate negative publicity, which could reduce customer traffic and sales. Although we maintain what we believe to have adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims or any adverse publicity resulting from claims could adversely affect our business and results of operations.

 

If we or our franchisees face labor shortages or increased labor costs, our results of operations and our growth could be adversely affected.

 

Labor is a primary component in the cost of operating our company-operated and franchised restaurants. If we or our franchisees face labor shortages or increased labor costs because of increased competition for employees, higher employee-turnover rates, unionization of restaurant workers, or increases in the federally-mandated or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), our and our franchisees’ operating expenses could increase and our growth could be adversely affected.

 

We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal or state minimum wage and increases in the minimum wage will increase our labor costs and the labor costs of our franchisees. The federal minimum wage has been $7.25 per hour since July 24, 2009. Federally-mandated, state-mandated or locally-mandated minimum wages may be raised in the future. We may be unable to increase our menu prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected. Also, reduced margins of franchisees could make it more difficult to sell franchises. If menu prices are increased by us and our franchisees to cover increased labor costs, the higher prices could adversely affect transactions which could lower sales and thereby reduce our margins and the royalties that we receive from franchisees.

 

In addition, our success depends in part upon our and our franchisees’ ability to attract, motivate and retain a sufficient number of well-qualified restaurant operators, management personnel and other employees. Qualified individuals needed to fill these positions can be in short supply in some geographic areas. In addition, limited service restaurants have traditionally experienced relatively high employee turnover rates. Although we have not yet experienced any significant problems in recruiting employees, our and our franchisees’ ability to recruit and retain such individuals may delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could increase our and our franchisees’ labor costs and have a material adverse effect on our business, financial condition, results of operations or cash flows. If we or our franchisees are unable to recruit and retain sufficiently qualified individuals, our business and our growth could be adversely affected. Competition for these employees could require us or our franchisees to pay higher wages, which could also result in higher labor costs.

 

We are locked into long-term and non-cancelable leases and may be unable to renew leases at the end of their terms.

 

Many of our restaurant leases are non-cancelable and typically have initial terms up to between 5 and 10 years and 1-3 renewal terms of 5 years each that we may exercise at our option. Even if we close a restaurant, we are required to perform our obligations under the applicable lease, which could include, among other things, a provision for a closed restaurant reserve when the restaurant is closed, which would impact our profitability, and payment of the base rent, property taxes, insurance and maintenance for the balance of the lease term. In addition, in connection with leases for restaurants that we will continue to operate, we may, at the end of the lease term and any renewal period for a restaurant, be unable to renew the lease without substantial additional cost, if at all. As a result, we may close or relocate the restaurant, which could subject us to construction and other costs and risks. Additionally, the revenues and profit, if any, generated at a relocated restaurant may not equal the revenues and profit generated at the existing restaurant. As of September 2019, the Company currently has two restaurant locations that have been closed. We are attempting to settle the outstanding lease amounts with the landlord of which there is no guarantee. The outcome on these two leases could have a negative material impact on our cash reserves as well as future earnings.

 

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We and our franchisees are subject to extensive government regulations that could result in claims leading to increased costs and restrict our ability to operate or sell franchises.

 

We and our franchisees are subject to extensive government regulation at the federal, state and local government levels. These include, but are not limited to, regulations relating to the preparation and sale of food, zoning and building codes, franchising, land use and employee, health, sanitation and safety matters. We and our franchisees are required to obtain and maintain a wide variety of governmental licenses, permits and approvals. Difficulty or failure in obtaining them in the future could result in delaying or canceling the opening of new restaurants. Local authorities may suspend or deny renewal of our governmental licenses if they determine that our operations do not meet the standards for initial grant or renewal. This risk would be even higher if there were a major change in the licensing requirements affecting our types of restaurants.

 

We are subject to the Americans with Disabilities Act, or the ADA, and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas, including our restaurants. We may in the future have to modify restaurants, websites or other consumer interaction points by adding access ramps or redesigning certain architectural fixtures or software programs, for example, to provide service to or make reasonable accommodations for disabled persons. The expenses associated with these modifications could be material.

 

Our operations are also subject to the Occupational Safety and Health Act, which governs worker health and safety, the Fair Labor Standards Act, which governs such matters as minimum wages and overtime, the Immigration Reform and Control Act of 1986, and a variety of similar federal, state and local laws that govern these and other employment law matters. We and our franchisees may also be subject to lawsuits from our employees, the U.S. Equal Employment Opportunity Commission or others alleging violations of federal and state laws regarding workplace and employment matters, discrimination and similar matters, and we have been a party to such matters in the past. In addition, federal, state and local proposals related to paid sick leave or similar matters could, if implemented, have a material adverse effect on our business, financial condition and results of operations.

 

The Patient Protection and Affordable Care Act of 2010, or the PPACA, requires employers such as us to provide adequate and affordable health insurance for all qualifying employees or pay a monthly per-employee fee or penalty for non-compliance beginning in fiscal 2015. We began to offer such health insurance benefits on January 1, 2015 to all eligible employees, and may incur substantial additional expense due to organizing and maintaining the plan which we anticipate will be more expensive on a per person basis and for an increased number of employees who we anticipate at other times may elect to obtain coverage through a healthcare plan that we partially subsidize. If we fail to offer such benefits, or the benefits that we elect to offer do not meet the applicable requirements, we may incur penalties. Since the PPACA also requires individuals to obtain coverage or face individual penalties, employees who are currently eligible but elect not to participate in our healthcare plans may find it more advantageous to do so when such individual penalties increase in size. It is also possible that by making changes or failing to make changes in the healthcare plans offered by us, we will become less competitive in the market for our labor. Finally, implementing the requirements of the PPACA is likely to impose additional administrative costs. The costs and other effects of these new healthcare requirements cannot be determined with certainty, but they may significantly increase our healthcare coverage costs and could have a material adverse effect on our business, financial condition and results of operations.

 

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There is also a potential for increased regulation of certain food establishments in the United States, where compliance with a Hazard Analysis and Critical Control Points, or HACCP, approach would be required. HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption of the finished product. Many states have required restaurants to develop and implement HACCP Systems, and the United States government continues to expand the sectors of the food industry that must adopt and implement HACCP programs. For example, the Food Safety Modernization Act, or the FSMA, signed into law in January 2011, granted the U.S. Food and Drug Administration, or the FDA, new authority regarding the safety of the entire food system, including through increased inspections and mandatory food recalls. Although restaurants are specifically exempted from or not directly implicated by some of these new requirements, we anticipate that the new requirements may impact our industry. Additionally, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require us to take actions that could be costly for us or otherwise impact our business.

 

We are also subject to regulation by the Federal Trade Commission and subject to state laws that govern the offer, sale, renewal and termination of franchises and our relationship with our franchisees. The failure to comply with these laws and regulations in any jurisdiction or to obtain required approvals could result in a ban or temporary suspension on franchise sales, fines or the requirement that we make a rescission offer to franchisees, any of which could affect our ability to open new restaurants in the future and thus could materially adversely affect our business and operating results. Any such failure could also subject us to liability to our franchisees.

 

Federal, State and Local Regulation and Compliance

 

We are subject to extensive federal, state and local government regulation, including those relating to, among others, public health and safety, zoning and fire codes, and franchising. Failure to obtain or retain food or other licenses and registrations or exemptions would adversely affect the operations of restaurants. Although we have not experienced and do not anticipate any significant problems in obtaining required licenses, permits or approvals, any difficulties, delays or failures in obtaining such licenses, permits, registrations, exemptions, or approvals could delay or prevent the opening of, or adversely impact the viability of, a restaurant in a particular area.

 

The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. We believe federal and state environmental regulations have not had a material effect on operations, but more stringent and varied requirements of local government bodies with respect to zoning, land use and environmental factors could delay construction and increase development costs for new restaurants.

 

We are also subject to the Fair Labor Standards Act, the Immigration Reform and Control Act of 1986 and various federal and state laws governing such matters as minimum wages, overtime, unemployment tax rates, workers’ compensation rates, citizenship requirements and other working conditions. A significant portion of the hourly staff is paid at rates consistent with the applicable federal or state minimum wage and, accordingly, increases in the minimum wage will increase labor costs. In addition, the PPACA increased medical costs beginning in fiscal 2015. We are also subject to the Americans With Disabilities Act, which prohibits discrimination on the basis of disability in public accommodations and employment, which may require us to design or modify our restaurants to make reasonable accommodations for disabled persons.

 

In addition, we must comply with regulations adopted by the Federal Trade Commission, or the FTC, and with several state laws that regulate the offer and sale of franchises. The FTC’s Trade Regulation Rule on Franchising, or the FTC Rule, and certain state laws require that we furnish prospective franchisees with a franchise offering circular or Franchise Disclosure Document containing information prescribed by the FTC Rule and applicable state laws and regulations.

 

We also must comply with a number of state laws that regulate some substantive aspects of the franchisor-franchisee relationship. These laws may limit a franchisor’s ability to: terminate or not renew a franchise without good cause; prohibit interference with the right of free association among franchisees; alter franchise agreements; disapprove the transfer of a franchise; discriminate among franchisees with regard to charges, royalties and other fees; and place new stores near existing franchises. Bills intended to regulate certain aspects of franchise relationships have been introduced into Congress on several occasions during the last decade, but none have been enacted.

 

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We may become subject to liabilities arising from environmental laws that could likely increase our operating expenses and materially and adversely affect our business and results of operations.

 

We are subject to federal, state and local laws and regulations, including those concerning waste disposal, pollution, protection of the environment, and the presence, discharge, storage, handling, release and disposal of, and exposure to, hazardous or toxic substances. These environmental laws provide for significant fines and penalties for non-compliance and liabilities for remediation, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of hazardous toxic substances. Third parties may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such hazardous or toxic substances at, on or from our restaurants. Environmental conditions relating to the presence of hazardous substances at prior, existing or future restaurant sites could materially adversely affect our business, financial condition and results of operations. Further, environmental laws and regulations, and the administration, interpretation and enforcement thereof, are subject to change and may become more stringent in the future, each of which could materially adversely affect our business, financial condition and results of operations.

 

We are subject to federal, state and local laws and regulations relating to environmental protection, including regulation of discharges into the air and water, storage and disposal of waste and clean-up of contaminated soil and groundwater. Under various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of hazardous or toxic substances on, in or emanating from such property. Such liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances, and in some cases, we may have obligations imposed by indemnity provisions in our leases.

 

No assurance can be given that we have identified all of the potential environmental liabilities at our properties or that such liabilities will not have a material adverse effect on our financial condition.

 

Legislation and regulations requiring the display and provision of nutritional information for our menu offerings, and new information or attitudes regarding diet and health or adverse opinions about the health effects of consuming our menu offerings, could affect consumer preferences and negatively impact our results of operations.

