Form 1-A Issuer Information UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 1-A
REGULATION A OFFERING STATEMENT
UNDER THE SECURITIES ACT OF 1933
OMB APPROVAL

FORM 1-A

OMB Number: 3235-0286


Estimated average burden hours per response: 608.0

1-A: Filer Information

Issuer CIK
0001701756
Issuer CCC
XXXXXXXX
DOS File Number
Offering File Number
024-10689
Is this a LIVE or TEST Filing? LIVE TEST
Would you like a Return Copy?
Notify via Filing Website only?
Since Last Filing?

Submission Contact Information

Name
Phone
E-Mail Address

1-A: Item 1. Issuer Information

Issuer Infomation

Exact name of issuer as specified in the issuer's charter
Muscle Maker, Inc
Jurisdiction of Incorporation / Organization
CALIFORNIA
Year of Incorporation
2014
CIK
0001701756
Primary Standard Industrial Classification Code
RETAIL-EATING & DRINKING PLACES
I.R.S. Employer Identification Number
47-2555533
Total number of full-time employees
71
Total number of part-time employees
102

Contact Infomation

Address of Principal Executive Offices

Address 1
2200 Space Park Drive
Address 2
Suite 310
City
HOUSTON
State/Country
TEXAS
Mailing Zip/ Postal Code
77058
Phone
732-669-1200

Provide the following information for the person the Securities and Exchange Commission's staff should call in connection with any pre-qualification review of the offering statement.

Name
LAURA ANTHONY
Address 1
Address 2
City
State/Country
Mailing Zip/ Postal Code
Phone

Provide up to two e-mail addresses to which the Securities and Exchange Commission's staff may send any comment letters relating to the offering statement. After qualification of the offering statement, such e-mail addresses are not required to remain active.

Financial Statements

Industry Group (select one) Banking Insurance Other

Use the financial statements for the most recent period contained in this offering statement to provide the following information about the issuer. The following table does not include all of the line items from the financial statements. Long Term Debt would include notes payable, bonds, mortgages, and similar obligations. To determine "Total Revenues" for all companies selecting "Other" for their industry group, refer to Article 5-03(b)(1) of Regulation S-X. For companies selecting "Insurance", refer to Article 7-04 of Regulation S-X for calculation of "Total Revenues" and paragraphs 5 and 7 of Article 7-04 for "Costs and Expenses Applicable to Revenues".

Balance Sheet Information

Cash and Cash Equivalents
$ 335724.00
Investment Securities
$ 0.00
Total Investments
$
Accounts and Notes Receivable
$ 201096.00
Loans
$
Property, Plant and Equipment (PP&E):
$ 1072545.00
Property and Equipment
$
Total Assets
$ 8254024.00
Accounts Payable and Accrued Liabilities
$ 944096.00
Policy Liabilities and Accruals
$
Deposits
$
Long Term Debt
$ 1078881.00
Total Liabilities
$ 3936592.00
Total Stockholders' Equity
$ 4317432.00
Total Liabilities and Equity
$ 8254024.00

Statement of Comprehensive Income Information

Total Revenues
$ 4953205.00
Total Interest Income
$
Costs and Expenses Applicable to Revenues
$ 1213776.00
Total Interest Expenses
$
Depreciation and Amortization
$ 204486.00
Net Income
$ -4219687.00
Earnings Per Share - Basic
$ -0.51
Earnings Per Share - Diluted
$ -0.51
Name of Auditor (if any)
Marcum LLP

Outstanding Securities

Common Equity

Name of Class (if any) Common Equity
Common Stock
Common Equity Units Outstanding
10270160
Common Equity CUSIP (if any):
000000000
Common Equity Units Name of Trading Center or Quotation Medium (if any)
NONE

Preferred Equity

Preferred Equity Name of Class (if any)
Preferred Stock
Preferred Equity Units Outstanding
0
Preferred Equity CUSIP (if any)
000000000
Preferred Equity Name of Trading Center or Quotation Medium (if any)
None

Debt Securities

Debt Securities Name of Class (if any)
Convertible Notes
Debt Securities Units Outstanding
1550000
Debt Securities CUSIP (if any):
000000000
Debt Securities Name of Trading Center or Quotation Medium (if any)
None

1-A: Item 2. Issuer Eligibility

Issuer Eligibility

Check this box to certify that all of the following statements are true for the issuer(s)

1-A: Item 3. Application of Rule 262

Application Rule 262

Check this box to certify that, as of the time of this filing, each person described in Rule 262 of Regulation A is either not disqualified under that rule or is disqualified but has received a waiver of such disqualification.

Check this box if "bad actor" disclosure under Rule 262(d) is provided in Part II of the offering statement.

1-A: Item 4. Summary Information Regarding the Offering and Other Current or Proposed Offerings

Summary Infomation

Check the appropriate box to indicate whether you are conducting a Tier 1 or Tier 2 offering Tier1 Tier2
Check the appropriate box to indicate whether the financial statements have been audited Unaudited Audited
Types of Securities Offered in this Offering Statement (select all that apply)
Equity (common or preferred stock)
Does the issuer intend to offer the securities on a delayed or continuous basis pursuant to Rule 251(d)(3)? Yes No
Does the issuer intend this offering to last more than one year? Yes No
Does the issuer intend to price this offering after qualification pursuant to Rule 253(b)? Yes No
Will the issuer be conducting a best efforts offering? Yes No
Has the issuer used solicitation of interest communications in connection with the proposed offering? Yes No
Does the proposed offering involve the resale of securities by affiliates of the issuer? Yes No
Number of securities offered
3333333
Number of securities of that class outstanding
10270160

The information called for by this item below may be omitted if undetermined at the time of filing or submission, except that if a price range has been included in the offering statement, the midpoint of that range must be used to respond. Please refer to Rule 251(a) for the definition of "aggregate offering price" or "aggregate sales" as used in this item. Please leave the field blank if undetermined at this time and include a zero if a particular item is not applicable to the offering.

Price per security
$ 6.0000
The portion of the aggregate offering price attributable to securities being offered on behalf of the issuer
$ 19999998.00
The portion of the aggregate offering price attributable to securities being offered on behalf of selling securityholders
$ 0.00
The portion of the aggregate offering price attributable to all the securities of the issuer sold pursuant to a qualified offering statement within the 12 months before the qualification of this offering statement
$ 0.00
The estimated portion of aggregate sales attributable to securities that may be sold pursuant to any other qualified offering statement concurrently with securities being sold under this offering statement
$ 0.00
Total (the sum of the aggregate offering price and aggregate sales in the four preceding paragraphs)
$ 19999998.00

Anticipated fees in connection with this offering and names of service providers

Underwriters - Name of Service Provider
TriPoint Global Equities, LLC
Underwriters - Fees
$ 75000.00
Sales Commissions - Name of Service Provider
TriPoint Global Equities, LLC
Sales Commissions - Fee
$ 1500000.00
Finders' Fees - Name of Service Provider
N/A
Finders' Fees - Fees
$ 0.00
Audit - Name of Service Provider
Marcum LLP
Audit - Fees
$ 250000.00
Legal - Name of Service Provider
Legal and Compliance, LLC
Legal - Fees
$ 100000.00
Promoters - Name of Service Provider
CrowdfundX
Promoters - Fees
$ 145000.00
Blue Sky Compliance - Name of Service Provider
Legal and Compliance, LLC
Blue Sky Compliance - Fees
$ 17000.00
CRD Number of any broker or dealer listed:
143174
Estimated net proceeds to the issuer
$ 17912998.00
Clarification of responses (if necessary)
Net Proceeds Calculation of $17,912,998 includes Additional Estimated Expenses of: Escrow Agent Fees: $2,500; and Financial Printer Fees: $3,500. CrowdfundX is also receiving 28,333 shares of common stock of Muscle Maker at a value of $6.00 per share.

1-A: Item 5. Jurisdictions in Which Securities are to be Offered

Jurisdictions in Which Securities are to be Offered

Using the list below, select the jurisdictions in which the issuer intends to offer the securities

Selected States and Jurisdictions
ALABAMA
ALASKA
ARIZONA
ARKANSAS
CALIFORNIA
COLORADO
CONNECTICUT
DELAWARE
FLORIDA
GEORGIA
HAWAII
IDAHO
ILLINOIS
INDIANA
IOWA
KANSAS
KENTUCKY
LOUISIANA
MAINE
MARYLAND
MASSACHUSETTS
MICHIGAN
MINNESOTA
MISSISSIPPI
MISSOURI
MONTANA
NEBRASKA
NEVADA
NEW HAMPSHIRE
NEW JERSEY
NEW MEXICO
NEW YORK
NORTH CAROLINA
NORTH DAKOTA
OHIO
OKLAHOMA
OREGON
PENNSYLVANIA
RHODE ISLAND
SOUTH CAROLINA
SOUTH DAKOTA
TENNESSEE
TEXAS
UTAH
VERMONT
VIRGINIA
WASHINGTON
WEST VIRGINIA
WISCONSIN
WYOMING
DISTRICT OF COLUMBIA
PUERTO RICO

Using the list below, select the jurisdictions in which the securities are to be offered by underwriters, dealers or sales persons or check the appropriate box

None
Same as the jurisdictions in which the issuer intends to offer the securities
Selected States and Jurisdictions

ALABAMA
ALASKA
ARIZONA
ARKANSAS
CALIFORNIA
COLORADO
CONNECTICUT
DELAWARE
FLORIDA
GEORGIA
HAWAII
IDAHO
ILLINOIS
INDIANA
IOWA
KANSAS
KENTUCKY
LOUISIANA
MAINE
MARYLAND
MASSACHUSETTS
MICHIGAN
MINNESOTA
MISSISSIPPI
MISSOURI
MONTANA
NEBRASKA
NEVADA
NEW HAMPSHIRE
NEW JERSEY
NEW MEXICO
NEW YORK
NORTH CAROLINA
NORTH DAKOTA
OHIO
OKLAHOMA
OREGON
PENNSYLVANIA
RHODE ISLAND
SOUTH CAROLINA
SOUTH DAKOTA
TENNESSEE
TEXAS
UTAH
VERMONT
VIRGINIA
WASHINGTON
WEST VIRGINIA
WISCONSIN
WYOMING
DISTRICT OF COLUMBIA
PUERTO RICO

1-A: Item 6. Unregistered Securities Issued or Sold Within One Year

Unregistered Securities Issued or Sold Within One Year

None

Unregistered Securities Issued

As to any unregistered securities issued by the issuer of any of its predecessors or affiliated issuers within one year before the filing of this Form 1-A, state:

(a)Name of such issuer
Muscle Maker, Inc
(b)(1) Title of securities issued
Common Stock
(2) Total Amount of such securities issued
4130359
(3) Amount of such securities sold by or for the account of any person who at the time was a director, officer, promoter or principal securityholder of the issuer of such securities, or was an underwriter of any securities of such issuer.
0
(c)(1) Aggregate consideration for which the securities were issued and basis for computing the amount thereof.
3,899,527 shares issued at average price of $1.54 per share ($6,014,571 cash proceeds) and 230,833 shares issued for services rendered at average value of $6.88 per share.
(2) Aggregate consideration for which the securities listed in (b)(3) of this item (if any) were issued and the basis for computing the amount thereof (if different from the basis described in (c)(1)).

Unregistered Securities Issued

As to any unregistered securities issued by the issuer of any of its predecessors or affiliated issuers within one year before the filing of this Form 1-A, state:

(a)Name of such issuer
Muscle Maker, Inc
(b)(1) Title of securities issued
Warrants and Options to Purchase Common Stock
(2) Total Amount of such securities issued
657597
(3) Amount of such securities sold by or for the account of any person who at the time was a director, officer, promoter or principal securityholder of the issuer of such securities, or was an underwriter of any securities of such issuer.
0
(c)(1) Aggregate consideration for which the securities were issued and basis for computing the amount thereof.
None. The warrants and options are exercisable for 657,597 shares at an exercise price of $7.00 per share.
(2) Aggregate consideration for which the securities listed in (b)(3) of this item (if any) were issued and the basis for computing the amount thereof (if different from the basis described in (c)(1)).

Unregistered Securities Issued

As to any unregistered securities issued by the issuer of any of its predecessors or affiliated issuers within one year before the filing of this Form 1-A, state:

(a)Name of such issuer
Muscle Maker, Inc
(b)(1) Title of securities issued
Convertible Promissory Notes
(2) Total Amount of such securities issued
1550000
(3) Amount of such securities sold by or for the account of any person who at the time was a director, officer, promoter or principal securityholder of the issuer of such securities, or was an underwriter of any securities of such issuer.
0
(c)(1) Aggregate consideration for which the securities were issued and basis for computing the amount thereof.
$1,550,000 in cash proceeds. The $1,550,000 principal amount and accrued interest of the convertible promissory notes are convertible into common stock at $3.00 per share (50% of the initial offering price).
(2) Aggregate consideration for which the securities listed in (b)(3) of this item (if any) were issued and the basis for computing the amount thereof (if different from the basis described in (c)(1)).

Unregistered Securities Act

(e) Indicate the section of the Securities Act or Commission rule or regulation relied upon for exemption from the registration requirements of such Act and state briefly the facts relied upon for such exemption
The foregoing issuances were pursuant to Rule 506 of Regulation D, Section 4(2) and Rule 701 of the Securities Act of 1933, as amended, for transactions by an issuer not involving any public offering.

 

As filed with the Securities and Exchange Commission on September 21 , 2017

File No. 024-10689

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 1-A

 

REGULATION A OFFERING CIRCULAR

UNDER THE SECURITIES ACT OF 1933

 

MUSCLE MAKER, INC

(Exact name of issuer as specified in its charter)

 

California

(State of other jurisdiction of incorporation or organization)

 

2200 Space Park Drive, Suite 310

Houston, Texas 77058

Phone: (732) 669-1200

(Address, including zip code, and telephone number,

including area code of issuer’s principal executive office)

 

Robert E. Morgan

Chief Executive Officer

Muscle Maker, Inc

2200 Space Park Drive, Suite 310

Houston, Texas 77058

Phone: (732) 669-1200

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

Copy to:

Laura Anthony, Esq.

Legal & Compliance, LLC

330 Clematis Street, Suite 217

West Palm Beach, FL 33401

Phone: 561-514-0936

Fax: 561-514-0832

 

5810   47-2555533

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

 

 
 

 

Preliminary Offering Circular

September 21 , 2017

Subject to Completion

 

An offering statement pursuant to Regulation A relating to these securities has been filed with the Securities and Exchange Commission. Information contained in this Preliminary Offering Circular is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted before the offering statement filed with the Commission is qualified. This Preliminary Offering Circular shall not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sales of these securities in any state in which such offer, solicitation or sale would be unlawful before registration or qualification under the laws of any such state. We may elect to satisfy our obligation to deliver a Final Offering Circular by sending you a notice within two business days after the completion of our sale to you that contains the URL where the Offering Circular was filed may be obtained.

 

 

MUSCLE MAKER, INC

 

3,333,333 Shares of Common Stock

Minimum Purchase: 75 shares of Common Stock ($450.00)

 

MUSCLE MAKER, INC, a California corporation (the “Company”), is offering up to 3,333,333 shares (“Shares”) of its common stock, no par value per share (“Common Stock”), at a fixed price of $6.00 per share of Common Stock, with an aggregate amount of $19,999,998, in a “Tier 2 Offering” under Regulation A (the “Offering”). There is no minimum number of Shares that needs to be sold in order for funds to be released to the Company and for this Offering to close. The minimum investment amount per investor is $450 (75 shares of Common Stock); however, we can waive the minimum purchase requirement on a case to case basis in our sole discretion. The subscriptions, once received, are irrevocable. TriPoint Global Equities, LLC, a registered broker-dealer and a member of the Financial Industry Regulatory Authority (“FINRA”), has agreed to act as our exclusive, lead managing selling agent (the “Selling Agent”) to offer the Shares to prospective investors on a “best efforts” basis. In addition, the Selling Agent may engage one or more sub selling agents or selected dealers. The Selling Agent is not purchasing the Shares, and is not required to sell any specific number or dollar amount of the Shares in the Offering. The Selling Agent and other broker dealers will receive compensation for sales of the securities offered hereby at a fixed commission rate of 7.5% of the gross proceeds of the Offering, however this commission rate will be reduced to 4% for any proceeds received from investors introduced by the Company to the Selling Agent. See “Plan of Distribution” in this Offering Circular. None of the Shares offered are being sold by present security holders of the Company.

 

We expect to commence the sale of the Shares as of the date on which the Offering Statement of which this Offering Circular is a part is declared qualified by the United States Securities and Exchange Commission (“SEC”). The Offering will terminate at the earlier of: (1) the date at which $19,999,998 of Shares has been sold, (2) the date which is one year after this Offering being qualified by the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”), or (3) the date on which this Offering is earlier terminated by the Company in its sole discretion (the “Termination Date”).

 

In addition, we have engaged WhoYouKnow LLC, a California limited liability company, d/b/a CrowdfundX (“Offering Campaign Consultant”), to assist us in the planning, public relations and promotion of this Offering, utilizing the BANQ Online Platform.

 

No public market currently exists for our shares of Common Stock. We intend to list our common stock on the NYSE American (“NYSE American”) or the NASDAQ Capital Market (“NASDAQ”) under the symbol “MMB” after we register our common stock under the Securities Exchange Act of 1934, as amended (“Exchange Act”), following the termination of this offering. There is no assurance that our common stock will be registered under the Exchange Act or, if registered under the Exchange Act, that our listing application will be approved by the NYSE American or the NASDAQ. If not approved by the NYSE American or NASDAQ, we intend to apply for quotation of our common stock on the OTCQX Marketplace under the symbol “MMB” after the termination of this offering.

 

We are an “emerging growth company,” as such term is defined in Section 2(a)(19) of the Securities Act of 1933, as amended, and we will be subject to reduced public reporting requirements. See “Emerging Growth Company Status.”

 

    Price to Public     Underwriting
Discounts and Commissions(1) (2)
    Proceeds,
Before
Expenses,
to Company(3)
 
Per Share   $ 6.00     $ 0.45     $ 5.55  
Total (4)   $ 19,999,998     $ 1,500,000     $ 18,499,998  

 

(1) This table depicts broker-dealer commissions of 7.5% of the gross offering proceeds. Please refer to the section entitled Plan of Distribution” beginning on page 50 of this Offering Circular for additional information regarding total underwriter compensation. We agreed to pay the Selling Agent a non-accountable due diligence fee of $30,000 of which $15,000 was paid on signing the engagement letter with the Selling Agent and $15,000 on closing. We have agreed to reimburse certain additional expenses to our Selling Agent. Please refer to the section entitled “Plan of Distribution” in this Offering Circular for additional information regarding total Selling Agent compensation

 

(2) In addition to the broker-dealer discounts and commissions included in the above table, our Selling Agent will have the right to acquire warrants to purchase shares of our common stock equal to 5% of the aggregate shares sold in this offering (“Selling Agent Warrants”). The Selling Agent Warrants have an exercise price of $6.60 per share.

 

(3) Does not include estimated offering expenses including, without limitation, legal, accounting, auditing, escrow agent, transfer agent, other professional, printing, advertising, travel, marketing, blue-sky compliance and other expenses of this Offering. We estimate the total expenses of this Offering, excluding the Selling Agent’s commissions and expenses, will be approximately $518,000.

 

(4) Assumes that the maximum aggregate offering amount of $19,999,998 is received by us.

 

Generally, no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.

 

An investment in the Shares is subject to certain risks and should be made only by persons or entities able to bear the risk of and to withstand the total loss of their investment. Prospective investors should carefully consider and review the RISK FACTORS beginning on page 21.

 

THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, OR THE COMMISSION, DOES NOT PASS UPON THE MERITS OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SELLING LITERATURE. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

 

This Offering Circular follows the disclosure format of Part I of Form S-1 pursuant to the general instructions of Part II(a)(1)(ii) of Form 1-A.

 

 

The date of this Offering Circular is __________, 2017.

 

 
 

 

TABLE OF CONTENTS

 

Market and Industry Data and Forecasts   1
Basis of Presentation   1
Trademarks and Copyrights   3
Cautionary Statement Regarding Forward-Looking Statements   3
Offering Circular Summary   4
The Offering   16
Summary Historical Consolidated Financial Data   20
Risk Factors   21
Use of Proceeds   43
Capitalization   43
Determination of Offering Price   45
Dilution   45
Plan of Distribution   50
Dividend Policy   61
Description of Business   61
Management’s Discussion and Analysis of Financial Condition and Results of Operations   85
Management   107
Executive Compensation   115
Security Ownership of Certain Beneficial Owners and Management   121
Certain Relationships and Related Party Transactions   122
Description of Capital Stock   124
Shares Eligible for Future Sale   127
Certain United States Federal Income Tax Consequences to Non-U.S. Holders   128
Additional Requirements and Restrictions   130
ERISA Considerations   131
Legal Matters   132
Experts   132
Appointment of Auditor   132
Where You Can Find More Information   133
Index to Consolidated Financial Statements   F-1

 

We have not, and the Selling Agent has not, authorized anyone to provide any information other than that contained or incorporated by reference in this Offering Circular prepared by us or to which we have referred you. Neither we nor the Selling Agent take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This Offering Circular is an offer to sell only the Common Stock offered hereby but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this Offering Circular is current only as of its date, regardless of the time of delivery of this Offering Circular or any sale of Common Stock.

 

For investors outside the United States: We have not done anything that would permit this Offering or possession or distribution of this Offering Circular in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this Offering and the distribution of this Offering Circular.

 

 
 

 

MARKET AND INDUSTRY DATA AND FORECASTS

 

Certain market and industry data included in this Offering Circular is derived from information provided by third-party market research firms, or third-party financial or analytics firms, that we believe to be reliable. Market estimates are calculated by using independent industry publications, government publications and third-party forecasts in conjunction with our assumptions about our markets. We have not independently verified such third-party information. The market data used in this Offering Circular involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in this Offering Circular. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

Certain data are also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on market data currently available to us. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this Offering Circular. Similarly, we believe our internal research is reliable, even though such research has not been verified by any independent sources.

 

BASIS OF PRESENTATION

 

In this Offering Circular, unless the context otherwise requires:

 

  “we,” “us,” “our,” the “company” or “Muscle Maker,” refers collectively to Muscle Maker, Inc, a California corporation, incorporated in December 2014, the issuer of the common stock in this offering, and its subsidiaries;
     
  “Common Stock” refers to common stock, no par value per share, of Muscle Maker, Inc
     
  “CTI” refers to Custom Technology, Inc., a New Jersey corporation, formed in July 2015, which is Muscle Maker Corp.’s direct, 70%-owned subsidiary;
     
  “MMF Members” refers to Robert E. Morgan, Membership, LLC and P. John, LLC, who previously owned collectively 26% of Muscle Maker Brands, which in turn converted into MMBC, and then MMBC merged into Muscle Maker;
     
  “Muscle Maker Brands” refers to Muscle Maker Brands, LLC, a California limited liability company, formed in December 2014, which was Muscle Maker’s previous direct, 74% owned subsidiary, prior to Muscle Maker Brands converting into MMBC and then MMBC merging into Muscle Maker;
     
  “MMBC” refers to Muscle Maker Brands Conversion, Inc., a California corporation, which Muscle Maker Brands converted into from a limited liability company on June 8, 2017 and then merged in to Muscle Maker on September 15, 2017;
     
   “Muscle Maker Corp.” refers to Muscle Maker Corp., LLC, a Nevada limited liability company, which was formed on July 18, 2017, which is Muscle Maker’s direct, wholly owned subsidiary, that operates the corporate restaurant operations of Muscle Maker;
     
  “Muscle Maker Development” refers to Muscle Maker Development, LLC, a Nevada limited liability company, which was formed on July 18, 2017, which is Muscle Maker’s direct, wholly owned subsidiary, that operates the franchising restaurant operations of Muscle Maker;
     
1
 

 

  “Muscle Maker Franchising” refers to Muscle Maker Franchising, LLC, a New Jersey limited liability company;
     
  “Muscle Maker Grill” refers to the name under which our corporate and franchised restaurants do business;
     
  “NASDAQ” refers to Nasdaq Capital Markets of The NASDAQ Stock Market;
     
  “NYSE American” refers to The NYSE American;
     
  “Offered Shares” or “Shares” refers to the 3,333,333 shares of common stock, no par value per share, of Muscle Maker, Inc which are being offered in this offering under Regulation A;
     
  “OTCQX” refers to the OTCQX Marketplace by the OTC Markets Group;
     
  “our restaurant system” or “our system” refers to both company-operated and franchised restaurants, and the number of restaurants presented in our restaurant system, unless otherwise indicated, is as of December 31, 2016;
     
  “our restaurants,” or results or statistics attributable to one or more restaurants without expressly identifying them as company-operated, franchised or both, refers to our company-operated restaurants only;
     
  when referring to “system-wide” financial metrics, we are referring to such financial metrics at the restaurant-level for company-operated restaurants plus those reported to us by our franchisees;
     
  “average check” refers to company restaurant revenues from company-operated restaurants divided by company-operated restaurant transactions;
     
  “dayparts” refers to five dayparts consisting of lunch as 10:00 a.m. to 2:00 p.m., snack as 2:00 p.m. to 5:00 p.m., dinner as 5:00 p.m. to 8:00 p.m., and after dinner as 8:00 p.m. to close; and
     
  “aided brand awareness” refers to when a survey respondent indicates recognition of a specific brand from a list of possible names presented by those conducting the survey instead of indicating recognition of a specific brand without being offered a list of potential responses.

 

We use a twelve-month fiscal year ending on December 31st of each calendar year. Fiscal 2015 and fiscal 2016 ended on December 31, 2015 and December 31, 2016, respectively.

 

In a twelve-month fiscal year, each quarter includes three-months of operations; the first, second, third and fourth quarters end on March 31st, June 30th, September 30th, and December 31st, respectively.

 

Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable restaurant base (as applicable, system-wide, franchised or company-operated restaurants). A new restaurant enters our comparable restaurant base on the first full day of the month after being open for 15 months using a mid-month convention.

 

System-wide comparable restaurant sales include restaurant sales at all comparable company-operated restaurants and at all comparable franchised restaurants, as reported by franchisees. While we do not record franchised restaurant sales as revenues, our royalty revenues are calculated based on a percentage of franchised restaurant sales.

 

We measure system-wide, franchised and company-operated average unit volumes, or AUVs, on a fiscal year basis. Annual AUVs are calculated using the following methodology: first, we determine the restaurants that have been open for a full 15-month period; and second, we calculate the revenues for these restaurants and divide by the number of restaurants in that base to arrive at our AUV calculation.

 

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The restaurant industry is divided into two segments: full service and limited service. Full service is comprised of the casual dining, mid-scale and fine dining sub-segments. Limited service, or LSR, is comprised of the quick-service restaurant, or QSR, and fast-casual sub-segments. “QSRs” are defined by Technomic as traditional “fast-food” restaurants with average check sizes of $3.00-$8.00. “Fast-casual” is defined by Technomic as a limited or self-service format with average check sizes of $8.00-$12.00 that offers food prepared to order within a generally more upscale and developed establishment. Our restaurants combine elements of both QSRs and fast-casual restaurants. Our restaurants’ convenient locations and format and average check are attributes that we share with QSRs (rather than with the fast-casual segment generally), while the quality of our food, the freshness of our ingredients and our traditional cooking methods are attributes that we generally share with fast-casual restaurants.

 

Certain monetary amounts, percentages and other figures included in this Offering Circular have been subject to rounding adjustments. Percentage amounts included in this Offering Circular have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this Offering Circular may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements. Certain other amounts that appear in this Offering Circular may not sum due to rounding.

 

Our board of directors and shareholders approved a 1-for-7 reverse split of our common stock, which was effected on September 20, 2017. The reverse split combined each seven shares of our outstanding common stock into one share of common stock and correspondingly adjusted the exercise prices of our common stock purchase warrants and options and conversion price of our convertible debt. No fractional shares were issued in connection with the reverse split, and any fractional shares resulting from the reverse split were rounded down to the nearest whole share. Unless otherwise provided herein, all references to common stock, common stock purchase warrants, restricted stock, share data, per share data and related information have been retroactively adjusted, where applicable, in this Offering Circular to reflect the reverse split of our common stock (and the corresponding adjustment of the exercise prices of our common stock purchase warrants) as if it had occurred at the beginning of the earliest period presented.

 

Unless otherwise indicated, all references to “dollars” and “$” in this Offering Circular are to, and amounts are presented in, U.S. dollars.

 

Unless otherwise indicated or the context otherwise requires, financial and operating data in this offering circular reflect the consolidated business and operations of Muscle Maker and its subsidiaries.

 

TRADEMARKS AND COPYRIGHTS

 

We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. This Offering Circular may also contain trademarks, service marks and trade names of other companies, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this Offering Circular is not intended to, and should not be read to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, some of the copyrights, trade names and trademarks referred to in this Offering Circular are listed without their ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks. All other trademarks are the property of their respective owners.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Offering Circular contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “outlook,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth or anticipated in our forward-looking statements. Factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, funds derived from operations, cash available for dividends, cash flows, liquidity and prospects include, but are not limited to, the factors referenced in this Offering Circular, including those set forth below.

 

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When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Offering Circular. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Offering Circular. The matters summarized below and elsewhere in this Offering Circular could cause our actual results and performance to differ materially from those set forth or anticipated in forward-looking statements. Accordingly, we cannot guarantee future results or performance. Furthermore, except as required by law, we are under no duty to, and we do not intend to, update any of our forward-looking statements after the date of this Offering Circular, whether as a result of new information, future events or otherwise.

 

OFFERING CIRCULAR SUMMARY

 

This summary of the Offering Circular highlights material information concerning our business and this offering. This summary does not contain all of the information that you should consider before making your investment decision. You should carefully read the entire Offering Circular, including the information presented under the section entitled “Risk Factors” and the financial data and related notes, before making an investment decision. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from future results contemplated in the forward-looking statements as a result of factors such as those set forth in “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” Unless otherwise provided herein, all historical information in this Offering Circular has been adjusted to reflect the 1-for-7 reverse stock split of our common stock that was effective September 20, 2017.

 

In this Offering Circular, unless the context indicates otherwise, “Muscle Maker,” the “Company,” “we,” “our,” “ours” or “us” refer to Muscle Maker, Inc, a California corporation, and its subsidiaries.

 

Our Company

 

The Muscle Maker Grill is a high-growth, fast casual restaurant concept that specializes in preparing healthy-inspired, high-quality, fresh, made-to-order lean, protein-based meals featuring chicken, seafood, pasta, burgers, wraps and flat breads. In addition, we feature freshly prepared entrée salads and an appealing selection of sides, protein shakes and fruit smoothies. We operate in the approximately $34.5 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 restaurant concepts such as Muscle Maker Grill.

 

We believe our 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 following core values form the foundation of our brand:

 

  Quality. Commitment to provide the highest quality, healthy-inspired food for a wonderful experience.
     
  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 a low 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 18, 2017, Muscle Maker and its subsidiaries and franchisees operated 53 Muscle Maker Grill restaurants located in 12 states, 12 of which are owned and operated by Muscle Maker, and 41 are franchise restaurants.

 

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As of December 31, 2016, Muscle Maker and its subsidiaries and franchisees operated 49 Muscle Maker Grill restaurants located in 10 states, 8 of which are owned and operated by Muscle Maker, and 41 are franchise restaurants. Our restaurants generated company-operated restaurant revenue of $1,032,558 and $2,735,222 for the years ended December 31, 2015 and 2016, respectively. For the years ended December 31, 2015 and 2016, total company revenues were $3,106,779 and $4,953,205, respectively. For the fiscal years ended December 31, 2015 and 2016, we reported net losses of $1,021,641 and $4,219,687, respectively, and negative cash flow from operating activities of $670,399 and $2,110,702, respectively. As of December 31, 2016, we had an aggregate accumulated deficit of $3,841,638 . 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, 2016 and 2015 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 December traffic and higher traffic in the first, second, and third quarters.

 

Our healthy-inspired menu, value proposition, and culture have helped us to deliver strong and consistent financial and operating performance, as illustrated by the following:

 

  our company-owned annual average unit volumes, or AUVs, slightly reduced from $762,000 in fiscal year 2015 to $712,000 in fiscal year 2016; and
     
  from the year ended December 31, 2015 to the year ended December 31, 2016, we increased our total revenue by 59% from $3,106,779 to $4,953,205.

 

Our Industry

 

We operate within the LSR segment of the U.S. restaurant industry, which includes QSR and fast-casual restaurants. According to Technomic, 2015 sales for the total LSR category increased 5.2% from 2014 to $255 billion. We offer fast-casual quality food combined with quick-service speed, convenience and value across multiple dayparts. According to Technomic, sales for the total QSR segment grew 4.1% from 2014 to $212 billion in 2015, and are projected to grow to $254 billion by 2019, representing a compounded annual growth rate, or CAGR, of 4.6%. Total sales in the fast-casual segment grew 11.3% from 2014 to $43 billion in 2015, and are projected to grow to $64 billion by 2019, representing a CAGR of 10.2%. We believe our differentiated, high-quality menu delivers great value all day, every day, positions us to compete successfully against both QSR and fast-casual concepts, providing us with a large addressable market.

 

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

 

Our Strengths

 

Compelling Speed Using Cook to Order Preparation: Our guests can expect to enjoy their meals in eight minutes or less. While this service time may be slightly higher than the QSR segment, it fits well within the range of the fast casual segment. Our meals are prepared from a cook to order method using only the freshest, all natural ingredients.

 

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 PM, Saturday, and closed on Sunday. While 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 that allow for greater efficiencies and operations and ultimately higher profitability. A typical QSR fast casual brand has two to three revenue streams: dine-in, take-out and delivery. Muscle Maker Grill executes on eight different revenue streams; including: dine-in, take-out, delivery, catering, meal plans, retail and grab and go kiosks and food trucks.

 

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Attractive Price Point and Perceived Value: Muscle Maker Grill offers meals with ‘power sides’ beginning at $8.99, using only the highest 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 a meal making them not only convenient but affordable too. Muscle Maker Grill also offers a boxed lunch program for schools and other organizations starting at $10 a box. These lunches include a wrap, salad or entrée, and a side and a drink. We not only 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 its loyalty program, Muscle Maker Grill Rewards, where points are awarded for every dollar spent towards free or discounted menu items. Cards are not required to participate as members can provide their phone number or use the mobile app, Muscle Maker Grill Rewards, to receive notifications announcing new menu items, special events and more. The program is enjoyed by thousands or guests!

 

Muscle Maker Grill Business Facts:

 

  Largest protein based QSR fast casual in the united states.
     
  Established in 1995 in Colonia, NJ.
     
  Muscle Maker Grill operates 53 restaurants, 41 franchised and 12 company as of September 18, 2017 with system-wide sales exceeding $24 million in 2016.
     
  Ranked in the future 50 list of the fastest growing small chains in America and achieved a spot on Fastcasual.com’s top 100 Movers and Shakers in 2016 and expecting a top five ranking in 2017.
     
  National footprint in 12 states as of September 18, 2017 and soon to be 18 states by the end of 2017.
     
  Multiple International expansion opportunities including: Kuwait, Dubai and India.
     
  Currently a preferred vendor for the US military with restaurants opportunities in GA, KY, MA, NY, NC, SC, VA, TX and WA.

 

Restaurant Level Profitability and Unit Economics: We believe our brand position in a segment with limited competition, strong value perception and multiple revenue streams provides a great opportunity for continued corporate and franchise growth. Our low cost of entry and real estate strategy allows for greater operating efficiencies and higher profitability. See below for corporate store economics. We primarily operate in urban and suburban markets using in line locations and targeting second generation restaurants. Typical capital investment ranges from $180,000 to $225,000 for buildout and equipment. Annual revenues of $800,000 may anticipate achieving a 10% operating profit. Other company revenue sources include a franchise fee of $35,000 per unit on a sliding scale for multi-unit development. Franchisees currently pay 5% off gross sales in royalties and 3% of gross sales for marketing and advertising.

 

Leveraging Non-Traditional Revenue Streams:

 

Delivery: A significant differentiator is that Muscle Maker Grill offers delivery at every location nation-wide. Delivery is an option through our mobile app, online ordering platform making it easy and convenient for our guests. Delivery percentages range from 10% up to 56% of sales. We strongly believe this segment will continue to grow as our core demographic has demonstrated the need for online ordering and delivery versus dine-in and take-out.

 

Catering: Our diverse menus items are also offered through our catering program making it easy and affordable to feed a group. We can feed a group ranging from 10 or 5,000. Muscle Maker Grill has secured large catering contracts with multi-national corporations, universities as well as professional and college athletic programs. Our boxed lunch program, which includes a wrap, salad, or entrée, a side and a drink for a set price is widely popular within schools and other organizations.

 

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Meal Plans: To make healthy eating even easier, Muscle Maker Grill’s signature nutritionally-focused menu items are available through its new Meal Plan program, allowing pre-orders of meals that taste great 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, including the Hollywood Salad, Turkey Meatball Wrap, Arizona and many more.

 

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 offers 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.

 

Food Trucks: Food trucks have become a more main stream point of destination for restaurant goers and we strongly believe the growth trend in the segment will continue. Muscle Maker Grill wants to make our healthy options available to all consumers and will continue to develop and grow this revenue stream. Muscle Maker Grill currently has one food truck in operation in Dallas, TX and three to five in the pipeline for US military bases such as Hans comb Airforce Base, Quantico Marine Base and West Point Military Academy.

 

Strategy

 

We plan to pursue the following strategies to continue to grow our revenues and profits.

 

Expand Our System-Wide Restaurant Base. We believe we are in the early stages of our growth story with 53 current locations in 12 states, as of September 18, 2017. For the year ended December 31, 2014, we opened 12 new franchised restaurants and no new company-operated restaurants. For the year ended December 31, 2015, we opened one new company-operated and seven new franchised restaurants. For the year ended December 31, 2016, we opened six new company-operated and four new franchised restaurants. In 2017, we intend to open 10 to 15 new company-operated and 15 new franchised restaurants, including military bases, across Arizona, California, Florida, Georgia, Illinois, Louisiana, Kansas, Massachusetts, Nebraska, New Jersey, New York, Nevada, North Carolina, Pennsylvania, Texas, Washington and Internationally. Over the long term, we plan to grow the number Muscle Maker Grill restaurants by 30% to 50% annually. There is no guarantee that we will be able to increase the number of our restaurants. We may be unsuccessful in expanding within our existing or into new markets for a variety of reasons described herein under “Risk Factors” above, including competition for customers, sites, franchisees, employees, licenses and financing.

 

Drive Comparable Restaurant Sales. We plan to continue delivering 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. Our marketing and operations teams collaborate to ensure that the items developed in our test kitchen 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 fish tacos and shish-k-bobs. 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 Muscle Maker Grill 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 made-from-scratch 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 marketing and various advertising funds as we continue to grow our restaurant base.

 

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  Increase Existing Customer Frequency: We are striving to increase customer frequency by providing a service experience and environment that “compliments” 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. Additionally, we have recently implemented a customer experience measurement system, which provides us with real-time feedback and customers’ insights to enhance our service experience. We believe that always striving for excellent customer service will create an experience and environment that will support increased existing customer visits.
     
  Continue to Grow Dayparts: We expect to drive growth across these dayparts through optimized labor and management allocation, enhanced menu offerings, innovative merchandising and marketing campaigns, which have successfully driven growth in our dayparts. 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.

 

Continue to Enhance Profitability. We focus on expanding our 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 believe we will be able to leverage support costs as general and administrative expenses grow at a slower rate than our revenues.

 

Overview of Corporate Structure

 

Muscle Maker serves as a holding company of the following subsidiaries:

 

  (i) Muscle Maker Development, LLC (“Muscle Maker Development”), a directly wholly owned subsidiary, which was formed in Nevada on July 18, 2017 for the purposes of running our existing franchise operations and continuing to franchise the Muscle Maker Grill name and business system to qualified franchisees; and
  (ii) Muscle Maker Corp., LLC (“Muscle Maker Corp.”), a directly wholly owned subsidiary, which was formed in Nevada on July 18, 2017 for the purposes of developing new corporate stores and operating our new and existing corporate stores. Muscle Maker Corp. has a direct 70% ownership interest in Custom Technology, Inc. (“CTI”), which was formed in New Jersey on July 29, 2015, and is a technology and point of sale (“POS”) systems dealer and technology consultant.

 

We plan to expand our Muscle Maker Grill brand through the (i) development and opening of additional company owned Muscle Maker Grill restaurants and (ii) franchising of additional Muscle Maker Grill restaurants. Muscle Maker together with Muscle Maker Development, Muscle Maker Corp., and CTI are referred to herein collectively as the “Company”.

 

Corporate History

 

Formation of Muscle Maker

 

Muscle Maker, Inc. (“Muscle Maker”), was incorporated by American Restaurant Holdings (“American Restaurant Holdings”) in California on December 8, 2014. On December 22, 2014, Muscle Maker issued 14,285 shares of its common stock, no par value per share, to the Chief Executive Officer of American Restaurant Holdings as founder shares for cash proceeds of $10.

 

Acquisition of 74% of Muscle Maker Brands

 

Muscle Maker Brands, LLC (“Muscle Maker Brands”) was formed on December 22, 2014 in the state of California for the purpose of acquiring and operating company owned Muscle Maker Grill restaurants, as well as franchising the Muscle Maker Grill name and business system to qualified franchisees. Muscle Maker Franchising, LLC (“Muscle Maker Franchising”) was founded in 1995 in order to develop a brand of healthy-option fast food restaurants.

 

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On January 23, 2015, Muscle Maker, Muscle Maker Brands and Muscle Maker Franchising entered into a Unit Purchase Agreement whereby Muscle Maker Brands purchased substantially all of the assets and liabilities of Muscle Maker Franchising, Muscle Maker acquired 7,400 membership units of Muscle Maker Brands (representing 74% of the membership units of Muscle Maker Brands), and certain members of Muscle Maker Franchising (“MMF Members”) acquired 2,600 membership units of Muscle Maker Brands (representing 26% of the membership units of Muscle Maker Brands). (the “MMG Acquisition”). The aggregate purchase consideration for Muscle Maker’s membership interest in Muscle Maker Brands was $4,244,000 and consisted of $3,570,000 in cash, $604,000 of promissory notes (consisting of a $400,000 promissory note (“MM Note”) from Muscle Maker and a $204,000 promissory note (“MMB Note”) from Muscle Maker Brands) and 71,428 shares of common stock of Muscle Maker valued at $0.98 per share or $70,000 issued. On January 23, 2015, in exchange for the issuance by Muscle Maker to American Restaurant Holdings of 5,785,714 shares of common stock of Muscle Maker, American Restaurant Holdings provided cash of $3,645,000 and an obligation to repay an aggregate of $604,000 of principal due under MM Note and MMB Note issued to Muscle Maker Franchising in order to facilitate the Muscle Maker Brands acquisition. Pursuant to the terms of the Unit Purchase Agreement, the MMF Members shall convert their non-controlling interest in Muscle Maker Brands into an aggregate of 2,067,953 shares of common stock of Muscle Maker prior Muscle Maker going public.

 

On January 24, 2015, Muscle Maker granted 28,571 shares of its common stock valued at $0.98 per share to its Director of Brand Development, in connection with an employment agreement with the Director of Brand Development.

 

On January 24, 2015, the Company issued 61,224 shares of its common stock to the Director of Brand Development in exchange for cash proceeds of $0.98 per share, or $60,000.

 

On July 23, 2015 and August 28, 2015, the Company issued 107,142 and 71,428 of its common stock, and 5-year warrants for the purchase of 53,571 and 35,714 shares of common stock respectively, for aggregate cash proceeds of $750,000. The warrants are exercisable at $5.25 per share.

 

Springfield Acquisition

 

On May 4, 2015, Muscle Maker Brands acquired a business in Springfield, New Jersey, as a corporate store (the “Springfield Acquisition”). The purchase price of the store was $30,060, of which $8,670 related to equipment purchased and the remaining $21,390 was accounted for as goodwill.

 

CTI Acquisition

 

On August 1, 2015, the Company acquired 70% of the shares of Custom Technology, Inc. (“CTI”), a technology and point of sale (“POS”) systems dealer and technology consultant, in exchange for $70,000 in cash (the “CTI Acquisition”). CTI was formed in New Jersey on July 29, 2015 and entered into an asset purchase agreement on August 1, 2015 pursuant to which CTI purchased POS computer systems, cash registers, camera systems and related inventory and supplies from its predecessor entity.

 

Repayment of Promissory Notes regarding MMG Acquisition

 

The MMB Note was completely repaid on March 9, 2015. On July 21, 2015, January 23, 2016 and July 23, 2016, installments of $100,000, $150,000 and $150,000 were repaid on the balance of the MM Note. As of July 23, 2016, there is no balance outstanding related to MM Note.

 

Advances and Exchange of Advances for Convertible Notes

 

On December 31, 2015, Muscle Maker issued a promissory note in the amount of $1,082,620 (the “2015 ARH Note”) to American Restaurant Holdings. The 2015 ARH Note had no stated interest rate and was convertible into 309,320 shares of the Company’s common stock at $3.50 per share.

 

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During the period from July 1, 2016 through December 31, 2016, American Restaurant Holdings provided $1,364,842 of advances to Muscle Maker. These advances, combined with the $1,257,000 payable to American Restaurant Holdings as June 30, 2016 were exchanged for a convertible note in the amount of $2,621,842 (the “2016 ARH Note”). The 2016 ARH Note had no stated interest rate or maturity date and was convertible into shares of common stock of Muscle Maker at a conversion price of $2.80 per share at a time to be determined by the American Restaurant Holdings.

 

Recent Developments

 

More Advances and Exchange of Advances for Convertible Notes and Conversion of Convertible Notes to Shares of Common Stock

 

During the period from December 31, 2016 through February 15, 2017, American Restaurant Holdings provided $980,949 of advances to the Company. The payable due to American Restaurant Holdings as a result of these advances was exchanged for a convertible promissory note in the amount of $980,949 (the “2017 ARH Note”). The 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of common stock of Muscle Maker at a conversion price of $2.80 per share at a time to be determined by the lender.

 

On March 14, 2017, American Restaurant Holdings elected to convert: (a) the 2015 ARH Note in the principal amount of $1,082,620 into 309,320 shares of common stock of Muscle Maker at a conversion price of $3.50 per share; (b) the 2016 ARH Note in the principal amount of $2,621,842 into 936,372 shares of common stock of Muscle Maker at a conversion price of $2.80 per share; and (c) the 2017 ARH Note in the principal amount of $980,949 into 350,338 shares of common stock of Muscle Maker at a conversion price of $2.80 per share.

 

Second 2017 Advances, Exchange of Advances for Convertible Notes, and Conversion of Convertible Notes to Shares of Common Stock

 

During the period from February 16, 2017 through March 15, 2017, American Restaurant Holdings provided $338,834 of advances to the Company. The payable due to American Restaurant Holdings as a result of these advances was exchanged for a convertible promissory note in the amount of $338,834 (the “Second 2017 ARH Note”). The Second 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of common stock of Muscle Maker at a conversion price of $3.50 per share at a time to be determined by the lender.

 

On September 19, 2017, American Restaurant Holdings elected to convert the Second 2017 ARH Note in the principal amount of $338,834 into 96,809 shares of common stock of Muscle Maker at a conversion price of $3.50 per share.

 

Unrelated Party Loans for Convertible Notes

 

During the period from March 17, 2017 to August 15, 2017, Muscle Maker issued convertible notes maturing six months after the issuance of the convertible note , convertible into common stock at a price per share of $3.00 (50% of initial public offering price), and a stated interest rate of 10% per six months to the following unrelated parties:

 

(a) JM Assets LP for a loan of $500,000;

(b) Midland IRA Inc FBO Randall Avery for a loan of $100,000;

(c) Tom Buckley for a loan of $25,000;

(d) John Mohan for a loan of $100,000;

(e) Kevin Mohan for a loan of $50,000;

(f) Dan Pettit for a loan of $150,000;

(g) Attary LLC for a loan of $75,000;

(h) Sean Harrison for a loan of $50,000;

(i) Robert Mohan for a loan of $50,000;

(j) Jerry Neugebauer for a loan of $100,000; and

(k) Shawn Holmes for a loan of $100,000.

 

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Related Party Loans for Convertible Notes

 

During the period from May 1, 2017 to August 15, 2017, Muscle Maker issued convertible notes maturing six months after the issuance of the convertible note , convertible into common stock at a price per share of $3.00 (50% of initial public offering price), and a stated interest rate of 10% per six months to the following related parties:

 

(a) John Feeney for a loan of $50,000;

(b) Membership, LLC for a loan of $100,000; and

(c) A.B. Southall for a loan of $100,000.

 

Issuances of Warrants

 

The Company issued the following warrants to purchase an aggregate of 701,890 shares of common stock of Muscle Maker: (a) a 5-year warrant to Dean Miles to purchase 89,285 shares of common stock of Muscle Maker at an exercise price of $5.25 per share, in connection with two private placements to Mr. Miles in 2015; (b) a 3-year warrant to American Restaurant Holdings to purchase of 327,730 shares of common stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the 2016 ARH Note in 2016; (c) a 3-year warrant to American Restaurant Holdings to purchase of 122,618 shares of common stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the 2017 ARH Note in 2017; (d) a 3-year warrant to American Restaurant Holdings to purchase of 21,058 shares of common stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the Second 2017 ARH Note in 2017; (e) a 3-year warrant to American Restaurant Holdings to purchase of 21,058 shares of common stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the Third 2017 ARH Note in 2017; (f) a 3-year warrant to Prashant Shah to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share; (g) a 3-year warrant to JM Assets LP to purchase of 35,714 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by JM Assets LP to Muscle Maker in 2017; (h) a 3-year warrant to Midland IRA Inc FBO Randall Avery to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Midland IRA Inc FBO Randall Avery to Muscle Maker in 2017; (i) a 3-year warrant to John Feeney to purchase of 3,571 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by John Feeney to Muscle Maker in 2017; (j) a 3-year warrant to Tom Buckley to purchase of 1,785 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Tom Buckley to Muscle Maker in 2017; (k) a 3-year warrant to John Mohan to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by John Mohan to Muscle Maker in 2017; (l) a 3-year warrant to Kevin Mohan to purchase of 3,571 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Kevin Mohan to Muscle Maker in 2017; (m) a 3-year warrant to Dan Pettit to purchase of 10,714 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Dan Pettit to Muscle Maker in 2017; (n) a 3-year warrant to Attary LLC to purchase of 5,357 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Attary LLC to Muscle Maker in 2017; (o) a 3-year warrant to John Marques to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Membership, LLC to Muscle Maker in 2017; (p) a 3-year warrant to Sean Harrison to purchase of 3,571 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Sean Harrison to Muscle Maker in 2017; (q) a 3-year warrant to Robert Mohan to purchase of 3,571 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Robert Mohan to Muscle Maker in 2017; (r) a 3-year warrant to Spartan Capital Securities, LLC to purchase of 2,285 shares of common stock of Muscle Maker at an exercise price of $7.00 per share; (s) a 3-year warrant to Jerry Neugebauer to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan Jerry Neugebauer to Muscle Maker in 2017; (t) a 3-year warrant to A.B. Southall to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by A.B. Southall to Muscle Maker in 2017; and (u) a 3-year warrant to Shawn Holmes to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Shawn Holmes to Muscle Maker in 2017. As of the date of this Offering Statement, there are unexercised warrants outstanding to purchase an aggregate of 694,748 shares of common stock of Muscle Maker.

 

Spin-Off of Muscle Maker by American Restaurant Holdings

 

On March 23, 2017, American Restaurant Holdings authorized and facilitated the distribution of 7,381,745 shares of common stock of Muscle Maker held by American Restaurants, LLC, the wholly owned subsidiary of American Restaurant Holdings, to the shareholders of American Restaurant Holdings (the “Spin-Off”). As a result of the Spin-Off on March 23, 2017, American Restaurant Holdings is no longer a majority owner of Muscle Maker.

 

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Grant of Shares of Restricted Common Stock to Employees and Consultants

 

In May 2017, Muscle Maker granted 159,642 shares of its common stock to its employees and consultants at a value of $7.00 per share. Such share grants are subject to graduated vesting in equal installments of 20% on each of the following dates: (i) the date of grant, (ii) January 1, 2018, (iii) January 1, 2019, (iv) January 1, 2020, and (v) January 1, 2021. In the event of resignation or termination for any reason (except for a “change of control”) of an employee or consultant that receives such shares, the remaining non-vested shares of such employee or consultant prior to such resignation or termination will be forfeited.

 

Reorganization

 

Conversion of Muscle Maker Brands

 

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

 

Formation of Muscle Maker Development to Operate Franchising and Assignment of Franchise Agreements

 

On July 18, 2017, Muscle Maker formed Muscle Maker Development, LLC (“Muscle Maker Development”) in the state of Nevada for the purpose of running our existing franchise operations and continuing to franchise the Muscle Maker Grill name and business system to qualified franchisees. Muscle Maker Development issued 1,000 membership units to its sole member and manager, Muscle Maker. On August 25, 2017, MMBC assigned all the existing franchise agreements to Muscle Maker Development pursuant to the terms of that certain Assignment and Assumption Agreement, dated August 25, 2017, between MMBC and Muscle Maker Development.

 

Formation of Muscle Maker Corp. to Develop and Operate Corporate Stores

 

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

 

Issuance of Shares of Muscle Maker to CrowdfundX for Marketing Services in Connection with Offering

 

On July 20, 2017, Muscle Maker entered into that certain Master Services Agreement, effective as of July 20, 2017, with WhoYouKnow LLC, California limited liability company d/b/a CrowdfundX (“CrowdfundX”), whereby CrowdfundX is providing management services to Muscle Maker in connection with the Offering. Pursuant to the terms of the agreement, Muscle Maker issued 28,333 shares of common stock at a value of $6.00 per share (or, an aggregate value of $170,000) to CrowdfundX. In addition, Muscle Maker has agreed to pay a cash fee to CrowdfundX in the amount of $145,000, which is payable in installments of $40,000 within five business days after the Effective Date, $40,000 on August 21, 2017, and $65,000 on September 21, 2017.

 

Appointment of Computershare as Transfer Agent

 

On July 24, 2017, Muscle Maker entered into an agreement with Computershare Inc., and its wholly-owned subsidiary Computershare Trust Company, N.A. (together with Computershare, Inc., “Computershare”), whereby Computershare agreed to act as the transfer agent of Muscle Maker.

 

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Options Granted to Franchisees

 

On July 27, 2017, Muscle Maker granted stand-alone (non-Plan based) non-qualified stock options to purchase an aggregate of 45,000 shares of its common stock to its franchisees. The options are fully vested, have an exercise price of $7.00 per share and expire 3 years after the date of grant.

 

Third 2017 Advances, Exchange of Advances for Convertible Notes, and Conversion of Convertible Notes to Shares of Common Stock

 

During the period from March 16, 2017 through July 18, 2017, American Restaurant Holdings provided $336,932 of advances to the Company. The payable due to American Restaurant Holdings as a result of these advances was exchanged for a convertible promissory note in the amount of $336,932 (the “Third 2017 ARH Note”). The Third 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of common stock of Muscle Maker at a conversion price of $5.60 per share at a time to be determined by the lender.

 

On September 19, 2017, American Restaurant Holdings elected to convert the Third 2017 ARH Note in the principal amount of $336,932 into 60,166 shares of common stock of Muscle Maker at a conversion price of $5.60 per share.

 

Shares Purchased by Daniel Pettit

 

On July 21, 2017, Muscle Maker issued 8,928 shares of common stock of Muscle Maker to Daniel Pettit, as trustee of the Daniel E. Pettit Revocable Trust at a purchase price of $5.60 per share providing $50,000 of proceeds to Muscle Maker.

 

Exercise of Warrants by Prashant Shah

 

On July 25, 2017, Prashant Shah exercised his 3-year warrant to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share providing $50,000 of proceeds to Muscle Maker.

 

Amendment of Bylaws Permitting Electronic Voting of Shareholders

 

Our board of directors approved on August 11, 2017 an amendment to our Bylaws permitting electronic notice by the Board of Directors to shareholders seeking shareholder approval on corporate matters and for shareholders to electronically vote directly on corporate matters rather than to require the provision of proxies at a shareholder meeting.