 

Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the health effects of consuming our menu offerings. These changes have resulted in, and may continue to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings, or laws and regulations requiring us to disclose the nutritional content of our food offerings.

 

The PPACA establishes a uniform, federal requirement for certain restaurants to post certain nutritional information on their menus. Specifically, the PPACA amended the Federal Food, Drug and Cosmetic Act to, as of December 1, 2015, require chain restaurants with 20 or more locations operating under the same name and offering substantially the same menus to publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the context of a total daily calorie intake. The PPACA also requires covered restaurants to, as of December 1, 2015, provide to consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus and menu boards about the availability of this information. The PPACA further permits the United States Food and Drug Administration to require covered restaurants to make additional nutrient disclosures, such as disclosure of trans-fat content. An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our offerings.

 

Furthermore, a number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information to customers or have enacted legislation restricting the use of certain types of ingredients, portion sizes or packaging materials in restaurants.

 

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Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming. Additionally, if consumer health regulations or consumer eating habits change significantly, we may be required to modify or discontinue certain menu items, and we may experience higher costs associated with the implementation of those changes. Additionally, some government authorities are increasing regulations regarding trans-fats and sodium, which may require us to limit or eliminate trans-fats and sodium in our menu offerings or switch to higher cost ingredients or may hinder our ability to operate in certain markets. Some jurisdictions have banned certain cooking ingredients, such as trans-fats, which a limited number of our menu products contain in small, but measurable amounts, or have discussed banning certain products, such as large sodas. Removal of these products and ingredients from our menus could affect product tastes, customer satisfaction levels, and sales volumes, whereas if we fail to comply with these laws or regulations, our business could experience a material adverse effect.

 

We cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions or our ability to successfully implement the nutrient content disclosure requirements and to adapt our menu offerings to trends in eating habits. The imposition of additional menu-labeling laws could have an adverse effect on our results of operations and financial position, as well as on the restaurant industry in general.

 

We are exposed to the risk of natural disasters, unusual weather conditions, pandemic outbreaks, political events, war and terrorism that could disrupt business and result in lower sales, increased operating costs and capital expenditures.

 

Our headquarters, company-operated and franchised restaurant locations, third-party sole distributor and its facilities, as well as certain of our vendors and customers, are located in areas which have been and could be subject to natural disasters such as floods, hurricanes, tornadoes, fires or earthquakes. Adverse weather conditions or other extreme changes in the weather, including resulting electrical and technological failures, especially such events which occur in New Jersey and New York, as a result of the concentration of our restaurants, may disrupt our and our franchisees’ business and may adversely affect our and our franchisees’ ability to obtain food and supplies and sell menu items. Our business may be harmed if our or our franchisees’ ability to obtain food and supplies and sell menu items is impacted by any such events, any of which could influence customer trends and purchases and may negatively impact our and our franchisees’ revenues, properties or operations. Such events could result in physical damage to one or more of our or our franchisees’ properties, the temporary closure of some or all of our company-operated restaurants, franchised restaurants and third-party distributor, the temporary lack of an adequate work force in a market, temporary or long-term disruption in the transport of goods, delay in the delivery of goods and supplies to our company-operated and franchised restaurants and third-party distributor, disruption of our technology support or information systems, or fuel shortages or dramatic increases in fuel prices, all of which would increase the cost of doing business. These events also could have indirect consequences such as increases in the costs of insurance if they result in significant loss of property or other insurable damage. Any of these factors, or any combination thereof, could adversely affect our operations. Some of our restaurants are located on military bases. Our strategy as of July 2019 is to continue to build corporately owned and operated non-traditional restaurants, including on military bases, which in the event of a significant troop deployment, our total revenue and operating profits could be materially adversely affected.

 

We currently have two franchise located in Kuwait and upon the further expansion of our operations internationally, we could be adversely affected by violations of the Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws.

 

We anticipate developing additional franchised locations located outside the United States. The Foreign Corrupt Practices Act, and other similar anti-bribery and anti-kickback laws and regulations, generally prohibit companies and their intermediaries from making improper payments to non-United States officials for the purpose of obtaining or retaining business. We cannot assure you that we will be successful in preventing our franchisees or other agents from taking actions in violation of these laws or regulations. Such violations, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations and cash flows.

 

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Risks Related to this Offering and Ownership of our Common Stock

 

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Common Stock may decline.

 

As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Further, we are required to report any changes in internal controls on a quarterly basis. In addition, we must furnish a report by management on the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. As of December 31, 2018, we had material weakness in our internal controls. We need to improve the design, implementation, and testing of the internal controls over financial reporting required to comply with these obligations. If we continue to identify material weaknesses in our internal control over financial reporting or are unable to remedy our existing material weaknesses, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of its internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of the Common Stock could be negatively affected. We also could become subject to investigations by the stock exchange if we are ever listed on an exchange, Securities and Exchange Commission, or the Commission, or other regulatory authorities, which could require additional financial and management resources. In connection with management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified the following material weaknesses in our internal control over financial reporting as of September 30, 2019:

 

  We do not have written documentation of our internal control policies and procedures.
     
  We do not have sufficient resources in our accounting function, which restricts our ability to gather, analyze and properly review information related to financial reporting in a timely manner. In addition, due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.
     
  We have inadequate controls to ensure that information necessary to properly record transactions is adequately communicated on a timely basis from non-financial personnel to those responsible for financial reporting.
     
  We have significant deficiencies in the design and implementation of IT controls, specifically in the following areas: data center and network operations, access security and change management.

 

As an emerging growth company, our auditor is not required to attest to the effectiveness of our internal controls.

 

Our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting while we are an emerging growth company. This means that the effectiveness of our financial operations may differ from our peer companies in that they may be required to obtain independent registered public accounting firm attestations as to the effectiveness of their internal controls over financial reporting and we are not. While our management will be required to attest to internal control over financial reporting and we will be required to detail changes to our internal controls on a quarterly basis, we cannot provide assurance that the independent registered public accounting firm’s review process in assessing the effectiveness of our internal controls over financial reporting, if obtained, would not find one or more material weaknesses or significant deficiencies. Further, once we cease to be an emerging growth company we will be subject to independent registered public accounting firm attestation regarding the effectiveness of our internal controls over financial reporting. Even if management finds such controls to be effective, our independent registered public accounting firm may decline to attest to the effectiveness of such internal controls and issue a qualified report.

 

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As a smaller reporting company and will be exempt from certain disclosure requirements, which could make our Common Stock less attractive to potential investors.

 

Rule 12b-2 of the Exchange Act defines a “smaller reporting company” as an issuer that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that:

 

  had a public float of less than $250 million as of the last business day of our most recently completed second fiscal quarter, computed by multiplying the aggregate worldwide number of shares of our voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity; or
     
  in the case of an initial registration statement under the Securities Act, or the Exchange Act, for shares of our common equity, had a public float of less than $250 million as of a date within 30 days of the date of the filing of the registration statement, computed by multiplying the aggregate worldwide number of such shares held by non-affiliates before the registration plus, in the case of a Securities Act registration statement, the number of such shares included in the registration statement by the estimated public offering price of the shares; or
     
  in the case of an issuer whose public float as calculated under paragraph (1) or (2) of this definition was zero, had annual revenues of less than $100 million during the most recently completed fiscal year for which audited financial statements are available.

 

As a smaller reporting company, we will not be required and may not include a Compensation Discussion and Analysis section in our proxy statements; we will provide only two years of financial statements; and we need not provide the table of selected financial data. We also will have other “scaled” disclosure requirements that are less comprehensive than issuers that are not smaller reporting companies which could make our Common Stock less attractive to potential investors, which could make it more difficult for our stockholders to sell their shares.

 

As a public company, we have incurred and will continue to incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

 

As a public company, we have incurred and will continue to significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, and rules of the Commission and those of the NYSE American or Nasdaq Capital Market have imposed various requirements on public companies including requiring establishment and maintenance of effective disclosure and financial controls. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased and will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costlier. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs.

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In addition, we will be required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting the later of our second annual report on Form 10-K or the first annual report on Form 10-K following the date on which we are no longer an emerging growth company. Our compliance with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an adequate internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the exchange we are listed on, the Commission or other regulatory authorities, which would require additional financial and management resources.

 

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Our ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate financial statements. We expect that we will need to continue to improve existing, and implement new operational and financial systems, procedures and controls to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors as required under Section 404 of the Sarbanes-Oxley Act. This, in turn, could have an adverse impact on trading prices for our common stock, and could adversely affect our ability to access the capital markets.

 

We are an emerging growth company and subject to less rigorous public reporting requirements and cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Common Stock less attractive to investors.

 

We are a public reporting company under the Exchange Act, and thereafter publicly report on an ongoing basis as an “emerging growth company” (as defined in Rule 12b-2 of the Exchange Act) under the reporting rules set forth under the Exchange Act. For so long as we remain an “emerging growth company”, we may take advantage of certain exemptions from various reporting requirements that are applicable to other Exchange Act reporting companies that are not “emerging growth companies”, including but not limited to:

 

  Not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
  Taking advantage of extensions of time to comply with certain new or revised financial accounting standards;
  Being permitted to comply with reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
  Being exempt from the requirement to hold a non-binding advisory vote on executive compensations and stockholder approval of golden parachute payments not previously approved.

 

We expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We could be an emerging growth company for up to five years, circumstances could cause us to lose that status earlier, including if the market value of our Common Stock held by non-affiliates exceeds $700 million, if we issue $1.07 billion or more in non-convertible debt during a three-year period, or if our annual gross revenues exceed $1.07 billion. We would cease to be an emerging growth company on the last day of the fiscal year following the date of the fifth anniversary of our first sale of common equity securities under an effective registration statement or a fiscal year in which we have $1.07 billion in gross revenues. Finally, at any time we may choose to opt-out of the emerging growth company reporting requirements. If we choose to opt out, we will be unable to opt back in to being an emerging growth company. Even after we no longer qualify as an “emerging growth company”, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including exemption from compliance with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

 

We cannot predict if investors will find our Common Stock less attractive because we may rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and our stock price may be more volatile.

 

If our shares of Common Stock become subject to the penny stock rules, it would become more difficult to trade our shares.

 

The Commission has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price per share of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not obtain or retain a listing on the NYSE American or Nasdaq Capital Market and if the price of our Common Stock is less than $5.00 per share, our Common Stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before effecting a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that, before effecting any such transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our Common Stock, and therefore stockholders may have difficulty selling their shares.

 

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FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.

 

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. The FINRA requirements may make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may have the effect of reducing the level of trading activity in our Common Stock. As a result, fewer broker-dealers may be willing to make a market in our common stock, reducing a stockholder’s ability to resell shares of our Common Stock.

 

We are a holding company with no operations and rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations and to pay taxes, expenses and dividends.