 

Shares Purchased by CCNC-MMG, LLC

 

On August 25, 2017, Muscle Maker issued 53,571 shares of common stock of Muscle Maker to CCNC-MMG, LLC at a purchase price of $5.60 per share providing $300,000 of proceeds to Muscle Maker.

 

Shares Purchased by Alex Danze

 

On September 1, 2017, Muscle Maker issued 8,928 shares of common stock of Muscle Maker to Alex Danze at a purchase price of $5.60 per share providing $50,000 of proceeds to Muscle Maker.

 

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Merger and Reorganization

 

Merger of Muscle Maker Brands Conversion, Inc. with Muscle Maker

 

On September 15, 2017 (“Effective Merger Date”), pursuant to an Agreement of Merger, MMBC was merged (“Merger”) into Muscle Maker, with Muscle Maker as the surviving corporation, in a tax-free reorganization. Pursuant to the Merger, each share of common stock of MMBC, no par value per share (the “MMBC Common Stock”), other than shares owned by Muscle Maker, was converted into 795.3668 shares of common stock of Muscle Maker, with any fractional shares resulting to any shareholder of MMBC being rounded to the next nearest whole share (the “Merger Consideration”) for a total consideration of 2,067,953 shares of common stock of Muscle Maker to the MMF Members. On the Effective Merger Date, by virtue of the Merger, each share of MMBC Common Stock issued and held immediately prior to the Effective Time by Muscle Maker was automatically cancelled and retired and ceased to exist, and no consideration was delivered in exchange for the cancellation and retirement of the MMBC Common Stock held by Muscle Maker. As a result of the Merger, Muscle Maker owned 70% of the shares of CTI.

 

Assignment of Corporate Stores and shares of CTI to Muscle Maker Corp.

 

On September 15 , 2017, Muscle Maker assigned all the existing corporate stores and its 70% ownership interest in CTI to Muscle Maker Corp. pursuant to the terms of that certain Agreement of Conveyance, Transfer and Assigning of Assets and Assumptions of Liabilities, dated September 15, 2017, between Muscle Maker Corp and Muscle Maker.

 

Shared -Service Agreement between Muscle Maker and Muscle Maker Development

 

On August 25, 2017, Muscle Maker and Muscle Maker Development entered into a Shared-Service Agreement as to the payment of compensation and expenses of employees and consultants which are shared by both Muscle Maker and Muscle Maker Development.

 

Employment Agreements

 

Muscle Maker entered into an Employment Agreement with each of (i) Robert Morgan, as Chief Executive Officer, (ii) Grady Metoyer, as Chief Financial Officer and (iii) Rodney Silva, as Chief Culture Officer, effective as of the date Muscle Maker successfully receives at least $5,000,000 in gross proceeds from an SEC qualified offering under this Offering Statement under Regulation A+ under the Securities Act of 1933, as amended. See “Executive Compensation – Employment Agreements”.

 

Payment of Lease Payment Obligations

 

On September 15 , 2017, American Restaurant Holdings entered into an Assumption Agreement with Muscle Maker and Muscle Maker Corp, whereby Muscle Maker and Muscle Maker Corp. agree to make all required payments under the Muscle Maker Grill corporate restaurant leases which American Restaurant Holdings entered into on behalf of Muscle Maker, Inc, Muscle Maker Corp., LLC, Muscle Maker Brands, LLC and Muscle Maker Brands Conversion, Inc.

 

Reverse Stock Split

 

Our board of directors and shareholders approved on September 18, 2017 and September 20 , 2017, respectively, a 1-for-7 reverse split of our common stock, which was effected on September 20 , 2017. The reverse split combined each seven shares of our outstanding common stock into one share of common stock and correspondingly adjusted the exercise prices of our common stock purchase warrants and options and conversion price of our convertible debt. No fractional shares were issued in connection with the reverse split, and any fractional shares resulting from the reverse split were rounded down to the nearest whole share. All references to common stock, common stock purchase warrants, restricted stock, share data, per share data and related information have been retroactively adjusted, where applicable, in this Offering Circular to reflect the reverse split of our common stock (and the corresponding adjustment of the exercise prices of our common stock purchase warrants) as if it had occurred at the beginning of the earliest period presented. As a result of the reverse stock split, the number of shares of common stock issued and outstanding decreased from 71,891,120 shares as of September 20 , 2017, to approximately 10,227,302 shares. In connection with the reverse stock split, we filed Certificate of Amendment to our Articles of Incorporation to effect the reverse stock split with the Secretary of State of California on September 20 , 2017.

 

Adoption of Muscle Maker, Inc 2017 Stock Option and Stock Issuance Plan

 

Our board of directors and shareholders adopted and approved on July 27, 2017 and September 21, 2017, respectively, the Muscle Maker, Inc 2017 Stock Option and Stock Issuance Plan, effective September 21, 2017, under which stock options and restricted stock may be granted to officers, directors, employees and consultants. Under the Plan, 1,428,571 shares (10,000,000 pre-reverse split shares) of Common Stock, no par value per share, are reserved for issuance.

 

Grant of Shares of Restricted Common Stock to Directors under Plan

 

On September 21, 2017, Muscle Maker granted 7,142 shares (post-reverse stock split) of common stock under its Muscle Maker 2017 Stock Option and Stock Issuance Plan to each of its six directors of Muscle Maker (42,857 shares of common stock in the aggregate) at a value of $7.00 per share. Such share grants are subject to graduated vesting in the following installments on each of the following dates: (i) 50% as of the date of grant and (ii) 8.333% as of (a) August 1, 2017, (b) September 1, 2017, (c) October 1, 2017, (d) November 1, 2017, (e) December 1, 2017, and (f) January 1, 2017.

 

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Risk Factors

 

Before you invest in our common stock, you should carefully consider all of the information in this Offering Circular, including matters set forth under the heading “Risk Factors.” Risks relating to our business include the following, among others:

 

  our vulnerability to changes in consumer preferences and economic conditions;
     
  our ability to open new restaurants in new and existing markets and expand our franchise system;
     
  our ability to generate comparable restaurant sales growth;
     
  our restaurants and our franchisees’ restaurants may close due to financial or other difficulties;
     
  new menu items, advertising campaigns and restaurant designs and remodels may not generate increased sales or profits;
     
  anticipated future restaurant openings may be delayed or cancelled;
     
  increases in the cost of food supplies and other products;
     
  our ability to compete successfully with other quick-service and fast-casual restaurants; and
     
  our reliance on our franchisees, who may be adversely impacted by economic conditions and who may incur financial hardships, be unable to obtain credit, need to close their restaurants or declare bankruptcy.

 

In addition, the report of our independent registered public accounting firm for the two years ended December 31, 2016 and 2015 contains a statement with respect to substantial doubt as to our ability to continue as a going concern as a result of recurring losses from operations and negative cash flows.

 

Emerging Growth Company Status

 

We are an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public 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 of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of all of these exemptions.

 

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards, and delay compliance with new or revised accounting standards until those standards are applicable to private companies. We have elected to take advantage of the benefits of this extended transition period.

 

We could be an emerging growth company until the last day of the first fiscal year following the fifth anniversary of our first common equity offering, although circumstances could cause us to lose that status earlier if our annual revenues exceed $1.0 billion, if we issue more than $1.0 billion in non-convertible debt in any three-year period or if we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act.

 

Company Information

 

Our principal office is located at 2200 Space Park Drive, Suite 310, Houston, Texas 77058 and our phone number is (732) 669-1200. Our corporate website address is www.musclemakergrill.com. Information contained on, or accessible through, our website is not a part of, and is not incorporated by reference into, this Offering Circular.

 

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Muscle Maker Grill, the logos of Muscle Maker Grill, and other trade names, trademarks or service marks of Muscle Maker appearing in this Offering Circular are the property of Muscle Maker. Trade names, trademarks and service marks of other organizations appearing in this Offering Circular are the property of their respective holders.

 

The diagram below depicts our organizational structure after this Offering:

 

 

The share information in this diagram for Muscle Maker has been adjusted to reflect the 1-for-7 reverse stock split of our common stock that was effective September 20, 2017.

 

THE OFFERING

 

Securities Being Offered by the
Company
3,333,333 shares of common stock, no par value per share (the “Common Stock”), on a “best efforts” basis for up to $19,999,998 of gross proceeds. Purchasers of the Shares will become our common stockholders.
   
Offering Price per Common
Stock by the Company
$6.00 per share of Common Stock.
   
Selling Agent TriPoint Global Equities, LLC shall serve as our Selling Agent. The Selling Agent may engage one or more sub selling agents or selected dealers.
   
Subscribing Online

After the qualification by the SEC of the Offering Statement of which this Offering Circular is a part, investors of Muscle Maker may (i) if a U.S. investor, open a BANQ online brokerage account (“BANQ Online Brokerage Account”) through the online brokerage division of Selling Agent and utilize the BANQ online platform (“BANQ Online Platform”) to receive, review, execute and deliver subscription agreements electronically or (ii) if a U.S. investor who participates in this Offering other than through BANQ or is a non-U.S. investor, deliver completed and executed subscription agreements directly to the Company thru the BANQ platform. 

 

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Escrow Agent Wilmington Trust, N.A. shall serve as our Escrow Agent.
   
Escrow Account and Brokerage Account After the qualification by the SEC of the Offering Statement of which this Offering Circular is a part, investors of Muscle Maker may, (i) if a U.S. investor using a BANQ Online Brokerage Account, deposit funds in the amount of the purchase price by ACH debit transfer, wire transfer, or by mailing in a check into the BANQ Online Brokerage Account or (ii) if a U.S. investor who participates in this Offering other than through BANQ or is a non-U.S. investor, deposit funds in the amount of the purchase price by ACH debit transfer, wire transfer, or by mailing in a check into a non-interest bearing escrow account (“Escrow Account”) held by Wilmington Trust, N.A. (the “Escrow Agent”) in compliance with SEC Rule 15c2-4. The funds in the Escrow Account or the Brokerage Account will be released to the Company only after we closed on the subscription as described in this Offering Circular. The Company may undertake one or more closings on a rolling basis; however, it intends to complete one closing. Until we complete a closing, the proceeds for the Offering will be kept in the Escrow Account, except with respect to those investors using a BANQ Online Brokerage Account. At a closing, the proceeds will be distributed to the Company and the associated Shares will be issued to the investors in such Shares. If there are no closings or if funds remain in the escrow account upon termination of this Offering without any corresponding closing, the investments for this Offering will be promptly returned to investors, without deduction and generally without interest.
   
Offering Campaign Consultant We have engaged WhoYouKnow LLC, a California limited liability company, d/b/a CrowdfundX (“Offering Campaign Consultant”), to assist us in the planning, public relations and promotion of this Offering, utilizing the BANQ Online Platform.
   
Minimum Investment Amount The minimum investment amount per investor is $450 (75 shares of Common Stock); however, we can waive the minimum purchase requirement on a case to case basis in our sole discretion. The subscriptions, once received, are irrevocable.
   
Investment Amount Restrictions Generally, no sale may be made to you in this Offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(c) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.
   
Capital Stock Our common stock is common equity and contains no preferences as to other classes of our capital stock. Each share of our common stock entitles the holder to one vote on all matters submitted to the vote of the stockholders, including the election of directors.

 

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Number of Shares Outstanding
Before the Offering
of Common Stock
A total of 10,270,160 shares of Common Stock issued and outstanding as of the date hereof. This number includes the following issuances after December 31, 2016 to: (a) American Restaurant Holdings of (i) 309,320 shares of Common Stock of Muscle Maker issued in connection with the conversion of the 2015 ARH Note in the principal amount of $1,082,620; (ii) 936,372 shares of Common Stock of Muscle Maker issued in connection with the conversion of the 2016 ARH Note in the principal amount of $2,621,842; (iii) 350,338 shares of Common Stock of Muscle Maker in connection with the conversion of the 2017 ARH Note in the principal amount of $980,949; (iv) 96,809 shares of Common Stock of Muscle Maker in connection with the conversion of the Second 2017 ARH Note in the principal amount of $338,834; and (v) 60,166 shares of Common Stock of Muscle Maker in connection with the conversion of the Third 2017 ARH Note in the principal amount of $336,932; (b) Daniel Pettit, as trustee of the Daniel E. Pettit Revocable Trust of 8,928 shares of Common Stock of Muscle Maker at a price of $5.60 per share; (c) CCNC-MMG, LLC of 53,571 shares of Common Stock of Muscle Maker at a price of $5.60 per share; (d) Alex Danze of 8,928 shares of Common Stock of Muscle Maker at a price of $5.60 per share; (e) certain employees and consultants of Muscle Maker of 159,642 shares of Common Stock of Muscle Maker in connection with restricted stock grants at a value of $7.00 per share; (f) MMF Members of 2,067,953 shares of Common Stock of Muscle Maker in connection with the Merger; (g) CrowdfundX of 28,333 shares of Common Stock of Muscle Maker at a value of $6.00 per share (or, an aggregate value of $170,000) as partial consideration for marketing services provided by CrowdfundX in connection with this offering; (h) Prashant Shah of 7,142 shares of Common Stock of Muscle Maker, who exercised a 3-year warrant at an exercise price of $7.00 per share; and (i) each of the six directors of the Board of 7,142 shares of Common Stock of Muscle Maker (an aggregate of 42,857 shares of Common Stock) in connection with restricted stock grants at a value of $7.00 per share.
   
Number of Shares Outstanding
After the Offering of
Common Stock if All the
Stock Being Offered are Sold
A total of 13,603,481 shares of Common Stock will be issued and outstanding after this Offering is completed if all the Offered Shares are sold. This number includes the following issuances after December 31, 2016 to: (a) American Restaurant Holdings of (i) 309,320 shares of Common Stock of Muscle Maker issued in connection with the conversion of the 2015 ARH Note in the principal amount of $1,082,620; (ii) 936,372 shares of Common Stock of Muscle Maker issued in connection with the conversion of the 2016 ARH Note in the principal amount of $2,621,842; (iii) 350,338 shares of Common Stock of Muscle Maker in connection with the conversion of the 2017 ARH Note in the principal amount of $980,949; (iv) 96,809 shares of Common Stock of Muscle Maker in connection with the conversion of the Second 2017 ARH Note in the principal amount of $338,834; and (v) 60,166 shares of Common Stock of Muscle Maker in connection with the conversion of the Third 2017 ARH Note in the principal amount of $336,932; (b) Daniel Pettit, as trustee of the Daniel E. Pettit Revocable Trust of 8,928 shares of Common Stock of Muscle Maker at a price of $5.60 per share; (c) CCNC-MMG, LLC of 53,571 shares of Common Stock of Muscle Maker at a price of $5.60 per share; (d) Alex Danze of 8,928 shares of Common Stock of Muscle Maker at a price of $5.60 per share; (e) certain employees and consultants of Muscle Maker of 159,642 shares of Common Stock of Muscle Maker in connection with restricted stock grants at a value of $7.00 per share; (f) MMF Members of 2,067,953 shares of Common Stock of Muscle Maker in connection with the Merger; (g) CrowdfundX of 28,333 shares of Common Stock of Muscle Maker at a value of $6.00 per share (or, an aggregate value of $170,000) as partial consideration for marketing services provided by CrowdfundX in connection with this offering; (h) Prashant Shah of 7,142 shares of Common Stock of Muscle Maker, who exercised a 3-year warrant at an exercise price of $7.00 per share; and (i) each of the six directors of the Board of 7,142 shares of Common Stock of Muscle Maker (an aggregate of 42,857 shares of Common Stock) in connection with restricted stock grants at a value of $7.00 per share.

 

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Voting Rights The Common Stock offered hereby are entitled to one vote per share.
   
Selling Agent’s Warrant Upon each closing of this offering, we have agreed to issue to the Selling Agent warrants to purchase a number of shares of our common stock equal to five percent (5%) of the total shares of our common stock sold in such closing (“Selling Agent’s Warrants”). The Selling Agent’s Warrants are exercisable commencing 180 days after the qualification date of the offering statement related to this offering, and will be exercisable until the fifth anniversary of the qualification date. The Selling Agent’s Warrants are not redeemable by us. The Selling Agent Warrants have an exercise price of $6.60 per share (equal to 110% of the implied price per share of the Offering).
   
Risk Factors Investing in our Common Stock involves risks. See the section entitled “Risk Factors” in this Offering Circular and other information included in this Offering Circular for a discussion of factors you should carefully consider before deciding to invest in our Common Stock.

 

Use of Proceeds We expect to receive net proceeds from this offering of approximately $18,50,000 after deducting estimated underwriting discounts and commissions in the amount of $1,500,000 (7.5% of the gross proceeds of the Offering). We intend to use the net proceeds for the following purposes in the following order: (a) first towards the fees and expenses associated with qualification of Offering under Regulation A of up to $593,000, including legal, auditing, accounting, escrow agent, transfer agent, financial printer and other professional fees; (b) second towards the implementation of our business plan, including but not limited to, (i) opening new corporate stores, (ii) funding possible acquisition opportunities, and (iii) funding a national marketing campaign; and (c) the balance of capital raised toward working capital and general corporate purposes. See “Use of Proceeds.”
   
Termination of the Offering The Offering will terminate at the earlier of: (1) the date at which $19,999,998 of Shares has been sold, (2) the date which is one year after this Offering being qualified by the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”), or (3) the date on which this Offering is earlier terminated by the Company in its sole discretion (the “Termination Date”).
   
Proposed Listing No public market currently exists for our shares of Common Stock. We intend to list our common stock on the NYSE American (“NYSE American”) or the NASDAQ Capital Market (“NASDAQ”) under the symbol “MMB” after we register our common stock under the Securities Exchange Act of 1934, as amended (“Exchange Act”), following the termination of this offering. There is no assurance that our common stock will be registered under the Exchange Act or, if registered under the Exchange Act, that our listing application will be approved by the NYSE American or the NASDAQ. If not approved by the NYSE American or NASDAQ, we intend to apply for quotation of our common stock on the OTCQX Marketplace under the symbol “MMB” after the termination of this offering.
   
Transfer Agent and Registrar We have engaged Computershare Trust Company, N.A. to be our transfer agent and registrar in connection with the Offering.
   
Dividends Our ability to pay dividends depends on both our achievement of positive cash flow and our board of directors’ discretion in declaring dividends. The order and priority of our dividends is further described in “Description of Capital Stock – Dividends.”

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The following table presents our summary historical consolidated financial data for the periods indicated. The summary historical consolidated financial data for the years ended December 31, 2016 and December 31, 2015 and the balance sheet data as of December 31, 2016 and December 31, 2015 are derived from the audited financial statements.

 

Historical results are included for illustrative and informational purposes only and are not necessarily indicative of results we expect in future periods, and results of interim periods are not necessarily indicative of results for the entire year. You should read the following summary financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes appearing elsewhere in this Offering Circular.

 

    Successor     Combined
Successor
& Predecessor
 
Statement of Operations Data   For the Year Ended
December 31,
 
    2016     2015  
       
Revenues   $ 4,953,205     $ 3,106,779  
Operating Costs and Expenses     8,919,142       4,010,074  
(Loss) Income from Operations     (3,965,937)       (903,295 )
Total Other (Expense) Income     (126,468)       899  
Net Loss before Taxes     (4,092,405)       (902,396 )
Income tax provision     (127,282)       (119,245 )
Net (Loss) Income     (4,219,687)       (1,021,641 )
Net loss attributable to the non-controlling interests     (1,110,106)       (226,718 )
Net (Loss) Income Attributable to Controlling Interest   $ (3,109,581)     $ (794,923 )
                 
Net Loss Attributable to Controlling Interest Per Share:   $ (0.51)     $ (0.14 )

 

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          Combined  
          Successor &  
    Successor     Predecessor  
    December 31,     December 31,  
Balance Sheet Data (at period end)   2016     2015  
             
Cash and cash equivalents   $ 335,724     $ 599,278  
Working capital (1)   $ (1,723,852 )   $ (61,507 )
Total assets   $ 8,254,024     $ 8,138,370  
Total liabilities   $ 3,936,592     $ 2,227,070  
Stockholders’ equity (deficit)   $ 4,317,432     $ 5,911,300  

 

(1) Working capital represents total current assets less total current liabilities.

 

RISK FACTORS

 

An investment in our Offered Shares is highly speculative and is suitable only for persons or entities that are able to evaluate the risks of the investment. An investment in our Offered Shares should be made only by persons or entities able to bear the risk of and to withstand the total loss of their investment. Prospective investors should consider the following risks before making a decision to purchase our Offered Shares. To the best of our knowledge, we have included all material risks.

 

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 fiscal years ended December 31, 2016 and 2015, we reported net losses of $4,219,687 and $1,021,641, respectively, and negative cash flow from operating activities of $2,110,702 and $670,399, respectively. As of December 31, 2016, we had an aggregate accumulated deficit of $3,841,638 . 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, 2016 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, including common stock issued in this offering, 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, including funds to be raised in this offering. 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 even if this offering is successful. 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—Ability to Continue as a Going Concern.”

 

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

 

At December 31, 2016, Muscle Maker had a cash balance of approximately $335,724, a working capital deficit of approximately $1,723,852, and an accumulated deficit of approximately $3,841,638 . 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 offerings, 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.

 

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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 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 and the type, number and locations of competing restaurants may adversely affect the performances of individual locations. In addition, economic downturns, 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.

 

Our growth strategy depends in part on opening new restaurants in existing and new markets 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. We opened one new company-operated restaurant in fiscal 2015 in Springfield, NJ, six new company-operated restaurants in fiscal 2016 in Columbia, NY, Ft. Bliss, TX, Gramercy, NY, Irvine, CA, Santa Monica, CA and Tribeca, NY and plan to open 10 to 15 new company-operated restaurants in fiscal 2017. Our franchisees opened seven and four new franchise operated restaurants in fiscal 2015 and fiscal 2016, respectively, and plan to open 15 in fiscal 2017. 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;

 

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

 

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: difficulties in hiring experienced personnel; unfamiliarity with local real estate markets and demographics; 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, and the increases in average restaurant revenues and comparable restaurant sales that we have experienced in the past may not be indicative of future results.

 

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;
     
  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;

 

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  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 would have a material adverse effect on our business, financial condition and results of operations.

 

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

 

The consumer target area of our and our franchisees’ restaurants varies by location, depending on a number of factors, including population density, other local retail and business attractions, area demographics and geography. As a result, the opening of a new restaurant in or near markets in which we or our franchisees’ already have restaurants could adversely impact sales at these existing restaurants. Existing restaurants could also make it more difficult to build our and our franchisees’ consumer base for a new restaurant in the same market. Our core business strategy does not entail opening new restaurants that we believe will materially affect sales at our or our franchisees’ existing restaurants. However, we cannot guarantee there will not be 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. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement our initiatives to build sales. 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 and 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.

 

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

 

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, soybean oil 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 and 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. These potential changes in food and supply costs could have a material adverse effect on our business, financial condition and results of operations.

 

We may not be able to compete successfully with other quick-service and fast-casual restaurants. Intense competition in the restaurant industry could make it more difficult to expand our business and could also have a negative impact on our operating results if customers favor our competitors or we are forced to change our pricing and other marketing strategies.

 

The food service industry, and particularly its quick-service and fast-casual segments, is intensely competitive. We expect competition in each of our markets to continue to be intense because consumer trends are favoring limited service restaurants that offer healthier menu items made with better quality products, and many limited service restaurants are responding to these trends. Competition in our industry is primarily based on price, convenience, quality of service, brand recognition, restaurant location and type and quality of food. If our company-operated and franchised restaurants cannot compete successfully with other quick-service and fast-casual restaurants in new and existing markets, we could lose customers and our revenues could decline. Our company-operated and franchised restaurants compete with national and regional quick-service and fast-casual restaurant chains for customers, restaurant locations and qualified management and other staff. Compared with us, some of our competitors have substantially greater financial and other resources, have been in business longer, have greater brand recognition or are better established in the markets where our restaurants are located or are planned to be located. Any of these competitive factors may materially adversely affect our business, financial condition or results of operations.

 

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

 

Our growth plan includes opening a significant number of new restaurants. 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 plan to open 10 to 20 new company-operated restaurants and 10 to 32 new franchise operated restaurants in fiscal 2017. We intend to continue to increase the number of our 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 at historical rates, 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 84% of our restaurants are franchised as of December 31, 2016, our financial results are dependent in significant part upon the operational and financial success of our franchisees. We receive royalties, franchise fees, contributions to our marketing development fund and contributions to our national and local co-op advertising funds, and other fees from our franchisees. 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 ensuring the 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. We anticipate that we and our franchisees will continue to be financially impacted by the recent health care reform legislation if such legislation is not repealed. 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 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 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. As of December 31, 2016, our top 6 franchisees operated 10 of our franchised restaurants and accounted for approximately 40% of our royalty revenues in fiscal 2015 and fiscal 2016, respectively. 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 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.

 

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

 

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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 68% of our system-wide restaurants as of December 31, 2016. Our company-operated and franchised restaurants in New Jersey and New York represent approximately 62% of our system-wide restaurants as of December 31, 2016. Approximately 57% of our company-operated restaurants are located in New Jersey and New York. 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 over 30 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 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.

 

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 and our 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 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. Certain menu items and ingredients are provided to us and our franchisees by single suppliers for various proteins and a single supplier for spices. 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.

 

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 positive cash flow from company-operated and franchised restaurants, net of costs. 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.

 

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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.

 

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.

 

Information technology system failures or breaches of our network security could interrupt our operations and adversely affect our business.

 

We and our franchisees rely on our computer systems and network infrastructure across our operations, including point-of-sale processing at our restaurants. Our and our franchisees’ operations depend upon our and our franchisees’ ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us or our franchisees to litigation or to actions by regulatory authorities.

 

We are continuing to expand, upgrade and develop 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.

 

If we or our franchisees are unable to protect our customers’ credit and debit card data, we could be exposed to data loss, litigation, liability and reputational damage.

 

In connection with credit and debit card sales, we and our franchisees transmit confidential credit and debit card information by way of secure private retail networks. Although we and our franchisees use private networks, third parties may have the technology or know-how to breach the security of the customer information transmitted in connection with credit and debit card sales, and our and our franchisees’ security measures and those of our and our franchisees’ technology vendors may not effectively prohibit others from obtaining improper access to this information. If a person were able to circumvent these security measures, he or she could destroy or steal valuable information or disrupt our and our franchisees’ operations. Any security breach could expose us and our franchisees to risks of data loss, litigation and liability and could seriously disrupt our and our franchisees’ operations and any resulting negative publicity could significantly harm our reputation.

 

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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 and Twitter accounts are our intellectual property. The success of our business strategy depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and develop our branded products. If our efforts to protect our intellectual property are not adequate, or if any third-party misappropriates or infringes on our intellectual property, whether in print, on the Internet or through other media, the value of our brands may be harmed, which could have a material adverse effect on our business, including the failure of our brands and branded products to achieve and maintain market acceptance. There can be no assurance that all of the steps we have taken to protect our intellectual property in the United States and in foreign countries will be adequate. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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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 U.S. 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. We currently participate in the “E-Verify” program, an Internet-based, free program run by the United States government to verify employment eligibility, in states in which participation is required. However, use of the “E-Verify” program does not guarantee that we will properly identify all applicants who are ineligible for employment. 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. Though we do not believe any lawsuits in which we are currently involved will have a material adverse effect on our financial position, results of operations, liquidity or capital resources, we may in the future be subject to lawsuits that could have such an effect.

 

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 be 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.

 

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

 

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

 

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

 

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

 

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

 

Many of our restaurant leases are non-cancelable and typically have initial terms up to between 5 and 10 years and 1-3 renewal terms of 5 years each that we may exercise at our option. Even if we close a restaurant, we are required to perform our obligations under the applicable lease, which could include, among other things, a provision for a closed restaurant reserve when the restaurant is closed, which would impact our profitability, and payment of the base rent, property taxes, insurance and maintenance for the balance of the lease term. In addition, in connection with leases for restaurants that we will continue to operate, we may, at the end of the lease term and any renewal period for a restaurant, be unable to renew the lease without substantial additional cost, if at all. As a result, we may close or relocate the restaurant, which could subject us to construction and other costs and risks. Additionally, the revenues and profit, if any, generated at a relocated restaurant may not equal the revenues and profit generated at the existing restaurant

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Compliance with environmental laws may negatively affect our business.

 

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.

 

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, including our buttermilk biscuits, legendary sweet tea and bone-in fried chicken. 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 in restaurants.

 

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

 

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

 

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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, regulations and ordinances that:

 

  govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as waste handling and disposal practices for solid and hazardous wastes; and
     
  impose liability for the costs of cleaning up, and damage resulting from, sites of past spills, disposals or other releases of hazardous materials.

 

In particular, under applicable environmental laws, we may be responsible for remediation of environmental conditions and may be subject to associated liabilities, including liabilities for clean-up costs and personal injury or property damage, relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or own the restaurants in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant. If we are found liable for the costs of remediating contamination at any of our properties, our operating expenses would likely increase and our results of operations would be materially adversely affected. See “Description of Business—Environmental Matters.” Some of our leases provide for indemnification of our landlords for environmental contamination, clean-up or owner liability.

 

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.

 

Upon the expansion of our operations internationally, we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws.

 

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

 

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

 

As a public company, we would be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Further, we will be required to report any changes in internal controls on a quarterly basis. In addition, we would be required to furnish a report by management on the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We will design, implement, and test the internal controls over financial reporting required to comply with these obligations. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of its internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of the Common Stock could be negatively affected. We also could become subject to investigations by the stock exchange on which the securities are listed, the Commission, or other regulatory authorities, which could require additional financial and management resources.

 

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.

 

We believe we will be considered 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 $75 million as of the last business day of its most recently completed second fiscal quarter, computed by multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity; or
     
  in the case of an initial registration statement under the Securities Act, or the Exchange Act of 1934, as amended, which we refer to as the Exchange Act, for shares of its common equity, had a public float of less than $75 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 $50 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.

 

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If we become a public company (reporting under the Exchange Act), we will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

 

If we become a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, and rules of the SEC and those of the NASDAQ or the NYSE American, whichever is applicable, 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 costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs.

 

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

 

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

 

If we do not become a public company, compliance with Regulation A and reporting to the SEC could be costly, and our management will be required to devote substantial time to the compliance requirements of Regulation A.

 

If we do not become a public company, compliance with Regulation A could be costly and requires legal and accounting expertise. Because the new rules implementing Title IV of the Jumpstart Our Business Startups Act of 2012 took effect in June 2015, we have no experience complying with the new provisions of Regulation A or making the public filings required by the rule. Besides qualifying this Form 1-A, we must file an annual report on Form 1-K, a semiannual report on Form 1-SA, and current reports on Form 1-U.

 

Our legal and financial staff may need to be increased in order to comply with Regulation A. Compliance with Regulation A will also require greater expenditures on outside counsel, outside auditors, and financial printers in order to remain in compliance. Failure to remain in compliance with Regulation A may subject us to sanctions, penalties, and reputational damage and would adversely affect our results of operations.

 

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We may not be able to satisfy listing requirements of the NASDAQ or the NYSE American, whichever is applicable, to maintain a listing of our Common Stock.

 

Following the registration of our Common Stock under the Exchange Act upon qualification of this offering, if our Common Stock is listed on the NASDAQ or the NYSE American, whichever is applicable, we must meet certain financial and liquidity criteria to maintain such listing. If we fail to meet any of the NASDAQ’s or the NYSE American’s, whichever is applicable, listing standards, our Common Stock may be delisted. In addition, our board may determine that the cost of maintaining our listing on a national securities exchange outweighs the benefits of such listing. A delisting of our Common Stock from the NASDAQ or the NYSE American, whichever is applicable, may materially impair our stockholders’ ability to buy and sell our Common Stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our Common Stock. In addition, the delisting of our Common Stock could significantly impair our ability to raise capital.

 

Upon qualification of this offering, we intend to become 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.

 

Upon qualification of this offering, we expect to become a public reporting company under the Exchange Act, and thereafter publicly report on an ongoing basis as an “emerging growth company” (as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act) under the reporting rules set forth under the Exchange Act. For so long as we remain an “emerging growth company”, we may take advantage of certain exemptions from various reporting requirements that are applicable to other Exchange Act reporting companies that are not “emerging growth companies”, including but not limited to:

 

  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 compensation and stockholder approval of any golden parachute payments not previously approved.

 

We expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We could be an emerging growth company for up to five years, circumstances could cause us to lose that status earlier, including if the market value of our Common Stock held by non-affiliates exceeds $700 million, if we issue $1 billion or more in non-convertible debt during a three-year period, or if our annual gross revenues exceed $1 billion. We would cease to be an emerging growth company on the last day of the fiscal year following the date of the fifth anniversary of our first sale of common equity securities under an effective registration statement or a fiscal year in which we have $1 billion in gross revenues (note that the offering of Common Stock pursuant to this Offering Circular will not result in the sale of securities under an effective registration statement). 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.

 

If we elect not to become a public reporting company under the Exchange Act, we will be required to publicly report on an ongoing basis under the reporting rules set forth in Regulation A for Tier 2 issuers. The ongoing reporting requirements under Regulation A are more relaxed than for “emerging growth companies” under the Exchange Act. The differences include, but are not limited to, being required to file only annual and semiannual reports, rather than annual and quarterly reports. Annual reports are due within 120 calendar days after the end of the issuer’s fiscal year, and semiannual reports are due within 90 calendar days after the end of the first six months of the issuer’s fiscal year.

 

In either case, we will be subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not “emerging growth companies”, and our stockholders could receive less information than they might expect to receive from more mature public companies.

 

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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 NASDAQ or the NYSE American, whichever is applicable, and if the price of our Common Stock is less than $5.00 per share, our Common Stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before effecting a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that, before effecting any such transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our Common Stock, and therefore stockholders may have difficulty selling their shares.

 

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

 

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

 

Muscle Maker is a holding company with no operations and relies on its operating subsidiaries to provide it with funds necessary to meet its 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 (“Muscle Maker Development”), which runs our franchising restaurant operations and (ii) a 100% ownership interest in Muscle Maker Corp., LLC (“Muscle Maker Corp.”; together with Muscle Maker Development, referred to as the “Subsidiaries”), which runs our company restaurant operations, and holds a 70% ownership interest in Custom Technology, Inc. (“CTI”), a technology and point of sale (“POS”) systems dealer and technology consultant, 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 California 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.

 

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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.

 

Risks Related to Ownership of Our Common Stock, the Offering and Lack of Liquidity

 

An active trading market for our common stock may not develop and you may not be able to resell your shares at or above the initial offering price.

 

Prior to this offering, there has been no public market for shares of our common stock. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the initial offering price or at the time that they would like to sell. In addition, we intend to list our common stock on the NASDAQ Capital Market (“NASDAQ”) or The NYSE American (“NYSE American”) after we register our common stock under the Securities Exchange Act of 1934, as amended (“Exchange Act”), following the termination of this offering, and there is no guarantee that our common stock will be registered under the Exchange Act or that we can meet the listing standards or that our listing application with the NSDAQ or NYSE American will be accepted. Even if our common stock is registered under the Exchange Act, such application is accepted and our common stock is listed on the NASDAQ or NYSE American, an active trading market for our common stock may never develop, which will adversely impact your ability to sell our shares. If shares of common stock are not eligible for listing on the NASDAQ and NYSE American, we intend to apply for quotation of our common stock on the OTCQX Marketplace by the OTC Markets Group, Inc. following the termination of this offering. Even if we obtain quotation on the OTCQX, we do not know the extent to which investor interest will lead to the development and maintenance of a liquid trading market. Purchasers will be required to wait until at least after the final termination date of this offering for such listing, if the shares are registered under the Exchange Act, or quotation. The initial offering price for shares of our common stock will be determined by negotiation between us and our Selling Agent. You may not be able to sell your shares of common stock at or above the initial offering price.

 

The OTCQX, as with other public markets, has from time to time experienced significant price and volume fluctuations. As a result, the market price of shares of our common stock may be similarly volatile, and holders of shares of our common stock may from time to time experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. The price of shares of our common stock could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section of this Offering Circular.

 

No assurance can be given that the market price of shares of our common stock will not fluctuate or decline significantly in the future or that common stockholders will be able to sell their shares when desired on favorable terms, or at all.

 

The Company’s stock price may be volatile.

 

The market price of the Company’s Common Stock is likely to be highly volatile and could fluctuate widely in price in response to various potential factors, many of which will be beyond the Company’s control, including the following:

 

  services by the Company or its competitors;
     
  additions or departures of key personnel;
     
  the Company’s ability to execute its business plan;
     
  operating results that fall below expectations;
     
  loss of any strategic relationship;
     
  industry developments;
     
  economic and other external factors; and
     
  period-to-period fluctuations in the Company’s financial results.

 

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In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of the Company’s common stock.

 

This is a fixed price offering and the fixed offering price may not accurately represent the current value of us or our assets at any particular time. Therefore, the purchase price you pay for Offered Shares may not be supported by the value of our assets at the time of your purchase.

 

This is a fixed price offering, which means that the offering price for our Shares is fixed and will not vary based on the underlying value of our assets at any time. Our board of directors, in consultation with our Selling Agent, has determined the offering price in its sole discretion. The fixed offering price for our Shares has not been based on appraisals of any assets we own or may own, or of our Company as a whole, nor do we intend to obtain such appraisals. Therefore, the fixed offering price established for our Shares may not be supported by the current value of our Company or our assets at any particular time.

 

The entire amount of your purchase price for your Shares will not be available for investment in the Company.

 

A portion of the offering proceeds will be used to pay selling commissions of six percent (6%) of the offering proceeds to our Selling Agent, which it may re-allow and pay to participating broker-dealers, who sell Shares. See “Plan of Distribution.” Thus, a portion of the gross amount of the offering proceeds will not be available for investment in the Company. See “Use of Proceeds.”

 

If investors successfully seek rescission, we would face severe financial demands that we may not be able to meet.

 

Our Shares have not been registered under the Securities Act of 1933, or the Securities Act, and are being offered in reliance upon the exemption provided by Section 3(b) of the Securities Act and Regulation A promulgated thereunder. We represent that this Offering Circular does not contain any untrue statements of material fact or omit to state any material fact necessary to make the statements made, in light of all the circumstances under which they are made, not misleading. However, if this representation is inaccurate with respect to a material fact, if this offering fails to qualify for exemption from registration under the federal securities laws pursuant to Regulation A, or if we fail to register the Shares or find an exemption under the securities laws of each state in which we offer the Shares, each investor may have the right to rescind his, her or its purchase of the Shares and to receive back from the Company his, her or its purchase price with interest. Such investors, however, may be unable to collect on any judgment, and the cost of obtaining such judgment may outweigh the benefits. If investors successfully seek rescission, we would face severe financial demands we may not be able to meet and it may adversely affect any non-rescinding investors.

 

If our securities are quoted on the OTCQX rather than listed on either of the NASDAQ or NYSE American, our securities holders may face significant restrictions on the resale of our securities due to state “Blue Sky” laws.

 

Each state has its own securities laws, often called “blue sky” laws, which (i) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that state. We do not know whether our common stock will be registered or exempt from registration under the laws of any state. If our securities are quoted on the OTCQX rather than listed on either of the NASDAQ or NYSE American, a determination regarding registration will be made by those broker-dealers, if any, who agree to serve as the market-makers for our common stock. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our common stock. You should therefore consider the resale market for our common stock to be limited, as you may be unable to resell your common stock without the significant expense of state registration or qualification.

 

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Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

 

The initial public offering price per share will be substantially higher than the pro forma net tangible book value per share of our common stock outstanding prior to this offering. As a result, investors purchasing common stock in this offering will experience immediate dilution of $4.12 per share. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of common stock. In addition, if we issue additional equity securities, you will experience additional dilution.

 

Fiduciaries investing the assets of a trust or pension or profit sharing plan must carefully assess an investment in our Company to ensure compliance with ERISA.

 

In considering an investment in the Company of a portion of the assets of a trust or a pension or profit-sharing plan qualified under Section 401(a) of the Code and exempt from tax under Section 501(a), a fiduciary should consider (i) whether the investment satisfies the diversification requirements of Section 404 of ERISA; (ii) whether the investment is prudent, since the Offered Shares are not freely transferable and there may not be a market created in which the Offered Shares may be sold or otherwise disposed; and (iii) whether interests in the Company or the underlying assets owned by the Company constitute “Plan Assets” under ERISA. See “ERISA Consideration.”

 

Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.

 

The market price of shares of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares.

 

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

 

The principal purposes of this offering are to raise additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets. We currently intend to use the proceeds we receive from this offering after deducting estimated underwriting discounts and commissions and fees and expenses associated with qualification of Offering under Regulation A, including legal, auditing, accounting, escrow agent, transfer agent, financial printer and other professional fees, primarily for (a) the implementation of our business plan, including but not limited to, (i) opening new corporate stores, (ii) funding possible acquisition opportunities, and (iii) funding a national marketing campaign, and (b) working capital and general corporate purposes. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition, results of operations and prospects could be harmed, and the market price of our common stock could decline.

 

We do not intend to pay dividends for the foreseeable future.

 

We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

 

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USE OF PROCEEDS

 

We intend to use the net proceeds for the following purposes in the following order: (a) first towards the fees and expenses associated with qualification of Offering under Regulation A of up to $593,000, including legal, auditing, accounting, escrow agent, transfer agent, financial printer and other professional fees; (b) second towards the implementation of our business plan, including but not limited to, (i) opening new corporate stores, (ii) funding possible strategic acquisition opportunities, and (iii) funding a national marketing campaign, and (c) the balance towards working capital and general corporate purposes. In the event that we sell less than the maximum shares offered in the Offering, our first priority is to pay fees associated with the qualification of this Offering under Regulation A. No proceeds will be used to compensate or otherwise make payments to officers or directors except for ordinary payments under employment or consulting agreements.

 

If all of the Common Stock offered hereunder are purchased, we expect to receive net proceeds from this offering of approximately $18,500,000 after deducting estimated underwriting discounts and commissions in the amount of $1,500,000 (7.5% of the gross proceeds of the Offering). However, we cannot guarantee that we will sell all of the Common Stock being offered by us. The following table summarizes how we anticipate using the gross proceeds of this Offering, depending upon whether we sell 25%, 50%, 75%, or 100% of the shares being offered in the Offering:

 

    If 25% of
Shares
Sold
    If 50% of
Shares
Sold
    If 75% of
Shares
Sold
    If 100% of
Shares
Sold
 
Gross Proceeds   $ 5,000,000     $ 10,000,000     $ 15,000,000     $ 19,999,998  
Offering Expenses (Underwriting Discounts and Commissions to Selling Agent and other broker dealers)   $ (375,000 )   $ (750,000 )   $ (1,125,000 )   $ (1,500,000 )
                                 
Net Proceeds   $ 4,625,000     $ 9,250,000     $ 13,875,000     $ 18,499,998  
                                 
Our intended use of the net proceeds is as follows:                                
Fees for Qualification of Offering under Regulation A (includes legal, auditing, accounting, escrow agent, transfer agent, financial printer and other professional fees)   $ (593,000 )   $ (593,000 )   $ (593,000 )   $ (593,000 )
Opening New Corporate Stores     (2,000,000 )     (5,000,000 )     (7,000,000 )     (10,000,000 )
Acquisition Opportunities     (1,532,000 )     (2,457,000 )     (4,482,000 )     (5,607,000 )
National Marketing Campaign     (200,000 )     (400,000 )     (600,000 )     (800,000 )
Working Capital and General Corporate Purposes     (300,000 )     (800,000 )     (1,200,000 )     (1,499,998 )
Total Use of Proceeds   $ 5,000,000     $ 10,000,000     $ 15,000,000     $ 19,999,998  

 

CAPITALIZATION

 

The following table shows:

 

  Our actual capitalization as of December 31, 2016; and
     
 

Our audited capitalization as of December 31, 2016, as adjusted to reflect (i) the receipt of the net proceeds from the sale by us in this offering of shares of common stock, after deducting $2,100,000 in estimated underwriting discounts and commissions, reimbursements to Selling Agent, and estimated offering expenses payable by us, (ii) the issuance of 309,320 shares of Common Stock to American Restaurant Holdings in connection with the conversion of the 2015 ARH Note in the principal amount of $1,082,620, (iii) the issuance of 936,372 shares of Common Stock to American Restaurant Holdings in connection with the conversion of the 2016 ARH Note in the principal amount of $2,621,842, (iv) the issuance of 350,338 shares of Common Stock to American Restaurant Holdings in connection with the conversion of the 2017 ARH Note in the principal amount of $980,949, (v) the issuance of 96,809 shares of Common Stock to American Restaurant Holdings in connection with the conversion of the Second 2017 ARH Note in the principal amount of $338,834, (vi) the issuance of 60,166 shares of Common Stock to American Restaurant Holdings in connection with the conversion of the Third 2017 ARH Note in the principal amount of $336,932, (vii) the issuance of 874,903, 795,366, and 397,683 shares of Common Stock to P. John, LLC, Membership, LLC, and Robert Morgan, respectively, in connection with the Merger which were initially recorded collectively at $1,466,541, (viii) the issuance of 8,928 shares of Common Stock to Daniel Pettit, as trustee of the Daniel E. Pettit Revocable Trust at a price of $5.60 per share; (ix) issuance of 53,571 shares of Common Stock to CCNC-MMG, LLC at a price of $5.60 per share; (x) issuance of 8,928 shares of Common Stock to Alex Danze at a price of $5.60 per share; (xi) the grant of 159,642 shares of Common Stock to the employees and consultants of Muscle Maker at a value of $7.00 per share; (xii) the issuance of 28,333 shares of Common Stock to CrowdfundX at a value of $6.00 per share (or, an aggregate value of $170,000) as partial consideration for marketing services provided by CrowdfundX in connection with this offering; (xiii) the issuance of 7,142 shares of Common Stock to Prashant Shah, who exercised a 3-year warrant at an exercise price of $7.00 per share; and (xiv) the issuance of 7,142 shares of Common Stock to each of the six directors of Muscle Maker (an aggregate of 42,852 shares of Common Stock) at a value of $7.00 per share.

 

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We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, our historical and audited consolidated financial statements and the accompanying notes included elsewhere in this Offering Circular. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The share information in this table has been adjusted to reflect the 1-for-7 reverse stock split of our common stock that was effective September 20, 2017.

 

    As of December 31, 2016  
    Actual     Pro Forma As
Adjusted (1)
 
             
Cash and cash equivalents   $ 335,724     $ 23,085,436  
Total debt at face value   $ 3,778,607     $ 1,624,143  
Stockholders’ equity:                
Common stock, no par value; 100,000,000 shares authorized and 6,139,789 shares issued and outstanding on an actual basis, and 100,000,000 shares authorized and 13,603,481shares issued and outstanding on an as adjusted basis     5,157,010       31,649,572  
Additional paid-in capital     2,842,343       2,842,343  
Accumulated deficit     (3,841,638 )     (3,841,637 )
Non-controlling interest     159,717       (43,677 )
Total stockholders’ equity     4,317,432       30,606,601  
Total capitalization   $ 8,096,040     $ 32,230,744  

 

(1) The number of shares of common stock to be outstanding after the offering is based on 13,603,481 shares, which is the number of shares outstanding on September 21, 2017, and excludes:

 

  694,748 shares of common stock issuable upon the exercise of all of the outstanding warrants;
  516,666 shares issuable upon the conversion of all of the convertible notes held by related and unrelated parties;
  45,000 shares of common stock issuable upon the exercise of all of the outstanding options issued to franchisees; and
  166,666 shares of our common stock issuable upon the exercises of warrants which would be issued by Muscle Maker to the Selling Agent assuming all of the shares offered in this Offering are sold.

 

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DETERMINATION OF OFFERING PRICE

 

The public offering price of the shares was determined by negotiation between us and the Selling Agent. That public offering price is subject to change as a result of market conditions and other factors. Prior to this offering, no public market exists for our common stock. The principal factors considered in determining the public offering price of the shares included:

 

  the information in this Offering Circular and otherwise available to the Selling Agent, including our financial information;
     
  the history and the prospects for the industry in which we compete;
     
  the ability of our management;
     
  the prospects for our future earnings;
     
  the present state of our development and our current financial condition;
     
  the general condition of the economy and the securities markets in the United States at the time of this offering;
     
  the recent market prices of, and the demand for, publicly-traded securities of generally comparable companies; and
     
  other factors as were deemed relevant.

 

DILUTION

 

Dilution is the amount by which the offering price paid by purchasers of common stock sold in this offering will exceed the pro forma net tangible book value per share of common stock after the offering. As of December 31, 2016, our net tangible book value was approximately $(1,907,000), or $(0.31) per share. Net tangible book value is the value of our total tangible assets less total liabilities. As of December 31, 2016, our total liabilities exceed our total tangible assets by approximately $1,907,000. This section accounts for issuances of Muscle Maker after December 31, 2016, including (i) 309,320 shares of Common Stock to American Restaurant Holdings in connection with the conversion of the 2015 ARH Note in the principal amount of $1,082,620, (ii) 936,372 shares of Common Stock to American Restaurant Holdings in connection with the conversion of the 2016 ARH Note in the principal amount of $2,621,842, (iii) 350,338 shares of Common Stock to American Restaurant Holdings in connection with the conversion of the 2017 ARH Note in the principal amount of $980,949, (iv) 96,809 shares of Common Stock to American Restaurant Holdings in connection with the conversion of the Second 2017 ARH Note in the principal amount of $338,834, (v) 60,166 shares of Common Stock to American Restaurant Holdings in connection with the conversion of the Third 2017 ARH Note in the principal amount of $336,931, (vi) 2,067,953 shares of Common Stock to the MMF Members in connection with the Merger which were initially recorded collectively at $1,466,541, (vii) 8,928 shares of Common Stock to Daniel Pettit, as trustee of the Daniel E. Pettit Revocable Trust at a price of $5.60 per share, (viii) 53,571 shares of Common Stock to CCNC-MMG, LLC at a price of $5.60 per share, (ix) 8,928 shares of Common Stock to Alex Danze at a price of $5.60 per share, (x) 159,642 shares of Common Stock to the employees and consultants of Muscle Maker at a value of $7.00 per share; (xi) 28,333 shares of Common Stock to CrowdfundX at a value of $6.00 per share (or, an aggregate value of $170,000) as partial consideration for the marketing services provided by CrowdfundX in connection with the offering, (xii) 7,142 shares of Common Stock issued upon the exercise of a 3-year warrant by Prashant Shah at an exercise price of $7.00 per share, and (xiii) 7,142 shares of Common Stock to each of the six directors of Muscle Maker (an aggregate of 42,857 shares of Common Stock) at a value of $7.00 per share.

 

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In addition, this section assumes the issuance of 516,666 shares of common stock upon the conversion of an aggregate $1,550,000 of all of the convertible notes held by related and unrelated parties, as well as the exercise of (a) the 5-year warrant to Dean Miles to purchase 89,285 shares of Common Stock of Muscle Maker at an exercise price of $5.25 per share; (b) the 3-year warrant to American Restaurant Holdings to purchase 327,730 shares of Common Stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the 2016 ARH Note in 2016 ; (c) the 3-year warrant to American Restaurant Holdings to purchase of 122,618 shares of Common Stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the 2017 ARH Note in 2017; (d) the 3-year warrant to American Restaurant Holdings to purchase of 21,058 shares of Common Stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the Second 2017 ARH Note in 2017; (e) the 3-year warrant to American Restaurant Holdings to purchase of 21,058 shares of Common Stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the Third 2017 ARH Note in 2017 (f) 3-year warrants to fifteen investors of the Company to purchase an aggregate 112,991 shares of Common Stock of Muscle Maker at an exercise price of $7.00 per share; (g); and (h) 3-year non-qualified stock options to the franchisees of Muscle Maker to purchase an aggregate of 45,000 shares of Common Stock of Muscle Maker at an exercise price of $7.00 per share.

 

Based on the initial offering price of $6.00 per one share of common stock, on an as adjusted basis as of December 31, 2016, after giving effect to the issuance of common stock in connection with the Merger, conversion of debt, and restricted stock grants, assumed exercise of warrants to purchase common stock and the offering of shares of common stock and the application of the related net proceeds, our net tangible book value would be:

 

(i) 27,839,737, or $1.91 per share of common stock, assuming the sale of 100% of the shares offered (3,333,333 shares) with net proceeds in the amount of $17,906,998 after deducting estimated broker commissions of $1,500,000 and estimated offering expenses of $593,000;

 

(ii) $23,214,739, or $1.69 per share of common stock, assuming the sale of 75% of the shares offered (2,500,000 shares) with net proceeds in the amount of $13,282,000 after deducting estimated broker commissions of $1,125,000 and estimated offering expenses of $593,000;

 

(iii) $18,589,739, or $1.44 per share of common stock, assuming the sale of 50% of the shares offered (1,666,667 shares) with net proceeds in the amount of $8,657,000 after deducting estimated broker commissions of $750,000 and estimated offering expenses of $593,000; and

 

(iv) $13,964,739, or $1.16 per share of common stock, assuming the sale of 25% of the shares offered (833,333 shares) with net proceeds in the amount of $4,032,000 after deducting estimated broker commissions of $375,000 and estimated offering expenses of $593,000.

 

Purchasers of shares of common stock in this offering will experience immediate and substantial dilution in net tangible book value per share for financial accounting purposes, as illustrated in the following table on an approximate dollar per share basis, depending upon whether we sell 100%, 75%, 50%, or 25% of the shares being offered in this offering:

 

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Percentage of offering shares of common stock sold   100%     75%     50%     25%
Offering price per share of common stock   $ 6.00     $ 6.00     $ 6.00     $ 6.00
Net tangible book value per share of common stock before this offering   $ 0.87     $ 0.87     $ 0.87     $ 0.87
Increase in net tangible book value per share attributable to new investors   $ 5.37     $ 5.31     $ 5.19     $ 4.84
Pro forma net tangible book value per share after this offering   $ 1.88     $ 0.66     $ 1.41     $ 1.13
Immediate dilution in net tangible book value per share to new investors   $ 4.12     $ 4.34     $ 4.59     $ 4.87

  

The following tables sets forth depending upon whether we sell 100%, 75%, 50%, or 25% of the shares being offered in this offering, as of December 31, 2016, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing shares of common stock in this offering, after giving pro forma effect to the issuance of common stock in connection with the conversion of debt, the grant of common stock to our employees and consultants, the Merger, and the assumed exercise of warrants and options to purchase common stock, and the issuance of common stock to the new investors in this offering at the offering price of $6.00 per share of common stock, together with the total consideration paid an average price per share paid by each of these groups, before deducting estimated broker commissions and estimated offering expenses.

 

    100% of the Offered Shares Sold  
                      Average  
    Shares Purchased     Total Consideration     Price  
    Number     Percent     Amount     Percent     per Share  
Existing stockholders as of December 31, 2016     6,139,789       42 %   $ 5,157,010       13 %   $ 20.84  
Issuance of common stock in exchange for MMB Units     2,067,953       14 %   $ 203,394       1 %   $ 0.10  
Issuance of common stock for cash     71,427       0 %   $ 400,000       1 %   $ 5.60  
Issuance of common stock upon conversion of ARH Notes     1,753,005       12 %   $ 5,361,178       14 %   $ 3.06  
Issuance of common stock to directors, employees and consultants     230,832       2 %   $ 1,384,992       4 %   $ 6.00  
Exercise of warrants     7,142       0 %   $ 50,000       0 %   $ 7.00  
Assumed exercise of options to purchase common stock prior to the Offering     45,000       0 %   $ 315,000       1 %   $ 7.00  
Assumed exercise of warrants     694,740       5 %   $ 4,263,248       11 %   $ 6.14  
Assumed conversion of Investor Notes to common stock     516,666       2 %   $ 1,550,000       4 %   $ 3.00  
New investors     3,333,333       23 %   $ 19,999,998       51 %   $ 6.00  
Total     14,859,887       100 %   $ 38,684,820       100 %   $ 2.60  

 

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    75% of the Offered Shares Sold  
                Average  
    Shares Purchased     Total Consideration     Price  
    Number     Percent     Amount     Percent     per Share  
Existing stockholders as of December 31, 2016     6,139,789       44 %   $ 5,157,010       15 %   $ 0.84  
Issuance of common stock in exchange for MMB Units     2,067,953       15 %   $ 203,394       1 %   $ 0.10  
Issuance of common stock for cash     71,427       0 %   $ 400,000       1 %   $ 5.60  
Issuance of common stock upon conversion of ARH Notes     1,753,005       13 %   $ 5,361,178       16 %   $ 3.06  
Issuance of common stock to directors, employees and consultants     230,832       2 %   $ 1,384,992       4 %   $ 6.00  
Exercise of warrants     7,142       0 %   $ 50,000       0 %   $ 7.00  
Assumed exercise of options to purchase common stock prior to the Offering     45,000       0 %   $ 315,000       1 %   $ 7.00  
Assumed exercise of warrants     694,740       5 %   $ 4,263,248       13 %   $ 6.14  
Assumed conversion of Investor Notes to common stock     516,666       3 %   $ 1,550,000       5 %   $ 3.00  
New investors     2,500,000       18 %   $ 14,999,999       44 %   $ 6.00  
Total     14,026,554       100 %   $ 33,684,821       100 %   $ 2.40  

 

    50% of the Offered Shares Sold  
                Average  
    Shares Purchased     Total Consideration     Price  
    Number     Percent     Amount     Percent     per Share  
Existing stockholders as of December 31, 2016     6,139,789       47 %   $ 5,157,010       18 %   $ 0.84  
Issuance of common stock in exchange for MMB Units     2,067,953       16 %   $ 203,394       1 %   $ 0.10  
Issuance of common stock for cash     71,427       1 %   $ 400,000       1 %   $ 5.60  
Issuance of common stock upon conversion of ARH Notes     1,753,005       13 %   $ 5,361,178       19 %   $ 3.06  
Issuance of common stock to directors, employees and consultants     230,832       2 %   $ 1,384,992       5 %   $ 6.00  
Exercise of warrants     7,142       0 %   $ 50,000       0 %   $ 7.00  
Assumed exercise of options to purchase common stock prior to the Offering     45,000       0 %   $ 315,000       1 %   $ 7.00  
Assumed exercise of warrants     694,740       5 %   $ 4,263,248       15 %   $ 6.14  
Assumed conversion of Investor Notes to common stock     516,666       3 %   $ 1,550,000       5 %   $ 3.00  
New investors     1,666,667       13 %   $ 9,999,999       35 %   $ 6.00  
Total     13,193,221       100 %   $ 28,684,821       100 %   $ 2.17  

 

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    25% of the Offered Shares Sold  
                Average  
    Shares Purchased     Total Consideration     Price  
    Number     Percent     Amount     Percent     per Share  
Existing stockholders as of December 31, 2016     6,139,789       50 %   $ 5,157,010       22 %   $ 0.84  
Issuance of common stock in exchange for MMB Units     2,067,953       16 %   $ 203,394       1 %   $ 0.10  
Issuance of common stock for cash     71,427       1 %   $ 400,000       2 %   $ 5.60  
Issuance of common stock upon conversion of ARH Notes     1,753,005       15 %   $ 5,361,178       23 %   $ 3.06  
Issuance of common stock to directors, employees and consultants     230,832       2 %   $ 1,384,992       6 %   $ 6.00  
Exercise of warrants     7,142       0 %   $ 50,000       0 %   $ 7.00  
Assumed exercise of options to purchase common stock prior to the Offering     45,000       0 %   $ 315,000       1 %   $ 7.00  
Assumed exercise of warrants     694,740       6 %   $ 4,263,248       18 %   $ 6.14  
Assumed conversion of Investor Notes to common stock     516,666       3 %   $ 1,550,000       6 %   $ 3.00  
New investors     833,333       7 %   $ 5,000,000       21 %   $ 6.00  
Total     12,359,887       100 %   $ 23,684,822       100 %   $ 1.92  

 

The foregoing discussion and tables include:

 

  (i) the issuance of 1,753,005 shares of Common Stock of Muscle Maker to American Restaurant Holdings for converted debt of Muscle Maker;
  (ii) issuance of 2,067,953 shares of Common Stock of Muscle Maker to MMF Members in connection with the Merger;
  (iii) grant of 159,642 shares of Common Stock of Muscle Maker to our employees and consultants;
  (iv) grant of 42,857 shares of Common Stock of Muscle Maker to our directors;
  (v) issuance of 28,333 shares of Common Stock of Muscle Maker to CrowdfundX;
  (vi) the issuance of 7,142 shares of Common Stock upon the exercise of a warrant at an exercise price of $7.00 per share; and
  (vii) the issuance of an aggregate of 71,427 shares of Common Stock to three investors at a purchase price of $5.60 per share.

 

and assume the following transactions immediately prior to the completion of this Offering:

 

  (i) issuance of 433,333 shares of Common Stock of Muscle Maker to unrelated third-parties in connection with convertible debt issued in 2017 at a conversion price of $3.00 per share (50% of the initial public offering price);
  (ii) issuance of 83,333 shares of Common Stock of Muscle Maker to related parties in connection with convertible debt issued in 2017 at a conversion price of $3.00 per share (50% of the initial public offering price);
  (iii) The exercise of all outstanding warrants issued to (a) American Restaurant Holdings to purchase 492,464 shares of Common Stock at $7.00 per share (b) unrelated third-parties to purchase 95,136 shares of Common Stock at $7.00 per share and to purchase 89,285 shares of Common Stock at $5.25 per share and (c) related parties to purchase 17,855 shares of Common Stock at $7.00 per share.
  (iv) The exercise of all outstanding options issued to franchisees to purchase 45,000 shares of Common Stock at an exercise price of $7.00 per share.

 

The foregoing discussion and tables above do not give effect to the 166,666 shares of our common stock issuable upon the exercise of warrants at an exercise price of $6.60 per share which would be issued by Muscle Maker to the Selling Agent in connection with the Offering assuming all of the shares offered in this Offering are sold.

 

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PLAN OF DISTRIBUTION

 

Agreement with the Selling Agent

 

We are currently party to an engagement agreement, as amended, with the Selling Agent. The term of the engagement agreement began on July 31, 2017 and will continue until June 30, 2018, unless one of the following events occurs prior to June 30, 2018, in which case the engagement agreement would be terminated early:

 

  (i) we or the Selling Agent terminate the agreement for any reason;
     
  (ii) we execute a definitive selling agency agreement with the Selling Agent (a form of Selling Agency Agreement which is attached as an exhibit hereto); or
     
  (iii) we decide not to proceed with the Offering or withdraw any offering statement submitted to or filed with the SEC.

 

Compensation for Advisory Services. As part of the Engagement Letter, the Selling Agent agreed to provide us with advice with regard to (i) our business, (ii) entering the U.S. capital markets, (iii) the contemplated marketing and development of the Company as a public company and (iv) our ongoing compliance obligations as a public company. As compensation for these advisory services, we agreed to pay the Selling Agent $10,000 per month commencing upon the Company’s stock becoming publicly traded and continuing for a period of 6 months thereafter.

 

Offering Expenses. We are responsible for all Offering fees and expenses, including the following: (i) fees and disbursements of our legal counsel, accountants, and other professionals we engage; (ii) fees and expenses incurred in the production of Offering documents, including design, printing, photograph, and written material procurement costs; (iii) all filing fees, including those charged by the Financial Industry Regulatory Authority (“FINRA”); (iv) all of the legal fees related to FINRA clearance; and (v) our transportation, accommodation, and other roadshow expenses (up to a maximum of $1,000 which shall be pre-approved by the Company). We have agreed to reimburse the Selling Agent for its reasonable and documented legal costs (the Company must pre-approve any expenses in excess of $1,000) up to a maximum of $45,000.

 

Additionally, the Company agreed to pay a non-accountable due diligence fee of $30,000 of which $15,000 was paid upon signing of the engagement agreement and $15,000 on the closing. Any advances received by the Selling Agent or related person from the Company that are unused, in the event of the Offering does not close or the engagement agreement is terminated for any reason, shall be returned to the Company in compliance with FINRA Rule 5110(f)(2)(C).

 

Reimbursable Expenses in the Event of Termination. In the event the Offering does not close or the engagement agreement is terminated for any reason, we have agreed to reimburse the Selling Agent for all unreimbursed, reasonable, documented, out-of-pocket fees, expenses, and disbursements, including the Selling Agent’s legal fees, up to $45,000.

 

Selling Agent Commission. Pursuant to the Selling Agency Agreement, we shall pay a commission of 7.5% of the gross proceeds received by the Company in the Offering, which shall be allocated by the Selling Agent to members of the selling group and soliciting dealers in its sole discretion provided however, that the commission shall be reduced to 4% for any proceeds received from sales/orders placed through the Selling Agent’s affiliated online platform known as BANQ by investors the Company directly introduces to the Selling Agent through its marketing campaign or from existing security holders of the Company.

 

Selling Agent’s Warrants

 

Upon each closing of this Offering, we have agreed to issue certain warrants (the “Selling Agent’s Warrants”) to the Selling Agent to purchase a number of shares of the Common Stock equal to 5.0% of the total shares of the Common Stock sold in such closing. The Selling Agent’s Warrants are exercisable commencing six months after the date of the applicable closing until the close of business on the five (5) year anniversary of the qualification date of the Offering Statement. The Selling Agent’s Warrants are not redeemable by us. The exercise price for the Selling Agent’s Warrants will be the amount that is 10% greater than the public offering price, or $6.60.

 

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The Selling Agent’s Warrants and the Common Stock underlying the Selling Agent’s Warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The Selling Agent, or permitted assignees under such rule, may not exercise, sell, transfer, assign, pledge, or hypothecate the Selling Agent’s Warrants or the Common Stock underlying the Selling Agent’s Warrants, nor will the Selling Agent or permitted assignees engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the Selling Agent’s Warrants or the underlying shares for a period of 180 days from the applicable closing, except that they may be transferred, in whole or in part, by operation of law or by reason of our reorganization, or to any underwriter or selected dealer participating in the Offering and their officers or partners if the Selling Agent’s Warrants or the underlying shares so transferred remain subject to the foregoing lock-up restrictions for the remainder of the time period. The Selling Agent’s Warrants will provide for adjustment in the number and price of the Selling Agent’s Warrants and the shares underlying such Selling Agent’s Warrants in the event of recapitalization, merger, stock split, or other structural transaction, or a future financing undertaken by us.

 

Lock-Up Agreements

 

We and our officers, directors, and more than 5% holders of our Common Stock as of the qualification of the Offering Statement and investors in our recent private placement have agreed, or will agree, with the Selling Agent, subject to certain exceptions, that, without the prior written consent of the Selling Agent, we and they will not, directly or indirectly, during the period ending 180 days after the date of the final closing of the Offering:

 

  offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Common Stock or any securities convertible into or exchangeable or exercisable for the Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition; or
     
  enter into any swap or any other agreement or any transaction that transfers, in whole or in part, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of the Common Stock or other securities, in cash or otherwise.

 

This agreement does not apply, in our case, to securities issued pursuant to existing employee benefit plans or securities issued upon exercise of options, and other exceptions, and in the case of our officers, directors and other holders of our securities, exercise of stock options issued pursuant to a stock option or similar plans, and other exceptions.

 

Exchange Listing

 

Our Common Stock are not quoted on any stock exchange or quotation system. In addition, applicable state securities laws and regulations impose transfer restrictions on our Common Stock. We intend to list our common stock on the NYSE American or the NASDAQ under the symbol “MMB” after we register our common stock under the Exchange Act, following the termination of this offering. There is no assurance that our common stock will be registered under the Exchange Act or, if registered under the Exchange Act, that our listing application will be approved by the NYSE American or the NASDAQ.

 

Our Common Stock will not commence trading on the NYSE American or NASDAQ until each of the following conditions are met: (i) we have filed a registration statement on Form 8-A concurrent with the qualification by the SEC of our Offering Statement; (ii) (A) the receipt by the SEC of certification from the NYSE American or NASDAQ of its approval for listing on the exchange our Common Stock within five calendar days after the qualification of our Offering Statement and the Form 8-A has become effective or (B) we have filed a post-qualification amendment to the Offering Statement; refiling a registration statement on Form 8-A concurrent with the qualification by the SEC of the post-qualification amendment to the Offering Statement or waiver by the SEC of refiling a Form 8-A; the receipt by the SEC of certification from the NYSE American or NASDAQ of its approval for listing on the exchange our Common Stock within five calendar days after the post-qualification amendment to our Offering Statement, and such post-qualification amendment is qualified by the SEC and the Form 8-A has become effective; and (iii) the Offering is terminated. Even if we meet the minimum requirements for listing on the NYSE American or NASDAQ, we may wait before terminating the offering and commencing the trading of our Common Stock on the NYSE American or NASDAQ in order to raise additional proceeds. As a result, you may experience a delay between the closing of your purchase of shares of our Common Stock and the commencement of exchange trading of our Common Stock on the NYSE American or NASDAQ.

 

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If not approved by the NYSE American or NASDAQ, we intend to apply for quotation of our common stock on the OTCQX Marketplace under the symbol “MMB” after the termination of this offering.

 

Pricing of the Offering

 

Prior to the Offering, there has been no public market for the Shares. The initial public offering price was determined by negotiation between us and the Selling Agent. The principal factors considered in determining the initial public offering price included:

 

  the information in this Offering Circular and otherwise available to the Selling Agent, including our financial information;
     
  the history and the prospects for the industry in which we compete;
     
  the ability of our management;
     
  the prospects for our future earnings;
     
  the present state of our development and our current financial condition;
     
  the general condition of the economy and the securities markets in the United States at the time of this offering;
     
  the recent market prices of, and the demand for, publicly-traded securities of generally comparable companies; and
     
  other factors as were deemed relevant.

 

Indemnification and Control

 

We have agreed to indemnify the Selling Agent against certain liabilities, including liabilities under the Securities Act. If we are unable to provide this indemnification, we will contribute to the payments the Selling Agent and its affiliates and controlling persons may be required to make in respect of these liabilities.

 

The Selling Agent and its affiliates are engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The Selling Agent and its affiliates may in the future perform various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses.

 

Our Relationship with the Selling Agent

 

In the ordinary course of their various business activities, the Selling Agent and its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of the issuer. The Selling Agent and its affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

 

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Investment Limitations if We Do Not Obtain a Listing on a National Securities Exchange

 

As set forth in Title IV of the JOBS Act, there are no limits on how many shares an investor may purchase if the Offering results in a listing of our Common Stock on the NYSE American or other national securities exchange. The following would apply only if we are unable to obtain a listing on a national securities exchange and we seek for our Common Stock to trade on a platform of the OTC Markets.

 

Generally, in the case of trading on the over-the-counter markets, no sale may be made to you in this Offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth (please see under “How to calculate your net worth”). Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.

 

Because this is a Tier 2, Regulation A offering, most investors in the case of trading on the over-the-counter markets must comply with the 10% limitation on investment in the Offering. The only investor in this Offering exempt from this limitation is an “accredited investor” as defined under Rule 501 of Regulation D under the Securities Act (an “Accredited Investor”). If you meet one of the following tests you should qualify as an Accredited Investor:

 

(i) You are a natural person who has had individual income in excess of $200,000 in each of the two most recent years, or joint income with your spouse in excess of $300,000 in each of these years, and have a reasonable expectation of reaching the same income level in the current year;

 

(ii) You are a natural person and your individual net worth, or joint net worth with your spouse, exceeds $1,000,000 at the time you purchase Shares (please see below under “How to calculate your net worth”);

 

(iii) You are an executive officer or general partner of the issuer or a manager or executive officer of the general partner of the issuer;

 

(iv) You are an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, or the Code, a corporation, a Massachusetts or similar business trust or a partnership, not formed for the specific purpose of acquiring the Shares, with total assets in excess of $5,000,000;

 

(v) You are a bank or a savings and loan association or other institution as defined in the Securities Act, a broker or dealer registered pursuant to Section 15 of the Exchange Act, an insurance company as defined by the Securities Act, an investment company registered under the Investment Company Act of 1940 (the “Investment Company Act”), or a business development company as defined in that act, any Small Business Investment Company licensed by the Small Business Investment Act of 1958 or a private business development company as defined in the Investment Advisers Act of 1940;

 

(vi) You are an entity (including an Individual Retirement Account trust) in which each equity owner is an accredited investor;

 

(vii) You are a trust with total assets in excess of $5,000,000, your purchase of Shares is directed by a person who either alone or with his purchaser representative(s) (as defined in Regulation D promulgated under the Securities Act) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, and you were not formed for the specific purpose of investing in the Shares; or

 

(viii) You are a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has assets in excess of $5,000,000.

 

Offering Period and Expiration Date

 

This Offering will start on the date this Offering Circular is declared qualified by the SEC. We expect to commence the sale of the Shares as of the date on which the Offering Statement of which this Offering Circular is a part is declared qualified by the United States Securities and Exchange Commission (“SEC”). The Offering will terminate at the earlier of: (1) the date at which $19,999,998 of Shares has been sold, (2) the date which is one year after this Offering being qualified by the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”), or (3) the date on which this Offering is earlier terminated by the Company in its sole discretion (the “Termination Date”).

 

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Procedures for Subscribing

 

U.S. investors may participate in this Offering by opening an account with BANQ, an online brokerage division of TriPoint, the Selling Agent. The BANQ website may be found at Banq.co. BANQ is open to qualified U.S. investors and accepts individual, joint, corporate or IRA accounts. The application process takes approximately 5 minutes and there are no account minimums. Deposits to BANQ can be made via wire transfer or ACH deposit or by mailing in a check. Deposits usually post to an account within 3-5 days. BANQ® is a division of the Selling Agent, a member of FINRA and the Securities Investor Protection Corporation (“SIPC”), which protects the securities of its members’ customers up to $500,000 (including $250,000 for claims for cash). TriPoint and BANQ do not charge a fee for opening an account or for depositing shares purchased in the Offering into such account.

 

Investors investing through BANQ will be required to open their accounts and deposit funds into their respective BANQ accounts after the qualification of this Offering Statement relating to this Offering but prior to the applicable closing of this Offering in which such investor is participating; in all events, no funds may be used to purchase securities issued in this Offering until the Offering Statement relating to this Offering and filed by the Company with the SEC has been qualified by the SEC. After an account is opened but before 48 hours prior to the applicable closing of the Offering, the investor will be required to deposit funds into the account sufficient to purchase the amount of securities that the investor intends to purchase in this Offering. Such funds will not be held in an escrow account or otherwise segregated as part of the Offering process. During the marketing period for the Offering and after the Offering Statement has been qualified, the investor will provide an indication of interest as to the amount of securities the investor intends to purchase. Approximately 24-48 hours prior to the completion of a closing in this offering, each investor that has money deposited with BANQ® for this offering will be notified of the final allocation of the amount of securities such investor shall receive. Indications will not be finalized without sufficient funds in the investor’s BANQ online brokerage account. Upon the applicable closing, the funds required to purchase that amount of securities will be removed from such investor’s account and transferred to the account of the Company, and the amount of securities purchased will be deposited into such investor’s account. If an investor fails to confirm such investor’s desired investment within the required time, no funds will be withdrawn, no securities will be provided and the investor’s indication will not be confirmed. In addition, if this Offering fails to close, no funds will be withdrawn, no securities will be provided, the investor’s indication will not be confirmed and the funds in the investor’s BANQ account will remain available for withdrawal, in accordance with the investor’s account agreement with BANQ.

 

U.S. investors who participate in this Offering other than through BANQ, including through selected dealers who do not maintain clearing agreements, will be required to deposit their funds in an escrow account held at Wilmington Trust, N.A.; any such funds that Wilmington Trust receives shall be held in escrow until the applicable closing of the Offering or such other time as mutually agreed between the Company and the Selling Agent, and then used to complete securities purchases, or returned if this Offering fails to close.

 

Selected Dealers with clearing agreements shall provide the Selling Agent with executed indications and delivery sheets from their customers and shall settle the transaction with the Selling Agent thru DTC on closing. In the event that the Company does not qualify or list on NYSE American or NASDAQ, Selected Dealers who are unable to participate in an over the counter security may withdraw their subscriptions prior to closing.

 

Non-U.S. investors may participate in this Offering by depositing their funds in the escrow account held at Wilmington Trust, N.A.; any such funds that Wilmington Trust receives shall be held in escrow until the applicable closing of the Offering or such other time as mutually agreed between the Company and the Selling Agent, and then used to complete securities purchases, or returned if this Offering fails to close.

 

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Right to Reject Subscriptions. After we receive your complete, executed subscription agreement (forms of which are attached to the Offering Statement as Exhibits 4.1 and 4.2) and the funds required under the subscription agreement have been transferred to the escrow account or remain in your BANQ account, we have the right to review and accept or reject your subscription in whole or in part, for any reason or for no reason. We will return all monies from rejected subscriptions immediately to you, without interest or deduction.

 

Acceptance of Subscriptions. Upon our acceptance of a subscription agreement, we will countersign the subscription agreement and issue the shares subscribed at closing. Once you submit the subscription agreement and it is accepted, you may not revoke or change your subscription or request your subscription funds. All accepted subscription agreements are irrevocable.

 

Under Rule 251 of Regulation A, if our Common Stock will not trade on a national securities exchange, non-accredited, non-natural investors are subject to the investment limitation and may only invest funds which do not exceed 10% of the greater of the purchaser’s revenue or net assets (as of the purchaser’s most recent fiscal year end). If our Common Stock will not trade on a national securities exchange, a non-accredited, natural person may only invest funds which do not exceed 10% of the greater of the purchaser’s annual income or net worth (please see below on how to calculate your net worth).

 

How to Calculate Net Worth: For the purposes of calculating your net worth, it is defined as the difference between total assets and total liabilities. This calculation must exclude the value of your primary residence and may exclude any indebtedness secured by your primary residence (up to an amount equal to the value of your primary residence). In the case of fiduciary accounts, net worth and/or income suitability requirements may be satisfied by the beneficiary of the account or by the fiduciary, if the fiduciary directly or indirectly provides funds for the purchase of the shares in this Offering.

 

In order to purchase the shares in this Offering and prior to the acceptance of any funds from an investor, an investor will be required to represent, to the Company’s satisfaction, that he is either an accredited investor or is in compliance with the 10% of net worth or annual income limitation on investment in this Offering.

 

Offering Campaign Consultant

 

The Company also engaged WhoYouKnow LLC, a California limited liability company, d/b/a CrowdfundX (“CrowdfundX”), to assist the Company in the planning, public relations and promotion of this Offering, utilizing the BANQ Online Platform. Pursuant to the terms of the Master Services Agreement, effective as of July 20, 2017, between the Company and CrowdfundX, the Company issued 28,333 shares of common stock at a value of $6.00 per share (or, an aggregate value of $170,000) to CrowdfundX upon the execution of the agreement as well as agreed to pay a cash fee to CrowdfundX in the amount of $145,000, which is payable in installments of $40,000 within five business days after the effective date of the agreement, $40,000 on August 21, 2017, and $65,000 on September 21, 2017.

 

Escrow Account

 

Wilmington Trust, N.A. (“Escrow Agent”), will act as escrow agent for the Offering. Prior to the date the SEC issues a qualification for the sale of the shares of common stock pursuant to this Offering Circular, the escrow agent shall establish a non-interest-bearing account, which account shall be titled “WILMINGTON TRUST, N.A. as Escrow Agent for Muscle Maker, Inc Escrow” (the “Escrow Account”). The Escrow Account shall be a segregated deposit account at the bank. The Escrow Account maintained by the escrow agent shall be terminated in whole or in part on the earliest to occur of: (a) the date which is one year after this Offering being qualified by the SEC, or (b) the date on which this Offering is earlier terminated by the Company in its sole discretion. The foregoing sentence describes the escrow period the “Escrow Period”. During the Escrow Period, the parties agree that (i) the Escrow Account and escrowed funds will be held for the benefit of investors, and that (ii) the Company is not entitled to any funds received into escrow, and that no amount deposited into the Escrow Account shall become the property of the Company or any other entity, or be subject to any debts, liens or encumbrances of any kind of any other entity, until the Company has triggered closing of such funds. In the event the escrow agent does not receive written instructions from the Company to release funds from the Escrow Account on or prior to termination of the Escrow Period, the escrow agent shall terminate the escrow and make a full and prompt return of funds so that refunds are made to each investor in the exact amount received from said investor, without deduction, penalty or expense to investor.

 

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The Escrow Agent shall process all escrowed amounts for collection through the banking system and shall maintain an accounting of each deposit posted to its ledger, which also sets forth, among other things, each investor’s name and address, the quantity of shares of common stock purchased, and the amount paid.

 

If any subscription agreement for the purchase of shares of common stock is rejected by the Company in its sole discretion, then the subscription agreement and the escrowed amounts for such investor shall be promptly returned to the rejected investor by the Escrow Agent.

 

The Company paid a $2,500.00 administrative fee to Escrow Agent upon execution of the Closing Escrow Agreement, among the Company, Escrow Agent and Selling Agent. In addition, the Company shall be obligated to reimburse Escrow Agent for all fees, costs and expenses incurred or that become due in connection with the Escrow Agreement or the Escrow Account, including reasonable attorney’s fees. Wire fees have been waived for this Offering.

 

Escrow agent, in no way endorses the merits of the offering of the securities.

 

Transfer Agent and Registrar

 

We have engaged Computershare Trust Company, N.A. (“Transfer Agent”) to be the transfer agent and registrar for our common stock and will be subject to the agreed upon fee schedule.

 

The Transfer Agent’s address is at 250 Royall Street, Canton, Massachusetts 02021 and its telephone number is (877) 373-6374.

 

We will pay the Transfer Agent an ongoing account management fee per month in accordance with the fee schedule depending on the number of holder accounts as set forth below to cover the administration of services set forth on that certain Fee and Service Schedule among Muscle Maker, Computershare Inc. and Computershare Trust Company, N.A.:

 

Up to 250 holder accounts   $ 208.33 per month  
From 251 to 1000 holder accounts   $ 350.00 per month  
From 1,001 to 5000 holder accounts (annual fee/monthly billing)   $ 3.50 per account  
From 5,001 to 15,000 holder accounts (annual fee/monthly billing)   $ 3.25 per account  
From 15,001 to 25,000 holder accounts (annual fee/monthly billing)   $ 3.00 per account  

 

Stock Certificates

 

Ownership of the Offered Shares will be “book-entry” only form, meaning that ownership interests shall be recorded by the Transfer Agent, and kept only on the books and records of Transfer Agent. No physical certificates shall be issued, nor received, by Transfer Agent or any other person. The Transfer Agent records and maintains securities of Company in in book-entry form only. Book-entry form means the Transfer Agent maintains shares on an investor’s behalf without issuing or receiving physical certificates. Securities that are held in un-certificated book-entry form have the same rights and privileges as those held in certificate form, but the added convenience of electronic transactions (e.g. transferring ownership positions between a broker-dealer and the Transfer Agent), as well as reducing risks and costs required to store, manage, process and replace lost or stolen securities certificates. Transfer Agent shall send out email confirmations of positions and notifications of changes “from” Company upon each and every event affecting any person’s ownership interest, with a footer referencing Transfer Agent.

 

We have no responsibility for any aspect of the actions of the Transfer Agent. In addition, we have no responsibility or liability for any aspect of the records kept by the Transfer Agent relating to, or payments made on account of investors in, the Offered Shares, or for maintaining, supervising or reviewing any records relating to ownership of Offered Shares. We also do not supervise the systems of the Transfer Agent.

 

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Selling Restrictions

 

Notice to prospective investors in Canada

 

The offering of the Offered Shares in Canada is being made on a private placement basis in reliance on exemptions from the prospectus requirements under the securities laws of each applicable Canadian province and territory where the Common Stock may be offered and sold, and therein may only be made with investors that are purchasing as principal and that qualify as both an “accredited investor” as such term is defined in National Instrument 45-106 Prospectus and Registration Exemptions and as a “permitted client” as such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligation. Any offer and sale of the Offered Shares in any province or territory of Canada may only be made through a dealer that is properly registered under the securities legislation of the applicable province or territory wherein the Offered Shares is offered and/or sold or, alternatively, by a dealer that qualifies under and is relying upon an exemption from the registration requirements therein.

 

Any resale of the Offered Shares by an investor resident in Canada must be made in accordance with applicable Canadian securities laws, which may require resales to be made in accordance with prospectus and registration requirements, statutory exemptions from the prospectus and registration requirements or under a discretionary exemption from the prospectus and registration requirements granted by the applicable Canadian securities regulatory authority. These resale restrictions may under certain circumstances apply to resales of the Offered Shares outside of Canada.

 

Upon receipt of this document, each Canadian investor hereby confirms that it has expressly requested that all documents evidencing or relating in any way to the sale of the securities described herein (including for greater certainty any purchase confirmation or any notice) be drawn up in the English language only. Par la réception de ce document, chaque investisseur canadien confirme par les présentes qu’il a expressément exigé que tous les documents faisant foi ou se rapportant de quelque manière que ce soit à la vente des valeurs mobilières décrites aux présentes (incluant, pour plus de certitude, toute confirmation d’achat ou tout avis) soient rédigés en anglais seulement.

 

Notice to prospective investors in the European Economic Area

 

In relation to each Member State of the European Economic Area (each, a “Relevant Member State”), no offer of Offered Shares may be made to the public in that Relevant Member State other than:

 

A. to any legal entity which is a qualified investor as defined in the Prospectus Directive;
   
B. to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives; or
   
C. in any other circumstances falling within Article 3(2) of the Prospectus Directive,

 

provided that no such offer of Offered Shares shall require the Company or the representatives to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.

 

Each person in a Relevant Member State who initially acquires any Offered Shares or to whom any offer is made will be deemed to have represented, acknowledged and agreed that it is a “qualified investor” within the meaning of the law in that Relevant Member State implementing Article 2(1)(e) of the Prospectus Directive. In the case of any Offered Shares being offered to a financial intermediary as that term is used in Article 3(2) of the Prospectus Directive, each such financial intermediary will be deemed to have represented, acknowledged and agreed that the Offered Shares acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any Offered Shares to the public other than their offer or resale in a Relevant Member State to qualified investors as so defined or in circumstances in which the prior consent of the representatives has been obtained to each such proposed offer or resale.

 

The Company, the representatives and their affiliates will rely upon the truth and accuracy of the foregoing representations, acknowledgements and agreements.

 

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This offering circular has been prepared on the basis that any offer of Offered Shares in any Relevant Member State will be made pursuant to an exemption under the Prospectus Directive from the requirement to publish a prospectus for offers of Offered Shares. Accordingly, any person making or intending to make an offer in that Relevant Member State of Offered Shares which are the subject of the offering contemplated in this offering circular may only do so in circumstances in which no obligation arises for the Company or any of the underwriters to publish a prospectus pursuant to Article 3 of the Prospectus Directive in relation to such offer. The Company has not authorized, nor does it authorize, the making of any offer of Offered Shares in circumstances in which an obligation arises for the Company to publish a prospectus for such offer.

 

For the purpose of the above provisions, the expression “an offer to the public” in relation to any Offered Shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Offered Shares to be offered so as to enable an investor to decide to purchase or subscribe the Offered Shares, as the same may be varied in the Relevant Member State by any measure implementing the Prospectus Directive in the Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC (including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member States) and includes any relevant implementing measure in the Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

 

Notice to prospective investors in the United Kingdom

 

In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are “qualified investors” (as defined in the Prospectus Directive) (i) who have professional experience in matters relating to investments falling within Article 19 (5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”).

 

Any person in the United Kingdom that is not a relevant person should not act or rely on the information included in this document or use it as basis for taking any action. In the United Kingdom, any investment or investment activity that this document relates to may be made or taken exclusively by relevant persons. Any person in the United Kingdom that is not a relevant person should not act or rely on this document or any of its contents.

 

Notice to Prospective Investors in Switzerland

 

The Offered Shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange, or SIX, or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the Offered Shares or this offering may be publicly distributed or otherwise made publicly available in Switzerland.

 

Neither this document nor any other offering or marketing material relating to this offering, the Company, the Offered Shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of Offered Shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (FINMA), and the offer of Offered Shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes, or CISA. The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of Offered Shares.

 

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Notice to Prospective Investors in the Dubai International Financial Centre

 

This offering circular relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority, or DFSA. This offering circular is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this offering circular nor taken steps to verify the information set forth herein and has no responsibility for the offering circular. The Offered Shares to which this offering circular relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the Offered Shares offered should conduct their own due diligence on the Offered Shares. If you do not understand the contents of this offering circular you should consult an authorized financial advisor.

 

Notice to Prospective Investors in Australia

 

No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission, or ASIC, in relation to this offering. This offering circular does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001, or the Corporations Act, and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.

 

Any offer in Australia of the Offered Shares may only be made to persons, or the Exempt Investors, who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the Offered Shares without disclosure to investors under Chapter 6D of the Corporations Act.

 

The Offered Shares applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under this offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring Offered Shares must observe such Australian on-sale restrictions.

 

This offering circular contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this offering circular is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.

 

Notice to prospective investors in China

 

This offering circular does not constitute a public offer of the Offered Shares, whether by sale or subscription, in the People’s Republic of China (the “PRC”). The Offered Shares are not being offered or sold directly or indirectly in the PRC to or for the benefit of, legal or natural persons of the PRC.

 

Further, no legal or natural persons of the PRC may directly or indirectly purchase any of the Offered Shares or any beneficial interest therein without obtaining all prior PRC’s governmental approvals that are required, whether statutorily or otherwise. Persons who come into possession of this document are required by the issuer and its representatives to observe these restrictions.

 

Notice to Prospective Investors in Hong Kong

 

The Offered Shares have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document relating to the Offered Shares has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Offered Shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.

 

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Notice to Prospective Investors in Japan

 

The Offered Shares have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended) and, accordingly, will not be offered or sold, directly or indirectly, in Japan, or for the benefit of any Japanese Person or to others for re-offering or resale, directly or indirectly, in Japan or to any Japanese Person, except in compliance with all applicable laws, regulations and ministerial guidelines promulgated by relevant Japanese governmental or regulatory authorities in effect at the relevant time. For the purposes of this paragraph, “Japanese Person” shall mean any person resident in Japan, including any corporation or other entity organized under the laws of Japan.

 

Notice to Prospective Investors in Singapore

 

This offering circular has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this offering circular and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of Offered Shares may not be circulated or distributed, nor may the Offered Shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA, (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

 

Where the Offered Shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

 

(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

 

(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,

 

securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the Offered Shares pursuant to an offer made under Section 275 of the SFA except:

 

(a) to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

 

(b) where no consideration is or will be given for the transfer;

 

(c) where the transfer is by operation of law;

 

(d) as specified in Section 276(7) of the SFA; or

 

(e) as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.

 

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DIVIDEND POLICY

 

We have not declared or paid dividends on our common stock since our formation, and we do not anticipate paying dividends in the foreseeable future. Declaration or payment of dividends, if any, in the future, will be at the discretion of our Board of Directors and will depend on our then current financial condition, results of operations, capital requirements and other factors deemed relevant by the Board of Directors. There are no contractual restrictions on our ability to declare or pay dividends. Consequently, you will only realize an economic gain on your investment in our common stock if the price appreciates. You should not purchase our common stock expecting to receive cash dividends. Since we do not anticipate paying dividends, and if we are not successful in establishing an orderly public trading market for our shares, then you may not have any manner to liquidate or receive any payment on your investment. Therefore, our failure to pay dividends may cause you to not see any return on your investment even if we are successful in our business operations. In addition, because we may not pay dividends in the foreseeable future, we may have trouble raising additional funds which could affect our ability to expand our business operations.

 

DESCRIPTION OF BUSINESS

 

Our Business

 

The Muscle Maker Grill is a high-growth, fast casual restaurant concept that specializes in preparing healthy-inspired, high-quality, fresh, made-to-order lean, protein-based meals featuring chicken, seafood, pasta, burgers, wraps and flat breads. In addition, we feature freshly prepared entrée salads and an appealing selection of sides, protein shakes and fruit smoothies. We operate in the approximately $34.5 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 restaurant concepts such as Muscle Maker Grill.

 

We believe our 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 following core values form the foundation of our brand:

 

  Quality. Commitment to provide the highest quality, healthy-inspired food for a wonderful experience.
     
  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 a low 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 18, 2017, Muscle Maker and its subsidiaries and franchisees operated 53 Muscle Maker Grill restaurants located in 12 states, 12 of which are owned and operated by Muscle Maker, and 41 are franchise restaurants.

 

As of December 31, 2016, Muscle Maker and its subsidiaries and franchisees operated 49 Muscle Maker Grill restaurants located in 10 states, 8 of which are owned and operated by Muscle Maker, and 41 are franchise restaurants. Our restaurants generated company-operated restaurant revenue of $1,032,558 and $2,735,222 for the years ended December 31, 2015 and 2016, respectively. For the years ended December 31, 2015 and 2016, total company revenues were $3,106,779 and $4,953,205, respectively. For the fiscal years ended December 31, 2015 and 2016, we reported net losses of $1,021,641 and $4,219,687, respectively, and negative cash flow from operating activities of $670,399 and $2,110,702, respectively. As of December 31, 2016, we had an aggregate accumulated deficit of $3,841,638 . 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, 2016 and 2015 that indicated that there is a substantial doubt about our ability to continue as a going concern.

 

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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 December traffic and higher traffic in the first, second, and third quarters.

 

Our healthy-inspired menu, value proposition, and culture have helped us to deliver strong and consistent financial and operating performance, as illustrated by the following:

 

  our company-owned annual average unit volumes, or AUVs, slightly reduced from $762,000 in fiscal year 2015 to $712,000 in fiscal year 2016; and
     
  from the year ended December 31, 2015 to the year ended December 31, 2016, we increased our total revenue by 59% from $3,106,779 to $4,953,205.

 

Our Industry

 

We operate within the LSR segment of the U.S. restaurant industry, which includes QSR and fast-casual restaurants. According to Technomic, 2015 sales for the total LSR category increased 5.2% from 2014 to $255 billion. We offer fast-casual quality food combined with quick-service speed, convenience and value across multiple dayparts. According to Technomic, sales for the total QSR segment grew 4.1% from 2014 to $212 billion in 2015, and are projected to grow to $254 billion by 2019, representing a compounded annual growth rate, or CAGR, of 4.6%. Total sales in the fast-casual segment grew 11.3% from 2014 to $43 billion in 2015, and are projected to grow to $64 billion by 2019, representing a CAGR of 10.2%. We believe our differentiated, high-quality menu delivers great value all day, every day, positions us to compete successfully against both QSR and fast-casual concepts, providing us with a large addressable market.

 

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

 

Strategy

 

We plan to pursue the following strategies to continue to grow our revenues and profits.

 

Expand Our System-Wide Restaurant Base. We believe we are in the early stages of our growth story with 53 current locations in 12 states, as of September 18, 2017 . For the year ended December 31, 2014, we opened 12 new franchised restaurants and no new company-operated restaurants. For the year ended December 31, 2015, we opened one new company-operated and seven new franchised restaurants. For the year ended December 31, 2016, we opened six new company-operated and four new franchised restaurants. In 2017, we intend to open 10 to 15 new company-operated and 15 new franchised restaurants, including military bases, across Arizona, California, Florida, Georgia, Illinois, Louisiana, Kansas, Massachusetts, Nebraska, New Jersey, New York, Nevada, North Carolina, Pennsylvania, Texas, Washington and Internationally. Over the long term, we plan to grow the number Muscle Maker Grill restaurants by 30% to 50% annually. There is no guarantee that we will be able to increase the number of our restaurants. We may be unsuccessful in expanding within our existing or into new markets for a variety of reasons described herein under “Risk Factors” above, including competition for customers, sites, franchisees, employees, licenses and financing.

 

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Drive Comparable Restaurant Sales. We plan to continue delivering 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. Our marketing and operations teams collaborate to ensure that the items developed in our test kitchen 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 fish tacos and shish-k-bobs. 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 Muscle Maker Grill 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 made-from-scratch 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 marketing and various 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 “compliments” 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. Additionally, we have recently implemented a customer experience measurement system, which provides us with real-time feedback and customers’ insights to enhance our service experience. We believe that always striving for excellent customer service will create an experience and environment that will support increased existing customer visits.
     
  Continue to Grow Dayparts: We expect to drive growth across these dayparts through optimized labor and management allocation, enhanced menu offerings, innovative merchandising and marketing campaigns, which have successfully driven growth in our dayparts. 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.

 

Continue to Enhance Profitability. We focus on expanding our 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 believe we will be able to leverage support costs as general and administrative expenses grow at a slower rate than our revenues.

 

Our Brand

 

Iconic Brand and Unique Concept: We provide guests healthier versions of mainstream-favorite dishes that taste great, making it convenient, affordable and enjoyable to eat healthy. 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. Now, guests can have delicious, nutritionally balanced food without the regret. 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 marquee franchise partners to our system, increasing the number of corporately owned locations and through partnership deals with reputable venues including MetLife Stadium in East Rutherford, NJ and Angel Stadium in Anaheim, CA. The health-focused concept anticipates expanding its footprint exponentially over the next couple of years, with more than 100 units currently in development.

 

Our Food

 

High-Quality, Healthy Options of Mainstream Dishes: Providing “Great Food with Your Health in Mind,” Muscle Maker Grill’s menu features items with grass-fed steak and all-natural chicken, 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 options. We boast superfoods such as avocado, kale, quinoa, omega-3 packed shrimp, spinach, and use only healthier carb options such as whole wheat pasta and brown rice. We develop and source proprietary sauces and fat free dressings to enhance our unique flavor profiles. Our open style kitchen allows the guests to experience our preparation and cooking methods such as an open flame grill and sauté. In addition to our healthy and diverse food platform, Muscle Maker Grill offers 100% real fruit smoothies, boosters and proprietary protein shakes as well as retail supplements.

 

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Our Strengths

 

Compelling Speed Using Cook to Order Preparation: Our guests can expect to enjoy their meals in eight minutes or less. While this service time may be slightly higher than the QSR segment, it fits well within the range of the fast casual segment. Our meals are prepared from a cook to order method using only the freshest, all natural ingredients.

 

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 PM, Saturday, and closed on Sunday. While 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 that allow for greater efficiencies and operations and ultimately higher profitability. A typical QSR fast casual brand has two to three revenue streams: dine-in, take-out and delivery. Muscle Maker Grill executes on eight different revenue streams; including: dine-in, take-out, delivery, catering, meal plans, retail and grab and go kiosks and food trucks.

 

Attractive Price Point and Perceived Value: Muscle Maker Grill offers meals with ‘power sides’ beginning at $8.99, using only the highest 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 a meal making them not only convenient but affordable too. Muscle Maker Grill also offers a boxed lunch program for schools and other organizations starting at $10 a box. These lunches include a wrap, salad or entrée, and a side and a drink. We not only 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 its loyalty program, Muscle Maker Grill Rewards, where points are awarded for every dollar spent towards free or discounted menu items. Cards are not required to participate as members can provide their phone number or use the mobile app, Muscle Maker Grill Rewards, to receive notifications announcing new menu items, special events and more. The program is enjoyed by thousands or guests!

 

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Muscle Maker Grill Business Facts:

 

  Largest protein based QSR fast casual in the united states.
     
  Established in 1995 in Colonia, NJ.
     
  Muscle Maker Grill operates 53 restaurants, 41 franchised and 12 company as of September 18, 2017  with system-wide sales exceeding $24 million in 2016.
     
  Ranked in the future 50 list of the fastest growing small chains in America and achieved a spot on Fastcasual.com’s top 100 Movers and Shakers in 2016 and expecting a top five ranking in 2017.
     
  National footprint in 12 states as of September 18, 2017  and soon to be 18 states by the end of 2017.
     
  Multiple International expansion opportunities including: Kuwait, Dubai and India.
     
  Currently a preferred vendor for the US military with restaurants opportunities in GA, KY, MA, NY, NC, SC, VA, TX and WA.

 

Restaurant Level Profitability and Unit Economics: We believe our brand position in a segment with limited competition, strong value perception and multiple revenue streams provides a great opportunity for continued corporate and franchise growth. Our low cost of entry and real estate strategy allows for greater operating efficiencies and higher profitability. See below for corporate store economics. We primarily operate in urban and suburban markets using in line locations and targeting second generation restaurants. Typical capital investment ranges from $180,000 to $225,000 for buildout and equipment. Annual revenues of $800,000 may anticipate achieving a 10% operating profit. Other company revenue sources include a franchise fee of $35,000 per unit on a sliding scale for multi-unit development. Franchisees currently pay 5% off gross sales in royalties and 3% of gross sales for marketing and advertising.

 

Leveraging Non-Traditional Revenue Streams:

 

Delivery: A significant differentiator is that Muscle Maker Grill offers delivery at every location nation-wide. Delivery is an option through our mobile app, online ordering platform making it easy and convenient for our guests. Delivery percentages range from 10% up to 56% of sales. We strongly believe this segment will continue to grow as our core demographic has demonstrated the need for online ordering and delivery versus dine-in and take-out.

 

Catering: Our diverse menus items are also offered through our catering program making it easy and affordable to feed a group. We can feed a group ranging from 10 or 5,000. Muscle Maker Grill has secured large catering contracts with multi-national corporations, universities as well as professional and college athletic programs. Our boxed lunch program, which includes a wrap, salad, or entrée, a side and a drink for a set price is widely popular within schools and other organizations.

 

Meal Plans: To make healthy eating even easier, Muscle Maker Grill’s signature nutritionally-focused menu items are available through its new Meal Plan program, allowing pre-orders of meals that taste great 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, including the Hollywood Salad, Turkey Meatball Wrap, Arizona and many more.

 

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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 offers 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.

 

Food Trucks: Food trucks have become a more main stream point of destination for restaurant goers and we strongly believe the growth trend in the segment will continue. Muscle Maker Grill wants to make our healthy options available to all consumers and will continue to develop and grow this revenue stream. Muscle Maker Grill currently has one food truck in operation in Dallas, TX and three to five in the pipeline for US military bases such as Hans comb Airforce Base, Quantico Marine Base and West Point Military Academy.

 

 

Our Innovative, Healthy Menu:

 

A Muscle Maker Grill Restaurant offers quality food, freshly prepared with our proprietary recipes, designed to provide our guests, business neighbors and families with a healthy alternative to fast food. Our menu features chicken, seafood, pasta, burgers, wraps, flat breads, entrée salads, smoothies, and yogurt (including frozen yogurt), in a variety of assorted flavors. Restaurants offer a wide selection of protein supplements and protein snacks, and, where approved by us, breakfast and a nutritious children’s menu.

 

Muscle Maker Grill prides itself on making healthier versions of the guest’s favorite food, giving them easy access to the food they love, without any guilt. This means catering to an array of healthy eating lifestyles. For over 20 years Muscle Maker Grill has been keeping gluten-free diners, low-carb consumers and vegetarians satisfied. We offer 32 healthier versions of salads, wraps, bowls, sandwiches and flatbreads.

 

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Our Culture

 

Culture Driven Management Team: We have a highly experienced senior management team comprised of seven diverse individuals with 145 years of combined experience in franchising, development, real estate, operations, marketing, distribution and finance. Our president and chief executive officer, Robert Morgan, is a 40-year veteran of the restaurant industry. Mr. Morgan is responsible for all facets of Muscle Maker Grill’s rapidly-growing fast casual brand – including its aggressive expansion strategy in new and existing markets, operations, real estate, strategic marketing and more. A founding member of the company, Mr. Morgan joined Muscle Maker Grill as its Chief Operating Officer in 2007 – its inception as a franchised brand. His extensive experience in the franchise and restaurant industries combined with his strong leadership and in-depth knowledge of the Muscle Maker Grill brand have been a major contributor to the overall success of the company. Under Mr. Morgan’s leadership, Muscle Maker Grill has grown from one single location to 53 franchised and corporate restaurants in 12 states as of September 18, 2017, including universities, military bases and professional sports stadiums with more than 100 sites currently in development domestically and internationally. While we are highly motivated and focused on the growth of our brand and providing a return to our shareholders, we are equally committed to the individual, personal and professional growth of our franchisees, restaurant level management and team members. Their success will ultimately determine the success of our company.

 

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Properties

 

Our restaurants are typically in-line. A typical restaurant generally ranges from 1,200 to 2,000 square feet with seating for approximately 40 people. Our leases for the store sites occupied by our company-operated restaurants generally have terms of 5 years, with 1 or 2 renewal terms of 5 years. Restaurant leases provide for a specified annual rent, and some leases call for additional or contingent rent based on revenue above specified levels. Generally, our leases are “net leases” that require us to pay a pro rata share of taxes, insurance and maintenance costs.

 

As of December 31, 2016, our restaurant system consisted of 49 restaurants comprised of eight company-operated restaurants and 41 franchised restaurants located in Arizona, California, Connecticut, Florida, Illinois, New Jersey, New York, North Carolina, Pennsylvania and Texas.

 

We lease our executive offices, consisting of approximately 2,500 square feet in Houston, Texas, for a term expiring in 2020, plus one five-year extension option. We believe our current office space is suitable and adequate for its intended purposes and our near-term expansion plans.

 

As of September 18, 2017 , our domestic footprint is as follows:

 

 

Currently Operating System-Wide Restaurants

 

As of September 18, 2017, company-operated, franchised and total system-wide restaurants by jurisdiction are:

 

State   Company-Owned Restaurants     Franchise Restaurants     Total Restaurants  
Arizona     -       1       1  
California     2       3       5  
Florida     -       2       2  
Illinois     2       2       4  
Kansas     -       1       1  
Nebraska     -       1       1  
Nevada     -       1       1  
New Jersey     2       17       19  
New York     4       6       10  
North Carolina     1       1       2  
Pennsylvania     -       2       2  
Texas     1       4       5  
TOTAL     12       41       53  

 

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Anticipated System-Wide Restaurants

 

We anticipate by December 31, 2017 that our company-operated, franchised and total system-wide restaurants will be:

 

State  

Company-

Owned Restaurants

    Franchise Restaurants     Total Restaurants  
Arizona     -       1       1  
California     3       3       6  
Florida     -       3       3  
Georgia     1       1       2  
Illinois     2       3       5  
Kansas     -       1       1  
Massachusetts     -       1       1  
Nebraska     -       1       1  
New Jersey     2       18       20  
New York     5       5       10  
Nevada     -       1       1  
North Carolina     2       1       3  
Pennsylvania     -       3       3  
Kuwait     -       1       1  
Texas     1       9       10  
Virginia     -       1       1  
Washington     1       -       1  
TOTAL     17       53       70  

 

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Site Selection and Expansion

 

New Restaurant Development

 

We believe we are in the early stages of our growth story and that our restaurant model is designed to generate strong cash flow, attractive restaurant-level financial results and high returns on invested capital, which we believe provides us with a strong foundation for expansion. For the year ended December 31, 2014, we opened 12 new franchised restaurants and no new company-operated restaurants. For the year ended December 31, 2015, we opened one new company-operated and seven new franchised restaurants. For the year ended December 31, 2016, we opened six new company-operated and four new franchised restaurants. In 2017, we intend to open between 15 and 20 new company-operated and 15 new franchised restaurants, including military bases, across Arizona, California, Florida, Georgia, Illinois, Louisiana, Kansas, Massachusetts, Nebraska, New Jersey, New York, Nevada, North Carolina, Pennsylvania, Texas, Washington and Internationally. There is no guarantee that we will be able to open new company-operated or franchised restaurants, or to increase the overall number of our restaurants. We may be unsuccessful in expanding within our existing or into new markets for a variety of reasons described above under “Risk Factors,” including competition for customers, sites, franchisees, employees, licenses and financing. Over the long term, we plan to grow the number of Muscle Maker Grill restaurants by 30% to 50% annually.

 

Our strategy for entering new markets is to lead with company development while recruiting and developing franchisees to open new restaurants with us during the second year of new market entry. This will enable us to establish a development, operations and marketing infrastructure to help ensure that we maximize our consumer proposition and support franchisees as they enter the market. We anticipate that entering new markets with both company and franchisee development is the best way to establish our brand, as it will enable us to scale rapidly, thereby driving operational and marketing efficiencies.

 

We have opened 10 restaurants in fiscal 2016 and have another 9 restaurants under construction. In addition, we have 12 restaurant sites in various stages of development with 7 in permitting and another 5 in lease negotiations.

 

Over the next three to five years, our expansion strategy will focus on the northeast region of the United States. We believe this market provides an attractive opportunity to leverage our brand awareness and infrastructure.

 

Site Selection Process

 

We consider the location of a restaurant to be a critical variable in its long-term success and as such, we devote significant effort to the investigation and evaluation of potential restaurant locations. Our in-house development team has over 100 years of combined experience building such brands as Pizza Hut, Boston Market and Golden Corral. We use a combination of our in-house development team and outside real estate consultants to locate, evaluate and negotiate new sites using various criteria including demographic characteristics, daytime population thresholds and traffic patterns, along with the potential visibility of, and accessibility to, the restaurant. The process for selecting locations incorporates management’s experience and expertise and includes extensive data collection and analysis. Additionally, we use information and intelligence gathered from managers and other restaurant personnel that live in or near the neighborhoods we are considering.

 

A typical Muscle Maker Grill may be free standing or located in malls, airports, gyms, strip shopping centers, health clubs or highly concentrated business and residential demographic areas. Customers order their food at the counter and food servers deliver the food to the appropriate table. A typical restaurant located in urban and suburban settings ranges from 1,100-2,400 square feet. Based on our experience and results, we are currently focused on developing inline sites. Our restaurants perform well in a variety of neighborhoods, which gives us greater flexibility and lowers operating risk when selecting new restaurant locations.

 

We approve new restaurants only after formal review by our real estate site approval committee, which includes most of senior management, and monitor restaurants’ ongoing performances to inform future site selection decisions.

 

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Restaurant Design

 

After identifying a lease site, we commence our restaurant buildout. Our typical restaurant is an inline retail space that ranges in size from 1,200 to 2,000 square feet. Our restaurants are characterized by a unique exterior and interior design, color schemes, and layout, including specially designed decor and furnishings. Restaurant interiors incorporate modern designs and rich colors in an effort to provide a clean and inviting environment and fun, family-friendly atmosphere. Each restaurant is designed in accordance with plans we develop; and constructed with a similar design motif and trade dress. Restaurants are generally located near other business establishments that will attract customers who desire healthier food at fair prices served in a casual, fun environment.

 

In addition to our standard restaurants, we have three Muscle Maker Grill Express locations as of December 31, 2016, which are restaurants located in or attached to another business or other structures such as shopping malls, food courts, travel plazas, grocery stores, college campuses, airports, military bases or convention centers or sports arenas, that may be as small as 250 square feet and as large as 1,500 square feet. Muscle Maker Grill Express locations may be part of a larger structure or complex.

 

Our new restaurants are typically inline buildouts. We estimate that each inline buildout of a restaurant will require an average total cash investment of approximately $180,000, net of tenant allowances. On average, it takes us approximately 4 to 6 months from identification of the specific site to opening the restaurant. In order to maintain consistency of food and customer service, as well as our colorful, bright and contemporary restaurant environment, we have set processes and timelines to follow for all restaurant openings.

 

 

Our restaurants are built-out in approximately 10 weeks and the development and construction of our new sites is the responsibility of our Development Department. Several real estate managers are responsible for locating and leasing potential restaurant sites. Construction managers are then responsible for building the restaurants, and several staff members manage purchasing, budgeting, scheduling and other related administrative functions.

 

Restaurant Management and Operations

 

Service

 

We are extremely focused on customer service. We aim to provide fast, friendly service on a solid foundation of dedicated, driven team members and managers. Our cashiers are trained on the menu items we offer and offer customers thoughtful suggestions to enhance the ordering process. Our team members and managers are responsible for our dining room environment, personally visiting tables to ensure every customer’s satisfaction, and monitoring the fresh salsa bar and beverage station for cleanliness and an ample supply of products.

 

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Operations

 

We utilize systems that are aimed at measuring our ability to deliver a “best in class” experience for our customers. These systems include customer surveys, mystery shopper scores and speed of service performance trends. The operational results from all of these sources are then presented on an operations dashboard that displays the measures in an easy-to-read online format that corporate and restaurant-level management and franchisees can utilize in order to identify strengths and opportunities and develop specific plans for continuous performance improvement.

 

We measure the execution of our system standards within each restaurant through our commitment to our audit program for quality, service and cleanliness. These audits are conducted in each restaurant quarterly, but may be more frequent based upon restaurant performance. Additionally, we have food safety and quality assurance programs designed to maintain the highest standards for food and food preparation procedures used by both company-operated and franchised restaurants. We employ a team of quality assurance managers and third party auditors that perform our restaurant audits.