 

We are a holding company with no direct operations that will hold as our principal assets (i) a 100% ownership interest in Muscle Maker Development, LLC, or Muscle Maker Development, which runs our franchising restaurant operations and (ii) a 100% ownership interest in Muscle Maker Corp., LLC, or Muscle Maker Corp., which runs our company-operated restaurants and (iii) a 100% ownership interest in Muscle Maker USA, Inc., or Muscle Maker USA (together with Muscle Maker Development and Muscle Maker Corp referred to as the Subsidiaries), and will rely on the Subsidiaries to provide us with funds necessary to meet any financial obligations. As such, we will have no independent means of generating revenue. We intend to cause the Subsidiaries to make distributions or, in the case of certain expenses, payments in an amount sufficient to allow us to pay our taxes and operating expenses. However, the Subsidiaries’ ability to make such distributions and payments to Muscle Maker may be subject to various limitations and restrictions, including the operating results, cash requirements and financial condition of the Subsidiaries, the applicable provisions of Nevada law that may limit the amount of funds available for distribution to the shareholders of the Subsidiaries, compliance by the Subsidiaries with restrictions, covenants and financial ratios related to existing or future indebtedness, and other agreements entered into by the Subsidiaries with third parties. If we do not have sufficient funds to pay tax or other liabilities or to fund our operations (i.e., as a result of the Subsidiaries’ inability to make distributions due to various limitations and restrictions), we may have to borrow funds, and thus our liquidity and financial condition could be materially and adversely affected.

 

Members of our board of directors and our executive officers will have other business interests and obligations to other entities.

 

Neither our directors nor our executive officers will be required to manage the Company as their sole and exclusive function and they may have other business interests and may engage in other activities in addition to those relating to the Company, provided that such activities do not compete with the business of the Company or otherwise breach their agreements with the Company. We are dependent on our directors and executive officers to successfully operate our Company. Their other business interests and activities could divert time and attention from operating our business.

 

You will experience immediate and substantial dilution in the net tangible book value per share of our common stock you purchase in this offering.

 

The public offering price will substantially exceed the net tangible book value per share of our common stock immediately after this offering based on the total value of our tangible assets less our total liabilities. Therefore, based on an assumed initial public offering price of $5.00 per share if you purchase shares of our common stock in this offering, you will suffer, as of December 31, 2019, immediate dilution of $4.01 per share, or $3.89 if the underwriter exercises its option to purchase additional shares of common stock, in net tangible book value per share after giving effect to the sale of 1,600,000 shares of common stock in this offering at an assumed initial public offering price of $5.00 per share (the assumed initial public offering price set forth on the cover page of this prospectus) after deducting underwriting discounts and commissions and estimated offering expenses payable by us. As a result of this dilution, as of December 31, 2019, investors purchasing shares of common stock from us in this offering will have contributed 20% of the total amount of our total gross funding to date but will own 22% of our equity. In addition, if outstanding options to purchase shares of our common stock are exercised in the future, you will experience additional dilution. See “Dilution.”

 

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Our share price may be volatile, and you may lose all or part of your investment.

 

The public offering price for our common stock sold in this offering will be determined by negotiation between us and the underwriter. This price may not reflect the market price of shares of our common stock following this offering and the price of shares of our common stock may decline. In addition, the market price of shares of our common stock could be highly volatile and may fluctuate substantially as a result of many factors, including:

 

  actual or anticipated fluctuations in our results of operations;

 

  announcement or expectation of additional financing efforts;

 

  variance in our financial performance from the expectations of market analysts;

 

  sales of our common stock by us, our insiders, or other stockholders;

 

  expiration of market stand-off or lock-up agreements;

 

  our involvement in litigation;

 

  our sale of common stock or other securities in the future;

 

  market conditions in our industry;

 

  changes in key personnel;

 

  the trading volume of our common stock;

 

  changes in the estimation of the future size and growth rate of our markets;

 

  the recruitment or departure of key personnel;

 

  general economic, industry, and market conditions; and

 

  the other factors described in the “Risk Factors” section of this prospectus.

 

In recent years, the stock markets in general have experienced extreme price and volume fluctuations. Broad market and industry factors may materially harm the market price of shares of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation, we could incur substantial costs and our management’s attention and resources could be diverted.

 

30
 

 

No public market for our common stock currently exists, and an active public trading market may not develop or be sustained following this offering.

 

Prior to this offering, there has been no public market for our common stock. Although we expect to apply to list our common stock on The Nasdaq Capital Market, an active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

 

The concentration of the capital stock ownership with our insiders after the initial public offering will likely limit the ability of the stockholders to influence corporate matters.

 

Following the offering described in this prospectus, the executive officers, directors, 5% or greater stockholders, and their respective affiliated entities will in the aggregate beneficially own approximately 9.92% of our outstanding common stock (assuming no exercise of the underwriter’s over-allotment option and no exercise of outstanding options). As a result, these stockholders, acting together, have control over matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate actions might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a corporate transaction that other stockholders may view as beneficial.

 

We have broad discretion in the use of a portion of the net proceeds from our initial public offering and may not use them effectively.

 

We currently intend to use the net proceeds from this offering to fund the expansion of the company-operated and franchise systems, marketing and advertising, restaurant level consumer technology systems and applications and for general corporate purposes, including working capital and capital expenditures. For more information, see “Use of Proceeds.” However, our management will have broad discretion in the application of the net proceeds. Our stockholders may not agree with the manner in which we choose to allocate the net proceeds from this offering. Our failure to apply these funds effectively could have a material adverse effect on our business, financial condition and results of operation. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income.

 

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

 

The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

We do not intend to pay dividends for the foreseeable future, which could reduce the attractiveness of our stock to some investors.

 

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases. In addition, we may incur debt financing to further finance our operations, the governing documents of which may contain restrictions on our ability to pay dividends.

 

31
 

 

Provisions in our articles of incorporation and bylaws and Nevada law may discourage, delay or prevent a change of control of our company and, therefore, may depress the trading price of our stock.

 

Our articles of incorporation and bylaws contain certain provisions that may discourage, delay or prevent a change of control that our stockholders may consider favorable. These provisions:

 

  prohibit stockholder action to elect or remove directors by majority written consent;

 

  provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;

 

  prohibit our stockholders from calling a special meeting of stockholders; and

 

  establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

 

We may be subject to securities litigation, which is expensive and could divert management attention.

 

In the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could seriously hurt our business. Any adverse determination in litigation could also subject us to significant liabilities.

 

32
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

 

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described under the sections in this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for us to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

 

This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.

 

EXPLANATORY NOTE REGARDING REDOMESTICATION

 

Our Board of Directors has adopted resolutions, subject to stockholder approval, to change the Company’s state of incorporation from California to Nevada, which we refer to as the Re-domicile. The Re-domicile was approved by the Company’s shareholders on October 28, 2019. On November 13, 2019, the Company merged with and into its wholly owned subsidiary, Muscle Maker, Inc., a Nevada corporation pursuant to an Agreement and Plan of Merger. Muscle Maker, Inc. - Nevada continued as the surviving entity of the migratory merger. Pursuant to the migratory merger, the Company changed its state of incorporation from California to Nevada and each share of its common stock converted into one share of common stock of the surviving entity, par value $0.0001 per share, in the migratory merger.

 

USE OF PROCEEDS

 

We estimate that we will receive net proceeds of approximately $6.9 million, or $8.0 million if the underwriter exercises its over-allotment option in full, from the sale of the common stock offered by us, based upon the assumed initial public offering price of $5.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $5.00 per share would increase (decrease) the net proceeds to us from this offering by $1,600,000, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

33
 

 

Although it is difficult to predict our liquidity requirements, based upon our current operating plan, and assuming successful completion of this offering, we believe we will have sufficient cash to meet the following milestones: open 18 corporate owned locations in 2020, execute the franchise sales program and update our technology infrastructure.

 

In furtherance of the foregoing, we intend to use the net proceeds of this offering as follows:

 

 

approximately $5.1 million for implementation of our business plan, including but not limited to (i) growth initiatives through opening new corporate stores, launching a franchise sales program and technology improvements, (ii) funding possible acquisition opportunities and (iii) funding a corporate marketing campaign; and

 

 

the balance of net proceeds for general corporate purposes, including working capital requirements and retiring $550,000 in debt. The debt to be retired consist of $450,000 of 15% convertible notes payable with a maturity date range of March 12, 2020 through August 26, 2020 of which $350,000 was borrowed in third and fourth quarter of 2018 and $100,000 which was borrowed in February 2019, $75,000 of 12% convertible notes payable with a maturity date of March 12, 2020 which was borrowed in September 2019 and a $25,000 10% convertible note payable with a maturity date of February 24, 2020 which was borrowed in July 2017. The debt to be repaid was primarily used to fund new Company-owned store locations.

 

The expected use of net proceeds of this offering represents our current intentions based upon our present plan and business conditions. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. We will have broad discretion in the application of the net proceeds in the category of “for general corporate purposes and to fund ongoing operations and expansion of our business,” and investors will be relying on our judgment regarding the application of the proceeds of this offering. For example, if we identify opportunities that we believe are in the best interests of our stockholders, we may use a portion of the net proceeds from this offering to acquire, invest in or license complementary products, technologies or businesses although we have no current commitments, understandings or agreements to do so. Depending on the outcome of our business activities and other unforeseen events, our plans and priorities may change and we may apply the net proceeds of this offering in different proportions than we currently anticipate.

 

Pending use of the proceeds from this offering as described above, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities or certificates of deposit.

 

DIVIDEND POLICY

 

We have never paid dividends on our common stock, and currently do not intend to pay any cash dividends on our common stock in the foreseeable future. In addition, we may incur debt financing in the future, the terms of which will likely prohibit us from paying cash dividends or distributions on our common stock. Even if we are permitted to pay cash dividends in the future, we currently anticipate that we will retain all future earnings, if any, to fund the operation and expansion of our business and for general corporate purposes.

 

CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and our capitalization as of September 30, 2019 on:

 

  an actual basis;
     
  our unaudited capitalization as of September 30, 2019, pro forma basis to give effect to the (i) issuance of 3,749 shares of common stock as compensation to the board of directors and (ii) issuance of 4,055,683 shares of common stock issued in connection with conversion of various convertible notes; and
     
 

a pro forma as adjusted basis, to give effect to our sale of 1,600,000 shares of common stock in this offering, at an assumed public offering price of $5.00 per share after deducting underwriting discounts and commissions, estimated offering expenses payable by us and retiring of $550,000 in debt. The debt to be retired consists of $450,000 of 15% convertible notes payable with a maturity date range of March 12, 2020 through August 26, 2020 of which $350,000 was borrowed in third and fourth quarter of 2018 and $100,000 which was borrowed in February 2019, $75,000 of 12% convertible notes payable with a maturity date of March 12, 2020 which was borrowed in September 2019 and a $25,000 10% convertible note payable with a maturity date of February 24, 2020 which was borrowed in July 2017. The debt to be repaid was primarily used to fund new Company-owned store locations.