 

 

Managers and Team Members

 

Each of our restaurants typically has a general manager, an assistant manager, 2 to 4 shift leaders, and 2 team leaders. There are between 4 and 6 team members who prepare our food fresh daily and provide customer service. To lead our restaurant management teams, we have area leaders, each of whom is responsible for 5 to 15 restaurants. Overseeing the area leaders are 2 directors of operations, each responsible for 25 to 30 restaurants. The vice president of corporate operations leads our company-operated restaurants, managing both sales and profitability targets.

 

We are selective in our hiring processes, aiming to staff our restaurants with team members that are friendly, customer focused, and driven to provide high-quality products. We employ a unique approach to selecting future team members. Our team members are cross-trained in several disciplines to maximize depth of competency and efficiency in critical restaurant functions. Our focus on hiring the best possible employees has enabled us to develop a culture that breeds loyalty throughout our employee base. Many team members and managers have been employed by us for longer than 5 years, and it is not rare to identify team members with more than 7 years of seniority.

 

Training

 

We believe we have created a culture of constant learning. On the first day of employment, team members are introduced to our training program, which is a comprehensive training program developed to lead team members through the training process in easy to use, function-based, educational videos. Each team member can learn at their own pace, focusing on the videos that apply to their initial role on the restaurant team.

 

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The vast majority of our restaurant management staff is comprised of former team members who have advanced along the Muscle Maker Grill career path. Skilled team members who display leadership qualities are encouraged to enter the team leader training program. Successive steps along the management path add increasing levels of duties and responsibilities. Each stage in the management training path requires greater training periods, culminating in the general manager training process, comprised of seven weeks of intensive classroom and hands-on training in a certified training restaurant.

 

Franchise Program

 

Overview

 

We use a franchising strategy to increase new restaurant growth in certain markets, leveraging the ownership of entrepreneurs with specific local market expertise and requiring a relatively minimal capital commitment by us. As of December 31, 2016, there were a total of 41 franchised restaurants. Franchisees range in size from single-restaurant operators to the largest franchisee, which owned 4 restaurants as of December 31, 2016. Our existing franchise base consists of many successful, longstanding, multi-unit restaurant operators. As of December 31, 2016, approximately 42% of franchised restaurants were owned and operated by franchisees that have been with us for more than 4 years. Since the beginning of 2008, our franchisees have opened 40 new Muscle Maker Grill restaurants (net), representing a 1,900% net increase from 2008 to December 31, 2016.

 

We believe the franchise revenue generated from our franchise base has historically served as an important source of stable and recurring cash flows to us and, as such, we plan to expand our base of franchised restaurants. In existing markets, we encourage growth from current franchisees. In our expansion markets, we seek highly qualified and experienced new franchisees for multi-unit development opportunities. We seek franchisees of successful, non- competitive brands operating in our expansion markets. Through strategic networking and participation in select franchise conferences, we aim to identify highly-qualified prospects. Additionally, we market our franchise opportunities with the support of a franchising section on our website and printed brochures.

 

Franchise Owner Support

 

We believe creating a foundation of initial and on-going support is important to future success for both our franchisees and our brand. For that reason, we have structured our corporate staff, programs and communication systems to ensure that we are delivering high-quality support to our franchisees.

 

We have a mandatory training program that was designed to ensure that our franchise owners and their managers are equipped with the knowledge and skills necessary for success. The program consists of hands-on training in the operation and management of the restaurant. Training is conducted by a general training manager who has been certified by us for training. Instructional materials for the initial training program include our operations manual, crew training system, wall charts, job aids, recipe books, product build cards, management training materials, food safety book, videos and other materials we may create from time to time. Training must be successfully completed before a trainee can be assigned to a restaurant as a manager.

 

We also provide numerous opportunities for communication and shared feedback between us and franchise owners. Currently, we hold a franchise business update for all franchisees each quarter which includes multi-functional company representation and executive attendance. On a semi-annual basis, we meet with our franchise leadership team and marketing advisory committee to share ideas and resolve issues. Yearly we hold a conference for our franchisees, vendors and company leaders to celebrate our shared successes, discuss best practices and set the course for the following year.

 

Franchise Arrangements

 

Muscle Maker Development, our wholly-owned subsidiary, became the franchisor of Muscle Maker Grill restaurants on August 25, 2017 upon receipt of the operating assets of the franchise system formerly held by Muscle Maker Brands, our former majority-owned subsidiary, which has since been converted into a corporation and merged into Muscle Maker. Muscle Maker Brands had become the franchisor of Muscle Maker Grill restaurants on March 1, 2015 upon receipt of the operating assets of the franchise system formerly held by Muscle Maker Franchising. At the time of the acquisition from Muscle Maker Brands, we succeeded to Muscle Maker Brands’ rights and obligations under 40 franchise agreements for the operation of 40 Muscle Maker Grill franchise restaurants. At December 31, 2016, Muscle Maker Development franchises the operation of a total of 41 Muscle Maker Grill restaurants.

 

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The franchise agreements we succeeded to:

 

  Have terms for 15 years, with termination dates ranging from 2023 until 2030. These agreements are generally renewable for terms ranging from 5 to 10 years.
     
  Provide for the payment of initial franchise fees of $35,000.
     
  Require the payment of on-going royalty payments of 5% of gross revenues at the franchise location.

 

Since our acquisition of franchise assets from Muscle Maker Franchising, we have undertaken an extensive review of the terms and conditions of our franchise relationships and have recently finalized the terms of our revised standard franchise agreement and multi-unit development agreement which we intend to govern the relationship between Muscle Maker Development and its new franchisees. Under this franchise agreement:

 

  Franchisees are licensed the right to use the Muscle Maker Grill® trademarks, its confidential operating manual and other intellectual property in connection with the operation of a Muscle Maker Grill restaurant at a location authorized by us.
     
  Franchisees are protected from the establishment of another Muscle Maker Grill restaurant within a geographic territory, the scope of which is the subject of negotiation between Muscle Maker Development and the franchisee.
     
  The initial term of a franchise is 15 years, which may be renewed for up to two additional terms of five years each.
     
  Franchisees pay Muscle Maker Development an initial franchise fee of $35,000 in a lump sum at the time the Franchise Agreement is signed; however, we may offer financing assistance under certain circumstances.
     
  Franchisees pay Muscle Maker Development an on-going royalty in an amount equal to 5% of gross sales at the franchise location, payable weekly.
     
  Franchisees pay a weekly amount equal to 2% of gross revenues at the franchise location into a cooperative advertising fund for the benefit of all franchisees; except that until a regional advertising program is established, the advertising fee is retained and used by franchisees for local market advertising. In addition, franchisees pay an amount equal to 1% of gross sales into a brand development fund administered by Muscle Maker Development.

 

  A company affiliated with us receives a software license fee of $3,750 for our proprietary Muscle Power (R Power) computer software, payable in a lump sum at the time the franchisee orders the required electronic cash register/computer system from our affiliate.
     
  Franchisees are required to offer only those food products that are authorized by Muscle Maker Development, prepared using our proprietary recipes; and may obtain most supplies only from suppliers that are approved or designated by Muscle Maker Development.
     
  As partial consideration for payment of the initial franchise fee and on-going royalties, Muscle Maker Development loans its franchisees a copy of its confidential operating manual, administers the advertising fund and brand development fund, and provides franchisees with pre-opening and on-going assistance including site selection assistance, pre-opening training, and in-term training

 

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Franchisees who desire to develop more than one restaurant and who have the financial strength and managerial capability to develop more than one restaurant may enter into a Multi-Unit Agreement. Under a multi-unit development agreement, the franchisee agrees to open a specified number of restaurants, at least two, within a defined geographic area in accordance with an agreed upon development schedule. Each restaurant requires the execution of a separate Franchise Agreement, which will be the then current Franchise Agreement, except that the initial franchise fee, royalty and advertising expenditures will be those in effect at the time the multi-unit agreement is executed. Multi-Unit Agreements require the payment of a development fee (the “Development Fee”) equal to $35,000 for the first restaurant plus $17,500 multiplied by the number of additional Muscle Maker Grill® restaurants that must be opened under the Development Agreement. The entire Development Fee is payable at the time the Multi-Unit Agreement is signed; however, the development fee actually paid for a particular restaurant is credited as a deposit against the initial franchise fee that is payable when the Franchise Agreement for the particular franchise is signed.

 

Marketing and Advertising

 

We promote our restaurants and products through our advertising campaign. The campaign aims to deliver our message of going to whatever lengths necessary to deliver fresh and healthier product offerings. The campaign emphasizes our points of differentiation, from our fresh ingredients and scratch preparation, to the preparation of our healthy inspired meals.

 

We use multiple marketing channels, including television to broadly drive brand awareness and purchases of our featured products. We advertise on local network, radio and cable television in our primary markets, and utilize heavier cable schedules for some of our less developed markets. We complement this with direct mail and our Muscle Maker Grill Rewards e-mail marketing program, which allows us to reach more than 4,000 members. Muscle Maker Grill Rewards is our e-club program. We engage members via e-mails featuring news of promotional offers, member rewards and product previews. Muscle Maker Grill Rewards also allows members to voice their opinions through surveys that provide us with information that helps us define future product concepts. In addition, we use our database to survey and solicit new product ideas, which allows us to create a comprehensive product calendar that extends 12 months forward.

 

Through our public relations efforts we engage notable food editors and bloggers on a range of topics to help promote our products. In addition, we engage in one on one conversations using a portfolio of social media platforms which include Facebook, Twitter and Instagram. We also use social media as a research and customer service tool, and apply insight we gain to future marketing efforts.

 

We became the successor franchisor of Muscle Maker Grill restaurants on March 1, 2015 upon the receipt by our former majority-owned subsidiary, Muscle Maker Brands, of the operating assets of the franchise system formerly held by Muscle Maker Franchising. We began to offer franchises as the successor in March 2015. We succeeded as the successor to various area representative agreements that had been entered into by our predecessor, Muscle Maker Franchising. Under the area representative agreements that we succeeded to, the area representatives will identify and refer prospective franchisee candidates to us, provide franchisees with our site selection criteria and assist franchisees to complete a site review package, and will advise franchisees concerning our standards and specifications and make on-site visits, but we retain control of all decision-making authority relative to the franchisees, including franchisee approval, site location approval and determination whether franchisees are in compliance with their franchise agreements.

 

Area representative agreements are generally for a term of 15 years, in consideration for which we generally compensate area representatives with 1% of net sales of the franchises that are under the area representative for the 15 year term, payable quarterly.

 

Purchasing and Distribution

 

Maintaining a high degree of quality in our restaurants depends in part on our ability to acquire fresh ingredients and other necessary supplies that meet our specifications from reliable suppliers. We regularly inspect vendors to ensure that products purchased conform to our standards and that prices offered are competitive. We have a quality assurance team that performs comprehensive supplier audits on a frequency schedule based on the potential food safety risk of each product. We contract with Sysco (our “primary distributor”), a major foodservice distributor, for substantially all of our food and supplies. Our primary distributor delivers supplies to most of our restaurants one to two times per week. Our distributor relationship with our primary distributor has been in place since 2007. Our franchisees are required to use our primary distributor or an approved regional distributor and franchisees must purchase food and supplies from approved suppliers. In our normal course of business, we evaluate bids from multiple suppliers for various products. Fluctuations in supply and prices can significantly impact our restaurant service and profit performance. We actively manage cost volatility for food and supplies by negotiating with multiple suppliers and entering into what we believe are the most favorable contract terms given existing market conditions. In the past, we have entered into contracts ranging from twelve months to five years depending on current and expected market conditions. We currently source from six suppliers with these six accounting for approximately 95% of our planned purchases in 2017. We have entered into fixed price contracts with our six largest food suppliers through the end of 2017 with pricing generally favorable to current spot prices.

 

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Intellectual Property

 

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 and Muscle Maker Grill® in approximately two foreign countries. 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 and Facebook and Twitter accounts are our intellectual property. Our policy is to pursue and maintain registration of service marks and trademarks in those countries where business strategy requires us to do so and to oppose vigorously any infringement or dilution of the service marks or trademarks in such countries. We maintain the recipe for our healthy inspired recipes, as well as certain proprietary standards, specifications and operating procedures, as trade secrets or confidential proprietary information.

 

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 subsidiary, Muscle Maker Brands, and to further sublicense them to our franchisees for use in connection with Muscle Maker Grill® restaurants.

 

Competition

 

We operate in the restaurant industry, which is highly competitive and fragmented. The number, size and strength of competitors vary by region. Our competition includes a variety of locally owned restaurants and national and regional chains that offer dine-in, carry-out and delivery services. Our competition in the broadest perspective includes restaurants, pizza parlors, convenience food stores, delicatessens, supermarkets and club stores. There are no significant direct competitors with respect to menus that feature our healthy inspired offerings . However, we indirectly compete with fast casual restaurants, including Chipotle and Panera Bread, among others, and with healthy inspired fast casual restaurants, such as the Protein Bar and Veggie Grill, among others.

 

We believe competition within the fast casual restaurant segment is based primarily on ambience, price, taste, quality and the freshness of the menu items. We also believe that QSR competition is based primarily on quality, taste, speed of service, value, brand recognition, restaurant location and customer service. In addition, we compete with franchisors of other restaurant concepts for prospective franchisees.

 

Environmental Matters

 

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.

 

We have not conducted a comprehensive environmental review of all of our properties, although for new company development, a Phase I environmental review is typically completed, and when advisable, a Phase II review, prior to the company undertaking a long-term lease. 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.

 

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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 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.

 

For a discussion of the various risks we face from regulation and compliance matters, see “Risk Factors.”

 

Management Information Systems

 

All of our company-operated and franchised restaurants use computerized point-of-sale and back office systems, which we believe are scalable to support our long-term growth plans. The point-of-sale system provides a touch screen interface and integrated, high speed credit card and gift card processing. The point-of-sale system is used to collect daily transaction data, which generates information about daily sales and product mix that we actively analyze.

 

Our in-restaurant back office computer system is designed to assist in the management of our restaurants and provide labor and food cost management tools. The system also provides corporate headquarters and restaurant operations management quick access to detailed business data and reduces the time spent by our restaurant managers on administrative needs. The system also provides sales, bank deposit and variance data to our accounting department on a daily basis. For company-operated restaurants, we use this data to generate weekly consolidated reports regarding sales and other key measures, as well as preliminary weekly profit and loss statements for each location with final reports following the end of each period.

 

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Overview of Corporate Structure

 

Muscle Maker serves as a holding company of the following subsidiaries:

 

  (i) Muscle Maker Development, LLC (“Muscle Maker Development”), a directly wholly owned subsidiary, which was formed in Nevada on July 18, 2017 for the purposes of running our existing franchise operations and continuing to franchise the Muscle Maker Grill name and business system to qualified franchisees; and
  (ii) Muscle Maker Corp., LLC (“Muscle Maker Corp.”), a directly wholly owned subsidiary, which was formed in Nevada on July 18, 2017 for the purposes of developing new corporate stores and operating our new and existing corporate stores. Muscle Maker Corp. has a direct 70% ownership interest in Custom Technology, Inc. (“CTI”), which was formed in New Jersey on July 29, 2015, and is a technology and point of sale (“POS”) systems dealer and technology consultant.

 

We plan to expand our Muscle Maker Grill brand through the (i) development and opening of additional company owned Muscle Maker Grill restaurants and (ii) franchising of additional Muscle Maker Grill restaurants. Muscle Maker together with Muscle Maker Development, Muscle Maker Corp., and CTI are referred to herein collectively as the “Company”.

 

Corporate History

 

Formation of Muscle Maker

 

Muscle Maker, Inc. (“Muscle Maker”), was incorporated by American Restaurant Holdings (“American Restaurant Holdings”) in California on December 8, 2014. On December 22, 2014, Muscle Maker issued 14,285 shares of its common stock, no par value per share, to the Chief Executive Officer of American Restaurant Holdings as founder shares for cash proceeds of $10.

 

Acquisition of 74% of Muscle Maker Brands

 

Muscle Maker Brands, LLC (“Muscle Maker Brands”) was formed on December 22, 2014 in the state of California for the purpose of acquiring and operating company owned Muscle Maker Grill restaurants, as well as franchising the Muscle Maker Grill name and business system to qualified franchisees. Muscle Maker Franchising, LLC (“Muscle Maker Franchising”) was founded in 1995 in order to develop a brand of healthy-option fast food restaurants.

 

On January 23, 2015, Muscle Maker, Muscle Maker Brands and Muscle Maker Franchising entered into a Unit Purchase Agreement whereby Muscle Maker Brands purchased substantially all of the assets and liabilities of Muscle Maker Franchising, Muscle Maker acquired 7,400 membership units of Muscle Maker Brands (representing 74% of the membership units of Muscle Maker Brands), and certain members of Muscle Maker Franchising (“MMF Members”) acquired 2,600 membership units of Muscle Maker Brands (representing 26% of the membership units of Muscle Maker Brands). (the “MMG Acquisition”). The aggregate purchase consideration for Muscle Maker’s membership interest in Muscle Maker Brands was $4,244,000 and consisted of $3,570,000 in cash, $604,000 of promissory notes (consisting of a $400,000 promissory note (“MM Note”) from Muscle Maker and a $204,000 promissory note (“MMB Note”) from Muscle Maker Brands) and 71,428 shares of common stock of Muscle Maker valued at $0.98 per share or $70,000 issued. On January 23, 2015, in exchange for the issuance by Muscle Maker to American Restaurant Holdings of 5,785,714 shares of common stock of Muscle Maker, American Restaurant Holdings provided cash of $3,645,000 and an obligation to repay an aggregate of $604,000 of principal due under MM Note and MMB Note issued to Muscle Maker Franchising in order to facilitate the Muscle Maker Brands acquisition. Pursuant to the terms of the Unit Purchase Agreement, the MMF Members shall convert their non-controlling interest in Muscle Maker Brands into an aggregate of 2,067,953 shares of common stock of Muscle Maker prior Muscle Maker going public.

 

On January 24, 2015, Muscle Maker granted 28,571 shares of its common stock valued at $0.98 per share to its Director of Brand Development, in connection with an employment agreement with the Director of Brand Development.

 

On January 24, 2015, the Company issued 61,224 shares of its common stock to the Director of Brand Development in exchange for cash proceeds of $0.98 per share, or $60,000.

 

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On July 23, 2015 and August 28, 2015, the Company issued 107,142 and 71,428 of its common stock, and 5-year warrants for the purchase of 53,571 and 35,714 shares of common stock respectively, for aggregate cash proceeds of $750,000. The warrants are exercisable at $5.25 per share.

 

Springfield Acquisition

 

On May 4, 2015, Muscle Maker Brands acquired a business in Springfield, New Jersey, as a corporate store (the “Springfield Acquisition”). The purchase price of the store was $30,060, of which $8,670 related to equipment purchased and the remaining $21,390 was accounted for as goodwill.

 

CTI Acquisition

 

On August 1, 2015, the Company acquired 70% of the shares of Custom Technology, Inc. (“CTI”), a technology and point of sale (“POS”) systems dealer and technology consultant, in exchange for $70,000 in cash (the “CTI Acquisition”). CTI was formed in New Jersey on July 29, 2015 and entered into an asset purchase agreement on August 1, 2015 pursuant to which CTI purchased POS computer systems, cash registers, camera systems and related inventory and supplies from its predecessor entity.

 

Repayment of Promissory Notes regarding MMG Acquisition

 

The MMB Note was completely repaid on March 9, 2015. On July 21, 2015, January 23, 2016 and July 23, 2016, installments of $100,000, $150,000 and $150,000 were repaid on the balance of the MM Note. As of July 23, 2016, there is no balance outstanding related to MM Note.

 

Advances and Exchange of Advances for Convertible Notes

 

On December 31, 2015, Muscle Maker issued a promissory note in the amount of $1,082,620 (the “2015 ARH Note”) to American Restaurant Holdings. The 2015 ARH Note had no stated interest rate and was convertible into 309,320 shares of the Company’s common stock at $3.50 per share.

 

During the period from July 1, 2016 through December 31, 2016, American Restaurant Holdings provided $1,364,842 of advances to Muscle Maker. These advances, combined with the $1,257,000 payable to American Restaurant Holdings as June 30, 2016 were exchanged for a convertible note in the amount of $2,621,842 (the “2016 ARH Note”). The 2016 ARH Note had no stated interest rate or maturity date and was convertible into shares of common stock of Muscle Maker at a conversion price of $2.80 per share at a time to be determined by the American Restaurant Holdings.

 

Recent Developments

 

More Advances and Exchange of Advances for Convertible Notes and Conversion of Convertible Notes to Shares of Common Stock

 

During the period from December 31, 2016 through February 15, 2017, American Restaurant Holdings provided $980,949 of advances to the Company. The payable due to American Restaurant Holdings as a result of these advances was exchanged for a convertible promissory note in the amount of $980,949 (the “2017 ARH Note”). The 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of common stock of Muscle Maker at a conversion price of $2.80 per share at a time to be determined by the lender.

 

On March 14, 2017, American Restaurant Holdings elected to convert: (a) the 2015 ARH Note in the principal amount of $1,082,620 into 309,320 shares of common stock of Muscle Maker at a conversion price of $3.50 per share; (b) the 2016 ARH Note in the principal amount of $2,621,842 into 936,372 shares of common stock of Muscle Maker at a conversion price of $2.80 per share; and (c) the 2017 ARH Note in the principal amount of $980,949 into 350,338 shares of common stock of Muscle Maker at a conversion price of $2.80 per share.

 

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Second 2017 Advances, Exchange of Advances for Convertible Notes, and Conversion of Convertible Notes to Shares of Common Stock

 

During the period from February 16, 2017 through March 15, 2017, American Restaurant Holdings provided $338,834 of advances to the Company. The payable due to American Restaurant Holdings as a result of these advances was exchanged for a convertible promissory note in the amount of $338,834 (the “Second 2017 ARH Note”). The Second 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of common stock of Muscle Maker at a conversion price of $3.50 per share at a time to be determined by the lender.

 

On September 19 , 2017, American Restaurant Holdings elected to convert the Second 2017 ARH Note in the principal amount of $338,834 into 96,809 shares of common stock of Muscle Maker at a conversion price of $3.50 per share.

 

Unrelated Party Loans for Convertible Notes

 

During the period from March 17, 2017 to August 15, 2017, Muscle Maker issued convertible notes maturing six months after the issuance of the convertible note , convertible into common stock at a price per share of $3.00 (50% of initial public offering price), and a stated interest rate of 10% per six months to the following unrelated parties:

 

(a) JM Assets LP for a loan of $500,000;

(b) Midland IRA Inc FBO Randall Avery for a loan of $100,000;

(c) Tom Buckley for a loan of $25,000;

(d) John Mohan for a loan of $100,000;

(e) Kevin Mohan for a loan of $50,000;

(f) Dan Pettit for a loan of $150,000;

(g) Attary LLC for a loan of $75,000;

(h) Sean Harrison for a loan of $50,000;

(i) Robert Mohan for a loan of $50,000;

(j) Jerry Neugebauer for a loan of $100,000; and

(k) Shawn Holmes for a loan of $100,000.

 

Related Party Loans for Convertible Notes

 

During the period from May 1, 2017 to August 15, 2017, Muscle Maker issued convertible notes maturing six months after the issuance of the convertible note , convertible into common stock at a price per share of $3.00 (50% of initial public offering price), and a stated interest rate of 10% per six months to the following related parties:

 

(a) John Feeney for a loan of $50,000;

(b) Membership, LLC for a loan of $100,000; and

(c) A.B. Southall for a loan of $100,000.

 

Issuances of Warrants

 

The Company issued the following warrants to purchase an aggregate of 701,890 shares of common stock of Muscle Maker: (a) a 5-year warrant to Dean Miles to purchase 89,285 shares of common stock of Muscle Maker at an exercise price of $5.25 per share, in connection with two private placements to Mr. Miles in 2015; (b) a 3-year warrant to American Restaurant Holdings to purchase of 327,730 shares of common stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the 2016 ARH Note in 2016; (c) a 3-year warrant to American Restaurant Holdings to purchase of 122,618 shares of common stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the 2017 ARH Note in 2017; (d) a 3-year warrant to American Restaurant Holdings to purchase of 21,058 shares of common stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the Second 2017 ARH Note in 2017; (e) a 3-year warrant to American Restaurant Holdings to purchase of 21,058 shares of common stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the Third 2017 ARH Note in 2017; (f) a 3-year warrant to Prashant Shah to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share; (g) a 3-year warrant to JM Assets LP to purchase of 35,714 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by JM Assets LP to Muscle Maker in 2017; (h) a 3-year warrant to Midland IRA Inc FBO Randall Avery to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Midland IRA Inc FBO Randall Avery to Muscle Maker in 2017; (i) a 3-year warrant to John Feeney to purchase of 3,571 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by John Feeney to Muscle Maker in 2017; (j) a 3-year warrant to Tom Buckley to purchase of 1,785 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Tom Buckley to Muscle Maker in 2017; (k) a 3-year warrant to John Mohan to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by John Mohan to Muscle Maker in 2017; (l) a 3-year warrant to Kevin Mohan to purchase of 3,571 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Kevin Mohan to Muscle Maker in 2017; (m) a 3-year warrant to Dan Pettit to purchase of 10,714 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Dan Pettit to Muscle Maker in 2017; (n) a 3-year warrant to Attary LLC to purchase of 5,357 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Attary LLC to Muscle Maker in 2017; (o) a 3-year warrant to John Marques to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Membership, LLC to Muscle Maker in 2017; (p) a 3-year warrant to Sean Harrison to purchase of 3,571 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Sean Harrison to Muscle Maker in 2017; (q) a 3-year warrant to Robert Mohan to purchase of 3,571 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Robert Mohan to Muscle Maker in 2017; (r) a 3-year warrant to Spartan Capital Securities, LLC to purchase of 2,285 shares of common stock of Muscle Maker at an exercise price of $7.00 per share; (s) a 3-year warrant to Jerry Neugebauer to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan Jerry Neugebauer to Muscle Maker in 2017; (t) a 3-year warrant to A.B. Southall to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by A.B. Southall to Muscle Maker in 2017; and (u) a 3-year warrant to Shawn Holmes to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Shawn Holmes to Muscle Maker in 2017. As of the date of this Offering Statement, there are unexercised warrants outstanding to purchase an aggregate of 694,748 shares of common stock of Muscle Maker.

 

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Spin-Off of Muscle Maker by American Restaurant Holdings

 

On March 23, 2017, American Restaurant Holdings authorized and facilitated the distribution of 7,381,745 shares of common stock of Muscle Maker held by American Restaurants, LLC, the wholly owned subsidiary of American Restaurant Holdings, to the shareholders of American Restaurant Holdings (the “Spin-Off”). As a result of the Spin-Off on March 23, 2017, American Restaurant Holdings is no longer a majority owner of Muscle Maker.

 

Grant of Shares of Restricted Common Stock to Employees and Consultants

 

In May 2017, Muscle Maker granted 159,642 shares of its common stock to its employees and consultants at a value of $7.00 per share. Such share grants are subject to graduated vesting in equal installments of 20% on each of the following dates: (i) the date of grant, (ii) January 1, 2018, (iii) January 1, 2019, (iv) January 1, 2020, and (v) January 1, 2021. In the event of resignation or termination for any reason (except for a “change of control”) of an employee or consultant that receives such shares, the remaining non-vested shares of such employee or consultant prior to such resignation or termination will be forfeited.

 

Reorganization

 

Conversion of Muscle Maker Brands

 

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

 

Formation of Muscle Maker Development to Operate Franchising and Assignment of Franchise Agreements

 

On July 18, 2017, Muscle Maker formed Muscle Maker Development, LLC (“Muscle Maker Development”) in the state of Nevada for the purpose of running our existing franchise operations and continuing to franchise the Muscle Maker Grill name and business system to qualified franchisees. Muscle Maker Development issued 1,000 membership units to its sole member and manager, Muscle Maker. On August 25, 2017, MMBC assigned all the existing franchise agreements to Muscle Maker Development pursuant to the terms of that certain Assignment and Assumption Agreement, dated August 25, 2017, between MMBC and Muscle Maker Development.

 

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Formation of Muscle Maker Corp. to Develop and Operate Corporate Stores

 

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

 

Issuance of Shares of Muscle Maker to CrowdfundX for Marketing Services in Connection with Offering

 

On July 20, 2017, Muscle Maker entered into that certain Master Services Agreement, effective as of July 20, 2017, with WhoYouKnow LLC, California limited liability company d/b/a CrowdfundX (“CrowdfundX”), whereby CrowdfundX is providing management services to Muscle Maker in connection with the Offering. Pursuant to the terms of the agreement, Muscle Maker issued 28,333 shares of common stock at a value of $6.00 per share (or, an aggregate value of $170,000) to CrowdfundX. In addition, Muscle Maker has agreed to pay a cash fee to CrowdfundX in the amount of $145,000, which is payable in installments of $40,000 within five business days after the Effective Date, $40,000 on August 21, 2017, and $65,000 on September 21, 2017.

 

Appointment of Computershare as Transfer Agent

 

On July 24, 2017, Muscle Maker entered into an agreement with Computershare Inc., and its wholly-owned subsidiary Computershare Trust Company, N.A. (together with Computershare, Inc., “Computershare”), whereby Computershare agreed to act as the transfer agent of Muscle Maker.

 

Options Granted to Franchisees

 

On July 27, 2017, Muscle Maker granted stand-alone (non-Plan based) non-qualified stock options to purchase an aggregate of 45,000 shares of its common stock to its franchisees. The options are fully vested, have an exercise price of $7.00 per share and expire 3 years after the date of grant.

 

Third 2017 Advances, Exchange of Advances for Convertible Notes, and Conversion of Convertible Notes to Shares of Common Stock

 

During the period from March 16, 2017 through July 18, 2017, American Restaurant Holdings provided $336,932 of advances to the Company. The payable due to American Restaurant Holdings as a result of these advances was exchanged for a convertible promissory note in the amount of $336,932 (the “Third 2017 ARH Note”). The Third 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of common stock of Muscle Maker at a conversion price of $5.60 per share at a time to be determined by the lender.

 

On September 19 , 2017, American Restaurant Holdings elected to convert the Third 2017 ARH Note in the principal amount of $336,932 into 60,166 shares of common stock of Muscle Maker at a conversion price of $5.60 per share.

 

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Shares Purchased by Daniel Pettit

 

On July 21, 2017, Muscle Maker issued 8,928 shares of common stock of Muscle Maker to Daniel Pettit, as trustee of the Daniel E. Pettit Revocable Trust at a purchase price of $5.60 per share providing $50,000 of proceeds to Muscle Maker.

 

Exercise of Warrants by Prashant Shah

 

On July 25, 2017, Prashant Shah exercised his 3-year warrant to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share providing $50,000 of proceeds to Muscle Maker.

 

Amendment of Bylaws Permitting Electronic Voting of Shareholders

 

Our board of directors approved on August 11, 2017 an amendment to our Bylaws permitting electronic notice by the Board of Directors to shareholders seeking shareholder approval on corporate matters and for shareholders to electronically vote directly on corporate matters rather than to require the provision of proxies at a shareholder meeting.

 

Shares Purchased by CCNC-MMG, LLC

 

On August 25, 2017, Muscle Maker issued 53,571 shares of common stock of Muscle Maker to CCNC-MMG, LLC at a purchase price of $5.60 per share providing $300,000 of proceeds to Muscle Maker.

 

Shares Purchased by Alex Danze

 

On September 1, 2017, Muscle Maker issued 8,928 shares of common stock of Muscle Maker to Alex Danze at a purchase price of $5.60 per share providing $50,000 of proceeds to Muscle Maker.

 

Merger and Reorganization

 

Merger of Muscle Maker Brands Conversion, Inc. with Muscle Maker

 

On September 15 , 2017 (“Effective Merger Date”), pursuant to an Agreement of Merger, MMBC was merged (“Merger”) into Muscle Maker, with Muscle Maker as the surviving corporation, in a tax-free reorganization. Pursuant to the Merger, each share of common stock of MMBC, no par value per share (the “MMBC Common Stock”), other than shares owned by Muscle Maker, was converted into 795.3668 shares of common stock of Muscle Maker, with any fractional shares resulting to any shareholder of MMBC being rounded to the next nearest whole share (the “Merger Consideration”) for a total consideration of 2,067,953 shares of common stock of Muscle Maker to the MMF Members. On the Effective Merger Date, by virtue of the Merger, each share of MMBC Common Stock issued and held immediately prior to the Effective Time by Muscle Maker was automatically cancelled and retired and ceased to exist, and no consideration was delivered in exchange for the cancellation and retirement of the MMBC Common Stock held by Muscle Maker. As a result of the Merger, Muscle Maker owned 70% of the shares of CTI.

 

Assignment of Corporate Stores and shares of CTI to Muscle Maker Corp.

 

On September 15, 2017, Muscle Maker assigned all the existing corporate stores and its 70% ownership interest in CTI to Muscle Maker Corp. pursuant to the terms of that certain Agreement of Conveyance, Transfer and Assigning of Assets and Assumptions of Liabilities, dated September 15, 2017, between Muscle Maker Corp and Muscle Maker.

 

Shared -Service Agreement between Muscle Maker and Muscle Maker Development

 

On August 25, 2017, Muscle Maker and Muscle Maker Development entered into a Shared-Service Agreement as to the payment of compensation and expenses of employees and consultants which are shared by both Muscle Maker and Muscle Maker Development.

 

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Employment Agreements

 

Muscle Maker entered into an Employment Agreement with each of (i) Robert Morgan, as Chief Executive Officer, (ii) Grady Metoyer, as Chief Financial Officer and (iii) Rodney Silva, as Chief Culture Officer, effective as of the date Muscle Maker successfully receives at least $5,000,000 in gross proceeds from an SEC qualified offering under this Offering Statement under Regulation A+ under the Securities Act of 1933, as amended. See “Executive Compensation – Employment Agreements”.

 

Payment of Lease Payment Obligations

 

On September 15 , 2017, American Restaurant Holdings entered into an Assumption Agreement with Muscle Maker and Muscle Maker Corp, whereby Muscle Maker and Muscle Maker Corp. agree to make all required payments under the Muscle Maker Grill corporate restaurant leases which American Restaurant Holdings entered into on behalf of Muscle Maker, Inc, Muscle Maker Corp., LLC, Muscle Maker Brands, LLC and Muscle Maker Brands Conversion, Inc.

 

Reverse Stock Split

 

Our board of directors and shareholders approved on September 18, 2017 and September 20 , 2017, respectively, a 1-for-7 reverse split of our common stock, which was effected on September 20, 2017. The reverse split combined each seven shares of our outstanding common stock into one share of common stock and correspondingly adjusted the exercise prices of our common stock purchase warrants and options and conversion price of our convertible debt. No fractional shares were issued in connection with the reverse split, and any fractional shares resulting from the reverse split were rounded down to the nearest whole share. All references to common stock, common stock purchase warrants, restricted stock, share data, per share data and related information have been retroactively adjusted, where applicable, in this Offering Circular to reflect the reverse split of our common stock (and the corresponding adjustment of the exercise prices of our common stock purchase warrants) as if it had occurred at the beginning of the earliest period presented. As a result of the reverse stock split, the number of shares of common stock issued and outstanding decreased from 71,891,120 shares as of September 20, 2017, to approximately 10,227,302 shares. In connection with the reverse stock split, we filed Certificate of Amendment to our Articles of Incorporation to effect the reverse stock split with the Secretary of State of California on September 20, 2017.

 

Adoption of Muscle Maker, Inc 2017 Stock Option and Stock Issuance Plan

 

Our board of directors and shareholders adopted and approved on July 27, 2017 and September 21 , 2017, respectively, the Muscle Maker, Inc 2017 Stock Option and Stock Issuance Plan, effective September 21 , 2017, under which stock options and restricted stock may be granted to officers, directors, employees and consultants. Under the Plan, 1,428,571 shares (10,000,000 pre-reverse split shares) of Common Stock, no par value per share, are reserved for issuance.

 

Grant of Shares of Restricted Common Stock to Directors under Plan

 

On September 21, 2017, Muscle Maker granted 7,142 shares (post-reverse stock split) of common stock under its Muscle Maker 2017 Stock Option and Stock Issuance Plan to each of its six directors of Muscle Maker (42,857 shares of common stock in the aggregate) at a value of $7.00 per share. Such share grants are subject to graduated vesting in the following installments on each of the following dates: (i) 50% as of the date of grant and (ii) 8.333% as of (a) August 1, 2017, (b) September 1, 2017, (c) October 1, 2017, (d) November 1, 2017, (e) December 1, 2017, and (f) January 1, 2017.

 

Organizational Structure

 

The diagram below depicts our organizational structure after this Offering:

 

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The share information in this diagram for Muscle Maker has been adjusted to reflect the 1-for-7 reverse stock split of our common stock that was effective September 20 , 2017.

 

Employees

 

As of September 18, 2017, we had approximately 173 employees, of whom approximately 143 were restaurant employees and approximately 30 were support center personnel. None of our employees are part of a collective bargaining agreement, and we believe our relationships with our employees are satisfactory.

 

Legal Proceedings

 

From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. There are no legal proceedings currently pending against us which we believe would have a material effect on our business, financial position or results of operations and, to the best of our knowledge, there are no such legal proceedings contemplated or threatened.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the financial condition and results of operations of Muscle Maker, Inc. (“Muscle Maker”), together with its subsidiaries (collectively, the “Company”), should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included elsewhere in this Offering Circular. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us,” “we,” “our,” and similar terms refer to the Company. This Offering Circular includes forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as “anticipate,” “estimate,” “plan,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Reference is made to “Risk Factors”, which are included elsewhere in this Offering Circular.

 

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OVERVIEW

 

We operate under the name Muscle Maker Grill as a franchisor and owner-operator of Muscle Maker Grill restaurants. As of December 31, 2016, our restaurant system included eight Company-owned restaurants and 41 franchised restaurants. Our restaurants offer quality food, freshly prepared with our proprietary recipes created with the guest’s health in mind. The menu is protein based and features various supplements and health food snacks, along with a nutritious children’s menu.

 

The Muscle Maker Grill is a high-growth, fast casual restaurant concept that specializes in preparing healthy-inspired, high-quality, fresh, made-to-order lean, protein-based meals featuring chicken, seafood, pasta, burgers, wraps, and flat breads. In addition, we feature freshly prepared entrée salads and an appealing selection of sides, protein shakes and fruit smoothies. We operate in the approximately $34.5 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 restaurant concepts such as Muscle Maker Grill.

 

We believe our 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.

 

Our disciplined growth strategy has enabled strong growth across all of our key performance metrics. The number of Muscle Maker Grill restaurants has grown from one location in one market in New Jersey as of November 20, 2007 under our predecessor to 53 locations in twelve states as of September 18, 2017 under us as the successor. Our company-owned restaurant AUVs slightly declined from approximately $762,000 in fiscal 2015 to approximately $712,000 in fiscal 2016, representing a decrease of 6.5%. From fiscal 2015 to fiscal 2016, our company store restaurant sales increased from $1,032,558 to $2,735,222, and total company revenue increased from $3,106,779 to $4,953,205.

 

As of December 31, 2016, we had an accumulated deficit of $3,841,638 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, 2016, 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 – Ability to Continue as Going Concern” and Note 2 to Notes to Consolidated Financial Statements for additional information describing the circumstances that led to the inclusion of this explanatory paragraph.

 

Operations

 

The first location opened in Colonia, New Jersey in 1995 by Rod Silva, a son of Brazilian immigrants and bodybuilder. Our restaurant concept has been, and continues to be built around a distinctive and diverse lien, protein based menu, headlined by healthy-inspired chicken, seafood, pasta, burgers, wraps and flat breads made-to-order. Our Chief Executive Officer, Robert Morgan, formerly with Pizza Hut and PepsiCo, joined Muscle Maker in 2007, that led to the franchising of Muscle Maker Grill. At the time Mr. Morgan joined, we had one location opened by Mr. Silva. Since then, we have grown our brand on a disciplined basis designed to capitalize on the large market opportunity available to us and, as of December 31, 2016, we had 49 locations. Our highly experienced management team has created and refined the infrastructure to create replicable restaurant-level systems, processes and training procedures that can deliver a high-quality experience that is designed to consistently exceed our customers’ expectations.

 

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Corporate Structure

 

Muscle Maker serves as a holding company of the following subsidiaries:

 

  (i) Muscle Maker Development, LLC (“Muscle Maker Development”), a directly wholly owned subsidiary, which was formed in Nevada on July 18, 2017 for the purposes of running our existing franchise operations and continuing to franchise the Muscle Maker Grill name and business system to qualified franchisees; and
  (ii) Muscle Maker Corp., LLC (“Muscle Maker Corp.”), a directly wholly owned subsidiary, which was formed in Nevada on July 18, 2017 for the purposes of developing new corporate stores and operating our new and existing corporate stores. Muscle Maker Corp. has a direct 70% ownership interest in Custom Technology, Inc. (“CTI”), which was formed in New Jersey on July 29, 2015, and is a technology and point of sale (“POS”) systems dealer and technology consultant.

 

We plan to expand our Muscle Maker Grill brand through the (i) development and opening of additional company owned Muscle Maker Grill restaurants and (ii) franchising of additional Muscle Maker Grill restaurants. Muscle Maker together with Muscle Maker Development, Muscle Maker Corp., and CTI are referred to herein collectively as the “Company”.

 

Corporate History

 

Formation of Muscle Maker

 

Muscle Maker, Inc. (“Muscle Maker”), was incorporated by American Restaurant Holdings (“American Restaurant Holdings”) in California on December 8, 2014. On December 22, 2014, Muscle Maker issued 14,285 shares of its common stock, no par value per share, to the Chief Executive Officer of American Restaurant Holdings as founder shares for cash proceeds of $10.

 

Acquisition of 74% of Muscle Maker Brands

 

Muscle Maker Brands, LLC (“Muscle Maker Brands”) was formed on December 22, 2014 in the state of California for the purpose of acquiring and operating company owned Muscle Maker Grill restaurants, as well as franchising the Muscle Maker Grill name and business system to qualified franchisees. Muscle Maker Franchising, LLC (“Muscle Maker Franchising”) was founded in 1995 in order to develop a brand of healthy-option fast food restaurants.

 

On January 23, 2015, Muscle Maker, Muscle Maker Brands and Muscle Maker Franchising entered into a Unit Purchase Agreement whereby Muscle Maker Brands purchased substantially all of the assets and liabilities of Muscle Maker Franchising, Muscle Maker acquired 7,400 membership units of Muscle Maker Brands (representing 74% of the membership units of Muscle Maker Brands), and certain members of Muscle Maker Franchising (“MMF Members”) acquired 2,600 membership units of Muscle Maker Brands (representing 26% of the membership units of Muscle Maker Brands). (the “MMG Acquisition”). The aggregate purchase consideration for Muscle Maker’s membership interest in Muscle Maker Brands was $4,244,000 and consisted of $3,570,000 in cash, $604,000 of promissory notes (consisting of a $400,000 promissory note (“MM Note”) from Muscle Maker and a $204,000 promissory note (“MMB Note”) from Muscle Maker Brands) and 71,428 shares of common stock of Muscle Maker valued at $0.98 per share or $70,000 issued. On January 23, 2015, in exchange for the issuance by Muscle Maker to American Restaurant Holdings of 5,785,714 shares of common stock of Muscle Maker, American Restaurant Holdings provided cash of $3,645,000 and an obligation to repay an aggregate of $604,000 of principal due under MM Note and MMB Note issued to Muscle Maker Franchising in order to facilitate the Muscle Maker Brands acquisition. Pursuant to the terms of the Unit Purchase Agreement, the MMF Members shall convert their non-controlling interest in Muscle Maker Brands into an aggregate of 2,067,953 shares of common stock of Muscle Maker prior Muscle Maker going public.

 

On January 24, 2015, Muscle Maker granted 28,571 shares of its common stock valued at $0.98 per share to its Director of Brand Development, in connection with an employment agreement with the Director of Brand Development.

 

On January 24, 2015, the Company issued 61,224 shares of its common stock to the Director of Brand Development in exchange for cash proceeds of $0.98 per share, or $60,000.

 

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On July 23, 2015 and August 28, 2015, the Company issued 107,142 and 71,428 of its common stock, and 5-year warrants for the purchase of 53,571 and 35,714 shares of common stock respectively, for aggregate cash proceeds of $750,000. The warrants are exercisable at $5.25 per share.

 

Springfield Acquisition

 

On May 4, 2015, Muscle Maker Brands acquired a business in Springfield, New Jersey, as a corporate store (the “Springfield Acquisition”). The purchase price of the store was $30,060, of which $8,670 related to equipment purchased and the remaining $21,390 was accounted for as goodwill.

 

CTI Acquisition

 

On August 1, 2015, the Company acquired 70% of the shares of Custom Technology, Inc. (“CTI”), a technology and point of sale (“POS”) systems dealer and technology consultant, in exchange for $70,000 in cash (the “CTI Acquisition”). CTI was formed in New Jersey on July 29, 2015 and entered into an asset purchase agreement on August 1, 2015 pursuant to which CTI purchased POS computer systems, cash registers, camera systems and related inventory and supplies from its predecessor entity.

 

Repayment of Promissory Notes regarding MMG Acquisition

 

The MMB Note was completely repaid on March 9, 2015. On July 21, 2015, January 23, 2016 and July 23, 2016, installments of $100,000, $150,000 and $150,000 were repaid on the balance of the MM Note. As of July 23, 2016, there is no balance outstanding related to MM Note.

 

Advances and Exchange of Advances for Convertible Notes

 

On December 31, 2015, Muscle Maker issued a promissory note in the amount of $1,082,620 (the “2015 ARH Note”) to American Restaurant Holdings. The 2015 ARH Note had no stated interest rate and was convertible into 309,320 shares of the Company’s common stock at $3.50 per share.

 

During the period from July 1, 2016 through December 31, 2016, American Restaurant Holdings provided $1,364,842 of advances to Muscle Maker. These advances, combined with the $1,257,000 payable to American Restaurant Holdings as June 30, 2016 were exchanged for a convertible note in the amount of $2,621,842 (the “2016 ARH Note”). The 2016 ARH Note had no stated interest rate or maturity date and was convertible into shares of common stock of Muscle Maker at a conversion price of $2.80 per share at a time to be determined by the American Restaurant Holdings.

 

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Recent Developments

 

More Advances and Exchange of Advances for Convertible Notes and Conversion of Convertible Notes to Shares of Common Stock

 

During the period from December 31, 2016 through February 15, 2017, American Restaurant Holdings provided $980,949 of advances to the Company. The payable due to American Restaurant Holdings as a result of these advances was exchanged for a convertible promissory note in the amount of $980,949 (the “2017 ARH Note”). The 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of common stock of Muscle Maker at a conversion price of $2.80 per share at a time to be determined by the lender.

 

On March 14, 2017, American Restaurant Holdings elected to convert: (a) the 2015 ARH Note in the principal amount of $1,082,620 into 309,320 shares of common stock of Muscle Maker at a conversion price of $3.50 per share; (b) the 2016 ARH Note in the principal amount of $2,621,842 into 936,372 shares of common stock of Muscle Maker at a conversion price of $2.80 per share; and (c) the 2017 ARH Note in the principal amount of $980,949 into 350,338 shares of common stock of Muscle Maker at a conversion price of $2.80 per share.

 

Second 2017 Advances, Exchange of Advances for Convertible Notes, and Conversion of Convertible Notes to Shares of Common Stock

 

During the period from February 16, 2017 through March 15, 2017, American Restaurant Holdings provided $338,834 of advances to the Company. The payable due to American Restaurant Holdings as a result of these advances was exchanged for a convertible promissory note in the amount of $338,834 (the “Second 2017 ARH Note”). The Second 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of common stock of Muscle Maker at a conversion price of $3.50 per share at a time to be determined by the lender.

 

On September 19 , 2017, American Restaurant Holdings elected to convert the Second 2017 ARH Note in the principal amount of $338,834 into 96,809 shares of common stock of Muscle Maker at a conversion price of $3.50 per share.

 

Unrelated Party Loans for Convertible Notes

 

During the period from March 17, 2017 to August 15, 2017, Muscle Maker issued convertible notes maturing six months after the issuance of the convertible note , convertible into common stock at a price per share of $3.00 (50% of initial public offering price), and a stated interest rate of 10% per six months to the following unrelated parties:

 

(a) JM Assets LP for a loan of $500,000;

(b) Midland IRA Inc FBO Randall Avery for a loan of $100,000;

(c) Tom Buckley for a loan of $25,000;

(d) John Mohan for a loan of $100,000;

(e) Kevin Mohan for a loan of $50,000;

(f) Dan Pettit for a loan of $150,000;

(g) Attary LLC for a loan of $75,000;

(h) Sean Harrison for a loan of $50,000;

(i) Robert Mohan for a loan of $50,000;

(j) Jerry Neugebauer for a loan of $100,000; and

(k) Shawn Holmes for a loan of $100,000.

 

Related Party Loans for Convertible Notes

 

During the period from May 1, 2017 to August 15, 2017, Muscle Maker issued convertible notes maturing six months after the issuance of the convertible note , convertible into common stock at a price per share of $3.00 (50% of initial public offering price), and a stated interest rate of 10% per six months to the following related parties:

 

(a) John Feeney for a loan of $50,000;

(b) Membership, LLC for a loan of $100,000; and

(c) A.B. Southall for a loan of $100,000.

 

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Issuances of Warrants

 

The Company issued the following warrants to purchase an aggregate of 701,890 shares of common stock of Muscle Maker: (a) a 5-year warrant to Dean Miles to purchase 89,285 shares of common stock of Muscle Maker at an exercise price of $5.25 per share, in connection with two private placements to Mr. Miles in 2015; (b) a 3-year warrant to American Restaurant Holdings to purchase of 327,730 shares of common stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the 2016 ARH Note in 2016; (c) a 3-year warrant to American Restaurant Holdings to purchase of 122,618 shares of common stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the 2017 ARH Note in 2017; (d) a 3-year warrant to American Restaurant Holdings to purchase of 21,058 shares of common stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the Second 2017 ARH Note in 2017; (e) a 3-year warrant to American Restaurant Holdings to purchase of 21,058 shares of common stock of Muscle Maker at an exercise price of $7.00 per share, in connection with the exchange of advances for the Third 2017 ARH Note in 2017; (f) a 3-year warrant to Prashant Shah to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share; (g) a 3-year warrant to JM Assets LP to purchase of 35,714 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by JM Assets LP to Muscle Maker in 2017; (h) a 3-year warrant to Midland IRA Inc FBO Randall Avery to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Midland IRA Inc FBO Randall Avery to Muscle Maker in 2017; (i) a 3-year warrant to John Feeney to purchase of 3,571 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by John Feeney to Muscle Maker in 2017; (j) a 3-year warrant to Tom Buckley to purchase of 1,785 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Tom Buckley to Muscle Maker in 2017; (k) a 3-year warrant to John Mohan to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by John Mohan to Muscle Maker in 2017; (l) a 3-year warrant to Kevin Mohan to purchase of 3,571 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Kevin Mohan to Muscle Maker in 2017; (m) a 3-year warrant to Dan Pettit to purchase of 10,714 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Dan Pettit to Muscle Maker in 2017; (n) a 3-year warrant to Attary LLC to purchase of 5,357 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Attary LLC to Muscle Maker in 2017; (o) a 3-year warrant to John Marques to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Membership, LLC to Muscle Maker in 2017; (p) a 3-year warrant to Sean Harrison to purchase of 3,571 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Sean Harrison to Muscle Maker in 2017; (q) a 3-year warrant to Robert Mohan to purchase of 3,571 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Robert Mohan to Muscle Maker in 2017; (r) a 3-year warrant to Spartan Capital Securities, LLC to purchase of 2,285 shares of common stock of Muscle Maker at an exercise price of $7.00 per share; (s) a 3-year warrant to Jerry Neugebauer to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan Jerry Neugebauer to Muscle Maker in 2017; (t) a 3-year warrant to A.B. Southall to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by A.B. Southall to Muscle Maker in 2017; and (u) a 3-year warrant to Shawn Holmes to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share in connection with the loan by Shawn Holmes to Muscle Maker in 2017. As of the date of this Offering Statement, there are unexercised warrants outstanding to purchase an aggregate of 694,748 shares of common stock of Muscle Maker.

 

Spin-Off of Muscle Maker by American Restaurant Holdings

 

On March 23, 2017, American Restaurant Holdings authorized and facilitated the distribution of 7,381,745 shares of common stock of Muscle Maker held by American Restaurants, LLC, the wholly owned subsidiary of American Restaurant Holdings, to the shareholders of American Restaurant Holdings (the “Spin-Off”). As a result of the Spin-Off on March 23, 2017, American Restaurant Holdings is no longer a majority owner of Muscle Maker.

 

Grant of Shares of Restricted Common Stock to Employees and Consultants

 

In May 2017, Muscle Maker granted 159,642 shares of its common stock to its employees and consultants at a value of $7.00 per share. Such share grants are subject to graduated vesting in equal installments of 20% on each of the following dates: (i) the date of grant, (ii) January 1, 2018, (iii) January 1, 2019, (iv) January 1, 2020, and (v) January 1, 2021. In the event of resignation or termination for any reason (except for a “change of control”) of an employee or consultant that receives such shares, the remaining non-vested shares of such employee or consultant prior to such resignation or termination will be forfeited.

 

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Reorganization

 

Conversion of Muscle Maker Brands

 

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

 

Formation of Muscle Maker Development to Operate Franchising and Assignment of Franchise Agreements

 

On July 18, 2017, Muscle Maker formed Muscle Maker Development, LLC (“Muscle Maker Development”) in the state of Nevada for the purpose of running our existing franchise operations and continuing to franchise the Muscle Maker Grill name and business system to qualified franchisees. Muscle Maker Development issued 1,000 membership units to its sole member and manager, Muscle Maker. On August 25, 2017, MMBC assigned all the existing franchise agreements to Muscle Maker Development pursuant to the terms of that certain Assignment and Assumption Agreement, dated August 25, 2017, between MMBC and Muscle Maker Development.

 

Formation of Muscle Maker Corp. to Develop and Operate Corporate Stores

 

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

 

Issuance of Shares of Muscle Maker to CrowdfundX for Marketing Services in Connection with Offering

 

On July 20, 2017, Muscle Maker entered into that certain Master Services Agreement, effective as of July 20, 2017, with WhoYouKnow LLC, California limited liability company d/b/a CrowdfundX (“CrowdfundX”), whereby CrowdfundX is providing management services to Muscle Maker in connection with the Offering. Pursuant to the terms of the agreement, Muscle Maker issued 28,333 shares of common stock at a value of $6.00 per share (or, an aggregate value of $170,000) to CrowdfundX. In addition, Muscle Maker has agreed to pay a cash fee to CrowdfundX in the amount of $145,000, which is payable in installments of $40,000 within five business days after the Effective Date, $40,000 on August 21, 2017, and $65,000 on September 21, 2017.

 

Appointment of Computershare as Transfer Agent

 

On July 24, 2017, Muscle Maker entered into an agreement with Computershare Inc., and its wholly-owned subsidiary Computershare Trust Company, N.A. (together with Computershare, Inc., “Computershare”), whereby Computershare agreed to act as the transfer agent of Muscle Maker.

 

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Options Granted to Franchisees

 

On July 27, 2017, Muscle Maker granted stand-alone (non-Plan based) non-qualified stock options to purchase an aggregate of 45,000 shares of its common stock to its franchisees. The options are fully vested, have an exercise price of $7.00 per share and expire 3 years after the date of grant.

 

Third 2017 Advances, Exchange of Advances for Convertible Notes, and Conversion of Convertible Notes to Shares of Common Stock

 

During the period from March 16, 2017 through July 18, 2017, American Restaurant Holdings provided $336,932 of advances to the Company. The payable due to American Restaurant Holdings as a result of these advances was exchanged for a convertible promissory note in the amount of $336,932 (the “Third 2017 ARH Note”). The Third 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of common stock of Muscle Maker at a conversion price of $5.60 per share at a time to be determined by the lender.

 

On September 19 , 2017, American Restaurant Holdings elected to convert the Third 2017 ARH Note in the principal amount of $336,932 into 60,166 shares of common stock of Muscle Maker at a conversion price of $5.60 per share.

 

Shares Purchased by Daniel Pettit

 

On July 21, 2017, Muscle Maker issued 8,928 shares of common stock of Muscle Maker to Daniel Pettit, as trustee of the Daniel E. Pettit Revocable Trust at a purchase price of $5.60 per share providing $50,000 of proceeds to Muscle Maker.

 

Exercise of Warrants by Prashant Shah

 

On July 25, 2017, Prashant Shah exercised his 3-year warrant to purchase of 7,142 shares of common stock of Muscle Maker at an exercise price of $7.00 per share providing $50,000 of proceeds to Muscle Maker.

 

Amendment of Bylaws Permitting Electronic Voting of Shareholders

 

Our board of directors approved on August 11, 2017 an amendment to our Bylaws permitting electronic notice by the Board of Directors to shareholders seeking shareholder approval on corporate matters and for shareholders to electronically vote directly on corporate matters rather than to require the provision of proxies at a shareholder meeting.

 

Shares Purchased by CCNC-MMG, LLC

 

On August 25, 2017, Muscle Maker issued 53,571 shares of common stock of Muscle Maker to CCNC-MMG, LLC at a purchase price of $5.60 per share providing $300,000 of proceeds to Muscle Maker.

 

Shares Purchased by Alex Danze

 

On September 1, 2017, Muscle Maker issued 8,928 shares of common stock of Muscle Maker to Alex Danze at a purchase price of $5.60 per share providing $50,000 of proceeds to Muscle Maker.

 

Merger and Reorganization

 

Merger of Muscle Maker Brands Conversion, Inc. with Muscle Maker

 

On September 15 , 2017 (“Effective Merger Date”), pursuant to an Agreement of Merger, MMBC was merged (“Merger”) into Muscle Maker, with Muscle Maker as the surviving corporation, in a tax-free reorganization. Pursuant to the Merger, each share of common stock of MMBC, no par value per share (the “MMBC Common Stock”), other than shares owned by Muscle Maker, was converted into 795.3668 shares of common stock of Muscle Maker, with any fractional shares resulting to any shareholder of MMBC being rounded to the next nearest whole share (the “Merger Consideration”) for a total consideration of 2,067,953 shares of common stock of Muscle Maker to the MMF Members. On the Effective Merger Date, by virtue of the Merger, each share of MMBC Common Stock issued and held immediately prior to the Effective Time by Muscle Maker was automatically cancelled and retired and ceased to exist, and no consideration was delivered in exchange for the cancellation and retirement of the MMBC Common Stock held by Muscle Maker. As a result of the Merger, Muscle Maker owned 70% of the shares of CTI.

 

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Assignment of Corporate Stores and shares of CTI to Muscle Maker Corp.

 

On September 15, 2017, Muscle Maker assigned all the existing corporate stores and its 70% ownership interest in CTI to Muscle Maker Corp. pursuant to the terms of that certain Agreement of Conveyance, Transfer and Assigning of Assets and Assumptions of Liabilities, dated September 15, 2017, between Muscle Maker Corp and Muscle Maker.

 

Shared-Service Agreement between Muscle Maker and Muscle Maker Development

 

On August 25, 2017, Muscle Maker and Muscle Maker Development entered into a Shared-Service Agreement as to the payment of compensation and expenses of employees and consultants which are shared by both Muscle Maker and Muscle Maker Development.

 

Employment Agreements

 

Muscle Maker entered into an Employment Agreement with each of (i) Robert Morgan, as Chief Executive Officer, (ii) Grady Metoyer, as Chief Financial Officer and (iii) Rodney Silva, as Chief Culture Officer, effective as of the date Muscle Maker successfully receives at least $5,000,000 in gross proceeds from an SEC qualified offering under this Offering Statement under Regulation A+ under the Securities Act of 1933, as amended. See “Executive Compensation – Employment Agreements”.

 

Payment of Lease Payment Obligations

 

On September 15 , 2017, American Restaurant Holdings entered into an Assumption Agreement with Muscle Maker and Muscle Maker Corp, whereby Muscle Maker and Muscle Maker Corp. agree to make all required payments under the Muscle Maker Grill corporate restaurant leases which American Restaurant Holdings entered into on behalf of Muscle Maker, Inc, Muscle Maker Corp., LLC, Muscle Maker Brands, LLC and Muscle Maker Brands Conversion, Inc.

 

Reverse Stock Split

 

Our board of directors and shareholders approved on September 18, 2017 and September 20 , 2017, respectively, a 1-for-7 reverse split of our common stock, which was effected on September 20, 2017. The reverse split combined each seven shares of our outstanding common stock into one share of common stock and correspondingly adjusted the exercise prices of our common stock purchase warrants and options and conversion price of our convertible debt. No fractional shares were issued in connection with the reverse split, and any fractional shares resulting from the reverse split were rounded down to the nearest whole share. All references to common stock, common stock purchase warrants, restricted stock, share data, per share data and related information have been retroactively adjusted, where applicable, in this Offering Circular to reflect the reverse split of our common stock (and the corresponding adjustment of the exercise prices of our common stock purchase warrants) as if it had occurred at the beginning of the earliest period presented. As a result of the reverse stock split, the number of shares of common stock issued and outstanding decreased from 71,891,120 shares as of September 20, 2017, to approximately 10,227,302 shares. In connection with the reverse stock split, we filed Certificate of Amendment to our Articles of Incorporation to effect the reverse stock split with the Secretary of State of California on September 20, 2017.

 

Adoption of Muscle Maker, Inc 2017 Stock Option and Stock Issuance Plan

 

Our board of directors and shareholders adopted and approved on July 27, 2017 and September 21, 2017, respectively, the Muscle Maker, Inc 2017 Stock Option and Stock Issuance Plan, effective September 21, 2017, under which stock options and restricted stock may be granted to officers, directors, employees and consultants. Under the Plan, 1,428,571 shares (10,000,000 pre-reverse split shares) of Common Stock, no par value per share, are reserved for issuance.

 

Grant of Shares of Restricted Common Stock to Directors under Plan

 

On September 21, 2017, Muscle Maker granted 7,142 shares (post-reverse stock split) of common stock under its Muscle Maker 2017 Stock Option and Stock Issuance Plan to each of its six directors of Muscle Maker (42,857 shares of common stock in the aggregate) at a value of $7.00 per share. Such share grants are subject to graduated vesting in the following installments on each of the following dates: (i) 50% as of the date of grant and (ii) 8.333% as of (a) August 1, 2017, (b) September 1, 2017, (c) October 1, 2017, (d) November 1, 2017, (e) December 1, 2017, and (f) January 1, 2017.

 

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Corporate Structure

 

The diagram below depicts our organizational structure after this Offering:

 

 

The share information in this diagram for Muscle Maker has been adjusted to reflect the 1-for-7 reverse stock split of our common stock that was effective September 20 , 2017.

 

Growth Strategies and Outlook

 

We plan to pursue the following strategies to continue to grow our revenues and profits.

 

Continue to Open New Company-Operated and Franchised Restaurants. We believe we are in the early stages of our growth story. We had 41 system wide restaurants in ten states as of December 31, 2016, including franchised locations. In fiscal 2015, we opened one company-operated restaurants and seven franchised restaurants. For the year ended December 31, 2016, we opened six new company-operated and four new franchised restaurants. In 2017, we intend to open between 15 and 20 new company-operated and 15 new franchised restaurants, including military bases, across Arizona, California, Florida, Georgia, Illinois, Louisiana, Kansas, Massachusetts, Nebraska, New Jersey, New York, Nevada, North Carolina, Pennsylvania, Texas, Washington and Internationally. Over the long-term, we plan to continue growing the number of Muscle Maker Grill system-wide restaurants by approximately 30% to 50% annually, while maintaining a similar proportion of company-operated and franchised units. However, these growth rates cannot be guaranteed.

 

Drive Comparable Restaurant Sales. We plan to continue delivering comparable restaurant sales growth by attracting new customers through expanding our brand awareness with new restaurant openings and marketing efforts, increasing existing customer frequency by providing an enhanced service experience and continuing to grow across each of our dayparts.

 

Continue to Enhance Profitability. We focus on improving our 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.

 

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Key Measures We Use to Evaluate Our Performance

 

To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company restaurant revenues, franchise royalty and other franchise revenues, system-wide AUVs, comparable restaurant sales, new restaurant openings and net income.

 

Franchise Royalty and Other Franchise Revenues

 

Franchise restaurant revenues consist of royalty income, including franchise royalty, and other franchise revenues, including initial and renewal franchise fees.

 

Company-Operated Restaurant Revenue

 

Company-operated restaurant revenue consists of sales of food and beverages in company-operated restaurants net of promotional allowances, employee meals and other discounts. Company restaurant revenues in a period are influenced by several factors, including the number of operating days in such period, the number of open restaurants and comparable restaurant sales growth. While we expect the majority of our total revenue growth will be driven by franchised restaurants, our company-operated restaurants and growth in revenues from company-operated restaurants remain an important part of our financial success.

 

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 December traffic and higher traffic in the first, second, and third quarters. As a result of seasonality, our quarterly and annual results of operations and key performance indicators such as company restaurant revenue and comparable restaurant sales may fluctuate.

 

System-wide Average Unit Volumes

 

We measure system-wide, franchised and company-operated average unit volumes, or AUVs, on a fiscal year basis. Annual AUVs are calculated using the following methodology: first, we determine the restaurants that have been open for a full 15-month period; and second, we calculate the revenues for these restaurants and divide by the number of restaurants in that base to arrive at our AUV calculation.

 

Comparable Restaurant Sales

 

Comparable restaurant sales reflect the change in year-over-year sales for the comparable restaurant base. A restaurant enters our comparable restaurant base the first full day of the month after being open for 15-months using a mid-month convention. While we do not record franchised sales as revenues, our royalty revenues are calculated based on a percentage of franchised restaurant sales.

 

    Fiscal Year Ended  
    2016     2015  
Comparable Restaurant Sales                
Company-Operated     -6.7 %     1.3 %
Franchised     -1.6 %     2.3 %
Total System-wide     -1.8 %     2.3 %

 

New Restaurant Openings

 

The number of restaurant openings reflects the number of restaurants opened during a particular reporting period. Before we open new company-operated restaurants, we incur preopening costs. System-wide, some of our new restaurants open with an initial start-up period of higher than normal sales volume, which subsequently decreases to stabilized levels. New company-operated restaurants typically experience normal inefficiencies such as higher food and supplies, labor and other direct operating costs and, as a result, restaurant contribution margins are typically lower during the start-up period of operations. In addition, new restaurants typically have high occupancy costs compared to existing restaurants. When entering new markets, we may be exposed to longer start-up times and lower contribution margins than reflected in our average historical experience.

 

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Restaurant openings, closures and refranchised

 

    Fiscal Year Ended  
    2016     2015  
Company-operated restaurant activity:                
Beginning of period     2       1  
Openings     6       1  
Refranchised     0       0  
Closures     0       0  
Restaurants at end of period     8       2  
Franchised restaurant activity:                
Beginning of period     44       53  
Openings     4       7  
Refranchised     0       1  
Closures     7       15  
Restaurants at end of period     41       44  
Total restaurant activity:                
Beginning of period     46       54  
Openings     10       8  
Closures     7       16  
Restaurants at end of period     49       46  

 

In fiscal 2016, we and our franchisees opened ten restaurants, of which six were company-operated and four was franchised. In fiscal 2015, we and our franchisees opened eight restaurants of which one was company-operated and seven were franchised. In fiscal 2014, we and our franchisees opened twelve restaurants of which none were company-operated and twelve were franchised. From time to time we and our franchisees may close or relocate restaurants. A relocation results in a closure and an opening.

 

For fiscal 2016, we closed no company-operated restaurants and our franchisees closed seven restaurants, of which none were a relocation. For fiscal 2015, we closed no company-operated restaurants and our franchisees closed 15 restaurants, of which one was a relocation. For fiscal 2014, we closed no company-operated restaurants, and our franchisees closed 19 restaurants, of which none were a relocation.

 

Key Financial Definitions

 

Total Revenues

 

Our revenues are derived from two primary sources: company restaurant revenues and franchise revenues. Franchise revenues are comprised of franchise royalty revenues and, to a lesser extent, other franchise revenues which include initial and renewal franchisee fees.

 

Food and Beverage Costs

 

Food and beverage costs include the direct costs associated with food, beverage and packaging of our menu items at company-operated restaurants. The components of food, beverages and supplies are variable in nature, change with sales volume, are affected by menu mix and are subject to fluctuations in commodity costs.

 

Labor

 

Restaurant labor costs, including preopening labor, consist 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 grow due to inflation and as our company restaurant revenues grows. Factors that influence labor costs include minimum wage and employer payroll tax legislation, mandated health care costs and operational productivity established by the management team.

 

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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.

 

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, advertisings, merchant and bank fees, utilities, leasehold and equipment repairs and maintenance.

 

Depreciation and Amortization

 

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

 

General and Administrative Expenses

 

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

 

Interest Expense

 

Interest expense primarily consists of amortization of debt discounts on the 2016 ARH Note and 2015 ARH Note.

 

Income Taxes

 

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

 

Consolidated Results of Operations

 

Our financial statement presentation distinguishes a “Predecessor” for the periods prior to the Closing Date and a “Successor” for the periods following the Closing Date of the MMB Acquisition.

 

The operating results of the Company for the year ended December 31, 2016 and for the period from January 23, 2015 through December 31, 2015 are presented in the Successor period. The operating results of MMF and its subsidiary, MMF Colonia (“Colonia”) for the period from January 1, 2015 through January 22, 2015 are presented in the Predecessor period.

 

The Predecessor’s operations are substantially the same as the Successor’s operations. Therefore, for the purpose of comparing the results of our operations from period to period, we have combined the Predecessor results for the period from January 1, 2015 through January 22, 2015 with the Successor results for the period from January 23, 2015 through December 31, 2015, in order to present results for the year ended December 31, 2015.

 

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The following table represents selected items in our consolidated statements of operations for the years ended December 31, 2016 and 2015, respectively:

 

    Successor    

Combined

Successor &
Predecessor

 
    For the Year Ended  
    December 31,  
    2016     2015  
             
Revenues:                
Company restaurant sales, net of discounts   $ 2,735,222     $ 1,032,558  
Franchise royalties and fees     1,660,877       1,846,073  
Other revenues     557,106       228,148  
Total Revenues     4,953,205       3,106,779  
                 
Operating Costs and Expenses:                
Restaurant operating expenses:                
Food and beverage costs     918,545       315,924  
Labor     1,343,758       350,526  
Rent     731,371       52,709  
Other restaurant operating expenses     780,757       200,286  
Total restaurant operating expenses     3,774,431       919,445  
Costs of other revenues     295,231       115,988  
Depreciation and amortization     204,486       120,635  
General and administrative expenses     4,644,994       2,854,006  
Total Costs and Expenses     8,919,142       4,010,074  
Loss from Operations     (3,965,937 )     (903,295 )
                 
Other (Expense) Income:                
Other income (expense)     6,221       (45 )
Interest (expense) income, net     (132,689 )     944  
Total Other (Expense) Income, net     (126,468 )     899  
              -  
Net Loss Before Tax     (4,092,405 )     (902,396 )
Income tax provision     (127,282 )     (119,245 )
Net (Loss)     (4,219,687 )     (1,021,641 )
Net loss attributable to the non-controlling interest     (1,110,106 )     (226,718 )
Net Loss Attributable to Controlling Interest   $ (3,109,581 )   $ (794,923 )

 

Year Ended December 31, 2016 (Successor) Compared with Year Ended December 31, 2015 (Successor and Predecessor)

 

Revenues

 

Company revenues totaled $4,953,205 for the year ended December 31, 2016 compared to $3,106,779 for the year ended December 31, 2015. The 59% increase was primarily attributable to the addition of six Company-owned restaurants during year 2016.

 

We generated restaurant sales, net of discounts, of $2,735,222 for the year ended December 31, 2016 compared to $1,032,558 for the year ended December 31, 2015. This represented an increase of $1,702,664, or 165%, which resulted primarily from the increase in retail store revenues due to the addition of six Company-owned restaurants during 2016.

 

Franchise royalties and fees for the year ended December 31, 2016 and December 31, 2015 totaled $1,660,877 compared to $1,846,073, respectively. The $185,196 decline is primarily attributable to a reduction in new franchised store openings combined with closures and conversions of some franchise stores to company owned stores, as the Company increased its focus on company owned restaurant growth.

 

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Other revenues increased from $228,148 for the year ended December 31, 2015 to $557,106 for the year ended December 31, 2016, representing an increase of $328,958 or 144%. The increase is primarily attributable to CTI’s revenues recognized for a full year ended December 31, 2016, as opposed to partial year of approximately 5 months for the year ended December 31, 2015.

 

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, depreciation and amortization expenses, and general and administrative expenses (inclusive of labor).

 

Restaurant food and beverage costs for the year ended December 31, 2016 and December 31, 2015 totaled $918,545, or 33.6%, as a percentage of restaurant sales, and $315,924, or 30.6%, as a percentage of restaurant sales, respectively. The $602,621 increase results primarily from the addition of six new Company-owned locations noted above. The increase as a percentage of sales is primarily attributable to the impact of preopening training in which food and beverage inventory is utilized to train staff on the preparation of menu items, as well as lost efficiencies with new staff in portioning and preparation.

 

Restaurant labor for the year ended December 31, 2016 and December 31, 2015 totaled $1,343,758, or 49.1%, as a percentage of restaurant sales, and $350,526, or 33.9%, as a percentage of restaurant sales, respectively. The $993,232 increase results primarily from the addition of six new Company-owned locations noted above. The increase as a percentage of sales is primarily attributable to the impact of preopening training with newly hired staff, as well as lost efficiencies that are inherit in the start-up of new restaurants given the high level of attrition and retraining that occurs. Additionally, it is estimated that it takes approximately four to six months of extensive marketing efforts to effectively generate brand awareness in new geographical locations. These factors negatively impact labor margins in the early phases of operations of new restaurants.

 

Restaurant rent expense for the year ended December 31, 2016 and December 31, 2015 totaled $731,371, or 26.7%, as a percentage of restaurant sales, and $52,709, or 5.1%, as a percentage of restaurant sales, respectively. The $678,662 increase results primarily from the addition of six new Company-owned locations noted above. The increase as a percentage of sales is primarily attributable to the impact of recognizing rental expense prior to store openings, thus rental expenses incurred without offsetting revenues. Additionally, we have executed eight new lease agreements that have higher rental charges as a percentage of current sales volumes than historical agreements. As the company seeks to grow brand concepts, several factors are considered when deciding on leased locations. These include, but are not limited to, estimated foot traffic, lease term, lease rate, adjacent businesses, surrounding community economics, etc. As such, new lease agreements may tend to have a higher percentage of revenue as the brand establishes itself in new markets and the surrounding markets themselves grow.

 

Other restaurant operating expenses for the years ended December 31, 2016 and December 31, 2015 totaled $780,757, or 28.5% as a percentage of restaurant sales, and $200,286, or 19.4% as a percentage of restaurant sales, respectively. The $580,471 increase results primarily from the addition of six new Company-owned locations noted above. The increase as a percentage of sales is primarily attributable to the impact of advertising and marketing campaigns initialized months before and during restaurant openings to drive brand awareness, as well as ancillary pre-opening expenses related to service setups. As the company seeks to enter and grow markets beyond its historical “east coast” density, it is anticipated that advertising and marketing will be key in developing long-term brand awareness.

 

Cost of other revenues for the year ended December 31, 2016 and December 31, 2015 totaled $295,231, or 53.0%, as a percentage of other revenue, and $115,988, or 50.8%, as a percentage of other revenue, respectively. The $179,243 increase results primarily from full year operations during 2016 compared to partial year in 2017.

 

Depreciation and amortization expense for the year ended December 31, 2016 and December 31, 2015 totaled $204,486 or 4.1% as a percentage of total revenue and $120,635 or 3.9% as a percentage of total revenue, respectively. The $83,851 increase is primarily attributable to depreciation of approximately $957,000 in new fixed assets related to the addition of six new company owned locations.

 

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General and administrative expenses for the year ended December 31, 2016 and December 31, 2015 totaled $4,644,994, or 93.8% of total revenue, and $2,854,006, or 91.9% of total revenue, respectively. The $1,790,988 increase is primarily attributable to the “build-up” of the company’s corporate infrastructure to support new company owned store growth as well as third party related expenses to prepare the Company for a private placement offering and IPO. Wages increased $395,000 compared to the prior year with the addition of key management positions. Travel and related expenses increased approximately $235,000 to support buildout and store openings as well as evaluate new site locations. Advertising and marketing increased approximately $100,000 to grow national brand awareness. Third party accounting fees increased $155,000 with temporary accounting services to facilitate the corporate move as well as SEC financial statement preparation. Legal fees increased approximately $70,000 with enhanced SEC counsel for IPO readiness. Allowances for bad debt increased $89,000 with reserves for loan agreements. Additionally, CTI G&A expenses increased $413,000 as a result of full year of operations compared to partial year in 2015. It is anticipated that general and administrative expenses during the year 2017 will not decline due to audit, accounting and legal fees incurred in fiscal year 2017 as we close on the targeted private placement and IPO. Additionally, there will be compensation and third-party expenses incurred for the issuance of restricted stock to certain employees and third-party groups.

 

Loss from Operations

 

Our loss from operations for the year ended December 31, 2016 and December 31, 2015 totaled $3,965,937 or 80.0% of total revenue and $903,295 or 29.1% of total revenue, respectively. The increased loss of $3,062,642 can be primarily attributable to growth in general administrative expenses to build company infrastructure, inefficiencies in preopening expenses, new rental charges, local and national marketing campaigns, and third-party consulting services to facilitate our private placement and IPO.

 

Other (Expense) Income

 

Other (expense) income for the year ended December 31,2016 and December 31, 2015 totaled $(126,468) and $899, respectively. The $127,367 increase was primarily attributable to amortization of debt discount of approximately $139,000 in connection with the convertible note payable to a related party, partially offset by an increase in interest income.

 

Net (Loss) Income

 

Our net loss for the year ended December 31, 2016 increased by $3,198,046, to $4,219,687 as compared to $1,021,641 for the year ended December 31, 2015, resulting primarily from an increase in operating expenses. Our net loss attributable to the controlling interest was $3,109,581 and $794,923 for the year ended December 31, 2016 and 2015, respectively.

 

Liquidity and Capital Resources

 

Liquidity

 

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

 

    Successor  
    December 31, 2016     December 31, 2015  
Cash   $ 335,724     $ 599,278  
Working Capital Deficiency   $ (1,723,852 )   $ (61,507 )

 

The convertible note payable to American Restaurant Holdings with a face value of $1,082,620 that is a non-current liability on our balance sheet as of December 31, 2016 was converted into equity on March 14, 2017. Subsequent to December 31, 2016, American Restaurant Holdings advanced $2,621,842 of additional funds to Muscle Maker that were exchanged for convertible notes payable and eventually were converted into equity on March 14, 2017.

 

We expect cash flows to improve as we continue to open additional stores and our brand continues to gain recognition.

 

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Availability of Additional Funds and Going Concern

 

Based upon our working capital deficiency and accumulated deficit of $1,723,852 and $3,841,638 , respectively, as of December 31, 2016, plus our use of $2,110,702 of cash in operating activities during the twelve months ended December 31, 2016, 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 a result of the foregoing factors, together with our recurring losses from operations and negative cash flows since inception, our independent registered public accounting firm included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited consolidated financial statements for the fiscal years ended December 31, 2016 and 2015.

 

During the Successor period, our operations have primarily been funded through proceeds from American Restaurant Holdings in exchange for equity and debt. In fact, subsequent to December 31, 2016, we received an aggregate of $2,621,842 associated with the issuances of convertible promissory notes and warrants to American Restaurant Holdings. These notes were eventually converted into common stock. Although we believe that we have access to capital resources, there are no commitments in place for new financing as of the filing date of this Offering Circular and there can be no assurance that we will be able to obtain funds on commercially acceptable terms, if at all. We expect to have ongoing needs for working capital in order to (a) fund operations; plus (b) expand operations by opening additional corporate-owned restaurants. To that end, we may be required to raise additional funds through equity or debt financing. However, there can be no assurance that we will be successful in securing additional capital. If we are unsuccessful, we may need to (a) initiate cost reductions; (b) forego business development opportunities; (c) seek extensions of time to fund its liabilities, or (d) seek protection from creditors.

 

In addition, if we are unable to generate adequate cash from operations, and if we are unable to find sources of funding, it may be necessary for us to sell one or more lines of business or all or a portion of our assets, enter into a business combination, or reduce or eliminate operations. These possibilities, to the extent available, may be on terms that result in significant dilution to our shareholders or that result in our shareholders losing all of their investment in our Company.

 

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

 

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

 

We filed a Form 1-A offering statement for the sale of 3,333,333 shares of common stock to raise approximately $20,000,000 to fund our business plan and to provide working capital to Muscle Maker. There can be no assurance that our Form 1-A offering statement will be qualified nor can there be any assurance that we will be able to sell the securities to procure the funding needed to operate Muscle Maker. If our efforts to do so are unsuccessful, we may be required to reduce or eliminate our operations. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of these uncertainties.

 

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Public Company Expenses

 

Upon completion of this offering, we expect to incur direct, incremental general and administrative expenses as a result of being a publicly traded company (if we elect to report under the Exchange Act), or private company reporting under Regulation A, if we do not elect to report under the Exchange Act, including, but not limited to, where applicable, increased scope of our operations and costs associated with hiring new personnel, implementation of compensation programs that are competitive with our public company peer group, annual and quarterly reports to shareholders, tax return preparation, independent registered public accounting firm fees, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and independent director compensation. These direct, incremental general and administrative expenses are not included in our historical results of operations.

 

Sources and Uses of Cash for the Years Ended December 31, 2016 (Successor) and December 31, 2015 (Combined Successor and Predecessor)

 

For the year ended December 31, 2016 and 2015, we used cash of $2,110,702 and $670,399, respectively, in operations. Our cash used for the year ended December 31, 2016 was primarily attributable to our net loss of $4,219,687, adjusted for net non-cash income in the aggregate amount of $663,287, partially offset by $1,445,698 of net cash provided by changes in the levels of operating assets and liabilities. Our cash used for the year ended December 31, 2015 was primarily attributable to our net loss of $1,021,641, adjusted for net non-cash income in the aggregate amount of $300,956, plus $50,286 of net cash used to fund changes in the levels of operating assets and liabilities.

 

During the year ended December 31, 2016, cash used in investing activities was $1,095,675, of which $957,387 was used to purchase property and equipment, and $124,117 to acquire a franchised location. $14,171 was used to issue loans to franchisees and a related party net amount of repayments. During the year ended December 31, 2015, net cash used in investing activities was $3,829,655, of which, $61,520 was used to purchase property and equipment, $12,000 was paid in connection with the acquisition of Springfield, $70,000 was paid in connection with the acquisition of CTI, and $3,555,592 was paid in connection with the acquisition of Muscle Maker Brands, and $130,543 was used to fund net issuances of loans receivables.

 

Net cash provided by financing activities for the year ended December 31, 2016 was $2,942,823 of which $2,621,842 was proceeds from convertible notes payable to American Restaurant Holdings and $329,081 was advances from American Restaurant Holdings, partially offset by $8,100 of repayments of notes payable.  Net cash provided by financing activities for the year ended December 31, 2015 was $5,106,720, of which, $720,620 was provided by proceeds from the issuance of a convertible note payable to American Restaurant Holdings, $3,645,000 of proceeds from the issuance of common stock to American Restaurant Holdings, $810,000 of proceeds from the issuance of common stock and warrants for cash, partially offset by $68,900 of repayments of notes payable.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).

 

Critical Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires us 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.

 

We base our estimates on historical experience and on various assumptions 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.

 

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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, income taxes and reserves;
     
  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 SFAS No. 142, ’‘Goodwill and Other Intangible Assets’’ (’’SFAS 142’’). In accordance with SFAS 142, the Company does not amortize intangible assets having 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.

 

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.

 

Deferred Revenue

 

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

 

Revenue Recognition

 

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

 

Restaurant Sales

 

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

 

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Royalties and Franchise Fees

 

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

 

Other Revenues

 

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

 

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

 

Income Taxes

 

We account for income taxes under Accounting Standards Codification (“ASC”) 740 Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

 

ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

 

Tax benefits claimed or expected to be claimed on a tax return are recorded in our financial statements. A tax benefit from an uncertain tax position is only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

 

Our policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the consolidated statements of operations.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition and most industry-specific guidance throughout the ASC. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. To allow entities additional time to implement systems, gather data and resolve implementation questions, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, in August 2015, to defer the effective date of ASU No. 2014-09 for one year, which is fiscal years beginning after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2014-09 on our financial statements or disclosures. In addition, the FASB issued ASU 2016-08 in March 2016, to help provide interpretive clarifications on the new guidance in ASC Topic 606. We are currently evaluating the accounting, transition, and disclosure requirements of the standard to determine the impact, if any, on our consolidated financial statements.

 

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In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 explicitly requires us to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist which raise substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and annual and interim periods thereafter, with early adoption permitted. The adoption of this standard did not have a material impact on our consolidated financial statement disclosures.

 

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs, (“ASU 2015-03”). This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The adoption of ASU 2015-03 has not had a material impact on our financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” (“ASU 2015-11”). ASU 2015-11 amends the existing guidance to require that inventory should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out or the retail inventory method. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently evaluating the effects of ASU 2015–11 on our financial statements.

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The FASB issued ASU 2015-17 as part of its ongoing Simplification Initiative, with the objective of reducing complexity in accounting standards. The amendments in ASU 2015-17 require entities that present a classified balance sheet to classify all deferred tax liabilities and assets as a noncurrent amount. This guidance does not change the offsetting requirements for deferred tax liabilities and assets, which results in the presentation of one amount on the balance sheet. Additionally, the amendments in ASU 2015-17 align the deferred income tax presentation with the requirements in International Accounting Standards (IAS) 1, Presentation of Financial Statements. The amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We early adopted ASU 2015-17 and the adoption of ASU 2015-17 did not have a material impact on our consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating ASU 2016-02 and its impact on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations.” This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue From Contracts with Customers when another party, along with the reporting entity, is involved in providing a good or a service to a customer. In these circumstances, an entity is required to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The amendments in the Update clarify the implementation guidance on principal versus agent considerations. The update is effective, along with ASU 2014-09, for annual and interim periods beginning after December 15, 2017. The adoption of ASU 2016-08 is not expected to have a material impact on our consolidated financial statement or disclosures.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”). ASU 2016-09 requires an entity to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We are currently evaluating ASU 2016-09 and its impact on our consolidated financial statements or disclosures.

 

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing.” ASU No. 2016-10 maintains the core principles of Topic 606 on revenue recognition, but clarifies identification of performance obligations and licensing implementation guidance. The amendments in ASU 2016-10 affect the guidance of ASU 2014-09 which is not yet effective. We are currently evaluating the effects, if any, that adoption of this guidance will have on our consolidated financial statements.

 

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On May 9, 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”). ASU 2016-12 provides clarifying guidance in a few narrow areas and adds some practical expedients to the guidance. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements for ASU 2014-09. We are evaluating the effect of ASU 2014-09, if any, on our financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The ASU requires adoption on a retrospective basis unless it is impracticable to apply, in which case we will be required to apply the amendments prospectively as of the earliest date practicable. We are currently evaluating the effect that adopting this new accounting guidance will have on its consolidated cash flows and related disclosures.

 

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (230) – Restricted Cash.” ASU No. 2016-18 requires an entity to include amounts described as restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. It is effective for annual reporting periods beginning after December 15, 2018. The adoption of this standard is not expected to have a material impact on our financial position and results of operations.

 

In December 2016, the FASB issued ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” ASU No. 2016-20 amends certain aspects of ASU No. 2014-09 and clarifies, rather than changes, the core revenue recognition principles in ASU No. 2014-09. It is effective for annual reporting periods beginning after December 15, 2018. The adoption of this standard is not expected to have a material impact on our financial position and results of operations.

 

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU2017-04 is effective for public entities for fiscal years beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

 

Quantitative and Qualitative Disclosure about Market Risk

 

Inflation Risk

 

The primary inflationary factors affecting our operations are food and supplies, labor costs, energy costs and materials used in the construction of new company-operated restaurants. Increases in the minimum wage directly affect our labor costs and the PPACA will increase our health insurance costs beginning in fiscal 2015. Our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Finally, the cost of constructing our restaurants is subject to inflationary increase in the costs of labor and material which results in higher rent expense on new restaurants.

 

Commodity Market Risk

 

We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our consolidated balance sheets. Typically, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing, promotional mix, or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices, could increase food and supplies costs as a percentage of company restaurant revenues and customers may react negatively to increases in our menu prices which could adversely impact customer traffic and revenues.

 

Credit Risk

 

Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows.

 

Certain financial instruments potentially subject the company to a concentration of credit risk. These financial instruments consist primarily of cash and cash equivalents and accounts and vendor receivables. We place our cash and cash equivalents with high-credit, quality financial institutions. The balances in these accounts exceed the amounts insured by the Federal Deposit Insurance Corporation.

 

Concentration of credit risk with respect to receivables is primarily limited to franchisees, which are primarily located in the Northeastern United States. We continually evaluate and monitor the credit history of our franchisees and believe we have an adequate allowance for bad debts.

 

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MANAGEMENT

 

Board of Directors and Executive Officers

 

Our directors hold office until their successors are elected and qualified, or until their deaths, resignations or removals. Our executive officers hold office at the pleasure of our board of directors, or until their deaths, resignations or removals.

 

Our directors, executive officers and significant employees, their ages, positions held, and durations of such are as follows:

 

Name   Age   Positions Held   Entity   Initial Term of
Office
Tim M. Betts   47   Chairman of the Board, Secretary and Director   Muscle Maker, Inc   December 2014
        Chairman of the Board, Secretary and Manager   Muscle Maker Development, LLC   August 25, 2017
        Chairman of the Board, Secretary and Manager   Muscle Maker Corp., LLC   September 15 , 2017 
                 
Robert E. Morgan   65   CEO, President, and Director   Muscle Maker, Inc.   October 2015
        CEO, President and Manager   Muscle Maker Development, LLC   August 25, 2017
        CEO, President and Manager   Muscle Maker Corp., LLC   September 15 , 2017
                 
Grady Metoyer   52   Chief Financial Officer   Muscle Maker, Inc.   March 2017
        Chief Financial Officer   Muscle Maker Development, LLC   August 25, 2017
        Chief Financial Officer   Muscle Maker Corp., LLC   September 15 , 2017
                 
Rodney C. Silva   44   Chief Culture Officer   Muscle Maker Development, LLC   August 25, 2017
        Chief Culture Officer   Muscle Maker Corp., LLC   September 15 , 2017
                 
Benjamin Ross   26   Vice President   Muscle Maker Development, LLC   August 25, 2017
        Vice President   Muscle Maker Corp., LLC   September 15 , 2017
                 
Derek Bogner   36   Vice President of Franchise Operations   Muscle Maker Development, LLC   August 25, 2017
                 
Aimee Infante   30   Vice President of Marketing   Muscle Maker Development, LLC   August 25, 2017
        Vice President of Marketing   Muscle Maker Corp., LLC   September 15 , 2017
                 
Mark Farmer   48   Vice President of Corporate Operations   Muscle Maker Corp., LLC   September 15 , 2017
                 
Patrick J. Chiacchia   64   Director Non-Traditional Real Estate   Muscle Maker Corp., LLC   September 15 , 2017
                 
Eric Goldberg   29   Manager of Franchise Development   Muscle Maker Development, LLC   August 25, 2017
                 
Noel DeWinter   77   Director   Muscle Maker, Inc   February 2017
                 
Merlin C. Spencer   79   Director   Muscle Maker, Inc   February 2017
                 
A.B. Southall III   55   Director   Muscle Maker, Inc   February 2017
                 
Paul L. Menchik   69   Director   Muscle Maker, Inc   February 2017

 

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Executive Officers

 

Tim M. Betts. Mr. Betts has served as Chairman of the Board, Secretary and a director of Muscle Maker, Inc since December 2014. From December 2014 through October 2015, he also served as the Chief Executive Officer, President, and Chief Financial Officer of Muscle Maker, Inc. Mr. Betts has also served as the Chairman of the Board, Secretary and Manager of each of Muscle Maker Development, LLC and Muscle Maker Corp., LLC since August 25, 2017 and September 15 , 2017, respectively. From June 6, 2017 to September 15 , 2017, he was the Chairman of the Board, Secretary and a director of Muscle Maker Brands Conversion, Inc. From December 2014 to June 5, 2017, he was the Chairman of the Board and Secretary and the Manager of Muscle Maker Brands, LLC, which converted in to Muscle Maker Brands Conversion, Inc. on June 6, 2017. From December 2014 to October 2015, Mr. Betts was the President and Chief Executive Officer of Muscle Maker Brands, LLC. Since June 2012, Mr. Betts has served as the Chief Executive Officer and the President of and is the co-founder of American Restaurants Holdings, Inc. (“American Restaurant Holdings”), the direct parent company of American Restaurants, LLC, which formerly owned more than a 90% equity interest in Muscle Maker prior to the Spin-Off of Muscle Maker in March 2017. Mr. Betts has been instrumental in the acquisition of the current three brand portfolio of American Restaurant Holdings (including Fresca’s Mexican Grill, Canyon Fireside Grille, and Jojo’s Pizza Kitchen) and oversees the daily operations of American Restaurant Holdings.  With over 20 years of business/financial experience, he served as the Managing Director of Nobis Capital Advisors, Inc., a business advisory firm, from December 2008 to May 2012. From 2004 to 2008, Mr. Betts was the Director of Investment Banking for Westcap Securities, Inc., a licensed broker/dealer.  Prior to joining Westcap Securities, Mr. Betts was a Managing Director of CK Cooper and Company, a broker/dealer engaged in the oil and gas and technology markets.  Mr. Betts received his Masters in Business Administration from the University of LaVerne.

 

Robert E. Morgan. Mr. Morgan has served as Chief Executive Officer, President and a director of Muscle Maker, Inc since October 2015. He has also served as the Chief Executive Officer, President and Manager of each of Muscle Maker Development, LLC and Muscle Maker Corp., LLC since August 25, 2017 and September 15 , 2017, respectively. From June 6, 2017 to September 15 , 2017, he was the Chief Executive Officer, President and a director of Muscle Maker Brands Conversion, Inc. From October 2015 to June 5, 2017, Mr. Morgan was the Chief Executive Officer, President and Manager of Muscle Maker Brands, LLC, which converted in to Muscle Maker Brands Conversion, Inc. on June 6, 2017. From December 2014 to October 2015, Mr. Morgan was Chief Operating Officer of Muscle Maker Brands, LLC. From November 2007 (the inception of Muscle Maker Grill as a franchised brand) to January 2015, he was the Chief Operating Officer of Muscle Maker Franchising, LLC. A 40-year veteran of the restaurant industry, he previously held positions at Pizza Hut/PepsiCo Corporation, was owner of Pizza Huts of Southwest Louisiana, Papa John’s Pizza locations in New England and Golden Corral franchises in Texas, Oklahoma and Kansas. His career achievements include supervising the site selections and construction of more than 250 new restaurants and 500 remodels, the creation and testing of new products and nationwide marketing campaigns, management of full-service and fast food operations, set numerous national sales and profit records, supervising and developing training for staff of 13,000 employees and being named the youngest vice president in Pizza Hut history. He also helped grow the Muscle Maker Grill brand from one to 53 locations as of September 18, 2017- with others, including internationally, currently in development.

 

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Grady Metoyer. Mr. Metoyer has served as the Chief Financial Officer of Muscle Maker, Inc. since March 2017. He has also served as the Chief Financial Officer of each of Muscle Maker Development, LLC and Muscle Maker Corp., LLC since August 25, 2017 and September 15, 2017, respectively. From June 6, 2017 to September 15, 2017, he was Chief Financial Officer of Muscle Maker Brands Conversion, Inc. From March 2017 to June 5, 2017, Mr. Metoyer was the Chief Financial Officer and Manager of Muscle Maker Brands, LLC, which converted in to Muscle Maker Brands Conversion, Inc. on June 6, 2017. From August 2015 to March 2017, M. Metoyer served as the CFO of Specialty Operations where he expanded his strategic advisory counseling role and further served as the Executive financial liaison to segment Presidents and the Sysco Executive team while maintaining financial oversight of seven separate Sysco owned subsidiaries. From August 2013 to August 2015, Mr. Metoyer served Vice President of Operations of Sysco’s Specialty operations. Reporting to the Senior Vice President, Mr. Metoyer served as a strategic consultant to the various business segments that made up over $10 billion in annual revenue. From March 2008 until August 2013, Mr. Metoyer served as Executive Vice President and Chief Financial Officer of Sysco’s wholly owned subsidiary The SYGMA Network, Inc. His primary responsibilities included but were not limited to operations, administrative and financial oversight of over $6 billion in annual revenue. From March 1999 through August 2007, Mr. Metoyer served as Vice President of finance and administration of FoodBrand LLC, a privately held food retailer specializing in multiple franchised concepts prior to joining Sysco. Mr. Metoyer brings a wealth of experience and knowledge in food and beverage retail and distribution sector. He is a skilled and qualified professional with a background in diverse aspects of financial stewardship, financial management, accounting, executive leadership, and operations management. His experience and knowledge to collaboratively develop, challenge, and motivate the Muscle Maker leadership team through complex issues while bringing the simplicity of utilizing holistic business lens to aid in the company’s strategic decision process. His educational background is based in finance and accounting. He graduated from Louisiana State University with a B.S. in Business Administration (accounting / finance focus) in August of 1988.

 

Significant Employees

 

Rodney C. Silva. Mr. Silva has served as the Chief Culture Officer of each of Muscle Maker Development, LLC and Muscle Maker Corp., LLC since August 25, 2017 and September 15 , 2017, respectively. From June 6, 2017 to September 15, 2017, he was Chief Culture Officer of Muscle Maker Brands Conversion, Inc. From October 2015 through June 5, 2017, he served as the Chief Culture Officer of Muscle Maker Brands, LLC, which converted in to Muscle Maker Brands Conversion, Inc. on June 6, 2017. From January 2015 to October 2015, Mr. Silva served as Director of Brand Development of Muscle Maker Brands, LLC. Mr. Silva is the Founder of the system of Muscle Maker Grill restaurants and owned and operated the original Muscle Maker Grill restaurant. He was the Chairman and the Managing Member of Muscle Maker Franchising, LLC (“Muscle Maker Franchising”) from Muscle Maker Franchsing’s formation in November 2007 to January 2015 when we became the franchisor of Muscle Maker Grill restaurants. From December 1995 through September 2010, Mr. Silva was President of Muscle Maker Nutrition Center, Inc., located in Colonia, New Jersey.

 

Benjamin Ross. Mr. Ross has served as the Vice President of each of Muscle Maker Development, LLC and Muscle Maker Corp., LLC since August 25, 2017 and September 15 , 2017, respectively. From June 6, 2017 to September 15 , 2017, he was Vice President of Muscle Maker Brands Conversion, Inc. From October 2015 through June 5, 2017, he served as the Vice President of Muscle Maker Brands, LLC, which converted in to Muscle Maker Brands Conversion, Inc. on June 6, 2017. From January 2015 through September 2015, Mr. Ross was the Director of Franchise Development of Muscle Maker Brands. From December 2013 to January 2015, Mr. Ross was Director of Franchise Development of Muscle Maker Franchising. From September 2012 to November 2013, he was Manager of Franchise Development of Muscle Maker Franchising. From May 2011 to September 2012, Mr. Ross was the Business Development Manager of Muscle Maker Franchising. Since October 2010, Mr. Ross has also been a realtor with Keller Williams Real Estate, Cherry Hill, New Jersey.

 

Derek Bogner. Mr. Bogner has served as the Director of Operations Franchise of Muscle Maker Development, LLC since August 25, 2017. From June 6, 2017 to August 24, 2017, he was Director of Operations Franchise of Muscle Maker Brands Conversion, Inc. From January 2015 through June 5, 2017, he served as the Director of Operations Franchise of Muscle Maker Brands, LLC, which converted in to Muscle Maker Brands Conversion, Inc. on June 6, 2017. From May 2013 to January 2015, Mr. Bogner was a District Manager of Muscle Maker Franchising. From April 2011 to May 2013 he was Assistant General Manager of Fox & Hound Restaurant Group in Edison, New Jersey. From January 2009 to April 2011 he worked in Business Development for Marsh & McLennan Companies, Inc. in Somerset, New Jersey.

 

Aimee Infante. Ms. Infante has been the Vice President of Marketing of each of Muscle Maker Development, LLC and Muscle Maker Corp., LLC since August 25, 2017 and September 15 , 2017, respectively. From June 6, 2017 to September 15 , 2017, she was the Vice President of Marketing of Muscle Maker Brands Conversion, Inc. From February 2016 through June 5, 2017, she served as the Vice President of Marketing of Muscle Maker Brands, LLC, which converted in to Muscle Maker Brands Conversion, Inc. on June 6, 2017. From January 2015 through January, 2016, Ms. Infante served as our Director of Marketing of Muscle Maker Brands. Ms. Infante was Director of Marketing of Muscle Maker Franchising from October 2014 to January 2015. Ms. Infante was employed by Qdoba Mexican Grill in Denver, Colorado from November 2010 to April 2014, serving as Regional Marketing Specialist from November 2010 to October 2012 and Marketing Manager from October 2012 to April 2014.

 

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Mark Farmer. Mr. Farmer has served as Vice President of Corporation Operations of Muscle Maker Corp., LLC since September 15 , 2017. From June 6, 2017 to September 15 , 2017, he was the Vice President of Corporation Operations of Muscle Maker Brands Conversion, Inc. From October 2016 through June 5, 2017, he served as the Vice President of Corporation Operations of Muscle Maker Brands, LLC, which converted in to Muscle Maker Brands Conversion, Inc. on June 6, 2017. From October 2009 to August 2016, Mr. Farmer worked at LLIC (DBA Dairy Queen) where he served as Director of Operations. From October 2007 to October 2009, he owned Initium LLC (DBA Taco Factory) where he served as President and owner. From July 2007 to September 2007, Mr. Farmer worked at Steak N Shake where he served as Director of Operations. From July 1996 to July 2006, he worked at Sonic Restaurants Inc. (Sonic Corp) where he served as Senior Director of Operations. Mr. Farmer brings knowledge and experience in the restaurant industry, primarily QSR and fast casuals segments. Mr. Farmer has 20 plus years of experience in this industry working in multiple disciplines including Operations, Franchise Sales, Human Resources and Marketing. Mr. Farmer will bring knowledge and practical experience on establishing sustainable systems and routines that will allow the company to scale effectively and profitably. Additionally, his financial and operational experience will help to improve reporting, accountability and cost controls. His background in marketing and franchise sales can serve to provide support and advisement to those departments. Mr. Farmer is a graduate of the University of Oklahoma with a Bachelor of Arts in Psychology. May of 1993. Mr. Farmer is a graduate of Oklahoma City University with an M.B.A. in Finance in May of 2000.

 

Patrick J. Chiacchia. Mr. Chiacchia has been the Director Non-Traditional Real Estate of Muscle Maker Corp., LLC since September 15 , 2017. From June 6, 2017 to September 15 , 2017, he was the Director Non-Traditional Real Estate of Muscle Maker Brands Conversion, Inc. From June 2015 through June 6, 2017, he served as the Director Non-Traditional Real Estate of Muscle Maker Brands, LLC, which converted in to Muscle Maker Brands Conversion, Inc. on June 6, 2017. He was Senior Broker National Accounts for Corbett Restaurant Group in Boston, Massachusetts from May 2013 to May 2015. From May 2007 to October 2012, Mr. Chiacchia was Senior Vice President of Development of UFood Restaurant Group, Inc. in Newton, Massachusetts.

 

Eric Goldberg. Mr. Golderg has been the Manager of Franchise Development of Muscle Maker Development, LLC since August 25, 2017. From June 6, 2017 to August 24, 2017, he was Manager of Franchise Development of Muscle Maker Brands Conversion, Inc. From July 2015 through June 5, 2017, he served as the Manager of Franchise Development of Muscle Maker Brands, LLC, which converted in to Muscle Maker Brands Conversion, Inc. on June 6, 2017. From June 2014, through July 2015, Mr. Goldberg was the General Manager for the Trinity Hospitality Group in New Jersey. From February 2014 through June 2014, he was Assistant Maitre d and Banquet Manger for Landmark Hospitality in Warren, New Jersey. Prior to that, he served in the front of the house for Prigmore Corporation in New Brunswick, New Jersey.

 

Directors

 

Noel DeWinter. Mr. DeWinter has served as director of Muscle Maker, Inc since February 2017. Mr. DeWinter has over 40 years of both private and public accounting and finance experience within a number of different industries. Since January 2011, he has served as Chief Financial Officer of FileLife, a private developer of file protection and control system products. He was also the Chief Financial Officer of Apollo Medical Holdings from 2008 until 2010. Apollo Medical (AMEH) is a public healthcare company providing inpatient hospitalist services to various Southern California hospitals. Additional experience includes the Chief Financial Officer of Capital Pacific Homes and the same position at Wahlco Environmental Systems. Wahlco was an NYSE-listed public company during his tenure as Chief Financial Officer. Mr. DeWinter received his MBA from the University of Pennsylvania.

 

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Merlin C. Spencer. Mr. Spencer has served as director of Muscle Maker, Inc since February 2017. From 2012 to 2017, Mr. Spencer served as a consultant to staff at Waddell & Reed, an institutional investment firm. From 2000 to 2010, he advised the Sr. V.P. General Counsel of Great Plains Energy on merging legal departments with an acquisition, assisted CEO’s at electronic firms DCI and Elecsys plus served as “stand in CEO” at Pivot International and One Source Group to cut costs and increase profits. He served as Professor of Marketing and Strategy at 3 Universities, Chairman of the Board of 3 companies, Chairman of the Missouri Environmental Improvement Authority, and consultant to GE, GM, AT&T Long Lines and 5 Regional Bell Companies, Sprint, Mercedes Benz, Hitachi, two Generals in the US Army, Brookdale Senior Living, HCA, Weitz Construction, and as advisor to multiple other companies during his career. He signed over 900 million dollars of bonds and debt instruments while serving as Chairman of the Board and assisted in selling over 900 million dollars of retirement home developments while serving as director of marketing and strategy. His professional focus on management developed a 12-step process for accessing and improving performance in teams and organizations. The first application at Sprint produced a $15 million savings in 45 days and cumulative savings of over $118 million during an 18-month application. Mr. Spencer served as advisor to Bond Holders’ new owners, then was installed as Chairman of the Board during negotiations on exist plans, financing and property management issued with the 34 retirement homes opened and operated by the Forum Group, Inc., a public company. He holds a BS from Iowa State University in 1960, MBA in 1961 and DBA in 1965 from Indiana University.

 

A.B. Southall III. Mr. Southall has served as director of Muscle Maker, Inc since February 2017. He has over 35 years of experience managing construction and land developing businesses. Since 1997 he has been the President of a Custom Home Building Company, in addition to 20 years as President of a 189 boat slip marina complex. His involvement in the marina business led him to co-founding a local Waterway Association, where he has been on the board since it’s inception. He has diversely invested across multiple sectors including private placements, oil & gas, real estate, restaurant businesses and commodities. Mr. Southall is an advocate of a healthy approach to the food industry and the restaurant business.

 

Paul L. Menchik. Mr. Menchik has served as director of Muscle Maker, Inc since February 2017. Since 1986, Mr. Menchik has been Professor of Economics at Michigan State University where he has been Department chairperson and Director of Graduate Programs. He has served as Senior Economist for Economic Policy for the White House Office of Management and Budget (where among other matters he worked on Social Security solvency issues) and served as Visiting Scholar at the Tax Analysis Division of the Congressional Budget Office. Menchik has also been on the faculty of Rutgers University and the University of Wisconsin, and has served as visiting faculty at University of Pennsylvania, London School of Economics, University College London, and Victoria University in Wellington New Zealand. Over the years he has advised three state governments and five US government agencies. He holds a Ph.D. from the Wharton School of Finance and Commerce at the University of Pennsylvania. He has over 40 publications including a book on household and family economics, made over 85 paper presentations at other universities and conferences around the world and has refereed for over 20 academic journals and is currently a member of the editorial board for the Journal of Income Distribution. He is a member of Who’s Who in Economics and Who’s Who in America.

 

Corporate Governance

 

Director Qualifications

 

Tim M. Betts – Our board believes that Mr. Betts’s qualifications to serve on our board include his deep understanding of the restaurant/franchise industry as well as his vast experience in business and financial matters.

 

Robert E. Morgan – Our board believes that Mr. Morgan’s qualifications to serve on our board include his extensive experience in the restaurant/franchise industry and related business and financial matters.

 

Noel DeWinter – Our board believes that Mr. DeWinter’s qualifications to serve on our board include extensive experience in financial and accounting matters.

 

Merlin C. Spencer – Our board believes that Mr. Spencer’s qualifications to serve on our board include extensive experience in management, marketing, and strategizing.

 

A.B. Southall III – Our board believes that Mr. Southall’s qualifications to serve on our board include vast business and financial experience with real estate and restaurants.

 

Paul L. Menchik – Our board believes that Mr. Menchik’s qualifications to serve on our board include extensive experience in economic and financial matters.

 

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Board of Directors and Board Committees

 

Upon the registration of our common stock under the Exchange Act following the qualification of this offering, we intend to apply to list our common stock on the NYSE American or the NASDAQ Capital Market (“NASDAQ”). In order to list our common stock on the NYSE American or the NASDAQ (each, an “Exchange”), we are required to comply with the NYSE American or the NASDAQ standards, whichever is applicable, relating to corporate governance, requiring, among other things, that:

 

●          A majority of our Board of Directors to consist of “independent directors” as defined by the applicable rules and regulations of the applicable Exchange. Our Board of Directors has affirmatively determined that Messrs. DeWinter, Spencer, Southall, and Menchik are independent directors and Messrs. Betts and Morgan are non-independent directors;

 

●          The compensation of our executive officers to be determined, or recommended to the Board of Directors for determination, by independent directors constituting a majority of the independent directors of the Board in a vote in which only independent directors participate or by a Compensation Committee comprised solely of independent directors;

 

●          That director nominees to be selected, or recommended to the Board of Directors for selection, by independent directors constituting a majority of the independent directors of the Board in a vote in which only independent directors participate or by a nomination committee comprised solely of independent directors; and

 

●          Establishment of an audit committee with at least three independent directors as well as composed entirely of independent directors. As a result, we must have at least one independent director on our audit committee at the time of listing on the Exchange, at least two independent directors within 90 days of listing on the Exchange and at least three independent directors within one year of listing on the Exchange, where at least one of the independent directors qualifies as an audit committee financial expert under SEC rules and as a financially sophisticated audit committee member under the applicable Exchange rules. The board has determined that Mr. DeWinter qualifies as an “audit committee financial expert,” as that term is defined in Item 407(d)(5) of Regulation S-K, as promulgated by the SEC.

  

If we are not approved for listing on either Exchange, we intend to apply for quotation of our common stock on the OTCQX Marketplace of the OTC Markets by having a market maker file an application with FINRA for our common stock to be eligible for trading on the OTCQX Marketplace of the OTC Markets. We are not required to comply with the corporate governance rules of an Exchange, and instead may comply with less stringent corporate governance standards while listed on the OTCQX. The OTCQX does not require any of its members to establish any committees comprised of members of our board of directors, including an Audit Committee, a Compensation Committee or a Nominating Committee, any committee performing a similar function. Instead, the functions of those committees may be undertaken by the board of directors as a whole. Upon quotation of our common stock on the OTCQX, our securities would not be quoted on an exchange that has requirements that a majority of our board members be independent and we would not otherwise be subject to any law, rule or regulation requiring that all or any portion of our board of directors include “independent” directors, nor are we currently required to establish or maintain an Audit Committee or other committee of our board of directors. Although we may comply with less stringent corporate governance standards while listed on the OTCQX, we have elected to voluntarily comply with the corporate governance rules of the NASDAQ.