 

34
 

 

This table should be read in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and related notes thereto appearing elsewhere in this prospectus.

 

   As of September 30, 2019 
   (unaudited) 
   Actual   Pro Forma   Pro Forma As Adjusted 
             
Cash and cash equivalents  $1,983,306   $1,983,306   $ 8,335,631  
Total debt at face value   10,311,458    823,458     273,458  
Stockholders’ equity:               
Common stock, $0.0001 par value; 14,285,714 shares authorized, and 1,655,032 shares issued and outstanding on an actual basis; 5,714,464 shares issued and outstanding on a pro forma basis (1) and 7,314,464 issued and outstanding on a pro forma, as adjusted basis (2)   165    571    731 
Additional paid-in capital   23,291,052    32,812,261    39,714,426 
Accumulated deficit   (29,777,110)   

(31,029,239

)    

(31,106,818

)
Total stockholders’ (deficit) equity   (6,485,893)   

1,783,593

    

8,608,339

 
Total capitalization  $3,825,565   $

2,607,051

   $

8,881,797

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $5.00 per share would increase (decrease) each of pro forma additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $1,600,000, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of one million in the number of shares we are offering would increase (decrease) each of pro forma additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $5,000,000, assuming the assumed initial public offering price per share, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

 

The outstanding share information in the table above excludes the following:

 

 

4,821 shares of our common stock issuable upon the exercise of stock options as of September 30, 2019, with a weighted average exercise price of $65.31 per share;

     
 

2,450,285 shares of our common stock issuable upon the exercise of outstanding warrants. which includes the modified warrants, as of January 6, 2020 with a weighted average exercise price of $5.51 per share;

     
 

534,546 shares of our common stock issuable upon the conversion of all of the convertible notes;

     
  129,999 shares of Common Stock to be issued upon the successful completion of an uplisting to a national exchange with a public offering of at least $3,000,000 with an additional 85,714 shares of Common Stock in the event the public offering is at least $5,000,000;
     
 

the issuance of an estimated 128,000 shares of common stock underlying the warrant to be issued to the underwriter in connection with this offering with a per share exercise price of $6.00; and

     
 

214,286 shares of our common stock reserved for future issuance under the 2019 Equity Incentive Plan.

 

35
 

 

DILUTION

 

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after this offering. The historical net tangible book value (deficit) of our common stock as of September 30, 2019 was $(9,540,791) million, or $(5.76) per share. Historical net tangible book value (deficit) per share represents our total tangible assets less our total liabilities, divided by the number of shares of outstanding common stock at September 30, 2019.

 

This section accounts for on a pro forma basis to give effect to the (i) issuance of 3,749 shares of common stock as compensation to the board of directors and (ii) issuance of 4,055,683 shares of common stock issued in connection with conversion of various convertible notes; and on a pro forma as adjusted basis, to give effect to our sale of 1,600,000 shares of common stock in this offering, at an assumed public offering price of $5.00 per share after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

Pro forma net tangible book value per share represents the amount of our tangible assets less our total liabilities, divided by the number of shares of common stock outstanding, after giving effect to a reverse stock split on basis of one for seven.

 

After giving effect to the receipt of the net proceeds from our sale of 1,600,000 shares of common stock in this offering at an assumed public offering price of $5.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, pro forma net tangible book value as of September 30, 2019 would have been $7,260,013, or $0.99 per share. This represents an immediate increase in pro forma net tangible book value of $1.00 per share to existing stockholders and an immediate dilution of $4.01 per share to new investors purchasing common stock in this offering.

 

The following table illustrates this dilution on a per share basis to new investors (unaudited):

 

Assumed public offering price per share  $5.00 
Pro forma net tangible book value per share as of September 30, 2019  $(0.0035)
Increase in pro forma net tangible book value per share after this offering  $1.00 
Pro forma net tangible book value per share after this offering  $0.99 
Dilution in pro forma net tangible book value per share to new investors  $4.01 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $5.00 per share would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $0.20 per share and the dilution to new investors by $0.80 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million in the number of shares of common stock offered by us would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $0.43 per share for each increase and $(0.56) per share for each decrease, and the dilution to new investors by $(0.43) per shared due to the increase and $0.56 per share due to the decrease, assuming the assumed initial public offering price per share remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriter exercises its over-allotment option in full, the pro forma net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $1.11 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $3.89 per share of common stock.

 

The table below summarizes as of September 30, 2019, on a pro forma basis described above, the number of shares of our common stock, the total consideration and the average price per share (i) paid to us by existing stockholders and (ii) to be paid by new investors purchasing our common stock in this offering at an assumed public offering price of $5.00 per share, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

               Average 
   Shares Purchased   Total Consideration   Price 
   Number   Percent   Amount   Percent   per Share 
Existing stockholders as of September 30, 2019   1,655,032    23%  $23,291,217    56%  $14.07 
Shares issued upon conversion of convertible notes   4,055,683    55%  $9,488,000    24%  $2.34 
Common stock issued as compensation to board of directors   3,749    %  $32,804    -%  $8.75 
New investors   1,600,000    22%  $8,000,000    20%  $5.00 
Total   7,314,464    100%  $40,812,021    100%  $5.58 

 

36
 

 

A $1.00 increase or decrease in the assumed initial public offering price would increase or decrease total consideration paid by new investors, total consideration paid by all stockholders and average price per share paid by all stockholders by $0.22, respectively, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of one million in the number of shares offered by us would increase or decrease total consideration paid by new investors and total consideration paid by all stockholders by approximately $4,550,000, respectively, assuming an initial public offering price of $5.00 per share, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of one million in the number of shares offered by us would increase or decrease the average price per share paid by all stockholders by $0.07 and $(0.07) per share, respectively, assuming an initial public offering price of $5.00, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

If the underwriter exercises its option to purchase 240,000 additional shares of our common stock in this offering in full, the percentage of shares of common stock held by existing stockholders will be reduced to 76% of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to 1,840,000, or 24% of the total number of shares of common stock to be outstanding after this offering.

 

To the extent that any outstanding options are exercised, new options are issued under our stock-based compensation plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. If all outstanding options under our incentive plans as of September 30, 2019 were exercised, then our existing stockholders, including the holders of these options, would own 78% of the total number of shares of common stock to be outstanding after this offering and investors participating in this offering would own 22% of the total number of shares of our common stock outstanding upon the completion of this offering. In such event, the total consideration paid by our existing stockholders, including the holders of these options, would be approximately $33.1 million, or 81% of approximately $41.1 million, the total consideration paid by investors participating in this offering would be $8.0 million, or 20% of $41.1 million, the average price per share paid by our existing stockholders would be $5.79 and the average price per share paid by investors participating in this offering would be $5.00.

 

If the underwriter exercises its option to purchase 240,000 additional shares of our common stock in this offering in full, and if all outstanding options under our incentive plans as of September 30, 2019 were exercised, then our existing stockholders, including the holders of these options, would own 76% of the total number of shares of common stock to be outstanding after this offering and investors participating in this offering would own 24% of the total number of shares of our common stock outstanding upon the completion of this offering. In such event, the total consideration paid by our existing stockholders, including the holders of these options, would be approximately $33.1 million, or 81% of $42.3 million, the total consideration paid by investors participating in this offering would be $9.2 million, or 23% of $42.3 million the average price per share paid by our existing stockholders would be $5.79 and the average price per share paid by investors participating in this offering would be $5.00.

 

The outstanding share information in the table above excludes the following:

 

 

4,821 shares of our common stock issuable upon the exercise of stock options as of September 30, 2019, with a weighted average exercise price of $65.31 per share;

     
 

2,450,285 shares of our common stock issuable upon the exercise of outstanding warrants, which includes the modified warrants, as of January 6, 2020 with a weighted average exercise price of $5.51 per share;

     
 

534,546 shares of our common stock issuable upon the conversion of all of the convertible notes;

     
  129,999 shares of Common Stock to be issued upon the successful completion of an uplisting to a national exchange with a public offering of at least $3,000,000 with an additional 85,714 shares of Common Stock in the event the public offering is at least $5,000,000;
     
 

the issuance of an estimated 128,000 shares of common stock underlying the warrant to be issued to the underwriter in connection with this offering with a per share exercise price of $6.00; and

     
 

214,286 shares of our common stock reserved for future issuance under the 2019 Equity Incentive Plan.

 

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

37
 

 

SELECTED HISTORICAL FINANCIAL DATA

 

The following table sets forth our selected financial data as of the dates and for the periods indicated. We have derived the statement of operations data for the years ended December 31, 2018 and 2017 from our audited financial statements included elsewhere in this prospectus. The statements of operations data for the nine months ended September 30, 2019 and 2018 and the balance sheet data as of September 30, 2019 have been derived from our unaudited financial statements included elsewhere in this prospectus. The following summary financial data should be read with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes and other information included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future and the results for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the full fiscal year.

 

Statement of Operations Data:

 

  

For the Nine Months Ended

September 30,

  

For the Year Ended

December 31,

 
   2019   2018   2018   2017 
   (unaudited)         
Revenues  $3,681,248   $4,620,646   $6,022,669   $7,929,137 
Operating Costs and Expenses   6,451,638    8,183,873    9,608,515    19,860,161 
(Loss) Income from Operations   (2,770,390)   (3,563,227)   (3,585,846)   (11,931,024)
Total Other (Expense) Income   (2,604,524)   (3,136,048)   (3,618,694)   (3,883,254)
Loss Before Income Taxes   (5,374,914)   (6,699,275)   (7,204,540)   (15,814,278)
Income tax provision   -    -    -    246,527 
Net Loss   (5,374,914)   (6,699,275)   (7,204,540)   (15,567,751)
Net loss attributable to the non-controlling interests   -    (2,071)   (2,071)   (2,357,303)
Net Loss Attributable to Controlling Interest  $(5,374,914)  $(6,697,204)  $(7,202,469)  $(13,210,448)
                     
Net Loss Attributable to Controlling Interest Per Share:  $(3.50)  $(5.70)  $(5.66)  $(15.31)

 

Net loss per share—basic and diluted(1)

Weighted average shares outstanding—basic and diluted(1)

(1) See Note 3 to our consolidated financial statements for an explanation of the method used to compute basic and diluted net loss per share.