 

Board Leadership Structure and Board’s Role in Risk Oversight

 

Tim Betts is the Chairman of the Board. The Chairman has authority, among other things, to preside over Board meetings and set the agenda for Board meetings. Accordingly, the Chairman has substantial ability to shape the work of our Board. We currently believe that separation of the roles of Chairman (Tim Betts) and Chief Executive Officer (Robert Morgan) ensures appropriate oversight by the Board of our business and affairs. However, no single leadership model is right for all companies and at all times. The Board recognizes that depending on the circumstances, other leadership models, such as the appointment of a lead independent director, might be appropriate. Accordingly, the Board may periodically review its leadership structure. In addition, following the qualification of the offering, the Board will hold executive sessions in which only independent directors are present.

 

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Our Board is generally responsible for the oversight of corporate risk in its review and deliberations relating to our activities. Our principal source of risk falls into two categories, financial and product commercialization. The audit committee oversees management of financial risks; our Board regularly reviews information regarding our cash position, liquidity and operations, as well as the risks associated with each. The Board regularly reviews plans, results and potential risks related to our system-wide restaurant growth, brand awareness and menu offerings. Our Compensation Committee is expected to oversee risk management as it relates to our compensation plans, policies and practices for all employees including executives and directors, particularly whether our compensation programs may create incentives for our employees to take excessive or inappropriate risks which could have a material adverse effect on the Company.

  

Committees of the Board of Directors

 

The Board of Directors has already established an audit committee (the “Audit Committee”), a Compensation Committee (the “Compensation Committee”) and a Nominating and Corporate Governance Committee (“Governance Committee”). The composition and function of each committee are described below.

 

Audit Committee

 

The Audit Committee has three members that are independent directors, including Messrs. DeWinter, Spencer and Menchik. Mr. DeWinter serves as the chairman of the Audit Committee and satisfies the definition of “audit committee financial expert”. Our Audit Committee has adopted a written charter, and upon the qualification of this offering, a copy of this charter will be posted on the Corporate Governance section of our website, at www.musclemakergrill.com.

 

Our audit committee is authorized to:

 

  approve and retain the independent auditors to conduct the annual audit of our financial statements;
     
  review the proposed scope and results of the audit;
     
  review and pre-approve audit and non-audit fees and services;
     
  review accounting and financial controls with the independent auditors and our financial and accounting staff;
     
  review and approve transactions between us and our directors, officers and affiliates;
     
  recognize and prevent prohibited non-audit services; and
     
  establish procedures for complaints received by us regarding accounting matters; oversee internal audit functions, if any.

 

Compensation Committee

 

The Compensation Committee has three members that are independent directors, including Messrs. Spencer, DeWinter and Southall. Mr. Spencer serves as the chairman of the Compensation Committee. Our Compensation Committee has adopted a written charter, and upon the qualification of this offering, a copy of this charter will be posted on the Corporate Governance section of our website, at www.musclemakergrill.com.

 

Our Compensation Committee is authorized to:

 

  review and determine the compensation arrangements for management;
     
  establish and review general compensation policies with the objective to attract and retain superior talent, to reward individual performance and to achieve our financial goals;
     
  administer our stock incentive and purchase plans;
     
  oversee the evaluation of the Board of Directors and management; and
     
  review the independence of any compensation advisers.

 

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Nominating and Corporate Governance Committee

 

The Governance Committee has three members that are independent directors, including Messrs. Menchik, Spencer and DeWinter. Mr. Menchik serves as the chairman of the Governance Committee. Our Governance Committee has adopted a written charter, and upon the qualification of this offering, a copy of this charter will be posted on the Corporate Governance section of our website, at www.musclemakergrill.com.

 

The functions of our Governance Committee, among other things, include:

 

  identifying individuals qualified to become board members and recommending director;
     
  nominees and board members for committee membership;
     
  developing and recommending to our board corporate governance guidelines;
     
  review and determine the compensation arrangements for directors; and
     
  overseeing the evaluation of our board of directors and its committees and management.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of our Compensation Committee, at any time, has been one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the Board of Directors or Compensation Committee of any entity that has one or more executive officers on our Board of Directors or Compensation Committee. For a description of transactions between us and members of our Compensation Committee and affiliates of such members, please see “Certain Relationships and Related Party Transactions”.

 

Code of Business Conduct and Ethics

 

We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. Prior to the qualification of the offering, the code of business conduct and ethics will be available at our website at www.musclemakergrill.com. We expect that any amendments to the code, or any waivers of its requirement, will be disclosed on our website.

 

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EXECUTIVE COMPENSATION

 

The following table summarizes all compensation recorded by us in the past two fiscal years for each of our executive officers. For definitional purposes, these individuals are sometimes referred to as the “named executive officers”, or “NEOs”.

 

Summary Compensation Table

 

The following table provides information regarding the compensation paid during our fiscal years ended December 31, 2016 and December 31, 2015 to our chief executive officer (principal executive officer), our chief financial officer (principal financial officer), and Chief Cultural Officer. We refer to these individuals as our named executive officers.

 

Summary Compensation Table

 

Name and Principal Position   Year     Salary     Bonus     Stock
Award(4)
    Option
Awards
    Non-Equity
Incentive Plan
Compensation
    Non-Qualified
Deferred
Compensation
Earnings
    All Other
Compensation(5)
    Total  
Robert E. Morgan(1) Chief Executive Officer, President, and Director of Muscle Maker, Inc (principal executive officer of Muscle Maker, Inc)     2016     $ 270,000     $ 0     $ 0     $ 0     $ 0     $ 0     $ 64,800     $ 334,800  
Chief Executive Officer and President of Muscle Maker Brands, LLC     2015     $ 270,000     $ 0     $ 0     $ 0     $ 0     $ 0     $ 64,800     $ 334,800  
                                                                         
Rodney C. Silva(2) Chief Culture Officer of Muscle Maker Brands, LLC     2016     $ 150,000     $ 0     $ 0     $ 0     $ 0     $ 0     $ 28,800     $ 178,800  
      2015     $ 150,000     $ 0     $ 28,000     $ 0     $ 0     $ 0     $ 28,800     $ 206,800  
                                                                         
Grady Metoyer(3)                                                                        
Chief Financial Officer of Muscle Maker, Inc (principal financial officer of Muscle Maker, Inc)     2016     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  
Chief Financial Officer and Manager of Muscle Maker Brands, LLC     2015     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  

 

(1) Mr. Morgan has served as Chief Executive Officer and President of Muscle Maker, Inc since October 2015. He has also served as the Chief Executive Officer and President of each of Muscle Maker Development, LLC and Muscle Maker Corp., LLC since August 25, 2017 and September 15, 2017, respectively. From June 6, 2017 to September 15 , 2017, Mr. Morgan served as Chief Executive Officer and President of Muscle Maker Brands Conversion, Inc. From October 2015 through June 5, 2017, Mr. Morgan served as the Chief Executive Officer and President of Muscle Maker Brands, LLC, which converted into Muscle Maker Brands Conversion, Inc. on June 6, 2017. From December 2014 to October 2015, Mr. Morgan served as the Chief Operating Officer of Muscle Maker Brands, LLC.

 

(2) Mr. Silva has served as the Chief Culture Officer of each of Muscle Maker Development, LLC and Muscle Maker Corp., LLC since August 25, 2017 and September 15, 2017, respectively. From June 6, 2017 to September 15, 2017, Mr. Silva served as Chief Culture Officer of Muscle Maker Brands Conversion, Inc. From October 2015 through June 5, 2017, he served as the Chief Culture Officer of Muscle Maker Brands, LLC, which converted into Muscle Maker Brands Conversion, Inc. on June 6, 2017. From January 2015 to October 2015, Mr. Silva served as Director of Brand Development of Muscle Maker Brands, LLC.

 

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(3) Mr. Metoyer has served as the Chief Financial Officer of Muscle Maker, Inc. since March 2017. He has also served as the Chief Financial Officer of each of Muscle Maker Development, LLC and Muscle Maker Corp., LLC since August 25, 2017 and September 15, 2017, respectively. From June 6, 2017 to September 15 , 2017, Mr. Metoyer served as Chief Financial Officer of Muscle Maker Brands Conversion, Inc. From March 2017 through June 5, 2017, he served as the Chief Financial Officer of Muscle Maker Brands, LLC, which converted into Muscle Maker Brands Conversion, Inc. on June 6, 2017.

 

(4) On January 24, 2015, Muscle Maker, Inc. issued 28,571 shares to Mr. Silva as consideration for Mr. Silva entering into a former employment agreement with its subsidiary, Muscle Maker Brands, LLC. The value of the shares issued were $0.98 per share (or $28,000 in the aggregate).

 

(5) For Messrs. Morgan and Silva includes the following perquisites and benefits:

 

  Housing Allowance: For 2016, $3,000 per month ($36,000 per year) for Mr. Morgan and $0 for Mr. Silva and for 2015, $3,000 per month ($36,000 per year) for Mr. Morgan and $0 for Mr. Silva.
     
  Healthcare Allowance: For 2016, $2,000 per month ($24,000 per year) for Mr. Morgan and $2,000 ($24,000 per year) per month for Mr. Silva; and for 2015, $2,000 per month ($24,000 per year) for Mr. Morgan and $2,000 ($24,000 per year) per month for Mr. Silva.
     
  Auto Allowance: For 2016, $400 per month ($4,800 per year) for Mr. Morgan and $400 per month ($4,800 per year) for Mr. Silva; and for 2015, $400 per month ($4,800 per year) for Mr. Morgan and $400 per month ($4,800 per year) for Mr. Silva.

 

Employment Agreements

 

Robert E. Morgan

 

Muscle Maker entered into an employment agreement with Robert Morgan for a two-year term that is to commence as of the date Muscle Maker successfully receives at least $5,000,000 in gross proceeds from an SEC qualified offering under Regulation A+ under the Securities Act of 1933, as amended. The employment agreement is subject to earlier termination (i) for cause (as defined therein) by Muscle Maker or without cause by Mr. Morgan, whereby Mr. Morgan would be entitled to earned but unpaid compensation, bonuses and benefits through the date of termination, (ii) upon the death or disability of Mr. Morgan, whereby Mr. Morgan, upon disability, or Mr. Morgan’s estate, will be entitled to receive all compensation and benefits through the date of death or disability, or (iii) without cause by Muscle Maker or for good cause (as defined therein) by Mr. Morgan, whereby Mr. Morgan would be entitled to receive all earned but unpaid compensation, bonuses and benefits through the date of termination as well as continue to receive the per month rate of salary then in effect and benefits for the balance of the Initial Employment Term (defined therein) that would have remained hereunder had such termination not occurred.  The term of the employment agreement may be extended by mutual written agreement between Muscle Maker and Mr. Morgan. Pursuant to the terms of the employment agreement, in exchange for Mr. Morgan’s services as Chief Executive Officer to Muscle Maker and its subsidiaries, we agreed to pay Mr. Morgan $22,500.00. per month during the term of the employment agreement (an annual base salary of $270,000). Performance based bonuses may be awarded by Muscle Maker to Mr. Morgan at the discretion of the Board, together with the Compensation Committee. In addition, during the term of the employment agreement, Muscle Maker will pay to Mr. Morgan a housing allowance of $3,000 per month, an auto allowance of $400 per month, and health care allowance of $2,000 per month. Furthermore, Mr. Morgan will be eligible for employee benefits available to regular full-time executive management employees of Muscle Maker. Moreover, Mr. Morgan shall be eligible to receive restricted stock, stock options and other equity-based compensation awards under Muscle Maker’s 2017 Stock Option and Stock Issuance Plan and otherwise, which equity awards may be granted by Muscle Maker’s Board, together with the Compensation Committee, pursuant to the authority and sole discretion of the Board, together with the Compensation Committee.

 

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Grady Metoyer

 

Muscle Maker entered into an employment agreement with Grady Metoyer for a one-year term that is to commence as of the date Muscle Maker successfully receives at least $5,000,000 in gross proceeds from an SEC qualified offering under Regulation A+ under the Securities Act of 1933, as amended. The employment agreement is subject to earlier termination (i) for cause (as defined therein) by Muscle Maker or without cause by Mr. Metoyer, whereby Mr. Metoyer would be entitled to earned but unpaid compensation, bonuses and benefits through the date of termination, (ii) upon the death or disability of Mr. Metoyer, whereby Mr. Metoyer, upon disability, or Mr. Metoyer’s estate, will be entitled to receive all compensation and benefits through the date of death or disability, or (iii) without cause by Muscle Maker or for good cause (as defined therein) by Mr. Metoyer, whereby Mr. Metoyer would be entitled to receive all earned but unpaid compensation, bonuses and benefits through the date of termination as well as continue to receive the per month rate of salary then in effect and benefits for the balance of the Initial Employment Term (defined therein) that would have remained hereunder had such termination not occurred.  The term of the employment agreement may be extended by mutual written agreement between Muscle Maker and Mr. Metoyer. Pursuant to the terms of the employment agreement, in exchange for Mr. Metoyer’s services as Chief Financial Officer to Muscle Maker and its subsidiaries, we agreed to pay Mr. Metoyer $16,666.66 per month during the term of the employment agreement (an annual base salary of $200,000). Performance based bonuses may be awarded by Muscle Maker to Mr. Metoyer at the discretion of the Board, together with the Compensation Committee. In addition, Mr. Metoyer will be eligible for employee benefits available to regular full-time executive management employees of Muscle Maker. Furthermore, Mr. Metoyer shall be eligible to receive restricted stock, stock options and other equity-based compensation awards under Muscle Maker’s 2017 Stock Option and Stock Issuance Plan and otherwise, which equity awards may be granted by Muscle Maker’s Board, together with the Compensation Committee, pursuant to the authority and sole discretion of the Board, together with the Compensation Committee.

 

Rodney C. Silva

 

Muscle Maker entered into an employment agreement with Rodney Silva for a one-year term that is to commence as of the date Muscle Maker successfully receives at least $5,000,000 in gross proceeds from an SEC qualified offering under Regulation A+ under the Securities Act of 1933, as amended. The employment agreement is subject to earlier termination (i) for cause (as defined therein) by Muscle Maker or without cause by Mr. Silva, whereby Mr. Silva would be entitled to earned but unpaid compensation, bonuses and benefits through the date of termination, (ii) upon the death or disability of Mr. Silva, whereby Mr. Silva, upon disability, or Mr. Silva’s estate, will be entitled to receive all compensation and benefits through the date of death or disability, or (iii) without cause by Muscle Maker or for good cause (as defined therein) by Mr. Silva, whereby Mr. Silva would be entitled to receive all earned but unpaid compensation, bonuses and benefits through the date of termination as well as continue to receive the per month rate of salary then in effect and benefits for the balance of the Initial Employment Term (defined therein) that would have remained hereunder had such termination not occurred. The term of the employment agreement may be extended by mutual written agreement between Muscle Maker and Mr. Silva. Pursuant to the terms of the employment agreement, in exchange for Mr. Silva’s services as Chief Culture Officer to the subsidiaries of Muscle Maker, we agreed to pay Mr. Silva $12,500.00 per month during the term of the employment agreement (an annual base salary of $150,000). Performance based bonuses may be awarded by Muscle Maker to Mr. Silva at the discretion of the Board, together with the Compensation Committee. In addition, during the term of the employment agreement, Muscle Maker will pay to Mr. Silva an auto allowance of $400 per month and health care allowance of $2,000 per month. Furthermore, Mr. Silva will be eligible for employee benefits available to regular full-time executive management employees of Muscle Maker. Moreover, Mr. Silva shall be eligible to receive restricted stock, stock options and other equity-based compensation awards under Muscle Maker’s 2017 Stock Option and Stock Issuance Plan and otherwise, which equity awards may be granted by Muscle Maker’s Board, together with the Compensation Committee, pursuant to the authority and sole discretion of the Board, together with the Compensation Committee.

 

Elements of Compensation

 

None of our named executive officers, except for Messrs. Morgan and Silva, was compensated in 2016 or 2015 by us or Muscle Maker Brands. Messrs. Morgan and Silva were provided with the following primary elements of compensation in 2016 and 2015:

 

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Base Salary

 

Messrs. Morgan and Silva received a fixed base salary in an amount determined in accordance with his then employment agreement with Muscle Maker Brands, and based on a number of factors, including:

 

  The nature, responsibilities and duties of the officer’s position;
     
  The officer’s expertise, demonstrated leadership ability and prior performance;
     
  The officer’s salary history and total compensation, including annual cash bonuses and long-term incentive compensation; and
     
  The competitiveness of the market for the officer’s services.

 

Messrs. Morgan’s and Silva’s base salary for 2016 and 2015 is listed in “—Summary Compensation Table.”

 

Stock Award

 

In fiscal 2015, we issued 28,571 shares of our common stock to Rod Silva as consideration for Mr. Silva entering into his then employment agreement with our subsidiary, Muscle Maker Brands.

 

Other Benefits

 

In 2016 and 2015, Mr. Morgan, our President, and Mr. Silva, our Chief Cultural Officer, were provided with certain limited fringe benefits that we believe are commonly provided to similarly situated executives in the market in which we compete for talent and therefore are important to our ability to attract and retain top-level executive management. These benefits include (a) healthcare allowance and auto allowance for both Messrs. Morgan and Silva and (b) housing allowance for Mr. Morgan. The amounts paid to Messrs. Morgan and Silva in 2016 and 2015 in respect of these benefits is reflected above in the “—Summary Compensation Table” section under the “All Other Compensation” heading.

 

Compensation Discussion and Analysis

 

Stock Option Grants

 

We have not granted any stock options to our directors or executive officers since our incorporation.

 

Compensation Plans

 

Equity Incentive Plans

 

The board and shareholders of the Company approved of the 2017 Stock Option and Stock Issuance Plan (the “Plan ”) on July 27, 2017 and September 21, 2017, respectively. The Plan provides incentives to eligible employees, officers, directors and consultants in the form of incentive stock options and non-qualified stock options. The Company has reserved a total of 1,428,571 shares of common stock (10,000,000 pre-reverse split shares) for issuance under the Plan. Of these shares, approximately 42,857 shares (300,000 pre-reverse split shares) were issued to the directors (7,142 shares per director) under the Plan by the Board of Directors on September 21, 2017.

 

The Plan Administrator (which is the Board of Directors or a committee or other person(s) appointed or designated by the Board) has the authority to administer the Plan and determine, among other things, the interpretation of any provisions of the Plan, the eligible employees who are granted options, the number of options that may be granted, vesting schedules, and option exercise prices. The Company’s stock options have a contractual life not to exceed ten years. The Company issues new shares of common stock upon exercise of stock options.

 

The options may constitute either “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code or “non-statutory stock options.” The primary difference between incentive stock options and non-statutory stock options is that the former are not available to non-employees of the corporation. In addition, while neither is subject to tax at the time of grant, incentive stock options are not subject to tax at the time of exercise (but could be subject to alternative minimum tax), while upon exercise of the non-qualified options, the optionee will recognize ordinary income with respect to any vested shares purchased under the option; such income will be in an amount equal to the excess of the value of the vested shares on the exercise date over the exercise price paid for those shares.

 

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The exercise price of an option granted under the plan cannot be less than 100% of the fair market value per share of common stock on the date of the grant of the option. The exercise price of an incentive stock option granted to a person owning more than 10% of the total combined voting power of the common stock must be at least 110% of the fair market value per share of common stock on the date of the grant. Options may not be granted under the plan on or after the tenth anniversary of the adoption of the plan.

 

When an option is exercised, the purchase price of the underlying stock will be paid in cash, except that the plan administrator may permit the exercise price to be paid in any combination of cash, shares of stock having a fair market value equal to the exercise price, or as otherwise determined by the plan administrator.

 

If an optionee ceases to be an employee, director, or consultant with us, other than by reason of death, disability or retirement, all vested options must be exercised within three months following such event. However, if an optionee’s employment or consulting relationship with us terminates for cause, or if a director of ours is removed for cause, all unexercised options will terminate immediately. If an optionee ceases to be an employee or director of, or a consultant to us, by reason of death, disability, or retirement, all vested options may be exercised within one year following such event or such shorter period as is otherwise provided in the related agreement.

 

When a stock award expires or is terminated before it is exercised, the shares set aside for that award are returned to the pool of shares available for future awards.

 

No option can be granted under the plan after ten years following the earlier of the date the plan was adopted by the board of directors or the date the plan was approved by our stockholders.

 

Equity Compensation Plan Information

 

The following table provides information, as of September 21 , 2017, with respect to equity securities authorized for issuance under compensation plans:

 

Plan Category   Number of
Securities to
be Issued
Upon Exercise
of Outstanding
Options under
the Plan
(a)
    Weighted-
Average
Exercise
Price of
Outstanding
Options under
the Plan
(b)
   

Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation Plans (excluding securities
reflected in Column (a))

(c)

 
                                                             
Equity compensation plans approved by security holders     0     $ -       1,385,713  
Equity compensation plans not approved by security holders     0     $ -       -  
                         
TOTAL     0     $ -       1,385,713  

 

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Director Compensation

 

Historically, our directors have not received compensation for their service. In connection with this offering, we adopted a new director compensation program recommended by our corporate governance committee pursuant to which we would make equity-plan based awards to the directors and, contingent upon the completion of this offering, (i) each of our non-employee directors will receive (a) $2,500 per board meeting that they personally attend or (b) $500 per board meeting that they attend telephonically or other form of telecommunication and (ii) chairs of our committees will receive $500 per committee meeting that they personally attend. No additional compensation will be provided for attending committee meetings. Our corporate governance committee will continue to review and make recommendations to the board regarding compensation of directors, including equity-based plans. We will reimburse our non-employee directors for reasonable travel expenses incurred in attending board and committee meetings. We also intend to allow our non-employee directors to participate in any equity compensation plans that we adopt in the future.

 

On September 21, 2017, Muscle Maker granted 7,142 shares of common stock under its Muscle Maker 2017 Stock Option and Stock Issuance Plan to each of its six directors of Muscle Maker (42,857 shares of common stock in the aggregate) at a value of $7.00 per share. Such share grants are subject to graduated vesting in the following installments on each of the following dates: (i) 50% as of the date of grant and (ii) 8.333% as of (a) August 1, 2017, (b) September 1, 2017, (c) October 1, 2017, (d) November 1, 2017, (e) December 1, 2017, and (f) January 1, 2017.

 

Executive Compensation Philosophy

 

Our Board of Directors determines the compensation given to our executive officers in their sole determination. Our Board of Directors reserves the right to pay our executives or any future executives a salary, and/or issue them shares of common stock issued in consideration for services rendered and/or to award incentive bonuses which are linked to our performance, as well as to the individual executive officer’s performance. This package may also include long-term stock based compensation to certain executives, which is intended to align the performance of our executives with our long-term business strategies. Additionally, while our Board of Directors has not granted any performance base stock options to date, the Board of Directors reserves the right to grant such options in the future, if the Board in its sole determination believes such grants would be in the best interests of the Company.

  

Incentive Bonus

 

The Board of Directors may grant incentive bonuses to our executive officers and/or future executive officers in its sole discretion, if the Board of Directors believes such bonuses are in the Company’s best interest, after analyzing our current business objectives and growth, if any, and the amount of revenue we are able to generate each month, which revenue is a direct result of the actions and ability of such executives.

 

Long-Term, Stock Based Compensation

 

In order to attract, retain and motivate executive talent necessary to support the Company’s long-term business strategy we may award our executives and any future executives with long-term, stock-based compensation in the future, at the sole discretion of our Board of Directors.

 

Option Grants to Franchisees

 

On July 27, 2017, we granted stand-alone (non-Plan based) non-qualified stock options to purchase an aggregate of 45,000 shares of our common stock to our franchisees. The options are fully vested, have an exercise price of $7.00 per share and expire 3 years after the date of grant.

 

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SECURITY OWNERSHIP OF

CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information about the beneficial ownership of our common stock at September 21 , 2017, as adjusted to reflect the sale of 3,333,333 shares of our common stock in this offering, for:

 

  each person known to us to be the beneficial owner of more than 5% of our common stock;
     
  each named executive officer;
     
  each of our directors; and
     
  all of our executive officers and directors as a group.

 

Unless otherwise noted below, the address for each beneficial owner listed on the table is in care of Muscle Maker, Inc, 2200 Space Park Drive, Suite 310, Houston, Texas 77058. We have determined beneficial ownership in accordance with the rules of the SEC. We believe, based on the information furnished to us, that the persons and entities named in the tables below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws. We have based our calculation of the percentage of beneficial ownership on 10,270,160 shares of our common stock outstanding as of September 21 , 2017. The share information in this table has been adjusted to reflect the 1-for-7 reverse stock split of our common stock that was effective September 20 , 2017.

 

In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options or restricted stock units held by that person that are currently exercisable or exercisable within 60 days of September 21 , 2017. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.

 

    Shares Beneficially Owned Prior to the Offering     Percentage of Shares
Beneficially Owned
 
          Before Offering     After Offering (8)  
Name of Beneficial Owner                        
5% Stockholders:                        
P. John, LLC (1)     874,903       8.65 %     6.53 %
John Marques (2)     835,841       8.11 %     6.13 %
                         
Directors and Named Executive Officers:                        
Tim M. Betts (3)     601,229       5.85 %     4.42 %
Robert E. Morgan     409,277       3.99 %     3.01 %
Grady Metoyer     21,428       0.21 %     0.16 %
Rod Silva (4)     160,914       1.57 %     1.18 %
Noel DeWinter(5)     52,642       0.51 %     0.39 %
Merlin C. Spencer(6)     42,893       0.42 %     0.32 %
A.B. Southall, III(7)     173,904       1.69 %     1.27 %
Paul L. Menchik     102,077       0.99 %     0.75 %
All named executive officers and directors as a group (8 persons)     1,564,364       15.17 %     11.47 %

 

 

  (1) P. John, LLC directly beneficially owns 974,903 shares of Common Stock of Muscle Maker.  P. John, LLC’s members are John Feeney and his two adult sons, Michael Feeney and Ryan Feeney.  Pursuant to the terms of the Operating Agreement of P. John, LLC, decisions relating to the business and affairs of P. John are made by the majority consent of the members, where each member has the right to a percentage vote based on his percentage ownership of the outstanding membership interests (Michael Feeney (45%), Ryan Feeney (10%), and John Feeney (45%)). Michael Feeney and Ryan Feeney do not reside in the same household as John Feeney and therefore John Feeney disclaims beneficial ownership of Michael Feeney and Ryan Feeney's percentage interest of P. John LLC in Muscle Maker. John Feeney also directly beneficially owns (i) 3,571 shares of Common Stock of Muscle Maker subject to presently exercisable purchase warrants issued to John Feeney, (ii) 16,666 shares of Common Stock of Muscle Maker subject to presently convertible debt held by John Feeney, and (iii) 3,571 shares of Common Stock of Muscle Maker which were granted to John Feeney by Muscle Maker.
  (2) John Marques beneficially owns (i) indirectly 795,366 shares of Common Stock of Muscle Maker through Membership, LLC, (ii) directly 7,142 shares of Common Stock of Muscle Maker subject to presently exercisable purchase warrants issued to John Marques, and (iii) indirectly 33,333 shares of Common Stock of Muscle Maker subject to presently convertible debt held by Membership, LLC. John Marques, is the sole member and manager of Membership, LLC. As such, Mr. Marques may be deemed to have voting and dispositive power of all securities beneficially owned by Membership, LLC reported herein.
  (3) Tim Betts beneficially owns (i) indirectly 455,000 shares of Common Stock of Muscle Maker through his family limited partnership, Iron Bark Holdings, LP, (ii) indirectly 39,000 shares of Common Stock of Muscle Maker held by his wife, Zeina Betts, (iii) directly 52,000 shares of Common Stock of Muscle Maker as custodian for his two children under the California Uniform Transfers to Minors Act and (iii) directly 55,229 shares of Common Stock of Muscle Maker.
  (4) Rodney Silva beneficially owns (i) indirectly 78,260 shares of Common Stock of Muscle Maker through JSOS, LLC, an entity he controls and (ii) directly 82,653 shares of Common Stock of Muscle Maker.
  (5) Noel De Winter beneficially owns (i) indirectly 39,000 shares of Common Stock of Muscle Maker as trustee of the Arthur Noel DeWinter Trust; (ii) directly 13,642 shares of Common Stock of Muscle Maker.
  (6) Merlin Spencer beneficially owns (i) indirectly 35,750 shares of Common Stock of Muscle Maker held by his wife, Jacqueline Spencer and (ii) directly 7,143 shares of Common Stock of Muscle Maker.
  (7) A.B. Southall beneficially owns (i) directly 133,429 shares of Common Stock of Muscle Maker, (ii) directly 7,142 shares of Common Stock of Muscle Maker subject to presently exercisable purchase warrants issued to A.B. Southall, and (iii) directly 33,333 shares of Common Stock of Muscle Maker subject to presently convertible debt held by A.B. Southall.
  (8) Assumes the sale of all 3,333,333 shares of our common stock in this offering.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Policies and Procedures for Related Party Transactions

 

Following this offering, pursuant to the written charter of our Audit Committee, the Audit Committee will be responsible for reviewing and approving, prior to our entry into any such transaction, all related party transactions and potential conflict of interest situations involving:

 

  any of our directors, director nominees or executive officers;
     
  any beneficial owner of more than 5% of our outstanding stock; and
     
  any immediate family member of any of the foregoing.

 

Our Audit Committee will review any financial transaction, arrangement or relationship that:

 

  involves or will involve, directly or indirectly, any related party identified above and is in an amount greater than $0;
     
  would cast doubt on the independence of a director;
     
  would present the appearance of a conflict of interest between us and the related party; or
     
  is otherwise prohibited by law, rule or regulation.

 

The Audit Committee will review each such transaction, arrangement or relationship to determine whether a related party has, has had or expects to have a direct or indirect material interest. Following its review, the Audit Committee will take such action as it deems necessary and appropriate under the circumstances, including approving, disapproving, ratifying, canceling or recommending to management how to proceed if it determines a related party has a direct or indirect material interest in a transaction, arrangement or relationship with us. Any member of the Audit Committee who is a related party with respect to a transaction under review will not be permitted to participate in the discussions or evaluations of the transaction; however, the Audit Committee member will provide all material information concerning the transaction to the Audit Committee. The Audit Committee will report its action with respect to any related party transaction to the board of directors.

 

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Transactions with American Restaurants, LLC or American Restaurant Holdings, Inc.

 

On January 23, 2015, in connection with the acquisition of Muscle Maker Brands, we issued two promissory notes payable in the amount of $400,000 (“MM Note”) and $204,000 (“MMB Note”), respectively. MM Note includes interest imputed at the rate of 0.41% per annum and is payable in three installments with the final installment due eighteen months after the closing date of the Acquisition of Muscle Maker Brands. MMB Note was secured by the assets of Colonia, bore no stated interest and was due on March 9, 2015.

 

On January 23, 2015, Muscle Maker issued 5,785,714 shares of Common Stock to American Restaurant Holdings in exchange for cash of $3,645,000 and an obligation to repay an aggregate of $604,000 of principal due under MM Note and MMB Note.

 

On March 9, 2015, the American Restaurant Holdings repaid MMB Note in full. On July 21, 2015, January 23, 2016 and July 23, 2016, installments of $100,000, $150,000 and $150,000 were repaid on the balance of MM Note by the American Restaurant Holdings. As of July 23, 2016, there is no balance outstanding related to MM Note.

 

On December 31, 2015, we issued a promissory note in the amount of $1,082,620 to American Restaurant (the “2015 ARH Note”). The note bore note stated interest or maturity date, and was convertible into shares of Common Stock of Muscle Maker at a conversion price of $3.50 per share. On March 14, 2017, American Restaurant Holdings elected to convert the 2015 ARH Note in the principal amount of $1,082,620 into 309,320 shares of Common Stock of Muscle Maker at a conversion price of $3.50 per share.

 

During the period from January 1 through December 15, 2016, we received $2,621,842 of advances from the American Restaurant Holdings. The payable due to the American Restaurant Holdings as a result of these advances was exchanged for a convertible promissory note in the amount of $2,621,842 (the “2016 ARH Note”). The 2016 ARH Note had no stated interest rate or maturity date and was convertible into shares of the Common Stock of Muscle Maker at a conversion price of $2.80 per share at a time to be determined by the lender. The 2016 American Restaurant Holdings Note included a three-year warrant for the purchase of 327,730 shares of our common stock at an exercise price of $7.00 per share. On March 14, 2017, the American Restaurant Holdings elected to convert the 2016 ARH Note into 936,372 shares of Common Stock of Muscle Maker.

 

During the period from December 31, 2016 through February 15, 2017, we received $980,949 of advances from the American Restaurant Holdings. The payable due to the American Restaurant Holdings as a result of these advances was exchanged for a convertible promissory note in the amount of $980,949 (the “2017 ARH Note”). The 2017 ARH Note had no stated interest rate or maturity date and was convertible into shares of Common Stock of Muscle Maker at a conversion price of $2.80 per share at a time to be determined by the lender. The 2017 ARH Note included a three-year warrant for the purchase of 122,618 shares of our common stock at an exercise price of $7.00 per share. On March 14, 2017, the American Restaurant Holdings elected to convert the 2017 ARH Note into 350,338 shares of our common stock.

 

Transactions with Officers and Executives of Muscle Maker

 

On December 22, 2014, Muscle Maker issued 14,285 shares of its common stock to the Chief Executive Officer of American Restaurant Holdings as founder shares for cash proceeds of $10.

 

On August 1, 2015, we entered into a consulting agreement (the “Consulting Agreement”) with an officer of Custom Technology, Inc, who is also a stockholder of CTI, (the “Consultant”). The Consulting Agreement has a term of five years, and automatically extends for successive one-year periods, unless either party provides written notice of termination at least 60 days prior to the end of the term. Pursuant to the terms of the agreement, the Consultant will receive a base fee of $11,667 per month. In connection with the agreement, we provided a $100,000 advance to the consultant, to be repaid in equal monthly installments of $1,667, over the term of the consulting agreement.

 

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On January 24, 2015, we granted 28,571 shares of our common stock valued at $0.98 per share to our Director of Brand Development, in connection with his employment agreement. On January 24, 2015, we issued 61,224 shares of our common stock to the Director of Brand Development in exchange for cash proceeds of $0.98 per share, or $60,000.

 

In May 2017, Muscle Maker granted 159,642 shares of its common stock to its employees and consultants. Such share grants are subject to graduated vesting in equal installments of 20% on each of the following dates: (i) the date of grant, (ii) January 1, 2018, (iii) January 1, 2019, (iv) January 1, 2020, and (v) January 1, 2021. In the event of resignation or termination for any reason of an employee or consultant that receives such shares, the remaining non-vested shares of such employee or consultant prior to such resignation or termination will be forfeited.

 

In May 2017, we granted 21,428 shares of our common stock to Grady Metoyer, our chief financial officer. Such share grant is subject to graduated vesting in equal installments of 20% on each of the following dates: (i) the date of grant, (ii) January 1, 2018, (iii) January 1, 2019, (iv) January 1, 2020, and (v) January 1, 2021. In the event of resignation or termination for any reason of Mr. Metoyer, the remaining non-vested shares of Mr. Metoyer prior to such resignation or termination will be forfeited.

 

On September 15 , 2017, we issued 397,683 shares of our common stock to Robert Morgan, our chief executive officer, in connection with the Merger of MMBC into Muscle Maker.

 

We have entered into indemnification agreements with each of our directors and entered into such agreements with certain of our executive officers. These agreements require us, among other things, to indemnify these individuals for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts reasonably incurred by such person in any action or proceeding, including any action by or in our right, on account of any services undertaken by such person on behalf of our company or that person’s status as a member of our Board of Directors to the maximum extent allowed under California law.

 

DESCRIPTION OF CAPITAL STOCK

 

We are offering 3,333,333 shares of Common Stock pursuant to this Offering Circular. The following description of our capital stock is based upon our articles of incorporation, as amended, our bylaws, as amended, and applicable provisions of law, in each case as currently in effect. This discussion does not purport to be complete and is qualified in its entirety by reference to our articles of incorporation, as amended, and our bylaws, as amended, copies of which are filed with the SEC as exhibits to this Offering Circular.

 

Pursuant to our Articles of Incorporation filed with the California Secretary of State on December 8, 2014, our authorized capital stock consists of 100,000,000 shares of common stock, no par value per share. As of September 21 , 2017, we had 10,270,160 shares of common stock issued and outstanding. We had 630 holders of record of our common stock as of September 21 , 2017.

 

COMMON STOCK

 

Holders of the Company’s common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. The holders of common stock have cumulative voting rights with respect to the election of directors, which means that the shareholders have a number of votes equal to the number of shares held by each shareholder, multiplied by the number of directors to be elected. A shareholder can cast all of its votes in favor of one candidate, or distribute them among the directors to be elected, as the shareholder may decide. Holders of the Company’s common stock representing a majority of the voting power of the Company’s capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of stockholders.

 

Holders of the Company’s common stock are entitled to share in all dividends that our Board of Directors, in its discretion, declares from legally available funds. In the event of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock. The Company’s common stock has no pre-emptive rights, no conversion rights and there are no redemption provisions applicable to the Company’s common stock.

 

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Cash Dividends

 

As of the date of this Offering Circular, we have not paid any cash dividends to stockholders. The declaration of any future cash dividend will be at the discretion of our Board of Directors and will depend upon our earnings, if any, our capital requirements and financial position, the general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.

 

Piggyback registration rights

 

The shares issued upon the exercise of Selling Agent Warrants are entitled to piggyback registration rights. If we register any of our securities either for our own account or for the account of other security holders, the holders of these shares are entitled to include their shares in the registration. Subject to certain exceptions, we and the underwriters may limit the number of shares included in the underwritten offering if the underwriters believe that including these shares would adversely affect the offering.

 

Anti-Takeover Effects of Certain Provisions of Our Bylaws

 

Provisions of our bylaws could make it more difficult to acquire us by means of a merger, tender offer, proxy contest, open market purchases, removal of incumbent directors and otherwise. These provisions, which are summarized below, are expected to discourage types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because negotiation of these proposals could result in an improvement of their terms.

 

Calling of Special Meetings of Stockholders. Our bylaws provide that special meetings of the stockholders may be called only by the board of directors, chairman of the board, or by holders of shares entitled to cast not less than ten percent of the votes at the meeting.

 

Amendment of Bylaws. Our bylaws provide that our board of directors may amend or repeal the bylaws, or new bylaws may be adopted by the board of directors, at any time without stockholder approval. Allowing the board to amend our bylaws without stockholder approval enhances board control over our bylaws.

 

Indemnification of Directors and Officers

 

Section 317 of the California Corporations Code, or the California Code, authorizes a corporation to indemnify, subject to certain exceptions, any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that such person is or was an agent of the corporation, as the term “agent” is defined in section 317(a) of the California Code, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. A corporation is further authorized to indemnify, subject to certain exceptions, any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was an agent of the corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action if the person acted in good faith, in a manner the person believed to be in the best interests of the corporation and its shareholders.

 

Section 204 of the California Code provides that a corporation’s articles of incorporation may not limit the liability of directors (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director’s duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director’s duties, of a risk of a serious injury to the corporation or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director’s duty to the corporation or its shareholders, (vi) under Section 310 of the California Code (concerning transactions between corporations and directors or corporations having interrelated directors) or (vii) under Section 316 of the California Code (concerning directors’ liability for distributions, loans, and guarantees).

 

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Section 204 further provides that a corporation’s articles of incorporation may not limit the liability of directors for any act or omission occurring prior to the date when the provision became effective or any act or omission as an officer, notwithstanding that the officer is also a director or that his or her actions, if negligent or improper, have been ratified by the directors. Further, Section 317 has no effect on claims arising under federal or state securities laws and does not affect the availability of injunctions and other equitable remedies available to a corporation’s shareholders for any violation of a director’s fiduciary duty to the corporation or its shareholders.

 

The Company’s Articles of Incorporation provide for the elimination of liability for its directors to the fullest extent permissible under California law and authorize it to provide indemnification to directors, officers, employees or other agents through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Code, subject only to the applicable limits with respect to actions for breach of duty to the Company and its shareholders. The Company’s Articles of Incorporation also provides that any repeal or modification of the indemnification provisions of the Articles of Incorporation by the shareholders of the Company shall have no adverse affect on any rights or protection of an agent of the Company existing at the time of such repeal or modification.

 

The Company’s Bylaws provide that it shall indemnify its directors and officers, employees and agents against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was its agent. The Company’s Bylaws also contain provisions expressing the intent that these bylaws provide indemnity in excess of that expressly permitted by Section 317 of the California Code to indemnify each of its employees and agents (other than directors and officers) against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was its agent.

 

The Company’s Bylaws further provide that it may advance expenses incurred in defending any proceeding for which indemnification is required or permitted, following authorization thereof by the board of directors, prior to the final disposition of the proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay that amount if it shall be determined ultimately that the indemnified person is not entitled to be indemnified as authorized by its Bylaws.

 

Insofar as the limitation of, or indemnification for, liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling us pursuant to the foregoing, or otherwise, we have been advised that, in the opinion of the SEC, such limitation or indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

Transfer Agent

 

We have engaged Computershare Trust Company, N.A. to be the transfer agent and registrar for our common stock.

 

Computershare Trust Company, N.A.’s address is at 250 Royall Street, Canton, Massachusetts 02021 and its telephone number is (877) 373-6374.

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

Shares Eligible for Future Sale

 

Prior to this offering, there has been no public market for our common stock, and we cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding options or warrants, or the perception that these sales could occur in the public market after this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities.

 

Based on the number of shares of common stock outstanding as of September 21, 2017, upon the closing of this offering, 10,270,160 shares of common stock will be outstanding.

 

All of the shares sold in this offering will be freely tradable unless purchased by our affiliates. The remaining 13,603,481 shares of common stock outstanding after this offering will be restricted as a result of securities laws or lock-up agreements as described below. Following the expiration of the lock-up period, all shares will be eligible for resale in compliance with Rule 144 or Rule 701 to the extent these shares have been released from any repurchase option that we may hold.

 

Rule 144

 

In general, under Rule 144 as currently in effect, any person who is or has been an affiliate of ours during the 90 days immediately preceding the sale and who has beneficially owned shares for at least six months is entitled to sell, within any three-month period commencing 90 days after the date of this Offering Circular, a number of shares that does not exceed the greater of:

 

  1% of the then-outstanding shares of common stock, which will equal approximately 136,034 shares immediately after this offering; and
     
  the average weekly trading volume during the four calendar weeks preceding the sale, subject to the filing of a Form 144 with respect to the sale.

 

Sales under Rule 144 by our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.

 

A person who is not deemed to have been an affiliate of ours at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least six months is entitled to sell his or her shares under Rule 144 without regard to the limitations described above, subject only to the availability of current public information about us during the six months after the initial six-month holding period is met. After a non-affiliate has beneficially owned his or her shares for one year or more, he or she may freely sell his or her shares under Rule 144 without complying with any Rule 144 requirements.

 

We are unable to estimate the number of shares that will be sold under Rule 144, since this will depend on the market price for our common stock, the personal circumstances of the sellers and other factors. Prior to the offering, there has been no public market for the common stock, and there can be no assurance that a significant public market for the common stock will develop or be sustained after the offering. Any future sale of substantial amounts of the common stock in the open market may adversely affect the market price of the common stock offered by this Offering Circular.

 

Rule 701

 

In general, under Rule 701 under the Securities Act, any of our employees, directors, consultants or advisors who purchased shares from us in connection with a qualified compensatory stock or option plan or other written agreement and in compliance with Rule 701, is eligible to resell those shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with the various restrictions, including the holding period, contained in Rule 144.

 

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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

 

The following is a summary of certain United States federal income tax consequences generally applicable to the ownership and disposition of our common stock by a non-U.S. holder (as defined below) that purchases our common stock pursuant to this offering and holds such common stock as a “capital asset” within the meaning of the Code. This discussion is based on currently existing provisions of the Code, applicable United States Treasury regulations promulgated thereunder, judicial decisions, and rulings and pronouncements of the United States Internal Revenue Service (the “IRS”) all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect, or subject to different interpretation. This discussion does not address all the tax consequences that may be relevant to specific holders in light of their particular circumstances or to holders subject to special treatment under United States federal income tax laws (such as financial institutions, insurance companies, tax-exempt organizations, controlled foreign corporations, passive foreign investment companies, retirement plans, partnerships and their partners, dealers in securities, brokers, United States expatriates, persons who have acquired our common stock as compensation or otherwise in connection with the performance of services, or persons who have acquired our common stock as part of a straddle, hedge, conversion transaction or other integrated investment). This discussion does not address the state, local, or foreign tax or United States federal estate or alternative minimum tax consequences relating to the ownership and disposition of our common stock. Prospective investors should consult their tax advisors regarding the United States federal tax consequences of owning and disposing of our common stock, as well as the applicability and effect of any state, local or foreign tax laws.

 

As used in this discussion, the term “non-U.S. holder” refers to a beneficial owner of our common stock that is not, for United States federal income tax purposes, any of the following:

 

  an individual who is a citizen or resident of the United States;
     
  a corporation (or other entity or arrangement taxable as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States or any state thereof, including the District of Columbia;
     
  any entity or arrangement treated as a partnership for United States federal income tax purposes;
     
  an estate the income of which is subject to United States federal income tax regardless of its source; or
     
  a trust (i) if a court within the United States is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all of its substantial decisions, or (ii) that has in effect a valid election under applicable Treasury regulations to be treated as a United States person.

 

If a partnership or other entity or arrangement treated as a partnership for United States federal income tax purposes holds our common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. A partnership that holds our common stock and any partner who owns an interest in such a partnership should consult their tax advisors regarding the United States federal income tax consequences of an investment in our common stock.

 

You should consult your tax advisors concerning the particular United States federal income tax consequences to you of the purchase, ownership, and disposition of our common stock as well as the consequences to you arising under the laws of any other applicable taxing jurisdiction in light of your particular circumstances.

 

Distributions of Common Stock 

 

As discussed under “Dividend Policy” above, we do not currently expect to make distributions on our stock. If we do make a distribution of cash or other property (other than certain distributions of our stock or rights to acquire our stock) in respect of our common stock, the distribution generally will be treated as a dividend to the extent of our current or accumulated earnings and profits as determined under United States federal income tax principles. Any portion of a distribution that exceeds our current and accumulated earnings and profits will generally be treated first as a tax-free return of capital, on a share-by-share basis, to the extent of the non-U.S. holder’s tax basis in our common stock, and, to the extent such portion exceeds the non-U.S. holder’s tax basis in our common stock, the excess will be treated as gain from the disposition of the common stock, the tax treatment of which is discussed below under “—Sale, Exchange or Other Taxable Disposition.”

 

128
 

 

The gross amount of dividends paid to a non-U.S. holder with respect to our common stock generally will be subject to United States federal withholding tax at a rate of 30%, unless (i) an applicable income tax treaty reduces or eliminates such tax, and the non-U.S. holder certifies that it is eligible for the benefits of such treaty in the manner described below, or (ii) the dividends are effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment maintained by the non-U.S. holder in the United States) and the non-U.S. holder satisfies certain certification and disclosure requirements. In the latter case, generally, a non-U.S. holder will be subject to United States federal income tax with respect to such dividends on a net income basis at regular graduated United States federal income tax rates in the same manner as a United States person (as defined under the Code). Additionally, a non-U.S. holder that is a corporation may be subject to a branch profits tax equal to 30% (or such lower rate as may be specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items.

 

A non-U.S. holder that wishes to claim the benefit of an applicable income tax treaty with respect to dividends on our common stock will be required to provide the applicable withholding agent with a valid IRS Form W-8BEN or W-8BEN-E (or other applicable form) and certify under penalties of perjury that such holder (i) is not a United States person (as defined under the Code) and (ii) is eligible for the benefits of such treaty, and the withholding agent must not have actual knowledge or reason to know that the certification is incorrect. This certification must be provided to the applicable withholding agent prior to the payment of dividends and may be required to be updated periodically. If our common stock is held through a non-United States partnership or non-United States intermediary, such partnership or intermediary will also be required to comply with additional certification requirements under applicable Treasury regulations. A non-U.S. holder eligible for a reduced rate of United States federal withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.

 

Prospective investors, and in particular prospective investors engaged in a United States trade or business, are urged to consult their tax advisors regarding the United States federal income tax consequences of owning our common stock.

 

Sale, Exchange, or Other Taxable Disposition

 

Generally, a non-U.S. holder will not be subject to United States federal income tax on gain realized upon the sale, exchange, or other taxable disposition of our common stock unless (i) the gain is effectively connected with such non-U.S. holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States), (ii) such non-U.S. holder is an individual present in the United States for 183 days or more in the taxable year of the sale, exchange, or other taxable disposition and certain other conditions are satisfied, or (iii) we are or become a “United States real property holding corporation” (as defined in Section 897(c) of the Code) at any time during the shorter of the five-year period ending on the date of disposition or the non-U.S. holder’s holding period for our common stock and either (a) our common stock has ceased to be traded on an established securities market prior to the beginning of the calendar year in which the sale, exchange or other taxable disposition occurs, or (b) the non-U.S. holder owns (actually or constructively) more than five percent of our common stock at some time during the shorter of the five-year period ending on the date of disposition or such holder’s holding period for our common stock. Although there can be no assurances in this regard, we believe that we are not a United States real property holding corporation, and we do not expect to become a United States real property holding corporation.

 

Generally, gain described in clause (i) of the immediately preceding paragraph will be subject to tax on a net income basis at regular graduated United States federal income tax rates in the same manner as if the non-U.S. holder were a United States person (as defined under the Code). A non-U.S. holder that is a corporation may also be subject to a branch profits tax equal to 30% (or such lower rate as may be specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items. An individual non-U.S. holder described in clause (ii) of the immediately preceding paragraph will be required to pay (subject to applicable income tax treaties) a flat 30% tax on the gain derived from the sale, exchange, or other taxable disposition, which may be offset by certain United States source capital losses, even though the individual is not considered a resident of the United States.

 

129
 

 

Foreign Account Tax Compliance Act

 

Withholding at a rate of 30% is required on dividends in respect of our common stock, and, after December 31, 2016 will be required on gross proceeds from the sale or other disposition of our common stock, in each case, held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the United States Treasury Department to report, on an annual basis, information with respect to interests in, and accounts maintained by, the institution that are owned by certain United States persons and by certain non-United States entities that are wholly or partially owned by United States persons and to withhold on certain payments. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations, may modify these requirements. Accordingly, the entity through which our common stock is held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and gross proceeds from the sale or other disposition of, our common stock held by an investor that is a non-financial non-United States entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such entity does not have any substantial United States owners or (ii) provides certain information regarding the entity’s substantial United States owners. Prospective investors should consult their tax advisors regarding the possible implications of these rules on their investment in our common stock.

 

ADDITIONAL REQUIREMENTS AND RESTRICTIONS

 

Broker-Dealer Requirements

 

Each of the participating broker-dealers, authorized registered representatives or any other person selling Offered Shares on our behalf is required to:

 

  make every reasonable effort to determine that the purchase of Offered Shares is a suitable and appropriate investment for each investor based on information provided by such investor to the broker-dealer, including such investor’s age, investment objectives, income, net worth, financial situation and other investments held by such investor; and
     
  maintain, for at least six (6) years, records of the information used to determine that an investment in our Offered Shares is suitable and appropriate for each investor.

 

In making this determination, your participating broker-dealer, authorized registered representative or other person selling Offered Shares on our behalf will, based on a review of the information provided by you, consider whether you:

 

  meet the minimum suitability standards established by us and the investment limitations established under Regulation A;
     
  can reasonably benefit from an investment in our Offered Shares based on your overall investment objectives and portfolio structure;
     
  are able to bear the economic risk of the investment based on your overall financial situation; and
     
  have an apparent understanding of:

 

    the fundamental risks of an investment in the Offered Shares;
       
    the risk that you may lose your entire investment;
       
    the lack of liquidity of the Offered Shares;
       
    the restrictions on transferability of the Offered Shares;
       
    the background and qualifications of our management; and
       
    our business.

 

130
 

 

Restrictions Imposed by the USA PATRIOT Act and Related Acts

 

In accordance with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, the securities offered hereby may not be offered, sold, transferred or delivered, directly or indirectly, to any “unacceptable investor,” which means anyone who is:

 

  a “designated national,” “specially designated national,” “specially designated terrorist,” “specially designated global terrorist,” “foreign terrorist organization,” or “blocked person” within the definitions set forth in the Foreign Assets Control Regulations of the United States, or U.S., Treasury Department;
     
  acting on behalf of, or an entity owned or controlled by, any government against whom the U.S. maintains economic sanctions or embargoes under the Regulations of the U.S. Treasury Department;
     
  within the scope of Executive Order 13224 — Blocking Property and Prohibiting Transactions with Persons who Commit, Threaten to Commit, or Support Terrorism, effective September 24, 2001;
     
  a person or entity subject to additional restrictions imposed by any of the following statutes or regulations and executive orders issued thereunder: the Trading with the Enemy Act, the National Emergencies Act, the Antiterrorism and Effective Death Penalty Act of 1996, the International Emergency Economic Powers Act, the United Nations Participation Act, the International Security and Development Cooperation Act, the Nuclear Proliferation Prevention Act of 1994, the Foreign Narcotics Kingpin Designation Act, the Iran and Libya Sanctions Act of 1996, the Cuban Democracy Act, the Cuban Liberty and Democratic Solidarity Act and the Foreign Operations, Export Financing and Related Programs Appropriations Act or any other law of similar import as to any non-U.S. country, as each such act or law has been or may be amended, adjusted, modified or reviewed from time to time; or
     
  designated or blocked, associated or involved in terrorism, or subject to restrictions under laws, regulations, or executive orders as may apply in the future similar to those set forth above.

 

ERISA CONSIDERATIONS

 

An investment in us by an employee benefit plan is subject to additional considerations because the investments of these plans are subject to the fiduciary responsibility and prohibited transaction provisions of ERISA and restrictions imposed by Section 4975 of the Code. For these purposes the term “employee benefit plan” includes, but is not limited to, qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified employee pension plans and tax deferred annuities or IRAs established or maintained by an employer or employee organization. Among other things, consideration should be given to:

 

  whether the investment is prudent under Section 404(a)(1)(B) of ERISA;
     
  whether in making the investment, that plan will satisfy the diversification requirements of Section 404(a)(1)(C) of ERISA; and
     
  whether the investment will result in recognition of unrelated business taxable income by the plan and, if so, the potential after-tax investment returns.

 

The person with investment discretion with respect to the assets of an employee benefit plan, often called a fiduciary, should determine whether an investment in us is authorized by the appropriate governing instrument and is a proper investment for the plan.

  

Section 406 of ERISA and Section 4975 of the Code prohibit employee benefit plans from engaging in specified transactions involving “plan assets” with parties that are “parties in interest” under ERISA or “disqualified persons” under the Code with respect to the plan.

 

In addition to considering whether the purchase of Offered Shares is a prohibited transaction, a fiduciary of an employee benefit plan should consider whether the plan will, by investing in us, be deemed to own an undivided interest in our assets, with the result that our operations would be subject to the regulatory restrictions of ERISA, including its prohibited transaction rules, as well as the prohibited transaction rules of the Code.

 

131
 

 

The Department of Labor regulations provide guidance with respect to whether the assets of an entity in which employee benefit plans acquire equity interests would be deemed “plan assets” under some circumstances. Under these regulations, an entity’s assets would not be considered to be “plan assets” if, among other things:

 

(1) the equity interests acquired by employee benefit plans are publicly offered securities - i.e., the equity interests are widely held by 100 or more investors independent of the issuer and each other, freely transferable and registered under some provisions of the federal securities laws;

 

(2) the entity is an “operating company”—i.e., it is primarily engaged in the production or sale of a product or service other than the investment of capital either directly or through a majority-owned subsidiary or subsidiaries; or

 

(3) there is no significant investment by benefit plan investors, which is defined to mean that less than 25% of the value of each class of equity interest is held by the employee benefit plans referred to above.

 

We do not intend to limit investment by benefit plan investors in us because we anticipate that we will qualify as an “operating company”. If the Department of Labor were to take the position that we are not an operating company and we had significant investment by benefit plans, then we may become subject to the regulatory restrictions of ERISA which would likely have a material adverse effect on our business and the value of our common stock.

 

Plan fiduciaries contemplating a purchase of Offered Shares should consult with their own counsel regarding the consequences under ERISA and the Code in light of the serious penalties imposed on persons who engage in prohibited transactions or other violations.

 

 

 

ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF PLANS IS IN NO RESPECT A REPRESENTATION BY OUR BOARD OF DIRECTORS OR ANY OTHER PARTY RELATED TO US THAT THIS INVESTMENT MEETS THE RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY ANY PARTICULAR PLAN OR THAT THIS INVESTMENT IS APPROPRIATE FOR ANY PARTICULAR PLAN. THE PERSON WITH INVESTMENT DISCRETION SHOULD CONSULT WITH HIS OR HER ATTORNEY AND FINANCIAL ADVISERS AS TO THE PROPRIETY OF AN INVESTMENT IN US IN LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN.

 

 

 

LEGAL MATTERS

 

The validity of the securities offered by this Offering Circular will be passed upon for us by Legal & Compliance, LLC, 330 Clematis Street, Suite 217, West Palm Beach, Florida 33401.

 

EXPERTS

 

Our consolidated balance sheets as of December 31, 2016 and December 31, 2015 and the related consolidated statement of operations, changes in stockholders’ equity and cash flows and for the year ended December 31, 2016 (the Successor period) and for the period from January 23, 2015 through December 31, 2015 (the Successor period) and the period from January 1, 2015 through January 22, 2015 (the Predecessor period) included in this Offering Circular have been audited by Marcum LLP independent registered public accounting firm, as indicated in their report with respect thereto, and have been so included in reliance upon the report of such firm given on their authority as experts in accounting and auditing.

 

APPOINTMENT OF AUDITOR

 

On August 1, 2016, our board of directors appointed Marcum LLP as our independent registered public accounting firm. Marcum LLP audited our financial statements as of December 31, 2016 and 2015, and for the year ended December 31, 2016 (the Successor period) and for the period from January 23, 2015 through December 31, 2015 (the Successor period) and the period from January 1, 2015 through January 22, 2015 (the Predecessor period), which have been included in this Offering Circular. Prior to engaging Marcum LLP as our independent registered public accounting firm, we did not have an independent registered public accounting firm to audit our financial statements.

 

132
 

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed an offering statement on Form 1-A with the Commission under Regulation A of the Securities Act with respect to the Common Stock offered by this Offering Circular. This Offering Circular, which constitutes a part of the offering statement, does not contain all of the information set forth in the offering statement or the exhibits and schedules filed therewith. For further information with respect to us and our Common Stock, please see the offering statement and the exhibits and schedules filed with the offering statement. Statements contained in this Offering Circular regarding the contents of any contract or any other document that is filed as an exhibit to the offering statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the offering statement. The offering statement, including its exhibits and schedules, may be inspected without charge at the public reference room maintained by the Commission, located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and copies of all or any part of the offering statement may be obtained from such offices upon the payment of the fees prescribed by the Commission. Please call the Commission at 1-800-SEC-0330 for further information about the public reference room. The Commission also maintains an Internet website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is www.sec.gov.

 

We also maintain a website at www.musclemakergrill.com. After the qualification of this offering, you may access these materials at our website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the Commission. Information contained on our website is not a part of this Offering Circular and the inclusion of our website address in this Offering Circular is an inactive textual reference only.

 

After the qualification of this Tier II, Regulation A offering, we intend to become subject to the information and periodic reporting requirements of the Exchange Act. If we become subject to the reporting requirements of the Exchange Act, we will file periodic reports, proxy statements and other information with the Commission. Such periodic reports, proxy statements and other information will be available for inspection and copying at the public reference room and on the Commission’s website referred to above. Until we become or never become subject to the reporting requirements of the Exchange Act, we will furnish the following reports, statements, and tax information to each stockholder:

 

  1. Reporting Requirements under Tier II of Regulation A. Following this Tier II, Regulation A offering, we will be required to comply with certain ongoing disclosure requirements under Rule 257 of Regulation A. We will be required to file: an annual report with the SEC on Form 1-K; a semi-annual report with the SEC on Form 1-SA; current reports with the SEC on Form 1-U; and a notice under cover of Form 1-Z. The necessity to file current reports will be triggered by certain corporate events, similar to the ongoing reporting obligation faced by issuers under the Exchange Act, however the requirement to file a Form 1-U is expected to be triggered by significantly fewer corporate events than that of the Form 8-K. Such reports and other information will be available for inspection and copying at the public reference room and on the Commission’s website referred to above. Parts I & II of Form 1-Z will be filed by us if and when we decide to and are no longer obligated to file and provide annual reports pursuant to the requirements of Regulation A.
     
  2. Annual Reports. As soon as practicable, but in no event later than one hundred twenty (120) days after the close of our fiscal year, ending on the last Sunday of a calendar year, our board of directors will cause to be mailed or made available, by any reasonable means, to each Stockholder as of a date selected by the board of directors, an annual report containing financial statements of the Company for such fiscal year, presented in accordance with GAAP, including a balance sheet and statements of operations, company equity and cash flows, with such statements having been audited by an accountant selected by the board of directors. The board of directors shall be deemed to have made a report available to each stockholder as required if it has either (i) filed such report with the SEC via its Electronic Data Gathering, Analysis and Retrieval, or EDGAR, system and such report is publicly available on such system or (ii) made such report available on any website maintained by the Company and available for viewing by the stockholders.
     
  3. Tax Information. On or before January 31st of the year immediately following our fiscal year, which is currently January 1st through December 31st, we will send to each stockholder such tax information as shall be reasonably required for federal and state income tax reporting purposes.

 

133
 

 

MUSCLE MAKER, INC.

AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

 

For the Years Ended December 31, 2016 and 2015

 

(Successor)

 

For the Year Ended December 31, 2016

 

For the Period January 23, through
December 31, 2015

 

(Predecessor)

 

For the Period January 1, through
January 22, 2015

 

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MUSCLE MAKER, INC. AND SUBSIDIARIES

 

CONTENTS

 

  Page
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Financial Statements  
   
Balance Sheets as of December 31, 2016 and 2015 (Successors) F-3
   
Statements of Operations for the year ended December 31, 2016 and the period from January 23, 2015 through December 31, 2015 (Successor periods) and the period from January 1, 2015 through January 22, 2015 (Predecessor period) F-4
   
Statements of Changes in Stockholders’ Equity / Members’ Deficit for the year ended December 31, 2016 and the period from January 23, 2015 through December 31, 2015 (Successor periods) and the period from January 1, 2015 through January 22, 2015 (Predecessor period) F-5
   
Statements of Cash Flows for the year ended December 31, 2016 and the period from January 23, 2015 through December 31, 2015 (Successor periods) and the period from January 1, 2015 through January 22, 2015 (Predecessor period) F-6
   
Notes to Consolidated Financial Statements F-9

 

F-1
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Audit Committee of Board of Directors

and Stockholders / Members of Muscle Maker, Inc. & Subsidiaries

 

We have audited the accompanying consolidated financial statements of Muscle Maker, Inc. and Subsidiaries (the “Company”), which consist of the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in stockholders’ equity / members’ deficit and cash flows for the year ended December 31, 2016 and for the period from January 23, 2015 through December 31, 2015 (the Successor periods) and for the period from January 1, 2015 through January 22, 2015 (the Predecessor period). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Muscle Maker, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has had recurring losses, and has a working capital and stockholders’ deficit as of December 31, 2016. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Marcum LLP  
   
Marcum LLP  
New York, NY  
September 21, 2017  

 

F-2
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

 

    Successor  
    December 31, 2016     December 31, 2015  
         
Assets                
Current Assets:                
Cash   $ 335,724     $ 599,278  
Accounts receivable, net of allowance for doubtful accounts
of $4,500 as of December 31, 2016 and December 31, 2015
    45,766       60,621  
Inventory     64,120       14,199  
Receivable from Parent, current portion     -       300,000  
Current portion of loans receivable, net of allowance of
$25,000 and $0 at December 31, 2016 and 2015, respectively
    30,434       67,755  
Current portion of loan receivable from related party     20,000       20,000  
Prepaid expenses and other current assets     207,650       118,369  
Total Current Assets     703,694       1,180,222  
Property and equipment, net     1,072,545       88,800  
Goodwill     2,521,468       2,521,468  
Intangible assets, net     3,702,649       3,813,494  
Receivable from Parent, non-current     -       329,907  
Loans receivable - non current     53,229       30,603  
Loan receivable from related party - non current     51,667       71,667  
Security deposits and other assets     148,772       102,209  
Total Assets   $ 8,254,024     $ 8,138,370  
                 
Liabilities and Stockholders’ Equity                
Current Liabilities:                
Accounts payable and accrued expenses   $ 944,096     $ 93,161  
Notes payable     -       308,100  
Deferred revenue     1,302,967       646,501  
Other current liabilities     180,483       193,967  
Total Current Liabilities     2,427,546       1,241,729  
Convertible note payable to Parent, net of debt discount of $1,486,956 and $216,524 at December 31, 2016 and December 31, 2015, respectively     1,004,736       866,096  
Payable to Parent, non-current     74,145       -  
Deferred tax liability     246,527       119,245  
Deferred rent, non-current     183,638       -  
Total Liabilities     3,936,592       2,227,070  
                 
Commitments and Contingencies                
                 
Stockholders' Equity:                
Common stock, no par value, 100,000,000 shares authorized, 6,139,789 shares issued and outstanding as of December 31, 2016 and December 31, 2015     5,157,010       5,157,010  
Additional paid-in capital     2,842,343       216,524  
Accumulated deficit     (3,841,638 )     (732,057 )
Total Controlling Interest     4,157,715       4,641,477  
Non-controlling interest     159,717       1,269,823  
Total Stockholders’ Equity     4,317,432       5,911,300  
Total Liabilities and Stockholders’ Equity   $ 8,254,024     $ 8,138,370  

 

See Notes to the Consolidated Financial Statements

 

F-3
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

    Successor     Predecessor  
          For the Period     For the Period  
    For the Year
Ended
    January 23,
Through
    January 1,
Through
 
    December 31, 2016     December 31, 2015     January 22, 2015  
                   
Revenues:                        
Company restaurant sales, net of discounts   $ 2,735,222     $ 981,690     $ 50,868  
Franchise royalties and fees     1,660,877       1,756,772       89,301  
Other revenues     557,106       228,148       -  
Total Revenues     4,953,205       2,966,610       140,169  
                         
Operating Costs and Expenses:                        
Restaurant operating expenses:                        
Food and beverage costs     918,545       300,425       15,499  
Labor     1,343,758       334,252       16,274  
Rent     731,371       51,007       1,702  
Other restaurant operating expenses     780,757       191,977       8,309  
Total restaurant operating expenses     3,774,431       877,661       41,784  
Costs of other revenues     295,231       115,988       -  
Depreciation and amortization     204,486       117,272       3,363  
General and administrative expenses     4,644,994       2,695,057       158,949  
Total Costs and Expenses     8,919,142       3,805,978       204,096  
Loss from Operations     (3,965,937 )     (839,368 )     (63,927 )
                         
Other (Expense) Income:                        
Other income (expense)     6,221       (1,045 )     1,000  
Interest income, net     6,244       883       61  
Amortization of debt discount     (138,933 )     -       -  
Total Other (Expense) Income, net     (126,468 )     (162 )     1,061  
                         
Net Loss Before Tax     (4,092,405 )     (839,530 )     (62,866 )
Income tax provision     (127,282 )     (119,245 )     -  
Net Loss     (4,219,687 )     (958,775 )     (62,866 )
Net loss attributable to the non-controlling interest     (1,110,106 )     (226,718 )     -  
Net Loss Attributable to Controlling Interest   $ (3,109,581 )   $ (732,057 )   $ (62,866 )
                         
Net Loss Attributable to Controlling Interest
Per Share:
                       
Basic and Diluted   $ (0.51 )   $ (0.14 )        
                         
Weighted Average Number of Common Shares Outstanding:                        
Basic and Diluted     6,139,789       6,018,656          

 

See Notes to the Consolidated Financial Statements

 

F-4
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY / MEMBERS’ (DEFICIT)

 

    Members’     No Par Common Stock     Additional Paid-in     Accumulated     Total
Controlling
    Non-
Controlling
       
    Deficit     Shares     Amount     Capital     Deficit     Interest     Interest     Total  
Predecessor                                                                
Balance - December 31, 2014   $ (846,433 )     -     $ -     $ -     $ -     $ -     $ -     $ (846,433 )
Net loss     (62,866 )     -       -       -       -       -       -       (62,866 )
Balance - January 22, 2015   $ (909,299 )     -     $ -     $ -     $ -     $ -     $ -     $ (909,299 )
Successor                                                                
Balance - January 23, 2015   $ -       14,285     $ 10     $ -     $ -     $ -     $ -     $ 10  
Common stock issued to Parent, for cash and the obligations to pay certain promissory notes     -       5,785,712       4,249,000       -       -       -       -       4,249,000  
Issuance of common stock to certain members of MMF in connection with acquisition of MMB     -       71,427       70,000       -       -       -       1,466,541       1,536,541  
Issuance of common stock in connection with employee agreement     -       28,571       28,000       -       -       -       -       28,000  
Issuance of common stock and warrants for cash     -       239,794       810,000       -       -       -       -       810,000  
Beneficial conversion feature - 2015 ARH Note     -       -       -       216,524       -       -       -       216,524  
Non-control interest in CTI     -       -       -       -       -       -       30,000       30,000  
Net loss     -       -       -       -       (732,057 )     -       (226,718 )     (958,775 )
Balance - December 31, 2015     -       6,139,789       5,157,010       216,524       (732,057 )     4,641,477       1,269,823       5,911,300  
Beneficial conversion feature -2016 ARH Note     -       -       -       2,381,107       -       2,381,107       -       2,381,107  
Warrants issued in connection with convertible debt     -       -       -       241,028       -       241,028       -       241,028  
Warrant issued in exchange for services     -       -       -       3,684       -       3,684       -       3,684  
Net loss     -       -       -       -       (3,109,581 )     (3,109,581 )     (1,110,106 )     (4,219,687 )
Balance - December 31, 2016   $ -       6,139,789     $ 5,157,010     $ 2,842,343     $ (3,841,638 )   $ 4,157,715     $ 159,717     $ 4,317,432  

 

See Notes to the Consolidated Financial Statements

 

F-5
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Successor     Predecessor  
          For the period     For the period  
    For the
year ended
    January 23,
through
    January 1,
through
 
    December 31, 2016     December 31, 2015     January 22, 2015  
                   
Cash Flows from Operating Activities                        
Net loss   $ (4,219,687 )   $ (958,775 )   $ (62,866 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                        
Depreciation and amortization     204,486       117,272       3,363  
Stock-based compensation     3,684       28,000       -  
Amortization of debt discount     138,933       -       -  
Bad debt expense     113,932       4,500       28,576  
Deferred income tax provision     127,282       119,245       -  
Expenses paid by parent     74,970       -       -  
Changes in operating assets and liabilities:                        
Accounts receivable     (50,211 )     (64,148 )     2,926  
Inventory     (49,921 )     (3,100 )     -  
Prepaid expenses and other current assets     (89,281 )     (110,065 )     26,368  
Accounts payable and accrued expenses     850,937       80,851       (454 )
Deferred revenues     656,466       (72,000 )     (12,000 )
Other liabilities     170,154       193,967       23,057  
Security deposits and other assets     (42,446 )     (15,116 )     -  
Total Adjustments     2,108,985       279,406       71,836  
Net Cash (Used in) Provided by Operating Activities     (2,110,702 )     (679,369 )     8,970  
                         
Cash Flows from Investing Activities                        
Purchases of property and equipment     (957,387 )     (61,520 )     -  
Cash paid in connection with the acquisition of MMB, net of cash acquired     -       (3,555,592 )     -  
Cash paid in connection with the acquisition of Springfield     -       (12,000 )     -  
Cash paid in connection with the acquisition of CTI     -       (70,000 )     -  
Cash paid in connection with the acquisition of Winston Salem     (124,117 )     -       -  
Issuance of loans receivable     (192,500 )     (93,206 )     (3,182 )
Collections from loans receivable     158,329       35,912       1,600  
Issuances of loan receivable - related party     -       (100,000 )     -  
Collections from loans receivable - related party     20,000       28,333       -  
Net Cash Used in Investing Activities     (1,095,675 )     (3,828,073 )     (1,582 )
                         
Cash Flows from Financing Activities                        
Issuance of common stock to Parent for cash     -       3,645,000       -  
Issuance of common stock and warrants for cash     -       810,000       -  
Advances from Parent     329,081       -       -  
Repayments of notes payable     (8,100 )     (68,900 )     -  
Proceeds from convertible note payable to Parent     2,621,842       720,620       -  
Net Cash Provided by Financing Activities     2,942,823       5,106,720       -  
                         
Net (Decrease) Increase in Cash     (263,554 )     599,278       7,388  
Cash - Beginning of Period     599,278       -       118,346  
Cash - End of Period   $ 335,724     $ 599,278     $ 125,734  

 

F-6
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

 

    Successor     Predecessor  
          For the period     For the period  
    For the
year ended
    January 23,
through
    January 1,
through
 
    December 31, 2016     December 31, 2015     January 22, 2015  
                   
Supplemental Disclosures of Cash Flow Information:                        
Cash paid for interest   $ 119     $ -     $ -  
                         
Supplemental disclosures of non-cash investing and financing activities                        
Beneficial conversion feature   $ 2,381,107     $ 216,524     $ -  
Issuance of warrants in connection with
convertible debt
  $ 241,028     $ -     $ -  
Issuance of common stock to Parent in exchange for promise to pay notes payable   $ -     $ 604,000     $ -  
Payment on note payable by parent in exchange for reduction in receivable from parent   $ 300,000     $ 249,000     $ -  
                         
Non-cash advance for convertible note payable - Parent   $ -     $ 362,000     $ -  
Security deposit paid by Parent in exchange for reduction in receivable from Parent   $ -     $ 87,093     $ -  
Supplemental non-cash investing and financing activity - acquisition of 74% of Muscle Maker Brands, LLC                        
Assets acquiried and liabilities assumed:                        
Cash   $ -     $ 14,408     $ -  
Accounts receivable     -       973       -  
Inventory     -       8,599       -  
Loans receivable     -       41,064       -  
Loans receivable - related party     -       20,000       -  
Property and equipment, net     -       30,376       -  
Goodwill     -       2,437,578       -  
Intangible asset - trademarks     -       2,524,000       -  
Intangible asset - franchise agreements     -       1,360,000       -  
Security deposit and other assets     -       4,364       -  
Accounts payable and accrued expenses     -       (12,320 )     -  
Deferred revenue     -       (718,501 )     -  
Subtotal     -       5,710,541       -  
Non-controlling interest     -       (1,466,541 )     -  
Total purchase price     -       4,244,000       -  
                         
Less: Cash acquired     -       (14,408 )     -  
Less: Cash paid to acquire 74% Muscle Maker Brands, LLC     -       (3,555,592 )     -  
Non-cash consideration to seller   $ -     $ 674,000     $ -  
                         
Non-cash consideration consisted of:                        
Common stock issued to acquire Muscle Maker Brands, LLC   $ -     $ (70,000 )   $ -  
Note payable to seller     -       (604,000 )     -  
Total non-cash consideration   $ -     $ (674,000 )   $ -  

 

F-7
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

 

    Successor     Predecessor  
          For the period     For the period  
    For the
year ended
    January 23,
through
    January 1,
 through
 
    December 31, 2016     December 31, 2015     January 22, 2015  
                   
Supplemental non-cash investing and financing activity - acquisition of 70% Custom Technology, Inc.                        
Assets acquiried and liabilities assumed:                        
Inventory   $ -     $ 2,500     $ -  
Property and equipment, net     -       5,000       -  
Goodwill recognized on purchase
business combination
    -       62,500       -  
Intangible asset - non-compete agreement     -       30,000       -  
Subtotal     -       100,000       -  
Non-controlling interest     -       (30,000 )     -  
      -               -  
Total purchase price     -       70,000       -  
Less: Cash paid to acquire 70% of Custom Technology, Inc.     -       (70,000 )     -  
Non-cash consideration to seller   $ -     $ -     $ -  
                         
                         
Supplemental non-cash investing and financing activity - acquisition of a restaurant in Springfield, NJ                        
Assets acquiried and liabilities assumed:                        
Property and equipment, net   $ -     $ 8,670     $ -  
Goodwill recognized on purchase business combination     -       21,390       -  
                         
Total purchase price     -       30,060       -  
Less: Cash paid to acquire a restaurant in Springfield, NJ     -       (12,000 )     -  
Non-cash consideration to seller   $ -     $ 18,060     $ -  

 

See Notes to the Consolidated Financial Statements

 

F-8
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 1 – BUSINESS ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF OPERATIONS

 

Organization and Operations

 

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

 

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

 

On May 4, 2015, MMB acquired a business in Springfield, New Jersey, as a Company owned restaurant.

 

On August 1, 2015, the Company acquired 70% of the shares of CTI. CTI was formed on July 29, 2015 and entered into an asset purchase on August 1, 2015 pursuant to which CTI purchased POS computer systems, cash registers, camera systems and related inventory and supplies.

 

On September 30, 2016, MMB acquired a business in Winston-Salem, North Carolina, as a Company owned restaurant. As of December 31, 2016, this Company owned restaurant has not opened for business. The Company expects to open the store during 2017.

 

The Company’s financial statement presentation distinguishes a "Predecessor" for the periods prior to the Closing Date and a “Successor” for the periods following the Closing Date. The operating results of MMF and its subsidiary, MMF Colonia (“Colonia”) for the period January 1, 2015 through January 22, 2015 are presented in the Predecessor period in the accompanying consolidated financial statements. The operating results of the Company as of December 31, 2016 and for the period from January 23, 2015 through December 31, 2015 are presented in the Successor period in the accompanying consolidated financial statements.

 

The Company operates under the name Muscle Maker Grill, and is a franchisor and owner operator of Muscle Maker Grill restaurants. As of December 31, 2016, the Company’s restaurant system included thirteen Company-owned restaurants and forty-one franchised restaurants. Five of the thirteen Company-owned restaurants were in the pre-opening phase as of December 31, 2016, and three Company-owned restaurants were subsequently open for operation as of the date of filing. A Muscle Maker Grill restaurant offers quality food freshly prepared with the Company's proprietary recipes created with the guest's health in mind. The menu is protein based, and features various supplements, health food snacks, along with a nutritious children's menu.

 

F-9
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 1 – BUSINESS ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF OPERATIONS

 

Organization and Operations, continued

 

Effective September 20 , 2017, pursuant to authority granted by the stockholders of the Company, the Company implemented a 1-for-7 reverse split of the Company’s issued common stock (the “Reverse Split”). All share and per share information has been retroactively adjusted to reflect the Reverse Split for all periods presented. See Note 16 – Subsequent Events - Business Reorganization for further information.

 

NOTE 2 - GOING CONCERN AND MANAGEMENT’S PLANS

 

As of December 31, 2016, the Company had a cash balance, a working capital deficiency and an accumulated deficit of $335,724, $1,723,852 and $3,841,637 respectively. For the year ended December 31, 2016, the Company incurred a pre-tax net loss of $4,092,405. For the period from January 23, through December 31, 2015 and the period from January 1 through January 22, 2015, the Company incurred a pre-tax net loss of $839,530 and $62,866, respectively. These conditions indicate that there is substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date of this filing.

 

During the Successor period, the Company’s operations have primarily been funded through proceeds from the Parent in exchange for equity and debt. Subsequent to December 31, 2016, the Company received an aggregate of $3,206,715 associated with the issuances of convertible promissory notes payable and warrants to ARH and various lenders, of which $1,656,715 was converted into common stock during 2017. In addition, the Company received an aggregate of $400,000 in connection with sales of common stock and restricted common stock. (See Note 16 – Subsequent Events – Parent Transactions, Note 16 Subsequent Events – Other Convertible Notes Payable, Note 16 Subsequent Events – Other Convertible Notes Payable – Related Parties, Note 16 Subsequent Events – Sale of Common Stock and Note 16 Subsequent Events –Sales of Restricted Stock). Although management believes that the Company has access to capital resources, there are no commitments in place for new financing as of the filing date of this Form 1-A/A and there can be no assurance that the Company will be able to obtain funds on commercially acceptable terms, if at all. The Company expects to have ongoing needs for working capital in order to (a) fund operations; plus (b) expand operations by opening additional corporate-owned restaurants. To that end, the Company may be required to raise additional funds through equity or debt financing. However, there can be no assurance that the Company will be successful in securing additional capital. If the Company is unsuccessful, the Company may need to (a) initiate cost reductions; (b) forego business development opportunities; (c) seek extensions of time to fund its liabilities, or (d) seek protection from creditors.

 

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

 

F-10
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES

 

The Predecessor’s significant accounting policies are substantially the same as those of the Company presented below.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Any intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

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

 

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

 

  the 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, income taxes and reserves;
     
  the estimated useful lives of intangible and depreciable assets;
     
  the recognition of revenue; and
     
  the recognition, measurement and valuation of current and deferred income taxes.

 

Estimates and assumptions are periodically reviewed and the effects of any material revisions are reflected in the financial statements in the period that they are determined to be necessary. Actual results could differ from those estimates and assumptions.

 

Cash and Cash Equivalents.

 

The Company considers all highly-liquid instruments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents as of December 31, 2016 or 2015.

 

Inventory

 

Inventories, which are stated at the lower of cost or market, consist primarily of perishable food items and supplies. Cost is determined using the first-in, first out method.

 

F-11
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. Depreciation and amortization are calculated on the straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the estimated useful life or the lease term of the related asset. The estimated useful lives are as follows:

 

  Furniture and equipment 5 - 7 years
     
  Leasehold improvements 1.8 – 10.4 years

 

Smallware, which consists of pots, pans and other cooking utensils, is carried at cost and any replacements are expensed when acquired.

 

Intangible Assets

 

The Company accounts for recorded intangible assets in accordance with ASC 350 “Intangibles - Goodwill and Other”. In accordance with ASC 350, the Company does not amortize intangible assets having indefinite useful lives. The Company’s goodwill and trademarks are deemed to have indefinite lives, and accordingly are not amortized, but are evaluated for impairment at least annually, or more often whenever changes in facts and circumstances may indicate that the carrying value may not be recoverable. The Accounting Standards Codification (“ASC”) requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment). Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgment is required to estimate the fair value of reporting units which includes estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment.

 

When testing goodwill for impairment, the Company may assess qualitative factors for some or all of our reporting units to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. Alternatively, the Company may bypass this qualitative assessment for some or all of our reporting units and perform a detailed quantitative test of impairment (step 1). If the Company performs the detailed quantitative impairment test and the carrying amount of the reporting unit exceeds its fair value, the Company would perform an analysis (step 2) to measure such impairment. In 2016 and 2015, the Company performed a qualitative assessment to identify and evaluate events and circumstances to conclude whether it is more likely than not that the fair value of the Company’s reporting units is less than their carrying amounts. Based on the Company’s qualitative assessments, it is more likely than not that the fair value of the reporting units exceeded their carrying values and no impairments were identified.

 

F-12
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Intangible Assets, continued

 

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, the Company performs an analysis to review the recoverability of the asset’s carrying value, which includes estimating the undiscounted cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors. If the analysis indicates that the carrying value is not recoverable from future cash flows, an impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value. Any impairment losses are recorded as operating expenses, which reduce net income. There were no impairments of long-lived assets as of December 31, 2016 and 2015.

 

Revenue Recognition

 

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

 

Restaurant Sales

 

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

 

Royalties and Franchise Fees

 

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

 

The Company has supply agreements with certain food and beverage vendors. Pursuant to the terms of these agreements, rebates are provided to the Company based upon the dollar volume of purchases for all Company owned and franchised restaurants from these vendors. Rebates earned on purchases by franchise stores are recorded as revenue during the period in which the related food and beverage purchases are made. The Company recorded revenue from rebates of $333,248 during the year ended December 31, 2016, and recorded revenues from rebates of $384,044 and $21,653 during the periods from January 23 through December 31, 2015 and January 1 through January 22, 2015, respectively.

 

F-13
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Other Revenues

 

Through its subsidiary CTI, the Company derives revenue from the sale of POS computer systems, cash registers and camera systems, and from the provision of related consulting and support services, which generally include implementation, installation and training services. We recognize revenue when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, the fee is fixed or determinable and collectability is reasonably assured. The Company recorded $557,106 and $228,148 of revenues from these technology sales and services during the year ended December 31, 2016 and for the period from January 23 through December 31, 2015, respectively. No technology revenues were recorded during the period from January 1 through January 22, 2015.

 

Net Loss per Share

 

Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, plus the impact of potential common shares, if dilutive, resulting from the exercise of warrants, from the conversion of convertible debt and from the conversion of MMB membership units which were obtained by the non-controlling interest in connection with the acquisition of MMB and are convertible into shares of common stock of MMI (See Note 4 – Acquisition - Acquisition of 74% of MMB).

 

The following securities are excluded from the calculation of weighted average dilutive common shares at December 31, 2016 and 2015, respectively, because their inclusion would have been anti-dilutive:

 

    December 31,  
    2016     2015  
Warrants     424,158       89,285  
Convertible debt     1,340,488       309,320  
MMB membership units     2,067,953       2,067,953  
Total potentially dilutive shares     3,832,599       2,466,558  

 

Deferred Revenue

 

Deferred revenue primarily includes initial franchise fees received by the Company, for which the restaurant has not yet opened and customer deposits received in connection with technology sales and services by CTI.

 

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

 

F-14
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Concentration of Credit Risk

 

The Company is subject to credit risk through its loans receivable consisting primarily of amounts due from franchisees. The financial condition of these franchisees is largely dependent upon the underlying business trends of our brand and market conditions within the quick service restaurant industry. At December 31, 2016, two franchisees accounted for 37% and 19%, respectively, of loans receivable and at December 31, 2015, two franchisees accounted for 20% and 15%, respectively, of loans receivable. At December 31, 2016 and 2015, a loan to a consultant, who is also a stockholder of CTI, accounted for 53% and 48%, respectively, of loans receivable.

 

Additionally, the Company engages various vendors to distribute food products to their Company-owned restaurants. Purchases from the Company’s largest supplier totaled 83%, 84% and 84% of the Company’s purchases for the year ended December 31, 2016, for the period January 23, 2015 through December 31, 2015 (Successor period) and January 1, 2015 through January 22, 2015 (Predecessor period), respectively. This concentration of credit risks is mitigated in part by the existence of other local vendors that provide similar products.

 

Controlling and Non-Controlling Interest

 

As a result of the MMB Acquisition on January 23, 2015, MMI acquired a controlling interest of 74% of the membership units of MMB for an aggregate purchase price of $4,244,000 and certain members of MMF acquired 26% of the membership units of MMB, valued at $1,466,541, which was recorded as non-controlling interest (the “MMB Non-Controlling Interest”). (See Note 4 – Acquisitions – Acquisition of 74% of MMB.)

 

As a result of the CTI acquisition on August 1, 2015, MMI acquired a 70% controlling interest in CTI for an aggregate purchase price of $70,000. The ownership interest of the other investor in CTI is recorded as a non-controlling interest in the amount of $30,000 (the “CTI Non-Controlling Interest”). (See Note 4 – Acquisitions – CTI Acquisition).

 

The profits and losses of CTI are allocated among the controlling interest and the CTI Non-Controlling Interest in the same proportions as their membership interests. All of the profits and losses of MMB and its subsidiaries are allocated among the controlling interest and MMB Non-Controlling Interest in proportion to the ownership interests, after adjusting for the amount of profits and losses attributable to the CTI Non-Controlling Interest.

 

F-15
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Income Taxes

 

The Company accounts for income taxes under Accounting Standards Codification (“ASC”) 740 Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

 

ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

 

Tax benefits claimed or expected to be claimed on a tax return are recorded in the Company’s financial statements. A tax benefit from an uncertain tax position is only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Uncertain tax positions have had no impact on the Company’s financial condition, results of operations or cash flows. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date.

 

The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the consolidated statements of operations.

 

Reclassifications

 

Certain prior year balances have been reclassified in order to conform to current year presentation. These reclassifications have no effect on previously reported results of operations or loss per share.

 

Recent Accounting Pronouncements

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 explicitly requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist which raise substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and annual and interim periods thereafter, with early adoption permitted. The Company early-adopted ASU 2014-15. The adoption of this standard did not have a material impact on the Company’s financial statement disclosures.

 

F-16
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Recent Accounting Pronouncements, continued

 

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs, (“ASU 2015-03”). This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The adoption of ASU 2015-03 has not had a material impact on the Company’s financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” (“ASU 2015-11”). ASU 2015-11 amends the existing guidance to require that inventory should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out or the retail inventory method. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the effects of ASU 2015–11 on its financial statements.

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The FASB issued ASU 2015-17 as part of its ongoing Simplification Initiative, with the objective of reducing complexity in accounting standards. The amendments in ASU 2015-17 require entities that present a classified balance sheet to classify all deferred tax liabilities and assets as a noncurrent amount. This guidance does not change the offsetting requirements for deferred tax liabilities and assets, which results in the presentation of one amount on the balance sheet. Additionally, the amendments in ASU 2015-17 align the deferred income tax presentation with the requirements in International Accounting Standards (IAS) 1, Presentation of Financial Statements. The amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company early adopted ASU 2015-17 and the adoption of ASU 2015-17 did not have a material impact on its financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its financial statements and disclosures.

 

F-17
 

  

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Recent Accounting Pronouncements, continued

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”). ASU 2016-09 requires an entity to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating ASU 2016-09 and its impact on its consolidated financial statements or disclosures.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The Company will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated cash flows and related disclosures.

 

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (230) – Restricted Cash.” (“ASU 2016-18”). ASU 2016-18 requires an entity to include amounts described as restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. It is effective for annual reporting periods beginning after December 15, 2018. The adoption of this standard is not expected to have a material impact on the Company’s financial position and results of operations.

 

In December 2016, the FASB issued ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” ASU No. 2016-20 amends certain aspects of ASU No. 2014-09 and clarifies, rather than changes, the core revenue recognition principles in ASU No. 2014-09. It is effective for annual reporting periods beginning after December 15, 2018. The adoption of this standard is not expected to have a material impact on the Company’s financial position and results of operations.

 

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU2017-04 is effective for public entities for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.

 

F-18
 

  

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Recent Accounting Pronouncements, continued

 

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations”, in April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing” and in May 9, 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”). This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue From Contracts with Customers which is not yet effective. These new standards provide for a single, principles-based model for revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date of ASU 2014-09 until annual and interim periods beginning on or after December 15, 2017. It will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. The Company will evaluate the effects, if any, that adoption of this guidance will have on its financial statements.

 

Subsequent Events

 

The Company evaluated events that have occurred after the balance sheet date through the filing date of this Form 1-A/A, the date the financial statements are available to be issued. Based upon the evaluation and transactions, the Company did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed in Note 16.

 

NOTE 4 – ACQUISITIONS

 

Acquisition of 74% of MMB

 

On January 23, 2015, MMI, MMB and MMF entered into a Unit Purchase Agreement whereby MMB purchased substantially all of the assets and liabilities of MMF, MMI acquired 74% of the membership units of MMB, and certain members of MMF acquired 26% of the membership units of MMB (the “MMB Acquisition”). The MMB acquisition allows the Company to take advantage of significant growth opportunities in the fast-casual restaurant market. The aggregate purchase consideration for MMI’s membership interest in MMB was $4,244,000 and consisted of $3,570,000 in cash, $604,000 of promissory notes (see Note 11 – Notes Payable) and 71,428 shares of common stock of MMI valued at $0.98 per share or $70,000 issued (see Note 15 – Equity). On January 23, 2015, ARH provided cash of $3,645,000 in exchange for shares of MMI common stock in order to facilitate the MMB acquisition (See Note 15 – Equity). Pursuant to the terms of the Unit Purchase Agreement, certain members of MMF shall convert their non-controlling interest in MMB into an aggregate of 2,067,953 shares of MMI common stock prior to the Company going public.

 

The following presents a summary of the purchase price consideration for the purchase of 74% of MMB:

 

Cash   $ 3,570,000  
Promissory notes     604,000  
Value of common stock issued     70,000  
Total Purchase Price Consideration   $ 4,244,000  

 

F-19
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 4 – ACQUISITIONS, continued

 

Acquisition of 74% of MMB, continued

 

The following details the allocation of the purchase price for the acquisition of 74% of MMB:

 

    Fair Value  
Cash   $ 14,408  
Accounts receivable, net     973  
Inventory     8,599  
Loans receivable     41,064  
Loans receivable - related party     20,000  
Property and equipment, net     30,376  
Security deposits and other assets     4,364  
Intangible asset - trademark     2,524,000  
Intangible asset - franchise agreements     1,360,000  
Accounts payable and accrued expenses     (12,320 )
Deferred revenue     (718,501 )
Net fair value assigned to assets acquired and liabilities assumed     3,272,963  
Goodwill     2,437,578  
Subtotal     5,710,541  
Non-controlling interest     (1,466,541 )
Total   $ 4,244,000  

 

The fair value of the trademark was determined using the “relief-from-royalty” method of income approach. The fair value of franchise agreements was determined using an income approach, discounted cash flow analysis. The purchase price in excess of the tangible and identifiable intangible assets acquired less liabilities assumed is recognized as goodwill.

 

The goodwill recognized in connection with the MMB Acquisition is deductible for income tax purposes.

 

The following details amortization periods for the identifiable intangible assets:

 

Intangible Asset Category     Amortization Period  
Franchise agreements     13 years  
Trademarks - not subject to amortization     -  

 

Springfield Acquisition

 

On May 4, 2015, MMB acquired a business in Springfield, New Jersey, as a corporate store (the “Springfield Acquisition”). The purchase price of the store was $30,060, of which $8,670 related to equipment purchased and the remaining $21,390 was accounted for as goodwill. The financial results of Springfield prior to the acquisition are deemed to be not material to the Company’s consolidated financial statements.

 

F-20
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 4 – ACQUISITIONS, continued

 

CTI Acquisition

 

CTI was formed on July 29, 2015. On August 1, 2015, MMB acquired 70% of the shares of CTI in exchange for $70,000 in cash (the “CTI Acquisition”).

 

The following details the allocation of the purchase price for the acquisition of 70% of CTI:

 

    Fair Value  
Inventory   $ 2,500  
Property and equipment, net     5,000  
Intangible asset - non-compete agreement     30,000  
Net fair value assigned to assets acquired and liabilities assumed     37,500  
Goodwill     62,500  
Subtotal     100,000  
Non-controlling interest     (30,000 )
Total   $ 70,000  
         
Cash   $ 70,000  
Total Purchase Price Consideration   $ 70,000  

 

Winston-Salem Acquisition

 

On September 30, 2016, MMB acquired a business in Winston-Salem, North Carolina, as a corporate store (the “Winston Acquisition”). The purchase price of the store was $124,117, of which $120,000 relates to leasehold improvements and equipment purchases and the remaining $4,117 relates to security deposits. As of December 31, 2016, the Winston-Salem store has not started operations.

 

NOTE 5 - LOANS RECEIVABLE

 

At December 31, 2016 and 2015, the Company’s loans receivable consists of the following:

 

    Successor  
    December 31,  
    2016     2015  
Loans receivable, net   $ 83,663     $ 98,358  
Less: current portion     (30,434 )     (67,755 )
Loans receivable, non-current   $ 53,229     $ 30,603  

 

Loan receivable includes loans to franchisees totaling, in the aggregate, $81,413 and $98,358 as well as loans to employees of $2,250 and $0, net of reserves for uncollectible loans of $25,000 and $0 at December 31, 2016 and 2015, respectively. The loans have original terms ranging from 6 months to 5 years, earn interest at rates ranging from 0% to 5%, and are repaid on a weekly or monthly basis.

 

F-21
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 6 - LOANS RECEIVABLE FROM RELATED PARTIES

 

At December 31, 2016 and 2015, the Company’s loans receivable from related parties consist of the following:

 

    Successor  
    December 31,  
    2016     2015  
Loan to COO of CTI   $ 71,667     $ 91,667  
Less: current portion     (20,000 )     (20,000 )
Loan receivable from related parties, non-current   $ 51,667     $ 71,667  

 

On August 1, 2015, the Company advanced $100,000 to the Chief Operating Officer and stockholder of CTI, pursuant to a consulting agreement. The loan has no stated interest and will be repaid in 60 equal monthly installments (See Note 14 - Commitments and Contingencies – Consulting Agreement). During the years ended December 31, 2016 and 2015, principal of $20,000 and $8,333, respectively, was repaid on this loan.

 

NOTE 7 – RECEIVABLE FROM PARENT

 

The amount receivable from Parent as of December 31, 2015 consists of the Parent’s obligation to pay promissory notes issued in connection with the acquisition. These promissory notes were paid down at various dates through July 2016 (See Note 11 – Notes Payable).

 

NOTE 8 – PROPERTY AND EQUIPMENT, NET

 

As of December 31, 2016 and 2015, respectively, property and equipment consists of the following:

 

    Successor  
    December 31,  
    2016     2015  
             
Furniture and equipment   $ 517,603     $ 75,566  
Leasehold improvements     665,350       30,000  
      1,182,953       105,566  
Less: accumulated depreciation and amortization     (110,408 )     (16,766 )
Property and equipment, net   $ 1,072,545     $ 88,800  

 

Depreciation and amortization expense amounted to $93,641 for the year ended December 31, 2016 and $16,766 for the period January 23, through December 31, 2015, and $3,363 for the period January 1, through January 22, 2015.

 

F-22
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 9 – GOODWILL

 

On January 23, 2015, MMI recorded goodwill of $2,437,578 in connection with the MMB Acquisition, on August 1, 2015 the Company recorded goodwill of $62,500 in connection with the CTI Acquisition, and on May 4, 2015, the Company recorded goodwill of $21,390 in connection with the Springfield Acquisition. As of December 31, 2016 and 2015, the carrying value of goodwill was $2,521,468 (see Note 4 – Acquisitions).

 

NOTE 10 – INTANGIBLE ASSETS, NET

 

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

 

A summary of the intangible assets is presented below:

 

          Franchise     Non-Compete        
Intangible Assets - Successor   Trademark     Agreements     Agreement     Total  
Balance at January 23, 2015   $ -     $ -     $ -     $ -  
MMB acquisition     2,524,000       1,360,000       -       3,884,000  
Purchase of non-compete agreement     -       -       30,000       30,000  
Amortization expense     -       (97,961 )     (2,545 )     (100,506 )
Intangible assets, net at December 31, 2015     2,524,000       1,262,039       27,455       3,813,494  
Amortization expense             (104,835 )     (6,010 )     (110,845 )
Intangible assets, net at December 31, 2016   $ 2,524,000     $ 1,157,204     $ 21,445     $ 3,702,649  
                                 
Weighted average remaining amortization period at December 31, 2016 (in years)             11.1       3.6          

 

For the year ended December 31, 2016 and during the period from January 23 through December 31, 2015, amortization expense of $110,845 and $100,506 was charged to depreciation and amortization in the accompanying statement of operations.

 

The estimated future amortization expense is as follows:

 

For the Year Ended
December 31,
  Franchise
Agreements
    Non-Compete
Agreement
    Total  
2017   $ 104,549     $ 5,993     $ 110,542  
2018     104,549       5,993       110,542  
2019     104,549       5,993       110,542  
2020     104,836       3,466       108,302  
2021     104,549       -       104,549  
Thereafter     634,172       -       634,172  
    $ 1,157,204     $ 21,445     $ 1,178,649  

 

F-23
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 11 – NOTES PAYABLE

 

The following is a summary of notes payable at December 31, 2016 and 2015:

 

    Successor  
    December 31,  
    2016     2015  
Note I   $ -     $ 300,000  
Springfield Note     -       8,100  
    $ -     $ 308,100  

 

On January 23, 2015, in connection with the MMB Acquisition (see Note 4 – Acquisitions), MMI issued two promissory notes payable in the amount of $400,000 (“Note I”) and $204,000 (“Note II”), respectively. Note I includes interest imputed at the rate of 0.41% per annum and was payable in three installments with the final installment due eighteen months after the closing date of the MMB acquisition. Note II was secured by the assets of the Company-owned store in Colonia, New Jersey. Note II bore no stated interest and was due on March 9, 2015. In connection with MMB acquisition on January 23, 2015, MMI issued 822,445 shares of its common stock to the Parent, in exchange for the Parent’s obligation to repay the promissory notes in full.

 

On March 9, 2015, the Parent repaid Note II in full. On July 21, 2015, January 23, 2016 and July 23, 2016, installments of $100,000, $150,000 and $150,000 were repaid on the balance of Note I by the Parent. As of December 31, 2016, there is no balance outstanding related to Note I.

 

On May 4, 2015, in connection with the Springfield Acquisition (see Note 4 – Acquisitions), MMB entered into a note payable in the amount of $18,060 (the “Springfield Note”). The Company made payments on the Springfield Note totaling $9,960 during 2015, resulting in a principal balance of $8,100 at December 31, 2015. The remaining principal balance on the Springfield Note was repaid in 2016.

 

NOTE 12 – CONVERTIBLE NOTE PAYABLE TO PARENT

 

On December 31, 2015, MMI issued a promissory note in the amount of $1,082,620 (the “2015 ARH Note”) to the Parent, which owns a majority of the outstanding common stock of the Company. The 2015 ARH Note has no stated interest rate or maturity date. The note is convertible into 309,320 shares of the Company’s stock at $3.50 per share. The fair value of the Company’s common stock on the date the note was issued was $4.20 per share, creating an intrinsic value of $0.70 per share.

 

On December 15, 2016, MMI issued a promissory note in the amount of $2,621,842 (the “2016 ARH Note”) to the Parent which owns a majority of the outstanding common stock of the Company. The 2016 ARH Note has no stated interest rate or maturity date. The note is convertible into 936,372 shares of the Company’s stock at $2.31 per share. The fair value of the Company’s common stock on the date the note was issued was $5.11 per share, creating an intrinsic value of $2.31 per share. The 2016 ARH Note includes a three-year warrant for the purchase of 327,730 shares of MMI’s common stock at an exercise price of $7.00 per share.

 

F-24
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 12 – CONVERTIBLE NOTE PAYABLE TO PARENT, continued

 

In accordance with ASC 470 “Debt with Conversion and other Options”, the intrinsic value results in a beneficial conversion feature which is recorded as a debt discount with a corresponding credit to additional paid-in capital. The relative fair value of the warrant at date of grant of $241,028 was also recorded as a debt discount. The grant date fair value of the warrants was valued on the date of issuance using the Black-Scholes option pricing model with the following weighted average assumptions: (1) risk free interest rate 1.61%, (2) term of 3 years, (3) volatility of 37%, (4) expected dividend rate of 0%, and (5) common stock price of $4.20.The Company recorded aggregate debt discounts of $216,524 and $1,592,175 related to the warrant and the beneficial conversion feature on the 2015 ARH Note and the 2016 ARH Note, respectively.

 

The 2015 ARH Note and the 2016 ARH Note were converted to common stock on March 14, 2017 (see Note 16 – Subsequent Events).

 

NOTE 13 – INCOME TAXES

 

In the Successor period, MMI is a corporation which is subject to income taxes. However, a significant subsidiary of MMI, MMB with a non-controlling interest, is treated as a partnership for income tax purposes and therefore the non-controlling interest component is not subject to U.S. federal, state or local income taxes. The remaining consolidated entities are corporations and, therefore, are subject to U.S. federal, state, and local corporate income tax. MMB’s acquisition of most of the assets and liabilities of MMF was an asset acquisition which resulted in the stepped-up basis of the assets, including the recording of tax-deductible goodwill and intangible assets.

 

The Company early adopted ASU No. 2015-17 which requires the Company to classify all deferred tax assets as non-current amounts.

 

The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2016 and 2015 are presented below:

 

    Successor  
    December 31,  
    2016     2015  
Deferred tax assets:                
Net operating loss carryforwards   $ 1,544,234     $ 414,198  
Receivable allowance     18,000       -  
Deferred revenues     174,600       -  
Gross deferred tax asset     1,736,834       414,198  
                 
Deferred tax liabilities:                
Beneficial conversion feature     (952,336 )     -  
Intangible assets     (246,527 )     (119,245 )
Gross deferred tax liabilities     (1,198,863 )     (119,245 )
                 
Net deferred tax assets     537,971       294,953  
                 
Valuation allowance     (784,498 )     (414,198 )
                 
Net deferred tax liability   $ (246,527 )   $ (119,245 )

 

F-25
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 13 – INCOME TAXES, continued

 

The income tax provision for the periods shown, consist of the following:

 

    Successor  
          For the period  
    For the period     January 23,  
    ended     through  
    December 31, 2016     December 31, 2015  
Federal:                
Current   $ -     $ -  
Deferred     206,566       250,710  
State and local:                
Current     -       -  
Deferred     36,452       44,243  
      243,018       294,953  
Change in valuation allowance     (370,300 )     (414,198 )
Income tax provision   $ (127,282 )   $ (119,245 )

 

A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the periods shown, are as follows:

 

    Successor  
          For the period  
    For the period     January 23,  
    ended     through  
    December 31, 2016     December 31, 2015  
             
Federal income tax benefit at statutory rate     34.0 %     34.0 %
State income tax benefit, net of federal impact     6.0 %     6.0 %
Permanent differences     (0.3) %     -  
Income passed through to non-controlling interests     (10.5 )%     (11.1 )%
Change in valuation allowance     (32.3 )%     (43.1 )%
                 
Effective income tax rate     (3.1 )%     (14.2 )%

 

At December 31, 2016, the Company had approximately $3.9 million each of federal and state net operating losses that may be available to offset future taxable income. The net operating loss carry-forwards, if not utilized, will expire from 2030 to 2036 for federal purposes. In accordance with Section 382 of the Internal Revenue Code, the usage of the Company’s net operating loss carry-forwards could be subject to annual limitations if there have been greater than 50% ownership changes.

 

The Company has filed income tax returns in the U.S. federal jurisdiction and the states of California, New Jersey and New York. The Company’s tax return filed for 2015 remains subject to examination.

 

F-26
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 14 – COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

During the year ended December 31, 2015, the Company become obligated for payments pursuant to five lease agreements for restaurant spaces with lease terms ranging from 5 years to 10 years, exclusive of options to renew. Rent expenses pursuant to these lease agreements range from $1,852 to $7,693 per month.

 

During the year ended December 31, 2016, the Company become obligated for payments pursuant to six lease agreements for restaurant spaces with lease terms ranging from 3 years to 10 years, exclusive of options to renew. Rent expenses pursuant to these lease agreements range from $4,369 to $13,176 per month.

 

The Company leases office space in Colonia, New Jersey. The lease has a five-year term ending September 30, 2016, with a renewal option at the end of the term. Rent for the remaining term of the lease is $2,182 per month. The landlord is holding a $4,364 security deposit related to this lease. On September 21, 2016, the Company entered into an amendment of its lease agreement for office space in Colonia, New Jersey. The lease has a six-month term, and is renewable on a rolling six-month basis through September 30, 2021. The rent for the initial term is $2,266 per month, or $13,596 for six months.

 

On September 18, 2015, the Company entered into a lease agreement for office space in Houston, Texas which expires on September 30, 2020. Current rent expense related the Houston lease is $3,637 per month. The landlord is holding a $3,637 security deposit related to this lease.

 

The leases are subject to certain annual escalations as defined in the agreements. The Company recognizes rent on a straight-line basis. The cumulative difference between the rent payments and the rent expense since the inception of the lease was $183,638 at December 31, 2016.

 

The Company has recorded security deposits, totaling, in the aggregate, approximately $149,000 and $102,000 as of December 31, 2016 and 2015, respectively, related to the above-mentioned leases.

 

Future aggregate minimum lease payments for these leases as of December 31, 2016 are:

 

2017   $ 1,097,778  
2018     1,182,970  
2019     1,181,921  
2020     1,092,487  
2021     918,975  
Thereafter     4,123,069  
    $ 9,597,200  

 

Total rent expense was $806,724 for the year ended December 31, 2016 and $86,738 for the period January 23, through December 31, 2015, and $3,275 for the period January 1, through January 22, 2015.

 

See Note 16 – Subsequent Event – Operating Leases for further details regarding payment obligation on new leases subsequent to December 31, 2016.

 

F-27
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 14 – COMMITMENTS AND CONTINGENCIES, continued

 

Employment Agreements

 

On January 23, 2015, the Company entered into an employment agreement (the “COO Agreement”) with its Chief Operations Officer (the “COO”). The COO Agreement provides for a base salary of $22,500 per month and performance based bonuses, as well as standard employee insurance and other benefits as defined in the COO Agreement. The COO Agreement expired on January 23, 2017.

 

On January 23, 2015, the Company entered into an employment agreement (the “DBD Agreement”) with its Director of Brand Development (the “DBD”). The DBD Agreement provides for a base salary of $12,500 per month and performance based bonuses, as well as standard employee insurance and other benefits as defined in the DBD Agreement. Upon the execution of the DBD Agreement, the DBD received 28,571 shares of immediately vested Company common stock valued at $0.98 per share or $28,000 (see Note 15 - Equity). The DBD Agreement expired on January 23, 2017.

 

Consulting Agreement

 

On August 1, 2015, the Company entered into a consulting agreement (the “Consulting Agreement) with an officer of CTI, who is also a stockholder of CTI, (the “Consultant”). The Consulting Agreement has a term of five years, and automatically extends for successive one-year periods, unless either party provides written notice of termination at least 60 days prior to the end of the term. Pursuant to the terms of the agreement, the Consultant will receive a base fee of $11,667 per month. In connection with the agreement, the Company provided a $100,000 advance to the consultant, to be repaid in equal monthly installments of $1,667, over the term of the consulting agreement. (See Note 6 – Loans Receivable from Related Parties)

 

Litigations, Claims and Assessments

 

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. In the opinion of management, such matters are currently not expected to have a material impact on the Company’s financial statements.

 

The Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements.

 

NOTE 15 – EQUITY

 

Common Stock

 

On January 23, 2015, in connection with original capitalization of the Company, MMI issued 5,785,714 shares of its common stock to ARH in exchange for cash of $3,645,000 and an obligation to repay an aggregate of $604,000 of principal due under Note I and Note II issued to MMF in connection with the acquisition of 74% of MMB.

 

F-28
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 15 – EQUITY, continued

 

Common Stock, continued

 

On January 23, 2015, MMI issued 71,427 shares of common stock valued at $0.98 per share, or an aggregate of $70,000, to former members of MMF, in connection with the acquisition of 74% of MMB. (See Note 4 – Acquisitions).

 

On January 24, 2015, MMI granted 28,571 shares of its common stock valued at $0.98 per share to its Director of Brand Development, in connection with the DBD Agreement. The shares vested immediately and MMI recorded stock based compensation of $28,000 in connection with issuance of these shares (see Note 14 – Commitments and Contingencies, Employment Agreements).

 

On January 24, 2015, the Company issued 61,224 shares of its common stock to the Director of Brand Development in exchange for cash proceeds of $0.98 per share, or $60,000.

 

On July 23, 2015 and August 28, 2015, the Company issued 107,142 and 71,428 shares of its common stock, and 5-year warrants for the purchase of 53,571 and 35,714 shares of common stock respectively, for aggregate cash proceeds of $750,000. The warrants are exercisable at $5.25 per share.

 

Warrants

 

On April 21, 2016, the Company granted a three-year warrant for the purchase of 7,142 shares of MMI common stock at an exercise price of $7.00 per share to a franchisee and developer of the Company in exchange for services. The warrant had a grant date value of $3,684.

 

On December 15, 2016, the Company granted a three-year warrant for the purchase of 327,730 shares of MMI common stock at an exercise price of $7.00 to the Parent, in connection with the issuance of the 2016 ARH Note. See Note 12 – Convertible Note to Parent.

 

NOTE 16 – SUBSEQUENT EVENTS

 

New Company Owned Restaurants

 

Subsequent to December 31, 2016 and through the filing date of this report, the Company opened 3 additional Company-owned restaurants.

 

Parent Transactions

 

On March 14, 2017, the Parent elected to convert the 2015 ARH Note in the principal amount of $1,082,620 into 309,320 shares of MMI’s common stock at a conversion price of $3.50 per share.

 

On March 14, 2017, the Parent elected to convert the 2016 ARH Note in the principal amount of $2,621,842 into 936,372 shares of MMI’s common stock at a conversion price of $2.80 per share.

 

F-29
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 16 – SUBSEQUENT EVENTS , continued

 

During the period from December 31, 2016 through the filing date of the Form 1-A/A, the Parent provided $1,656,715 of advances to the Company. Of this amount, $980,949, $338,834 and $336,932 was exchanged for convertible promissory notes (the “First 2017 ARH Note”, the “Second 2017 ARH Note” and the “Third 2017 ARH Note”).