 

Balance Sheet Data:

 

    As of September 30, 2019  
Balance Sheet Data:   Actual     Pro Forma (1)     Pro Forma As Adjusted (2)  
                   
Cash and cash equivalents   $ 1,983,306     $ 1,983,306     $ 8,335,631  
Working capital (deficit)/surplus     (5,484,122 )    

(1,202,269

   

5,700,056

 
Total assets     6,985,106       6,985,106       13,337,431  
Total liabilities     13,470,999      

3,950,196

     

3,400,196

 
Accumulated deficit     (29,777,110 )    

(31,029,239

)    

(31,106,818

)
Stockholders’ (deficit) equity   $ (6,485,893 )   $

1,783,593

    $

8,608,339

 

 

(1)

Pro forma basis to give effect to the (i) issuance of 3,749 shares of common stock as compensation to the board of directors and (ii) issuance of 4,055,683 shares of common stock issued in connection with conversion of various convertible notes.

   
(2)

Pro forma as adjusted basis, to give effect to our sale of 1,600,000 shares of common stock in this offering, at an assumed public offering price of $5.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and retiring of $550,000in debt. The debt to be retired consists of $450,000 of 15% convertible notes payable with a maturity date range of March 12, 2020 through August 26, 2020 of which $350,000 was borrowed in third and fourth quarter of 2018 and $100,000 which was borrowed in February 2019, $75,000 of 12% convertible notes payable with a maturity date of March 12, 2020 which was borrowed in September 2019 and a $25,000 10% convertible note payable with a maturity date of February 24, 2020 which was borrowed in July 2017. The debt to be repaid was primarily used to fund new Company-owned store locations. Each $1.00 increase (decrease) in the assumed initial public offering price of $5.00 per share, would increase (decrease) the pro forma amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $1,600,000, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price per share, would increase (decrease) the pro forma amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $5,000,000.

 

38
 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results may differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors.” See “Cautionary Note Regarding Forward-Looking Statements.”

 

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are 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. Actual results may differ from these estimates under different assumptions or conditions.

 

As used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” except where the context otherwise requires, the term “we,” “us,” “our,” or “the Company,” refers to the business of Muscle Maker, Inc.

 

OVERVIEW

 

We operate under the name Muscle Maker Grill as a franchisor and owner-operator of Muscle Maker Grill restaurants. As of September 30, 2019, our restaurant system included eight company-owned restaurants and thirty-one 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, hamburgers, wraps and flat breads. In addition, we feature freshly prepared entrée salads and an appealing selection of sides, protein shakes and fruit smoothies. We operate in the 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 healthy-inspired restaurant concepts such as Muscle Maker Grill.

 

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We believe our healthy-inspired 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 September 30, 2019, we had an accumulated deficit of $29,777,110 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, 2018, 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.

 

Key Financial Definitions

 

Total Revenues

 

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

 

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 partially offset by vendor rebates from company-owned stores. 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 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 grow. 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 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. Our rent strategy 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 downside protection for lower volume locations. While we cannot guarantee a favorable variable rent expense in all future leases, we have forecasted average rental costs as a percentage of total sales at 8%.

 

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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, and others. 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, and other considerations to potentially offset these rising costs of delivery.

 

Other Expenses Incurred for Closed Locations

 

Other expenses incurred for closed locations consists primarily of restaurant operating expenses incurred subsequent to store closures, relating to ongoing obligations to vendors under signed agreements.

 

Depreciation and Amortization

 

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

 

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. We expect to 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 Income (Expense), net

 

Other income (expenses) primarily consists of amortization of debt discounts on the convertible notes payable 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 September 30, 2019 Compared with Three Months Ended September 30, 2018

 

The following table represents selected items in our condensed consolidated statements of operations for the three months ended September 30, 2019 and 2018, respectively:

 

   For the Three Months Ended 
   September 30, 
   2019   2018 
Revenues:        
Company restaurant sales, net of discounts  $821,684   $721,300 
Franchise royalties and fees   252,744    324,080 
Franchise advertising fund contributions   39,030    - 
Other revenues   -    - 
Total Revenues   1,113,458    1,045,380 
           
Operating Costs and Expenses:          
Restaurant operating expenses:          
Food and beverage costs   339,454    266,678 
Labor   347,786    266,817 
Rent   96,832    66,599 
Other restaurant operating expenses   113,292    60,084 
Total restaurant operating expenses   897,364    660,178 
Costs of other revenues   -    - 
Depreciation and amortization   59,033    47,663 
Other expenses incurred for closed locations   -     269,659  
Franchise advertising fund expenses   39,030    - 
General and administrative expenses   1,514,123     916,268  
Total Costs and Expenses   2,509,550    1,893,768 
Loss from Operations   (1,396,092)   (848,388)
           
Other (Expense) Income:          
Other income (expense), net   112,673   65,933 
Interest expense, net   (614,100)   (94,655)
Loss on sale of CTI   -    - 
Amortization of debt discount   (451,310)   (267,358)
Total Other Expense, net   (952,737)   (296,080)
           
Loss Before Income Tax   (2,348,829)   (1,144,468)
Income tax provision   -    - 
Net Loss   (2,348,829)   (1,144,468)
Net loss attributable to the non-controlling interest   -    - 
Net Loss Attributable to Controlling Interest  $(2,348,829)  $(1,144,468)

 

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Revenues

 

Our revenues totaled $1,113,458 for the three months ended September 30, 2019 compared to $1,045,380 for the three months ended September 30, 2018. The 6.51% increase was primarily attributable to more stores generating restaurant sales, net of discounts in the current period compared to the prior period, partially offset by a decrease in franchise royalties and fees.

 

We generated restaurant sales, net of discounts, of $821,684 for the three months ended September 30, 2019 compared to $721,300, for the three months ended September 30, 2018. This represented an increase of $100,384, or 13.9%, which is primarily attributable to a higher corporate owned store count during the current period compared to the prior period.

 

Franchise royalties and fees for the three months ended September 30, 2019 and 2018 totaled $252,744 compared to $324,080, respectively. The $71,336 decrease is primarily attributable to lower royalty revenue from franchisees as there are fewer franchisee location during the current period as compared to the prior period due to store closures.

 

Franchise advertising fund contributions for the three months ended September 30, 2019 totaled $39,030.

 

The level of comparable restaurant sales, which reflect the change in year-over-year sales for restaurants in the fiscal month following 15 months of operation using a mid-month convention, will affect our sales growth and will continue to be a critical factor affecting our ability to generate profits because the profit margin on comparable restaurant sales is generally higher than the profit margin on new restaurant sales. While we have experienced negative comparable same store sales of 8% in 2018 and 12% during year-to-date 2019, we have developed new sales and marketing efforts including new menu strategy/evolution, new marketing initiatives designed to increase brand awareness, new operating platforms which improve speed of service and other tactics with the goal of providing positive same store sales in future years. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement these initiatives. It is possible such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in sales growth and ability to achieve profitability that would have a material adverse effect on our business, financial condition and results of operations.

 

Operating Costs and Expenses

 

Restaurant food and beverage costs for the three months ended September 30, 2019 and 2018 totaled $339,454, or 41.3%, as a percentage of restaurant sales, and $266,678, or 37.0%, as a percentage of restaurant sales, respectively. The $72,776 increase results primarily due a higher store count during the period as compared to the prior period as the Company opened and acquired more stores as compared to the prior period.

 

Restaurant labor for the three months ended September 30, 2019 and 2018 totaled $347,786, or 42.3%, as a percentage of restaurant sales, and $266,817, or 37.0%, as a percentage of restaurant sales, respectively. The $80,969 increase results primarily due a higher store count during the period as compared to the prior period as the Company opened and acquired more stores as compared to the prior period.

 

Restaurant rent expense for the three months ended September 30, 2019 and 2018 totaled $96,832, or 11.8%, as a percentage of restaurant sales, and $66,599, or 9.2%, as a percentage of restaurant sales, respectively.

 

Other restaurant operating expenses for the three months ended September 30, 2019 and 2018 totaled $113,292, or 13.8% as a percentage of restaurant sales, and $60,084, or 8.3% as a percentage of restaurant sales, respectively. The $53,208 increase is primarily due a higher store count during the period as compared to the prior period as the Company opened and acquired more stores as compared to the prior period.

 

Depreciation and amortization expense for the three months ended September 30, 2019 and 2018 totaled $59,033 and $47,663, respectively. The $11,370 increase is primarily attributable to depreciation expense related to additions of property and equipment compared to the prior periods.

 

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General and administrative expenses for the three months ended September 30, 2019 and 2018 totaled $1,514,123, or 136% of total revenues, and $916,268, or 87.6% of total revenues, respectively. The $597,855 increase is primarily attributable to an increase in salaries of approximately $61,000, an increase in professional fees and consulting expenses of approximately $355,000 due to restricted stock issuance to consultants, an increase in bad debt expense of approximately $147,000 related to the forgiveness of royalties owed by a franchisee.

 

Loss from Operations

 

Our loss from operations for the three months ended September 30, 2019 and 2018 totaled $1,396,092 or 125.4% of total revenues and $848,388 or 81.2% of total revenues, respectively. The increase of $547,704 in loss from operations is primarily attributable to an increase in total costs and expenses of approximately $382,000, partially offset by the increase in total revenues of approximately $68,000.

 

Other Expense, net

 

Other expense, net for the three months ended September 30, 2019 and 2018 totaled $952,737 and $296,080, respectively. The $656,657 decrease in expense was primarily attributable to an increase in amortization of debt discounts of $183,863 and an increase in interest expense incurred in connection with convertible and other notes payable of approximately $519,000, partially offset by an increase in other income, net of approximately $47,000 due to other income on settlements of accounts payables.

 

Net Loss

 

Our net loss for the three months ended September 30, 2019 increased by $1,204,361 to $2,348,829 as compared to $1,144,468 for the three months ended September 30, 2018, resulting from an increase in other expense as discussed above. Our net loss attributable to the controlling interest was $2,348,829 and $1,144,468 for the three months ended September 30, 2019 and 2018, respectively.

 

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Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018

 

The following table represents selected items in our condensed consolidated statements of operations for the nine months ended September 30, 2019 and 2018, respectively:

 

   For the Nine Months Ended 
   September 30, 
   2019   2018 
Revenues:        
Company restaurant sales, net of discounts  $2,438,284   $3,246,041 
Franchise royalties and fees   1,126,541    1,129,972 
Franchise advertising fund contributions   116,423    - 
Other revenues   -    244,633 
Total Revenues   3,681,248    4,620,646 
           
Operating Costs and Expenses:          
Restaurant operating expenses:          
Food and beverage costs   915,063    1,193,908 
Labor   966,020    1,383,941 
Rent   283,668    537,588 
Other restaurant operating expenses   367,611    621,312 
Total restaurant operating expenses   2,532,361    3,736,749 
Costs of other revenues   -    114,388 
Depreciation and amortization   190,637    145,615 
Other expenses incurred for closed locations   27,519    473,375 
Franchise advertising fund expenses   116,423    - 
General and administrative expenses   3,584,698    3,713,743 
Total Costs and Expenses   6,451,638    8,183,873 
Loss from Operations   (2,770,390)   (3,563,227)
           
Other (Expense) Income:          
Other expense, net   3,680    60,314 
Interest expense, net   (1,262,521)   (826,155)
Loss on sale of CTI   -    (456,169)
Amortization of debt discount   (1,345,683)   (1,914,038)
Total Other Expense, net   (2,604,524)   (3,136,048)
           
Loss Before Income Tax   (5,374,914)   (6,699,275)
Income tax provision   -    - 
Net Loss   (5,374,914)   (6,699,275)
Net loss attributable to the non-controlling interest   -    (2,071)
Net Loss Attributable to Controlling Interest  $(5,374,914)  $(6,697,204)

 

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Revenues

 

Our revenues totaled $3,681,248 for the nine months ended September 30, 2019 compared to $4,620,646 for the nine months ended September 30, 2018. The 20.3% decrease was primarily attributable to store closures in the prior period therefore fewer stores generating revenues in the current period as compared to the prior period and due the sale of CTI during May 2018.

 

We generated restaurant sales, net of discounts, of $2,438,284 for the nine months ended September 30, 2019 compared to $3,246,041, for the nine months ended September 30, 2018. This represented a decrease of $807,757, or 24.9%, which is primarily attributable to closures of corporate owned stores during the prior period as compared to the current period.

 

Franchise royalties and fees for the nine months ended September 30, 2019 and 2018 totaled $1,126,541 compared to $1,129,972, respectively. The $3,431 decrease is primarily attributable to an increase of approximately $216,000 in recognition of deferred revenue for franchise agreements pursuant to adoption of the new revenue accounting standard, partially offset by a decrease in royalty income of approximately $173,000 as there are fewer franchise store location as compared to the prior period and a decrease of approximately $48,000 in vendor rebates due to fewer franchise owned stores in the current period as compared to the prior period.

 

Franchise advertising fund contributions for the nine months ended September 30, 2019 totaled $116,423.

 

Other revenues decreased from $244,633 for the nine months ended September 30, 2018 to $0 for the nine months ended September 30, 2019, representing a decrease of $244,633 or 100%. The decrease is attributed to the sale of CTI in May 2018.

 

Operating Costs and Expenses

 

Restaurant food and beverage costs for the nine months ended September 30, 2019 and 2018 totaled $915,063, or 37.5 as a percentage of restaurant sales, and $1,193,908, or 36.8%, as a percentage of restaurant sales, respectively. The $278,845 decrease results primarily from various company owned store closures in the prior period compared to the current period.

 

Restaurant labor for the nine months ended September 30, 2019 and 2018 totaled $966,020, or 39.6%, as a percentage of restaurant sales, and $1,383,941, or 42.6%, as a percentage of restaurant sales, respectively. The $417,921 decrease results primarily due to company owned store closures as compared to the current period.

 

Restaurant rent expense for the nine months ended September 30, 2019 and 2018 totaled $283,667, or 11.63%, as a percentage of restaurant sales, and $537,588, or 16.56%, as a percentage of restaurant sales, respectively. The $253,921 decrease in rent expense is primarily due to the closure of company owned stores in the prior period compared to the current period.

 

Other restaurant operating expenses for the nine months ended September 30, 2019 and 2018 totaled $367,611, or 15.1% as a percentage of restaurant sales, and $621,312, or 19.1% as a percentage of restaurant sales, respectively. The $253,701 decrease is primarily due to store closures compared to the current period and improved efficiencies.

 

Cost of other revenues for the nine months ended September 30, 2019 and 2018 totaled $0, or 0%, as a percentage of other revenues, and $114,388, or 46.8%, as a percentage of other revenues, respectively. The decrease is due to the sale of CTI in May 2018.

 

Depreciation and amortization expense for the nine months ended September 30, 2019 and 2018 totaled $190,637 and $145,615, respectively. The $45,022 increase is primarily attributable to depreciation expense related to additions of property and equipment compared to the prior periods.

 

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General and administrative expenses for the nine months ended September 30, 2019 and 2018 totaled $3,584,698, or 80.4% of total revenues, and $3,713,743, or 80.4% of total revenues, respectively. The $129,045 decrease is primarily attributable to a decrease of approximately $137,000 in general and administrative CTI expenses due to the sale of CTI.

 

The level of comparable restaurant sales, which reflect the change in year-over-year sales for restaurants in the fiscal month following 15 months of operation using a mid-month convention, will affect our sales growth and will continue to be a critical factor affecting our ability to generate profits because the profit margin on comparable restaurant sales is generally higher than the profit margin on new restaurant sales. While we have experienced negative comparable same store sales of 8% in 2018 and 12% during year-to-date 2019, we have developed new sales and marketing efforts including new menu strategy/evolution, new marketing initiatives designed to increase brand awareness, new operating platforms which improve speed of service and other tactics with the goal of providing positive same store sales in future years. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement these initiatives. It is possible such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in sales growth and ability to achieve profitability that would have a material adverse effect on our business, financial condition and results of operations.

 

Loss from Operations

 

Our loss from operations for the nine months ended September 30, 2019 and 2018 totaled $2,770,390 or 75.3% of total revenues and $3,563,227 or 77.1% of total revenues, respectively. The decrease of $792,837 in loss from operations is primarily attributable to a decrease in total costs and expenses of approximately $1,732,235, partially offset by the decrease in total revenues of approximately $939,000 due to fewer corporate owned stores generating revenues in the current period as compared to the prior period.

 

Other Expense, net

 

Other expense, net for the nine months ended September 30, 2019 and 2018 totaled $2,604,524 and $3,136,048, respectively. The $531,524 decrease in expense was primarily attributable to a decrease in amortization of debt discounts of approximately $568,000, a decrease due to the loss on sale of CTI of approximately $456,000 partially offset by an increase in interest expense of approximately $436,000 incurred in connection with the convertible notes and other notes payable.

 

Net Loss

 

Our net loss for the nine months ended September 30, 2019 decreased by $1,324,361 to $5,374,914 as compared to $6,699,275 for the nine months ended September 30, 2018, resulting from a decrease in loss of operations and total other expense, net, as discussed above. Our net loss attributable to our controlling interest was $5,374,914 and $6,697,204 (net of non-controlling interest of $2,071) for the nine months ended September 30, 2019 and 2018, respectively.

 

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Year Ended December 31, 2018 Compared with Year Ended December 31, 2017

 

The following table represents selected items in our consolidated statements of operations for the years ended December 31, 2018 and 2017, respectively:

 

   For the Years Ended 
   December 31, 
   2018   2017 
Revenues:          
Company restaurant sales, net of discounts  $3,869,758   $5,215,285 
Franchise royalties and fees   1,908,278    1,988,167 
Other revenues   244,633    725,685 
Total Revenues   6,022,669    7,929,137 
           
Operating Costs and Expenses:          
Restaurant operating expenses:          
Food and beverage costs   1,432,653    1,946,643 
Labor   1,646,264    2,634,730 
Rent   681,176    927,610 
Other restaurant operating expenses   853,197    1,283,286 
Total restaurant operating expenses   4,613,290    6,792,269 
Costs of other revenues   114,388    330,367 
Depreciation and amortization   200,885    446,369 
Impairment of intangible assets   -    410,225 
Impairment of property and equipment   -    1,375,790 
Impairment of goodwill   -    2,521,468 
Other expenses incurred for closed locations   321,821    - 
General and administrative expenses   4,358,131    7,983,673 
Total Costs and Expenses   9,608,515    19,860,161 
Loss from Operations   (3,585,846)   (11,931,024)
           
Other (Expense) Income:          
Other income   96,221    88,874 
Interest expense, net   (983,499)   (15,336)
Loss on sale of CTI   (456,169)   - 
Amortization of debt discounts   (2,275,247)   (3,956,792)
Total Other Expense, net   (3,618,694)   (3,883,254)
           
Loss Before Income Tax   (7,204,540)   (15,814,278)
Income tax provision   -    246,527 
Net Loss   (7,204,540)   (15,567,751)
Net loss attributable to the non-controlling interest   (2,071)   (2,357,303)
Net Loss Attributable to Controlling Interest  $(7,202,469)  $(13,210,448)

 

Year Ended December 31, 2018 Compared with Year Ended December 31, 2017

 

Revenues

 

Our revenues totaled $6,022,669 for the year ended December 31, 2018 compared to $7,929,137 for the year ended December 31, 2017. The 24.0% decrease was primarily attributable to the eight store closures throughout 2018 and partially due to the sale of CTI in May 2018.

 

We generated restaurant sales, net of discounts, of $3,869,758 for the year ended December 31, 2018 compared to $5,215,285, for the year ended December 31, 2017. This represented a decrease of $1,345,527, or 25.8%, which resulted primarily from the eight store closures throughout 2018.

 

Franchise royalties and fees for the year ended December 31, 2018 and December 31, 2017 totaled $1,908,278 compared to $1,988,167, respectively. The $79,889 decrease is primarily attributable to a decrease in royalty income of approximately $56,000.

 

Other revenues decreased to $244,633 for the year ended December 31, 2018 from $725,685 for the year ended December 31, 2017, representing a decrease of $481,052 or 66.3%. The decrease is primarily attributed to the sale of CTI in May 2018.

 

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Operating Costs and Expenses

 

Operating costs and expenses consist of restaurant food and beverage costs, restaurant labor expense, restaurant rent expense, other restaurant operating expenses, cost of other revenues, depreciation and amortization expenses, impairment losses and general and administrative expenses.

 

Restaurant food and beverage costs for the year ended December 31, 2018 and December 31, 2017 totaled $1,432,653 or 37.0% as a percentage of company restaurant net sales, and $1,946,643 or 37.3%, as a percentage of company restaurant net sales, respectively. The $513,990 decrease resulted primarily from the eight store closures throughout 2018. The current management team has been working on implementing new operational measures to lower these costs in 2019.

 

Restaurant labor for the year ended December 31, 2018 and December 31, 2017 totaled $1,646,264, or 42.5%, as a percentage of company restaurant net sales, and $2,634,730, or 50.5%, as a percentage of company restaurant net sales, respectively. The $988,466 decrease results primarily from eight store closures throughout 2018. The decrease as a percentage of sales is primarily attributable to improved efficiencies and fewer new locations that are being opened as compared to the prior period as new locations typically have higher starting operation efficiencies. The current management team has started to implement new operational measures to lower these costs as a percentage of corporate restaurant net sales in 2019.

 

Restaurant rent expense for the year ended December 31, 2018 and December 31, 2017 totaled $681,176, or 17.6% as a percentage of restaurant sales, and $927,610, or 17.8%, as a percentage of restaurant sales, respectively. The $246,434 decrease is primarily from the settlement on leases for the eight store closures throughout 2018. The decrease as a percentage of sales is primarily attributable to the impact of the eight store closures. Our current strategy focuses on new company-owned, non-traditional locations such as military bases with variable rent structures no greater than 10% of corporate restaurant revenue net sales, which would represent a significantly lower number than what was reported in 2018 and 2017.

 

Other restaurant operating expenses for the year ended December 31, 2018 and December 31, 2017 totaled $853,197, or 22.0% as a percentage of restaurant sales, and $1,283,286, or 24.6% as a percentage of restaurant sales, respectively. The $430,089 decrease is primarily attributed to eight store closures throughout 2018.

 

Cost of other revenues for the years ended December 31, 2018 and December 31, 2017 totaled $114,388, or 46.8%, as a percentage of other revenue, and $330,367, or 45.5%, as a percentage of other revenue, respectively. The $215,979 decrease resulted from the sale of CTI during May 2018. The increase as a percentage of other revenues resulted primarily from increased costs from service providers with no corresponding increase in monthly services fees being charged to our customers.

 

Other Expenses incurred for closed locations for the year ended December 31, 2018 totaled $321,821. This consisted predominantly of rent expense of approximately $258,000 incurred for closed locations while the remaining expense of approximately $64,000 consisted of expenses that would typically be consider as other restaurant operating expenses if the locations where not closed but we were still obligated to pay.

 

Depreciation and amortization expense for the year ended December 31, 2018 and December 31, 2017 totaled $200,885 and $446,369, respectively. The $245,484 decrease is primarily attributable to lower depreciation expense of property and equipment due to the eight store closures throughout 2018 and impairment of property and equipment taken in the latter part of 2017.

 

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General and administrative expenses for the year ended December 31, 2018 and December 31, 2017 totaled $4,358,131, or 72.4% of total revenue, and $7,983,673, or 100.7% of total revenue, respectively. The $3,625,542 decrease is primarily attributable to less expenses incurred for developing our corporate infrastructure The decrease is also attributed to a decrease in third party accounting and legal fees of approximately $1,259,000 as we used fewer temporary accounting services and incurred fewer legal reorganizational research to facilitate SEC financial statement preparation. In addition, there were decreases of approximately $1,001,000 in salaries, wages and benefits, approximately $348,000 in stock-based compensation as fewer restricted stock vest in the current period as compared to prior period, approximately $430,000 in CTI expenses due to the sale of CTI and approximately $583,000 in marketing expenses. The decreases are partially offset by an increase of approximately $584,000 in consulting expenses, approximately $82,000 in rent expense incurred due to the corporate office closure and the new corporate office space, approximately $73,000 in recruiting fees incurred specifically in connection with hiring new executives during 2018.

 

The level of comparable restaurant sales, which reflect the change in year-over-year sales for restaurants in the fiscal month following 15 months of operation using a mid-month convention, will affect our sales growth and will continue to be a critical factor affecting our ability to generate profits because the profit margin on comparable restaurant sales is generally higher than the profit margin on new restaurant sales. While we have experienced negative comparable same store sales of 8% in 2018 and 12% during year-to-date 2019, we have developed new sales and marketing efforts including new menu strategy/evolution, new marketing initiatives designed to increase brand awareness, new operating platforms which improve speed of service and other tactics with the goal of providing positive same store sales in future years. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement these initiatives. It is possible such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in sales growth and ability to achieve profitability that would have a material adverse effect on our business, financial condition and results of operations.

 

Loss from Operations

 

Our loss from operations for the year ended December 31, 2018 and December 31, 2017 totaled $3,585,846, or 59.5% of total revenues and $11,931,024, or 150.5% of total revenue, respectively. This resulted in a decrease of $8,345,178 in loss from operations which is primarily attributable to a decrease in total cost of expenses of approximately $10,250,000 offset by a decrease in total revenues of approximately $1,907,000.

 

Other (Expense) Income

 

Other expense for the year ended December 31, 2018 and December 31, 2017 totaled $3,618,694 and $3,883,254, respectively. The $264,560 decrease in expense was primarily attributable to a decrease in amortization of debt discounts of approximately $1,682,000 in connection with convertible notes payable as compared to the prior year, partially offset by an increase in interest expense of approximately $968,000 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 year ended December 31, 2018 decreased by $8,363,211 to $7,204,540 as compared to 15,567,751 for the year ended December 31, 2017, resulting primarily from a significant decrease in loss of operations and a decrease in other (expense) income as discussed above. Our net loss attributable to the controlling interest was $7,202,469 and $13,210,448 for the year ended December 31, 2018 and December 31, 2017, respectively.

 

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Liquidity and Capital Resources

 

Liquidity

 

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

 

   September 30, 2019   December 31, 2018 
Cash  $1,983,306   $357,842 
Working Capital Deficiency  $5,484,122   $3,918,443 
Convertible notes payable, including related parties and Former Parent, net of debt discount of $1,340,590 and $1,582,378, respectively  $8,879,868   $2,307,853 
Other notes payable, including related parties  $91,000   $560,000 

 

Availability of Additional Funds and Going Concern

 

Based upon our working capital deficiency and accumulated deficit of $5,484,122 and $29,777,110, respectively, as of September 30, 2019, plus our use of $2,013,398 of cash in operating activities during the nine months ended September 30, 2019, 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.

 

As of September 30, 2019, our gross outstanding debt of $10,958,631, together with interest at rates ranging between 10% - 15% per annum, was due on various dates through January 2021. As of September 30, 2019, our outstanding debt was as follows:

 

   Principal 
Maturity Date  Amount 
Past Due   181,508 
12/31/2019   647,173 
3/31/2020   2,301,000 
6/30/2020   1,355,000 
9/30/2020   1,235,000 
12/31/2020   4,738,950 
03/31/2021   500,000 
   $10,958,631 

 

Subsequent to September 30, 2019, we entered into conversion agreements and related addendums with various note holders and converted an aggregate of $9,488,000 convertible notes payables into 4,055,683 shares of our common stock of which 91,429 shares were issued to related parties.

 

Our principal source of liquidity to date has been provided by (i) investment from American Restaurant Holdings, a private equity restaurant group, (ii) loans and convertible loans from related and unrelated third parties and (iii) the sale of common stock through private placements. More specifically, American Restaurant Holdings has invested over $5 million in growth capital into our Company to date. Additionally, as of November 30, 2019 we have been funded through proceeds from the issuance of 15% Senior Secured Promissory Notes and 12% Secured Convertible Notes offered through various private offerings in the aggregate amount of approximately $8,003,000 as of the date of filing of this report.

 

We expect to have ongoing needs for working capital in order to fund operations and expand operations by opening additional corporate-owned restaurants. To that end, we intend to raise additional capital in 2019 and 2020 to raise additional funds through equity or debt financing. The amount required will be dependent on current operations, future investment and the execution of our business plan. We estimate our cash needs for the balance of 2019 and 2020 is approximately $7.2 million which will allow us to open 18 company owned and operated locations in 2020 and execute on our franchise sales program. However, there can be no assurance that we will be successful in securing additional capital. If we are unsuccessful, we may need to initiate cost reductions, forego business development opportunities, seek extensions of time to fund our liabilities, or 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 shares sold in this offering 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 prospectus have been prepared in conformity with accounting principles generally accepted in the United States of America or 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 nine months ended September 30, 2019 and September 30, 2018

 

During the nine months ended September 30, 2019 and 2018, we used cash of $3,296,114 and $1,752,878, respectively, in operations. Our net cash used in operating activities for the nine months ended September 30, 2019 was primarily attributable to our net loss of $5,374,914, adjusted for net non-cash items in the aggregate amount of $2,303,898 and $225,098 of net cash provided by changes in the levels of operating assets and liabilities. Our net cash used in operating activities for the nine months ended September 30, 2018 was primarily attributable to our net loss of $6,699,275, adjusted for net non-cash items in the aggregate amount of $4,074,686, partially offset by $871,711 of net cash provided by changes in the levels of operating assets and liabilities.

 

During the nine months ended September 30, 2019, net cash used in investing activities was $932,422, of which $864,451 was used to purchase property and equipment, $60,186 was used to issue a loan to a former franchisee and $35,116 was used to acquire a former franchisee location, partially offset by $27,331 of loans repayments by franchisees and a related party. During the nine months ended September 30, 2018, net cash used in investing activities was $33,121, of which $78,754 was used to purchase property and equipment and to issue loans to franchisees in the amount of $9,689, partially offset by $55,322 of loans repayments by franchisees and a related party.

 

Net cash provided by financing activities for the nine months ended September 30, 2019 was $5,854,000 of which $191,000 proceeds from convertible notes, related party and notes payable from other related party and $6,373,000 proceeds from convertible notes to various parties, partially offset by repayments of various convertible notes, including a related party, of $150,000 and $560,000 of repayments of other notes payables, including related parties. Net cash provided by financing activities for the nine months ended September 30, 2018 was $2,474,117 of which $650,000 proceeds from convertible notes from other related parties, $1,331,000 proceeds from convertible notes to various parties, $460,000 proceeds from other notes payable, $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 note payable and $132,459 net repayments of advances to Former Parent.

 

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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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Revenue Recognition

 

During the first quarter 2019, we adopted Topic 606 “Revenue from Contracts with Customers” for revenue recognition related to contracts with customers and applied the guidance modified retrospectively. Under the new guidance, revenue is recognized in accordance with a five-step revenue model, as follows: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. In applying this five-step model, we have made significant judgments in identifying the promised goods or services in our contracts with franchisees that are distinct, and which represent separate performance obligations.

 

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. We recorded retail store revenues of $821,684 and $2,438,284 during the three and nine months ended September 30, 2019, respectively. We recorded retail store revenues of $721,300 and $3,246,041 during the three and nine months ended September 30, 2018, respectively.

 

We sell gift cards which do not have an expiration date, and it does not deduct dormancy fees from outstanding gift card balances. We recognize revenue from gift cards as restaurant revenue once the Company satisfies its obligations to provide food and beverages to the customer upon redemption of the gift card.

 

Franchise Royalties and Fees

 

Franchise revenues consist of royalties, franchise fees and rebates. Royalties are based on a percentage of franchisee net sales revenue. We recognize the royalties as the underlying sales occur. We recorded revenue from royalties of $165,412 and $563,772 during the three and nine months ended September 30, 2019, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. We recorded revenue from royalties of $244,820 and $736,384 during the three and nine months ended September 30, 2018, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations.

 

We provide our franchisees with management expertise, training, pre-opening assistance, and restaurant operating assistance in exchange for the multi-unit development fees and franchise fees. We capitalize these fees upon collection from the franchisee, which results in recognizing franchise fee revenue on a straight-line basis over the life of the related franchise agreements and any exercised renewal periods. Cash payments are due upon the execution of the related franchise agreement. Our performance obligation with respect to franchise fee revenues consists of a license to utilize our brand for a specified period of time, which is satisfied equally over the life of each franchise agreement. We recorded revenue from franchise fees of $16,132 and $342,649 during the three and nine months ended September 30, 2019, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. We recorded revenue from royalties of $20,000 and $125,000 during the three and nine months ended September 30, 2018, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations.

 

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 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. We recorded revenue from rebates of $71,200 and $220,120 during the three and nine months ended September 30, 2019, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. We recorded revenue from rebates of $59,260 and $268,588 during the three and nine months ended September 30, 2018, 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.

 

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Other Revenues

 

Through our subsidiary, CTI, which was sold in May 2018, we derived revenue from the sale of point of sale 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. We recorded $0 and $244,633, respectively, of revenues from these technology sales and services during the three and nine months ended September 30, 2018.

 

Deferred Revenue

 

Deferred revenue primarily includes initial franchise fees received by us, which are being amortized over the life of our franchise agreements, as well as unearned vendor.

 

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.

 

Franchise Advertising Fund Contributions

 

Under our franchise agreements, we and our franchisees are required to contribute a certain percentage of revenues to a national advertising fund. Our national advertising services are provided on a system-wide basis and, therefore, not considered distinct performance obligations for individual franchisees. In accordance with Topic 606, we recognize these sales-based advertising contributions from franchisees as franchise revenue when the underlying franchisee sales occur. We record the related advertising expenses as incurred under general and administrative expenses. When an advertising contribution fund is over-spent at year end, advertising expenses will be reported on the condensed consolidated statement of operations in an amount that is greater than the revenue recorded for advertising contributions. Conversely, when an advertising contribution fund is under-spent at a period end, we will accrue advertising costs up to advertising contributions recorded in revenue. We recorded contributions from franchisees of $39,030 and $116,423, respectively, during the three and nine months ended September 30, 2019, which is included in franchise advertising fund contributions on the accompanying condensed consolidated statements of operations.

 

Income Taxes

 

We account for income taxes under Accounting Standards Codification, or 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.

 

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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.

 

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 condensed consolidated statements of operations.

 

Recently Issued Accounting Pronouncements

 

See Note 3 to our condensed consolidated financial statements for the nine months ended September 30, 2019.

 

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.

 

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BUSINESS

 

Our Business Overview

 

Muscle Maker is a fast casual restaurant concept that specializes in preparing healthy-inspired, high-quality, fresh, made-to-order lean, protein-based meals featuring chicken, seafood, pasta, hamburgers, wraps and flat breads. In addition, we feature freshly prepared entrée salads and an appealing selection of sides, protein shakes and fruit smoothies. We operate in the fast casual restaurant segment.

 

We believe our healthy-inspired restaurant concept delivers a highly differentiated customer experience. We combine the quality and hospitality that customers commonly associate with our full service and fast casual restaurant competitors with the convenience and value customers generally expect from traditional fast food restaurants, but in a healthy-inspired way. The following core values form the foundation of our brand:

 

  Quality. Commitment to provide high quality, healthy-inspired food for a perceived wonderful experience for our guests.
     
  Empowerment and Respect. We seek to empower our employees to take initiative and give their best while respecting themselves and others to maintain an environment for team work and growth.
     
  Service. Provide world class service to achieve excellence each passing day.
     
  Value. Our combination of high-quality, healthy-inspired food, empowerment of our employees, world class service, all delivered at an affordable price, strengthens the value proposition for our customers.

 

In striving for these goals, we aspire to connect with our target market and create a great brand with a strong and loyal customer base.

 

As of December 31, 2018, Muscle Maker and our subsidiaries and franchisees operated 40 Muscle Maker Grill restaurants located in 16 states and Kuwait, six of which are owned and operated by Muscle Maker, and 34 are franchise restaurants. Our restaurants generated company-operated restaurant revenue of $3,869,758 and $5,215,285 for the years ended December 31, 2018 and 2017, respectively. For the years ended December 31, 2018 and 2017, our total revenues which includes royalty, franchise fee and rebate revenue derived from franchisees were $6,022,669 and $7,929,137, respectively. For the fiscal years ended December 31, 2018 and 2017, we reported net losses of $7,204,540 and $15,567,751, respectively, and negative cash flows from operating activities of $2,726,737 and $3,676,999, respectively. As of December 31, 2018, we had an aggregate accumulated deficit of $23,833,656. We anticipate that we will continue to report losses and negative cash flow. As a result of the net loss and cash flow deficit for the year ended December 31, 2018 and other factors, our independent auditors issued an audit opinion with respect to our financial statements for the year ended December 31, 2018 that indicated that there is a substantial doubt about our ability to continue as a going concern.

 

We are the owner of the trade name and service mark Muscle Maker Grill® and other trademarks and intellectual property we use in connection with the operation of Muscle Maker Grill® restaurants. We license the right to use the Muscle Maker Grill® trademarks and intellectual property to our wholly-owned subsidiaries, Muscle Maker Development and Muscle Maker Corp., and to further sublicense them to our franchisees for use in connection with Muscle Maker Grill® restaurants.

 

Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the fourth quarter due to reduced November and December traffic and higher traffic in the first, second, and third quarters.

 

Our Industry

 

We operate within the Limited Service Restaurant, or LSR, segment, of the United States restaurant industry, which includes quick service restaurants, or QSR, and fast-casual restaurants. We offer fast-casual quality food combined with quick-service speed, convenience and value across multiple dayparts. We believe our differentiated, high-quality healthy-inspired menu delivers great value all day, every day and positions us to compete successfully against both QSR and fast-casual concepts.

 

We expect that the upward trend towards healthier eating will attract and increase consumer demand for fresh and hand-prepared dishes, leading to a positive impact on our sales.

 

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Our Strategy

 

In implementing our business plan, we plan to pursue the following strategies.

 

Expand Our System-Wide Restaurant Base. We believe we are in the early stages of executing our turn-around growth strategy with 39 current locations in 14 states and two current locations in Kuwait, as of September 30, 2019.

 

  Our near-term strategy focuses on two areas of unit level growth – company-operated restaurants in non-traditional locations such as universities, office buildings, military bases, and other locations and franchise growth by expanding in existing markets, especially in the Northeast region of the United States. We believe this market provides an attractive opportunity to leverage our brand awareness and infrastructure.
     
 

For year ended 2018, we opened one new company-operated and five new franchise restaurants. During 2019, we opened two new company-operated restaurants and four franchise operated locations in 2019. In addition to the United States-based franchise locations, our international franchisee in Kuwait opened one location in fiscal 2019.

 

Improve Comparable Restaurant Sales. We plan to improve comparable restaurant sales growth through the following strategies:

 

  Menu Strategy and Evolution: We will continue to adapt our menu to create entrees that complement our healthy-inspired offerings and that reinforce our differentiated fast casual positioning. We believe we have opportunities for menu innovation as we look to provide customers more choices through customization and limited time alternative proteins, recipes and other healthy-inspired ingredients. Our marketing and operations teams collaborate to ensure that the items developed in our test stores can be executed to our high standards in our restaurants with the speed and value that our customers have come to expect. To provide added variety, from time to time we introduce limited time offerings such as our grass-fed hamburger bar menu, “wrappy” new year featuring six new wraps, fish tacos and other seasonal items. Some of these items have been permanently added to the menu.
     
  Attract New Customers Through Expanded Brand Awareness: We expect to attract new customers as the Muscle Maker Grill brand becomes more widely known due to new restaurant openings and marketing efforts focused on broadening the reach and appeal of our brand. We expect consumers will become more familiar with Muscle Maker Grill as we continue to penetrate our markets, which we believe will benefit our existing restaurant base. Our marketing strategy centers on our “Great Food with Your Health in Mind” campaign, which highlights the desirability of healthy-inspired food and in-house made or proprietary recipe quality of our food. We also utilize social media community engagement and public relations to increase the reach of our brand. Additionally, our system will benefit from increased contributions to our franchise marketing and various franchise advertising funds as we continue to grow our restaurant base.
     
  Increase Existing Customer Frequency: We are striving to increase customer frequency by providing a service experience and environment that “complements” the quality of our food and models our culture. We expect to accomplish this by enhancing customer engagement, while also improving throughput, order execution and quality. We not only work to reward our guests with a great value and guest experience, we reward them for their loyalty as well. Frequent Muscle Maker Grill guests can take advantage of our loyalty program, Muscle Maker Grill Rewards, in which points are awarded for every dollar spent towards free or discounted menu items as well as special, members only coupon offers. Members use the Muscle Maker Grill Rewards app to receive notifications announcing new menu items, special events and more. The program is enjoyed by over 55,000 guests as of September 2019.
     
  Continue to Grow Dayparts: We currently have multiple dayparts and segments where revenue is generated in our restaurants. These dayparts and segments include: lunch, dinner, catering, smoothies/protein shakes and meal plans in all of our locations, and breakfast and grab & go in select locations. We expect to drive growth across our dayparts through enhanced menu offerings, innovative merchandising and marketing campaigns. We plan to continue introducing and marketing limited time offers to increase occasions across our dayparts as well as to educate customers on our lunch and dinner offerings. Muscle Maker Grill has the unique opportunity to grow in the pre-packaged, portion-controlled meal plan category. Currently, we offer pre-portioned and packaged meal plans for consumers who want to specifically plan their weekly meals for dietary or nutritional needs. These meal plans can be delivered to a consumer’s home or picked up at each restaurant location. Third party delivery services such as Uber Eats, Grub Hub, DoorDash, Seamless and others offer an expansion beyond the four walls of our restaurants and represents a growing segment of our overall revenue.

 

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Improve Profitability. We continuously look for ways to improve profitability, while also investing in personnel and infrastructure to support our future growth. We will seek to further enhance margins over the long-term by maintaining fiscal discipline and leveraging fixed costs. We constantly focus on restaurant-level operations, including cost controls, while ensuring that we do not sacrifice the quality and service for which we are known. Additionally, as our restaurant base grows, we expect that we will be able to leverage support costs as general and administrative expenses grow at a slower rate than our revenues.

 

Our Strengths

 

Iconic and Unique Concept: We provide guests healthy-inspired versions of mainstream-favorite dishes that are intended to taste great, in our effort to make it convenient, affordable and enjoyable to eat healthier. Our diverse menu was created for everyone – fitness enthusiasts, those starting their journey to a healthier lifestyle, and people trying to eat better while on-the-go. More than just food, our restaurants are a friendly, relaxed and social environment where guests can enjoy great tasting food and engage with fellow health enthusiasts in their area.

 

We are focused on expanding our presence within new and existing markets by continuing to add franchise partners to our system and increasing the number of corporate-owned locations. Our corporate-owned restaurants will focus on an expansion in non-traditional locations such as military bases. We believe our concept is a unique fit with the military’s “Operation Live Well” campaign and a focus on healthier eating habits.

 

Innovative, Healthy-Inspired Menu: Providing “Great Food with You