 

The First 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of MMI’s common stock at a conversion price of $2.80 per share at a time to be determined by the lender. The First 2017 ARH Note includes a three-year warrant for the purchase of 122,618 shares of MMI’s common stock at an exercise price of $7.00 per share. On March 14, 2017, the Parent elected to convert the First 2017 ARH Note in the principal amount of $980,949 into 350,338 shares of MMI’s common stock at a conversion price of $2.80 per share.

 

The Second 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of MMI’s common stock at a conversion price of $3.50 per share at a time to be determined by the lender. The Second 2017 ARH Note includes a three-year warrant for the purchase of 33,883 shares of MMI’s common stock at an exercise price of $7.00 per share. On September 19, 2017, the Parent elected to convert the Second 2017 ARH Note in the principal amount of $338,834 into 96,809 shares of MMI’s common stock at a conversion price of $3.50 per share.

 

The Third 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of MMI’s common stock at a conversion price of $1.50 per share at a time to be determined by the lender. The Third 2017 ARH Note includes a three-year warrant for the purchase of 473,036 shares of MMI’s common stock at an exercise price of $3.00 per share. On September 19, 2017, the Parent elected to convert the Third 2017 ARH Note in the principal amount of $336,932 into 60,166 shares of MMI’s common stock at a conversion price of $2.40 per share.

 

Other Convertible Notes Payable

 

Subsequent to December 31, 2016, the Company received an aggregate of $1,300,000 associated with the issuances of convertible promissory notes payable and warrants to various parties. The convertible promissory notes will incur interest at 10% if the notes are not converted with six months. The notes are convertible into shares of the Company’s stock at a 50% discount to the initial public offering price. In connection with the issuances of the convertible promissory notes, the Company issued three-year warrants for the purchase of an aggregate of 95,136 shares of MMI’s common stock at an exercise price of $7.00 per share.

 

F-30
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 16 – SUBSEQUENT EVENTS, continued

 

Other Convertible Notes Payable – Related Parties

 

Subsequent to December 31, 2016, the Company received an aggregate of $250,000 associated with the issuances of convertible promissory notes payable and warrants to various related parties. The convertible promissory notes will incur interest at 10% if the notes are not converted with six months. The notes are convertible into shares of the Company’s stock at a 50% discount to the initial public offering price. In connection with the issuances of the convertible promissory notes, the Company issued three-year warrants for the purchase of an aggregate of 17,855 shares of MMI’s common stock at an exercise price of $7.00 per share.

 

Spin-Off of MMI by Parent

 

On March 23, 2017, Parent authorized and facilitated the distribution of 7,381,745 shares of Common Stock of MMI held by American Restaurants, LLC, the wholly owned subsidiary of Parent, to the shareholders of Parent (the “Spin-Off”). As a result of the Spin-Off on March 23, 2017, ARH is no longer a majority owner of MMI.

 

Stock Option and Stock Issuance Plan

 

The Company’s board of directors and shareholders adopted and approved on July 27, 2017 and September 21, 2017, respectively, the Stock Option and Stock Issuance Plan (“2017 Plan”), effective September 21, 2017, under which stock options and restricted stock may be granted to officers, directors, employees and consultants. Under the 2017 Plan, 1,428,571 shares of Common Stock, no par value per share, are reserved for issuance.

 

Restricted Common Stock Issuances

 

In May 2017, Muscle Maker granted 159,642 shares of its restricted common stock to its employees and consultants.  The restricted common stock awards granted to the employees will vest in five equal installments with the first installment vesting on the date of grant and the remaining installment vesting on the first day of each of the next four calendar years thereafter. In the event of resignation or termination for any reason of an employee or consultant that receives such shares, the remaining non-vested shares of such employee or consultant prior to such resignation or termination will be forfeited

 

F-31
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 16 – SUBSEQUENT EVENTS, continued

 

Sales of Restricted Stock

 

Subsequent to December 31, 2016, the Company sold an aggregate of 71,427 shares of its restricted common stock at a price of $5.60 per shares for gross an aggregate of $400,000.

 

Exercise of warrants

 

On July 25, 2017, warrants were exercised to purchase 7,142 shares of common stock of the Company at an exercise price of $7.00 per share for gross proceeds of $50,000.

 

Issuance of Shares for Marketing Services in Connection with Offering

 

Effective July 20, 2017, the Company entered into a Master Services Agreement (the “Agreement”), with a consultant for management services to the Company in connection with the Offering. Pursuant to the terms of the agreement, the Company issued 28,333 shares of common stock at a value of $6.00 per share with an aggregate value of $170,000, as well as a cash fee of $145,000.

 

Business Reorganization

 

Conversion of MMB and Merger with MMI

 

On June 8, 2017, MMB converted from a limited liability company into a California corporation named Muscle Maker Brands Conversion, Inc. (“MMBC”). Thereafter, on September 15, 2017 (“Effective Merger Date”), pursuant to an Agreement of Merger, MMBC was merged (“Merger”) into MMI, with MMI as the surviving corporation, in a tax-free reorganization. Pursuant to the Merger, each share of common stock of MMBC (the “MMBC Common Stock”) owned by the members of MMF was converted into 796 shares of common stock of MMI, resulting in aggregate consideration of 2,067,953 shares of common stock of MMI to the members of MMF. As a result of the Merger, MMI directly owned 70% of the shares of CTI.

 

Formation of Muscle Maker Development to Operate Franchising and Assignment of Franchise Agreements

 

On July 18 , 2017, MMI formed Muscle Maker Development, LLC (“Muscle Maker Development”) in the state of Nevada for the purpose of running our existing franchise operations and continuing to franchise the Muscle Maker Grill name and business system to qualified franchisees.  Muscle Maker Development issued 1,000 membership units to its sole member and manager, MMI. MMB assigned all the existing franchise agreements to Muscle Maker Development pursuant to the terms of that certain Assignment and Assumption Agreement, dated August 25, 2017, among MMI, MMB and Muscle Maker Development.

 

Formation of Muscle Maker Corp. to Develop and Operate Corporate Stores

 

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

 

Options Granted

 

Franchisees

 

On July 27, 2017, the Company issued stand-alone non-qualified stock options, not pursuant to a plan, to purchase an aggregate of 45,000 shares of the Company’s common stock to its franchisees. The options are fully vested on the date of issuance and have an exercise price of $7.00 per share. The options expire three years from the date of issuance.

 

F-32
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

NOTE 16 – SUBSEQUENT EVENTS, continued

 

Employment Agreements

 

Muscle Maker entered into an Employment Agreement with each of (i) Robert Morgan, as Chief Executive Officer, (ii) Grady Metoyer, as Chief Financial Officer and (iii) Rodney Silva, as Chief Culture Officer, effective as of the date the Company successfully receives at least $5,000,000 in gross proceeds from an SEC qualified offering under the Offering Statement under Regulation A+ under the Securities Act of 1933, as amended. See “Executive Compensation – Employment Agreements”.

 

Operating Leases

 

On September 15, 2017, the Company became obligated for payments pursuant to four new lease agreements for restaurant spaces with lease terms ranging from 5 years to 10 years, exclusive of options to renew. Rent expenses pursuant to these lease agreements range from $5,916 to $11,832 per month.

 

F-33
 

 

 

MUSCLE MAKER, INC

 

Best Efforts Offering of 3,333,333 Shares of Common Stock

 

OFFERING CIRCULAR

 

Book Runner & Lead Manager

 

 

 
 

 

PART III – EXHIBITS

 

Index to Exhibits

 

Exhibit
No.
  Exhibit Description
1.1   Engagement Letter, dated July 31, 2017, between TriPoint Global Equities, LLC and Muscle Maker, Inc*
     
1.2   Form of Selling Agency Agreement, dated September __, 2017, between TriPoint Global Equities, LLC and Muscle Maker, Inc *
     
2.1   Articles of Incorporation of Muscle Maker, Inc filed with California Secretary of State on December 8, 2014+
     
2.2   Certificate of Amendment to Articles of Incorporation of Muscle Maker, Inc filed with California Secretary of State on September 20 , 2017 regarding the 7-for-1 reverse stock split *
     
2.3   Bylaws of Muscle Maker, Inc dated December 10, 2014.+
     
2.4   Amendment to Bylaws of Muscle Maker, Inc. dated August 11, 2017 *
     
3.1  

Form of Selling Agent Warrant *

     
3.2  

Form of Warrant *

     
3.3   Form of Convertible Promissory Note *
     
4.1   Form of Subscription Agreement for BANQ subscribers *
     
4.2   Form of Subscription Agreement *
     
6.1†   Muscle Maker 2017 Stock Option and Stock Issuance Plan and form of award agreements *
     
6.2†   Employment Agreement, between Muscle Maker and Robert Morgan 
     
6.3†   Employment Agreement, between Muscle Maker and Grady Metoyer 
     
6.4†   Employment Agreement, between Muscle Maker and Rodney Silva 
     
6.5†   Restricted Stock Agreement, dated May 3, 2017, between Muscle Maker and Grady Metoyer.
     
6.6   Unit Purchase Agreement, dated January 23, 2015, by and among Muscle Maker Franchising, LLC, MMF Target, LLC, Muscle Maker Brands, LLC, and Muscle Maker, Inc +
     
6.7   Assignment and Assumption Agreement, dated August 25, 2017, between Muscle Maker Brands Conversion, Inc. and Muscle Maker Development, LLC.*
     
6.8  

Agreement of Conveyance, Transfer and Assigning of Assets and Assumptions of Obligations, dated September 15, 2017, between Muscle Maker, Inc and Muscle Maker Corp., LLC*

     
6.9   Master Services Agreement, effective as of July 20, 2017, between Muscle Maker and WhoYouKnow LLC, California limited liability company d/b/a CrowdfundX *
     
6.10   Transfer Agency and Service Agreement, dated July 24, 2017, among Computershare, Inc., Computershare Trust Company, N.A. and Muscle Maker, Inc *

 

1
 

 

6.11   Form of Indemnification Agreement *
     
6.12   Form of Stand Alone Non-Qualified Stock Option Agreement to Franchisees *
     
8.1   Form of Closing Escrow Agreement, dated September __, 2017, between Wilmington Trust, N.A. and Muscle Maker, Inc. *
     
10.1   Power of attorney (included on signature page of Offering Circular).+
     
11.1   Consent of Marcum LLP *
     
11.2   Consent of Legal & Compliance, LLC (included in Exhibit 12.1) *
     
12.1   Opinion of Legal & Compliance, LLC*
     
13.1   Testing the Waters materials *

 

 

† Includes management contracts and compensation plans and arrangements

*Filed herewith.

+Previously filed.

 

2
 

 

SIGNATURES

 

Pursuant to the requirements of Regulation A, the registrant has duly caused this Form 1-A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on September 21 , 2017.

 

  MUSCLE MAKER, INC
   
  By:  /s/ Robert E. Morgan
    Robert E. Morgan,
    Chief Executive Officer and President

 

Pursuant to the requirements of Regulation A, this Form 1-A has been signed by the following persons in the capacities indicated on September 21 , 2017.

 

Name   Title
     
/s/ Robert E. Morgan   Chief Executive Officer, President, and
Robert E. Morgan   Director (Principal Executive Officer)
     
/s/ Grady Metoyer   Chief Financial Officer
Grady Metoyer   (Principal Financial Officer and Principal Accounting Officer)
     
/s/ Tim M. Betts  

Chairman of the Board, Secretary and Director

Tim M. Betts    
     
*   Director
Noel DeWinter    
     
*   Director
Merlin C. Spencer  
     
*   Director 
A.B. Southall III    
     
*   Director
Paul L. Menchik    

 

By: /s/ Robert E. Morgan  
  Robert E. Morgan  
  Attorney-in-fact*  

 

3
 

 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

EXHIBIT 1.2

 

MUSCLE MAKER, INC

 

Maximum: 3,333,333 Shares of Common Stock

no par value per share

 

SELLING AGENCY AGREEMENT

 

[ ● ], 2017

 

 

Tripoint Global Equities, LLC

1450 Broadway, 26th Floor

New York, New York 10018

 

Dear Ladies and Gentlemen:

 

Muscle Maker, Inc, a California corporation (the “Company”), proposes, subject to the terms and conditions contained in this Selling Agency Agreement (this “Agreement”), to issue and sell up to a maximum of 3,3333,333 shares of its common stock, no par value per share (the “Common Stock”),at an offering price of $6.00 per share, to investors (collectively, the “Investors”) in an initial public offering (the “Offering”) pursuant to Regulation A through Tripoint Global Equities, LLC and its online division, Banq®, as Selling Agent (collectively, the “Selling Agent”), acting on a best efforts basis only, in connection with such sales. The shares of Common Stock to be sold in this offering are referred to herein as the “Shares.” The Shares are more fully described in the Offering Statement (as hereinafter defined).

 

The Company hereby confirms its agreement with the Selling Agent concerning the purchase and sale of the Shares, as follows:

 

1. Agreement to Act on a Best Efforts Basis. On the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions of this Agreement, the Selling Agent agrees to act on a best efforts basis only, in connection with the issuance and sale by the Company of the Shares to the Investors. Under no circumstances will the Selling Agent be obligated to underwrite or purchase any of the Shares for its own account or otherwise provide any financing. The Company will pay to the Selling Agent a fee equal to seven and a half percent (7.5%) (the “Fee”) of the gross offering proceeds received by the Company from the sale of the Shares, which shall be allocated by Tripoint to Dealers (as hereinafter defined) participating in the offering, in its sole discretion; provided, however, the Fee shall be reduced to four percent (4.0%) for any proceeds received from sales/orders placed through Banq® by investors the Company directly introduces to Tripoint through its marketing campaign or from existing security holders of the Company, as set forth on the cover page of the Final Offering Circular (as hereinafter defined).

 

The Selling Agent shall have the right to enter into selected dealer agreements with other broker-dealers participating in the Offering (each dealer being referred to herein as a “Dealer” and said dealers being collectively referred to herein as the “Dealers”). The Fee shall be re-allowable, in whole or in part, to the Dealers. The Company will not be liable or responsible to any Dealer for direct payment of compensation to any Dealer, it being the sole and exclusive responsibility of the Selling Agent for payment of compensation to Dealers.

 

2. Delivery and Payment.

 

(a) On or after the date of this Agreement, the Company, the Selling Agent and Wilmington Trust (the “Escrow Agent”) will enter into an Escrow Agreement substantially in the form included as an exhibit to the Offering Statement (the “Escrow Agreement”), pursuant to which escrow accounts will be established, at the Company’s expense, for the benefit of those Investors who do not choose to invest through the Banq® online platform (the “Escrow Accounts”).

 

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(b) Prior to the initial Closing Date (as hereinafter defined) of the Offering and any subsequent Closing Date, (i) each Investor will execute and deliver a Purchaser Questionnaire and Subscription Agreement (each, an “Investor Subscription Agreement”) to the Company and the Company will make available to the Selling Agent and the Escrow Agent copies of each such Investor Subscription Agreement; (ii) each Investor will transfer to the Escrow Account funds in an amount equal to the price per Share as shown on the cover page of the Final Offering Circular (as hereinafter defined multiplied by the number of Shares subscribed by such Investor; (iii) subscription funds received from any Investor will be promptly transmitted to the Escrow Accounts in compliance with Rule 15c2-4 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and (iv) the Escrow Agent will notify the Company and the Selling Agent in writing as to the balance of the collected funds in the Escrow Accounts.

 

(c) Notwithstanding the foregoing Section 2(b), Investors that maintain an account with Banq®, a division of the Selling Agent, may participate in the Offering without depositing funds with the Escrow Agent, provided such Investors maintain sufficient funds in their account with Banq®. Investors who wish to participate in the Offering through their account with Banq® will be asked to confirm their respective investment immediately prior to Closing, at which time each Investor will be required to have funds in its account sufficient to fund the purchase of any Shares for which it subscribes in the Offering. At Closing, any amounts subscribed for will be removed from such Investor’s account and sent immediately to the account of the Company less any Fees due to the Selling Agent. Such funds will not be held in a separate escrow account or otherwise segregated until such time as the Offering is closed.

 

(d) If the Escrow Agent shall have received written notice from the Company and the Selling Agent on or before 4:00 p.m., New York City time, on [ ● ], 2017, or at such other time(s) on such other date(s), not more than thirty (30) days thereafter, as may be agreed upon by the Company and the Selling Agent (each such date, a “Closing Date”), the Escrow Agent will release the balance of the Escrow Accounts for collection by the Company and the Selling Agent as provided in the Escrow Agreement and the Company shall deliver the Shares purchased on such Closing Date to the Investors, which delivery may be made through the facilities of the Depository Trust Company (“DTC”) or via book entry with the Company’s securities registrar and transfer agent, Computershare Trust Company, N.A. (the “Transfer Agent”). The initial closing (the “Closing”) and any subsequent closing (each, a “Subsequent Closing”) shall take place at the office of the Selling Agent or such other location as the Selling Agent and the Company shall mutually agree. All actions taken at the Closing shall be deemed to have occurred simultaneously on the date of the Closing and all actions taken at any Subsequent Closing shall be deemed to have occurred simultaneously on the date of any such Subsequent Closing.

 

(e) If the Company and the Selling Agent determine that the offering will not proceed, then the Escrow Agent will promptly return the funds to the investors without interest.

 

(f) On each Closing Date, the Company will issue to the Selling Agent (and/or its designee) warrants to purchase that number of shares of Common Stock equal to five percent (5%) of the shares issued and sold by the Company on such Closing Date (adjusted upward to the nearest whole share) (the “Selling Agent’s Warrants”). The Selling Agent’s Warrants shall be in the form of Exhibit C attached hereto. The Selling Agent’s Warrants shall have an exercise price per share equal to one hundred ten percent (110%) of the price per Share as shown on the cover page of the Final Offering Circular (as defined below). The Selling Agent’s Warrants will be exercisable for a term of five years beginning on the Qualification Date (as defined below). The Selling Agent understands and agrees that there are significant restrictions pursuant to Financial Industry Regulatory Authority (“FINRA”) Rule 5110 against transferring the Selling Agent’s Warrants and the underlying shares of Common Stock during the one hundred eighty (180) days after the Qualification Date and by its acceptance thereof shall agree that it will not sell, transfer, assign, pledge or hypothecate the Selling Agent’s Warrants, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of one hundred eighty (180) days following the Qualification Date to anyone other than (i) a Selling Agent or Dealer in connection with the offering contemplated hereby or (ii) a bona fide officer or partner of the Selling Agent or of any Selling Agent or Dealer; and only if any such transferee agrees to the foregoing lock-up restrictions.

 

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3. Representations and Warranties of the Company. The Company represents and warrants and covenants to the Selling Agent that:

 

(a) The Company has filed with the Securities and Exchange Commission (the “Commission”) an offering statement on Form 1-A (File No. 024-10689) (collectively, with the various parts of such offering statement, each as amended as of the Qualification Date for such part, including any Offering Circular and all exhibits to such offering statement, the “Offering Statement”) relating to the Shares pursuant to Regulation A as promulgated under the Securities Act of 1933, as amended (the “Act”), and the other applicable rules, orders and regulations (collectively referred to as the “Rules and Regulations”) of the Commission promulgated under the Act. As used in this Agreement:

 

(1) “Applicable Time” means 9:00 am (Eastern time) on the date of this Agreement;

 

(2) “Final Offering Circular” means the final offering circular relating to the public offering of the Shares as filed with the Commission pursuant to Regulation A of the Rules and Regulations;

 

(3) “Preliminary Offering Circular” means any preliminary offering circular relating to the Shares included in the Offering Statement pursuant to Regulation A of the Rules and Regulations;

 

(4) “Pricing Disclosure Materials” means the most recent Preliminary Offering Circular and the materials identified in Schedule 1 hereto;

 

(5) “Qualification Date” means the date as of which the Offering Statement was or will be qualified with the Commission pursuant to Regulation A, the Act and the Rules and Regulations; and

 

(6) “Testing-the-Waters Communication” means any video or written communication with potential investors undertaken in reliance on Rule 255 of the Rules and Regulations.

 

(b) The Offering Statement has been filed with the Commission in accordance with the Act and Regulation A of the Rules and Regulations; no stop order of the Commission preventing or suspending the qualification or use of the Offering Statement, or any amendment thereto, has been issued, and no proceedings for such purpose have been instituted or, to the Company’s, knowledge, are contemplated by the Commission.

 

(c) The Offering Statement, at the time it became qualified, as of the date hereof, and as of each Closing Date, conformed and will conform in all material respects to the requirements of Regulation A, the Act and the Rules and Regulations.

 

(d) The Offering Statement, at the time it became qualified, as of the date hereof, and as of each Closing Date, did not and will not, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

 

(e) The Preliminary Offering Circular did not, as of its date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty with respect to the statements contained in the Preliminary Offering Circular as provided by the Selling Agent in Section 8(ii).

 

(f) The Final Offering Circular will not, as of its date and on each Closing Date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty with respect to the statements contained in the Final Offering Circular as provided by the Selling Agent in Section 8(ii).

 

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(g) the Pricing Disclosure Materials and each Testing-the-Waters Communication, when considered together, did not, as of the Applicable Time, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, however, that the Company makes no representation or warranty with respect to the statements contained in the Preliminary Offering Circular as provided by the Selling Agent in Section 8(ii).

 

(h) As of each Closing Date, the Company is duly organized and validly existing as a corporation in good standing under the laws of the State of California. The Company has full power and authority to conduct all the activities conducted by it, to own and lease all the assets owned and leased by it and to conduct its business as presently conducted and as described in the Offering Statement, the Pricing Disclosure Materials and the Final Offering Circular. The Company is duly licensed or qualified to do business and in good standing as a foreign organization in all jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so qualified or in good standing or have such power or authority would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on or affecting the business, prospects, properties, management, financial position, stockholders’ equity, or results of operations of the Company (a “Material Adverse Effect”). Complete and correct copies of the certificate of incorporation and of the bylaws of the Company and all amendments thereto have been made available to the Selling Agent, and no changes therein will be made subsequent to the date hereof and prior to any Closing Date.

 

(i) The Company has no subsidiaries, nor does it own a controlling interest in any entity other than those entities set forth on Schedule 4 to this Agreement (each a “Subsidiary” and collectively the “Subsidiaries”). Each Subsidiary has been duly organized and is validly existing and in good standing under the laws of its jurisdiction of formation. Each Subsidiary is duly qualified and in good standing as a foreign company in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except for those failures to be so qualified or in good standing which would not be reasonably expected to have a Material Adverse Effect. All of the shares of issued capital stock of each corporate subsidiary, and all of the share capital, membership interests and/or equity interests of each subsidiary that is not a corporation, have been duly authorized and validly issued, are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of any lien, encumbrance, claim, security interest, restriction on transfer, shareholders’ agreement, proxy, voting trust or other defect of title whatsoever.

 

(j) The Company is organized in, and its principal place of business is in, the United States.

 

(k) The Company is not subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act and has not been subject to an order by the Commission denying, suspending, or revoking the registration of any class of securities pursuant to Section 12(j) of the Exchange Act that was entered within five years preceding the date the Offering Statement was originally filed with the Commission. The Company is not, and has not been at any time during the two-year period preceding the date the Offering Statement was originally filed with the Commission, required to file with the Commission the ongoing reports required by the Rules and Regulations under Regulation A

 

(l) The Company is not, nor upon completion of the transactions contemplated herein will it be, an “investment company” or an “affiliated person” of, or “promoter” or “principal underwriter” for, an “investment company,” as such terms are defined in the Investment Company Act of 1940, as amended (the “Investment Company Act”). The Company is not a development stage company or a “business development company” as defined in Section 2(a)(48) of the Investment Company Act. The Company is not a blank check company and is not an issuer of fractional undivided interests in oil or gas rights or similar interests in other mineral rights. The Company is not an issuer of asset-backed securities as defined in Item 1101(c) of Regulation AB.

 

(m) Neither the Company, nor any predecessor of the Company; nor any other issuer affiliated with the Company; nor any director or executive officer of the Company or other officer of the Company participating in the offering, nor any beneficial owner of 20% or more of the Company’s outstanding voting equity securities, nor any promoter connected with the Company, is subject to the disqualification provisions of Rule 262 of the Rules and Regulations.

 

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(n) The Company is not a “foreign private issuer,” as such term is defined in Rule 405 under the Act.

 

(o) The Company has full legal right, power and authority to enter into this Agreement and the Escrow Agreement and perform the transactions contemplated hereby and thereby. This Agreement and the Escrow Agreement have each been authorized and validly executed and delivered by the Company and are each a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, subject to the effect of applicable bankruptcy, insolvency or similar laws affecting creditors’ rights generally and equitable principles of general applicability.

 

(p) The issuance and sale of the Shares have been duly authorized by the Company, and, when issued and paid for in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable and will not be subject to preemptive or similar rights. The holders of the Shares will not be subject to personal liability by reason of being such holders. The Shares, when issued, will conform to the description thereof set forth in the Final Offering Circular in all material respects.

 

(q) The Company has not authorized anyone other than the management of the Company and the Selling Agent to engage in Testing-the-Waters Communications. The Company reconfirms that the Selling Agent has been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Company has not distributed any Testing-the-Waters Communications other than those listed on Schedule 1 hereto.

 

(r) The financial statements and the related notes included in the Offering Statement, the Pricing Disclosure Materials and the Final Offering Circular present fairly, in all material respects, the financial condition of the Company and its Subsidiaries as of the dates thereof and the results of operations and cash flows at the dates and for the periods covered thereby in conformity with United States generally accepted accounting principles (“GAAP”), except as may be stated in the related notes thereto. No other financial statements or schedules of the Company, any Subsidiary or any other entity are required by the Act or the Rules and Regulations to be included in the Offering Statement or the Final Offering Circular. There are no off-balance sheet arrangements (as defined in Regulation S-K Item 303(a)(4)(ii)) that may have a material current or future effect on the Company’s financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.

 

(s) Marcum LLP (the “Accountants”), who have reported on the financial statements and schedules described in Section 3(s), are registered independent public accountants with respect to the Company as required by the Act and the Rules and Regulations and by the rules of the Public Company Accounting Oversight Board. The financial statements of the Company and the related notes and schedules included in the Offering Statement, the Pricing Disclosure Materials and the Final Offering Circular comply as to form in all material respects with the requirements of the Act and the Rules and Regulations and present fairly the information shown therein.

 

(t) Since the date of the most recent financial statements of the Company included or incorporated by reference in the Offering Statement and the most recent Preliminary Offering Circular and prior to the Closing and any Subsequent Closing, other than as described in the Final Offering Circular (A) there has not been and will not have been any change in the capital stock of the Company or long-term debt of the Company or any Subsidiary or any dividend or distribution of any kind declared, set aside for payment, paid or made by the Company on any class of capital stock or equity interests, or any material adverse change, or any development that would reasonably be expected to result in a material adverse change, in or affecting the business, prospects, properties, management, financial position, stockholders’ equity, or results of operations of the Company and its Subsidiaries taken as a whole (a “Material Adverse Change”) and (B) neither the Company nor any Subsidiary has sustained or will sustain any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor disturbance or dispute or any action, order or decree of any court or arbitrator or governmental or regulatory authority, except in each case as otherwise disclosed in the Offering Statement, the Pricing Disclosure Materials and the Final Offering Circular.

 

(u) Since the date as of which information is given in the most recent Preliminary Offering Circular, neither the Company nor any Subsidiary has entered or will before the Closing or any Subsequent Closing enter into any transaction or agreement, not in the ordinary course of business, that is material to the Company and its Subsidiaries taken as a whole or incurred or will incur any liability or obligation, direct or contingent, not in the ordinary course of business, that is material to the Company and its Subsidiaries taken as a whole, and neither the Company nor any Subsidiary has any plans to do any of the foregoing.

 

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(v) The Company and each Subsidiary has good and valid title in fee simple to all items of real property and good and valid title to all personal property described in the Offering Statement or the Final Offering Circular as being owned by them, in each case free and clear of all liens, encumbrances and claims except those that (1) do not materially interfere with the use made and proposed to be made of such property by the Company and its Subsidiaries or (2) would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. Any real property described in the Offering Statement or the Final Offering Circular as being leased by the Company or any Subsidiary that is material to the business of the Company and its Subsidiaries taken as a whole is held by them under valid, existing and enforceable leases, except those that (A) do not materially interfere with the use made or proposed to be made of such property by the Company and its Subsidiaries or (B) would not be reasonably expected, individually or in the aggregate, to have a Material Adverse Effect.

 

(w) There are no legal, governmental or regulatory actions, suits or proceedings pending, either domestic or foreign, to which the Company is a party or to which any property of the Company is the subject, nor are there, to the Company’s knowledge, any threatened legal, governmental or regulatory investigations, either domestic or foreign, involving the Company or any property of the Company that, individually or in the aggregate, if determined adversely to the Company, would reasonably be expected to have a Material Adverse Effect or materially and adversely affect the ability of the Company to perform its obligations under this Agreement; to the Company’s knowledge, no such actions, suits or proceedings are threatened or contemplated by any governmental or regulatory authority or threatened by others.

 

(x) The Company and each Subsidiary has, and at each Closing Date will have, (1) all governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as presently conducted except where the failure to have such governmental licenses, permits, consents, orders, approvals and other authorizations would not be reasonably expected to have a Material Adverse Effect, and (2) performed all its obligations required to be performed, and is not, and at each Closing Date will not be, in default, under any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement, lease, contract or other agreement or instrument (collectively, a “contract or other agreement”) to which it is a party or by which its property is bound or affected and, to the Company’s knowledge, no other party under any material contract or other agreement to which it is a party is in default in any respect thereunder. The Company and its Subsidiaries are not in violation of any provision of its organizational or governing documents.

 

(y) The Company has obtained all authorization, approval, consent, license, order, registration, exemption, qualification or decree of, any court or governmental authority or agency or any sub-division thereof that is required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Shares and the Selling Agent’s Securities under this Agreement or the consummation of the transactions contemplated by this Agreement as may be required under federal, state, local and foreign laws, the Act or the rules and regulations of the Commission thereunder, state securities or Blue Sky laws, the rules and regulations of FINRA or the NYSE:MKT Exchange .

 

(z) There is no actual or, to the knowledge of the Company, threatened, enforcement action or investigation by any governmental authority that has jurisdiction over the Company, and the Company has received no notice of any pending or threatened claim or investigation against the Company that would provide a legal basis for any enforcement action, and the Company has no reason to believe that any governmental authority is considering such action.

 

(aa) Neither the execution of this Agreement, nor the issuance, offering or sale of the Shares, nor the consummation of any of the transactions contemplated herein, nor the compliance by the Company with the terms and provisions hereof or thereof will conflict with, or will result in a breach of, any of the terms and provisions of, or has constituted or will constitute a default under, or has resulted in or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary pursuant to the terms of any contract or other agreement to which the Company or any Subsidiary may be bound or to which any of the property or assets of the Company or any Subsidiary is subject, except such conflicts, breaches or defaults as may have been waived or would not, in the aggregate, be reasonably expected to have a Material Adverse Effect; nor will such action result in any violation, except such violations that would not be reasonably expected to have a Material Adverse Effect, of (1) the provisions of the organizational or governing documents of the Company or any Subsidiary, or (2) any statute or any order, rule or regulation applicable to the Company or any Subsidiary or of any court or of any federal, state or other regulatory authority or other government body having jurisdiction over the Company or any Subsidiary.

 

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(bb) There is no document or contract of a character required to be described in the Offering Statement or the Final Offering Circular or to be filed as an exhibit to the Offering Statement which is not described or filed as required. All such contracts to which the Company or any Subsidiary is a party have been authorized, executed and delivered by the Company or any Subsidiary, and constitute valid and binding agreements of the Company or any Subsidiary, and are enforceable against the Company in accordance with the terms thereof, subject to the effect of applicable bankruptcy, insolvency or similar laws affecting creditors’ rights generally and equitable principles of general applicability. None of these contracts have been suspended or terminated for convenience or default by the Company or any of the other parties thereto, and the Company has not received notice of any such pending or threatened suspension or termination.

 

(cc) The Company and its directors, officers or controlling persons have not taken, directly or indirectly, any action intended, or which might reasonably be expected, to cause or result, under the Act or otherwise, in, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Company’s Common Stock.

 

(dd) Other than as previously disclosed to the Selling Agent in writing, the Company, or any person acting on behalf of the Company, has not and, except in consultation with the Selling Agent, will not publish, advertise or otherwise make any announcements concerning the distribution of the Shares, and has not and will not conduct road shows, seminars or similar activities relating to the distribution of the Shares nor has it taken or will it take any other action for the purpose of, or that could reasonably be expected to have the effect of, preparing the market, or creating demand, for the Shares.

 

(ee) No holder of securities of the Company has rights to the registration of any securities of the Company as a result of the filing of the Offering Statement or the transactions contemplated by this Agreement, except for such rights as have been waived or as are described in the Offering Statement.

 

(ff) No labor dispute with the employees of the Company or any Subsidiary exists or, to the knowledge of the Company, is threatened, and the Company is not aware of any existing or threatened labor disturbance by the employees of any of its or any Subsidiary’s principal suppliers, manufacturers, customers or contractors.

 

(gg) The Company and each of its subsidiaries: (i) are and have been in material compliance with all laws, to the extent applicable, and the regulations promulgated pursuant to such laws, and comparable state laws, and all other local, state, federal, national, supranational and foreign laws, manual provisions, policies and administrative guidance relating to the regulation of the Company and its subsidiaries except for such non-compliance as would not be reasonably expected, individually or in the aggregate, to have a Material Adverse Effect; (ii) have not received notice of any ongoing claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any Regulatory Agency or third party alleging that any product operation or activity is in material violation of any laws and has no knowledge that any such Regulatory Agency or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding; and (iii) are not a party to any corporate integrity agreement, deferred prosecution agreement, monitoring agreement, consent decree, settlement order, or similar agreements, or has any reporting obligations pursuant to any such agreement, plan or correction or other remedial measure entered into with any Governmental Authority.

 

(hh) The business and operations of the Company, and each of its Subsidiaries, have been and are being conducted in compliance with all applicable laws, ordinances, rules, regulations, licenses, permits, approvals, plans, authorizations or requirements relating to occupational safety and health, or pollution, or protection of health or the environment (including, without limitation, those relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous or toxic substances, materials or wastes into ambient air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of chemical substances, pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, gaseous or liquid in nature) of any governmental department, commission, board, bureau, agency or instrumentality of the United States, any state or political subdivision thereof, or any foreign jurisdiction (“Environmental Laws”), and all applicable judicial or administrative agency or regulatory decrees, awards, judgments and orders relating thereto, except where the failure to be in such compliance would not be reasonably expected, individually or in the aggregate, to have a Material Adverse Effect; and neither the Company nor any of its Subsidiaries has received any notice from any governmental instrumentality or any third party alleging any material violation thereof or liability thereunder (including, without limitation, liability for costs of investigating or remediating sites containing hazardous substances and/or damages to natural resources).

 

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(ii) There has been no storage, generation, transportation, use, handling, treatment, Release or threat of Release of Hazardous Materials (as defined below) by or caused by the Company or any of its Subsidiaries (or, to the knowledge of the Company, any other entity (including any predecessor) for whose acts or omissions the Company or any of its Subsidiaries is or could reasonably be expected to be liable) at, on, under or from any property or facility now or previously owned, operated or leased by the Company or any of its Subsidiaries, or at, on, under or from any other property or facility, in violation of any Environmental Laws or in a manner or amount or to a location that could reasonably be expected to result in any liability under any Environmental Law, except for any violation or liability which would not, individually or in the aggregate, have a Material Adverse Effect. “Hazardous Materials” means any material, chemical, substance, waste, pollutant, contaminant, compound, mixture, or constituent thereof, in any form or amount, including petroleum (including crude oil or any fraction thereof) and petroleum products, natural gas liquids, asbestos and asbestos containing materials, naturally occurring radioactive materials, brine, and drilling mud, regulated or which can give rise to liability under any Environmental Law. “Release” means any spilling, leaking, seepage, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing, depositing, dispersing, or migrating in, into or through the environment, or in, into from or through any building or structure.

 

(jj) The Company and its Subsidiaries own, possess, license or have other adequate rights to use, on reasonable terms, all material patents, patent applications, trade and service marks, trade and service mark registrations, trade names, copyrights, licenses, inventions, trade secrets, technology, know-how and other intellectual property necessary for the conduct of the Company’s and each of its Subsidiary’s business as now conducted (collectively, the “Intellectual Property”), except to the extent such failure to own, possess or have other rights to use such Intellectual Property would not result in a Material Adverse Effect. Except as set forth in the Final Offering Circular: (a) no party has been granted an exclusive license to use any portion of such Intellectual Property owned by the Company or its Subsidiaries; (b) to the knowledge of the Company, there is no infringement by third parties of any such Intellectual Property owned by or exclusively licensed to the Company or its Subsidiaries; (c) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the Company’s or any of its Subsidiaries’ rights in or to any Intellectual Property, and the Company and its Subsidiaries are unaware of any facts which would form a reasonable basis for any such claim; (d) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the validity or scope or enforceability of any such Intellectual Property, and the Company and its Subsidiaries are unaware of any facts which would form a reasonable basis for any such claim; and (e) there is no pending, or to the knowledge of the Company, threatened action, suit, proceeding or claim by others that the Company’s or any of its Subsidiaries’ business as now conducted infringes or otherwise violates any patent, trademark, copyright, trade secret or other proprietary rights of others, and the Company and its Subsidiaries are unaware of any other fact which would form a reasonable basis for any such claim.

 

(kk) Except as would not have, individually or in the aggregate, a Material Adverse Effect, the Company and each Subsidiary (1) has timely filed all federal, state, provincial, local and foreign tax returns that are required to be filed by such entity through the date hereof, which returns are true and correct, or has received timely extensions for the filing thereof, and (2) has paid all taxes, assessments, penalties, interest, fees and other charges due or claimed to be due from the Company, other than (A) any such amounts being contested in good faith and by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP or (B) any such amounts currently payable without penalty or interest. There are no tax audits or investigations pending, which if adversely determined could have a Material Adverse Effect; nor to the knowledge of the Company is there any proposed additional tax assessments against the Company or any Subsidiary which could have, individually or in the aggregate, a Material Adverse Effect. No transaction, stamp, capital or other issuance, registration, transaction, transfer or withholding tax or duty is payable by or on behalf of the Selling Agent to any foreign government outside the United States or any political subdivision thereof or any authority or agency thereof or therein having the power to tax in connection with (i) the issuance, sale and delivery of the Shares by the Company; (ii) the purchase from the Company, and the initial sale and delivery of the Shares to purchasers thereof; or (iii) the execution and delivery of this Agreement or any other document to be furnished hereunder.

 

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(ll) On each Closing Date, all stock transfer or other taxes (other than income taxes) which are required to be paid in connection with the sale and transfer of the Shares to be issued and sold on such Closing Date will be, or will have been, fully paid or provided for by the Company and all laws imposing such taxes will be or will have been fully complied with.

 

(mm) The Company and its Subsidiaries are insured with insurers with appropriately rated claims paying abilities against such losses and risks and in such amounts as are prudent and customary for the businesses in which they are engaged; all policies of insurance and fidelity or surety bonds insuring the Company, each Subsidiary or their respective businesses, assets, employees, officers and directors are in full force and effect; and there are no claims by the Company or its Subsidiary under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; neither the Company nor any Subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that is not materially greater than the current cost. The Company has obtained director’s and officer’s insurance in such amounts as is customary for a similarly situated company engaging in an initial public offering of securities.

 

(nn) Neither the Company nor its Subsidiaries, nor any director, officer, agent or employee of either the Company or any Subsidiary has directly or indirectly, (1) made any unlawful contribution to any federal, state, local and foreign candidate for public office, or failed to disclose fully any contribution in violation of law, (2) made any payment to any federal, state, local and foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof, (3) violated or is in violation of any provisions of the U.S. Foreign Corrupt Practices Act of 1977, or (4) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment.

 

(oo) The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance in all material respects with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “Money Laundering Laws”) and no material action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its Subsidiaries with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.

 

(pp) Neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company, any director, officer, agent or employee of the Company or any of its Subsidiaries is currently subject to any U.S. sanctions (the “Sanctions Regulations”) administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and the Company will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC or listed on the OFAC Specially Designated Nationals and Blocked Persons List. Neither the Company nor, to the knowledge of the Company, any director, officer, agent or employee of the Company, is named on any denied party or entity list administered by the Bureau of Industry and Security of the U.S. Department of Commerce pursuant to the Export Administration Regulations (“EAR”); and the Company will not, directly or indirectly, use the proceeds of the offering of the Shares hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any Sanctions Regulations or to support activities in or with countries sanctioned by said authorities, or for engaging in transactions that violate the EAR.

 

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(qq) The Company has not distributed and, prior to the later to occur of the last Closing Date and completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than each Preliminary Offering Circular, the Pricing Disclosure Materials and the Final Offering Circular, or such other materials as to which the Selling Agent shall have consented in writing.

 

(tt) Each employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and all stock purchase, stock option, stock-based severance, employment, change-in-control, medical, disability, fringe benefit, bonus, incentive, deferred compensation, employee loan and all other employee benefit plans, agreements, programs, policies or other arrangements, whether or not subject to ERISA, that is maintained, administered or contributed to by the Company or any of its affiliates for employees or former employees, directors or independent contractors of the Company or its Subsidiaries, or under which the Company or any of its Subsidiaries has had or has any present or future obligation or liability, has been maintained in material compliance with its terms and the requirements of any applicable federal, state, local and foreign laws, statutes, orders, rules and regulations, including but not limited to ERISA and the Code; no prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred which would result in a material liability to the Company with respect to any such plan excluding transactions effected pursuant to a statutory or administrative exemption; no event has occurred (including a “reportable event” as such term is defined in Section 4043 of ERISA) and no condition exists that would subject the Company to any material tax, fine, lien, penalty, or liability imposed by ERISA, the Code or other applicable law; and for each such plan that is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA, no “accumulated funding deficiency” as defined in Section 412 of the Code has been incurred, whether or not waived, and the fair market value of the assets of each such plan (excluding for these purposes accrued but unpaid contributions) exceeds the present value of all benefits accrued under such plan determined using reasonable actuarial assumptions.

 

(uu) No relationship, direct or indirect, exists between or among the Company or any Subsidiary, on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any Subsidiary, on the other, which would be required to be disclosed in the Offering Statement, the Preliminary Offering Circular and the Final Offering Circular and is not so disclosed.

 

(vv) The Company has not sold or issued any securities that would be integrated with the offering of the Shares contemplated by this Agreement pursuant to the Act, the Rules and Regulations or the interpretations thereof by the Commission or that would fail to come within the safe harbor for integration under Regulation A.

 

(xx) The Shares have been approved for listing on NYSE:MKT, under the symbol “MMB”

 

(yy) Except as set forth in this Agreement, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or the Selling Agent for a brokerage commission, finder’s fee or other like payment in connection with the offering of the Shares.

 

(zz) To the knowledge of the Company, there are no affiliations with FINRA among the Company’s directors, officers or any five percent or greater stockholder of the Company or any beneficial owner of the Company’s unregistered equity securities that were acquired during the 180-day period immediately preceding the initial filing date of the Offering Statement.

 

(aaa) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of their respective family members. The Company has not directly or indirectly, including through its Subsidiaries, extended or maintained credit, arranged for the extension of credit, or renewed any extension of credit, in the form of a personal loan to or for any director or executive officer of the Company or any of their respective related interests, other than any extensions of credit that ceased to be outstanding prior to the initial filing of the Offering Statement. No transaction has occurred between or among the Company and any of its officers or directors, stockholders, customers, suppliers or any affiliate or affiliates of the foregoing that is required to be described or filed as an exhibit to in the Offering Statement, the Preliminary Offering Circular, the Pricing Disclosure Materials or the Final Offering Circular and is not so described.

 

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(bbb) The Company has the power to submit, and pursuant to Section 13 of this Agreement, has legally, validly, effectively and irrevocably submitted, to the personal jurisdiction of each United States federal court and New York state court located in the Borough of Manhattan, in the City of New York, New York, U.S.A. (each, a “New York Court”), and the Company has the power to designate, appoint and authorize, and pursuant to Section 13 of this Agreement, has legally, validly, effectively and irrevocably designated, appointed and authorized an agent for service of process in any action arising out of or relating to this Agreement or the Shares in any New York Court, and service of process effected on such authorized agent will be effective to confer valid personal jurisdiction over the Company as provided in Section 13 hereof.

 

(ccc) The Selling Agent’s Warrants have been duly authorized for issuance. The Company has reserved a sufficient number of shares of its Common Stock for issuance upon exercise of the Selling Agent’s Warrants and, when issued and paid for in accordance with the terms of the Selling Agent’s Warrants, such shares of Common Stock will be validly issued, fully paid and non-assessable (such shares of Common Stock, together with the Selling Agent’s Warrants, the “Selling Agent’s Securities”). The issuance of the Common Stock pursuant to the Selling Agent’s Warrants will not be subject to any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company or any of its subsidiaries.

 

4. Agreements of the Company.

 

(a) The Offering Statement has become qualified, and the Company will file the Final Offering Circular, subject to the prior approval of the Selling Agent, pursuant to Rule 253 and Regulation A, within the prescribed time period and will provide a copy of such filing to the Selling Agent promptly following such filing.

 

(b) The Company will not, during such period as the Final Offering Circular would be required by law to be delivered in connection with sales of the Shares by an underwriter or dealer in connection with the offering contemplated by this Agreement (whether physically or through compliance with Rules 251 and 254 under the Act or any similar rule(s)), file any amendment or supplement to the Offering Statement or the Final Offering Circular unless a copy thereof shall first have been submitted to the Selling Agent within a reasonable period of time prior to the filing thereof and the Selling Agent shall not have reasonably objected thereto in good faith.

 

(c) The Company will notify the Selling Agent promptly, and will, if requested, confirm such notification in writing: (1) when any amendment to the Offering Statement is filed; (2) of any request by the Commission for any amendments to the Offering Statement or any amendment or supplements to the Final Offering Circular or for additional information; (3) of the issuance by the Commission of any stop order preventing or suspending the qualification of the Offering Statement or the Final Offering Circular, or the initiation of any proceedings for that purpose or the threat thereof; (4) of becoming aware of the occurrence of any event that in the judgment of the Company makes any statement made in the Offering Statement, the Preliminary Offering Circular, the Pricing Disclosure Materials or the Final Offering Circular untrue in any material respect or that requires the making of any changes in the Offering Statement, the Preliminary Offering Circular, the Pricing Disclosure Materials or the Final Offering Circular in order to make the statements therein, in light of the circumstances in which they are made, not misleading; and (5) of receipt by the Company of any notification with respect to any suspension of the qualification or exemption from registration of the Shares for offer and sale in any jurisdiction. If at any time the Commission shall issue any order suspending the qualification of the Offering Statement in connection with the offering contemplated hereby or in connection with sales of Common Stock pursuant to market making activities by the Selling Agent, the Company will make every reasonable effort to obtain the withdrawal of any such order at the earliest possible moment. If the Company has omitted any information from the Offering Statement, it will use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to Regulation A, the Act and the Rules and Regulations and to notify the Selling Agent promptly of all such filings.

 

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(d) If, at any time when the Final Offering Circular relating to the Shares is required to be delivered under the Act, the Company becomes aware of the occurrence of any event as a result of which the Final Offering Circular, as then amended or supplemented, would, in the reasonable judgment of counsel to the Company or counsel to the Selling Agent, include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or the Offering Statement, as then amended or supplemented, would, in the reasonable judgment of counsel to the Company or counsel to the Selling Agent, include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, or if for any other reason it is necessary, in the reasonable judgment of counsel to the Company or counsel to the Selling Agent, at any time to amend or supplement the Final Offering Circular or the Offering Statement to comply with the Act or the Rules and Regulations, the Company will promptly notify the Selling Agent and will promptly prepare and file with the Commission, at the Company’s expense, an amendment to the Offering Statement and/or an amendment or supplement to the Final Offering Circular that corrects such statement and/or omission or effects such compliance and will deliver to the Selling Agent, without charge, such number of copies thereof as the Selling Agent may reasonably request. The Company consents to the use of the Final Offering Circular or any amendment or supplement thereto by the Selling Agent, and the Selling Agent agrees to provide to each Investor, prior to the Closing and, as applicable, any Subsequent Closing, a copy of the Final Offering Circular and any amendments or supplements thereto.

 

(e) The Company will furnish to the Selling Agent and their counsel, without charge (a) one conformed copy of the Offering Statement as originally filed with the Commission and each amendment thereto, including financial statements and schedules, and all exhibits thereto, and (b) so long as an offering circular relating to the Shares is required to be delivered under the Act or the Rules and Regulations, as many copies of each Preliminary Offering Circular or the Final Offering Circular or any amendment or supplement thereto as the Selling Agent may reasonably request.

 

(f) If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company has or will promptly notify the Selling Agent in writing and has or will promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.

 

(h) The Company will comply with any undertakings contained in the Offering Statement.

 

(i) Prior to the sale of the Shares to the Investors, the Company will cooperate with the Selling Agent and its counsel in connection with the registration or qualification, or exemption therefrom, of the Shares for offer and sale under the state securities or Blue Sky laws of such jurisdictions as the Selling Agent may reasonably request; provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject.

 

(j) The Company will apply the net proceeds from the offering and sale of the Shares in the manner set forth in the Final Offering Circular under the caption “Use of Proceeds.”

 

(k) The Company will use its reasonable best efforts to ensure that the Shares are listed for trading on the NYSE:MKT upon approval of the listing application filed with NYSE:.

 

(l) The Company will not at any time, directly or indirectly, take any action intended, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization of the price of the Shares to facilitate the sale or resale of any of the Shares.

 

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(m) The Company will not, directly or indirectly, without the prior written consent of the Selling Agent, offer to sell, sell, contract to sell, grant any option or warrant to purchase, make any short sale, or otherwise dispose of (or announce any offer, sale, grant of any option or warrant to purchase or other disposition), any shares of capital stock of the Company or securities convertible into, or exchangeable or exercisable for, shares of capital stock of the Company, (the “Lock-Up Securities”) for a period of 180 days after the date of this Agreement (the “Lock-Up Period”), except with respect to (i) the Shares to be sold hereunder, (ii) the issuance of shares of Common Stock upon the exercise of stock options and warrants outstanding as of the date hereof and the issuance of Common Stock or stock options under any employee benefit or stock incentive plan of the Company existing on the date hereof, and described in the Final Offering Circular, (iii) the issuance of Common Stock or stock options under any non-employee director stock plan or dividend reinvestment plan described in the Final Offering Circular, or (iv) the issuance of any shares of Common Stock by the Company in connection with a licensing agreement, joint venture, acquisition or business combination or other collaboration or strategic transaction, provided, however that recipients of such shares of Common Stock agree to be bound by the terms of the lock-up letter described in Section 7(x) hereof and the sum of the aggregate number of shares of Common Stock so issued shall not exceed 10% of the total outstanding shares of Common Stock outstanding immediately following the consummation of this offering of Shares. If the Selling Agent agrees to waive or release any Lock-Up Securities from the Lock-Up Period, the Company will announce the impending release or waiver by press release through a major news service at least two business days before the effective date of such release or waiver.

 

(n) The Company will direct its counsel to issue legal opinions to the Company’s transfer agent, as requested by the Selling Agent, to enable the Selling Agent to resell the shares issuable upon cashless exercise of the Selling Agent’s Warrant in accordance with the provisions of Rule 144 under the Act.

 

5. Representations and Warranties of the Selling Agent; Agreements of the Selling Agent. The Selling Agent represents and warrants and covenants to the Company that:

 

(a) The Selling Agent agrees that it shall not include any “issuer information” (as defined in Rule 433 under the Act) in any Written Testing-the-Waters Communication used or referred to by such Selling Agent without the prior consent of the Company (any such issuer information with respect to whose use the Company has given its consent, “Permitted Issuer Information”), provided that “issuer information” (as defined in Rule 433 under the Act) within the meaning of this Section 5 shall not be deemed to include information prepared by the Selling Agent on the basis of, or derived from, “issuer information”.

 

(b) Neither the Selling Agent nor any Dealer, nor any managing member of the Selling Agent or any Dealer, nor any director or executive officer of the Selling Agent or any Dealer or other officer of the Selling Agent or any Dealer participating in the offering of the Shares is subject to the disqualification provisions of Rule 262 of the Rules and Regulations. No registered representative of the Selling Agent or any Dealer, or any other person being compensated by or through the Selling Agent or any Dealer for the solicitation of Investors, is subject to the disqualification provisions of Rule 262 of the Rules and Regulations.

 

(c) The Selling Agent and each Dealer is a member of FINRA and each of them and their respective employees and representatives have all required licenses and registrations to act under this Agreement, and each shall remain a member or duly licensed, as the case may be, during the Offering.

 

(d) Except for Participating Dealer Agreements, no agreement will be made by the Selling Agent with any person permitting the resale, repurchase or distribution of any Shares purchased by such person.

 

(e) Except as otherwise consented to by the Company, the Selling Agent has not and will not use or distribute any written offering materials other than the Preliminary Offering Circular, Pricing Disclosure Materials and the Final Offering Circular. The Selling Agent has not and will not use any “broker-dealer use only” materials with members of the public, or has not and will not make any unauthorized verbal representations or verbal representations which contradict or are inconsistent with the statements made in the Offering Statement in connection with offers or sales of the Shares.

 

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6. Expenses.

 

(i) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay, or reimburse if paid by the Selling Agent, all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including but not limited to costs and expenses of or relating to (i) the preparation, printing and filing of the Offering Statement (including each and every amendment thereto) and exhibits thereto, each Preliminary Offering Circular, the Pricing Disclosure Materials, the Final Offering Circular and any amendments or supplements thereto, including all fees, disbursements and other charges of counsel and accountants to the Company, (ii) the preparation and delivery of certificates representing the Shares (if any), (iii) furnishing (including costs of shipping and mailing) such copies of the Offering Statement (including each and every amendment thereto), each Preliminary Offering Circular, the Pricing Disclosure Materials, the Final Offering Circular, and all amendments and supplements thereto, as may be requested for use in connection with the direct placement of the Shares and market making activities of the Selling Agent, (iv) all fees and expenses in connection with listing the Shares on the NYSE:MKT including any supplemental listing application, (v) any filings required to be made by the Selling Agent with FINRA, and the fees, disbursements and other charges of counsel for the Selling Agent in connection therewith, and in connection with any required review by FINRA, (vi) the registration or qualification of the Shares and the Selling Agent’s Securities (as defined in Section 3(aaa)) for offer and sale under the securities or Blue Sky laws of such jurisdictions designated pursuant to Section 4(j), including the fees, disbursements and other charges of counsel to the Selling Agent in connection therewith up to a maximum of $25,000, and the preparation and printing of preliminary, supplemental and final Blue Sky memoranda, (vii) all transfer taxes, if any, with respect to the sale and delivery of the Shares by the Company to the Investors, (viii) fees and disbursements of the Accountants incurred in delivering the letter(s) described in Section 7(vii) of this Agreement and (ix) the fees and expenses of the Escrow Agent.

 

(ii) If this Agreement is terminated by the Selling Agent in accordance with the provisions of Section 7, Section 9(i)(c), (d) or (f), the Company shall reimburse the Selling Agent for all of its documented out-of-pocket expenses, including the fees of its counsel (upon abandonment of the Offering or expiration or termination of this Agreement, the legal counsel shall submit their legal fees to the Company, not to exceed $15,000) (“Reimbursable Expenses”).

 

7. Conditions of the Obligations of the Selling Agent. The obligations of the Selling Agent hereunder are subject to the following conditions:

 

(i) (a) No stop order suspending the qualification of the Offering Statement shall have been issued, and no proceedings for that purpose shall be pending or threatened by any securities or other governmental authority (including, without limitation, the Commission), (b) no order suspending the effectiveness of the Offering Statement or the qualification or exemption of the Shares under the securities or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for such purpose shall be pending before, or threatened or contemplated by, any securities or other governmental authority (including, without limitation, the Commission), (c) any request for additional information on the part of the staff of any securities or other governmental authority (including, without limitation, the Commission) shall have been complied with to the satisfaction of the staff of the Commission or such authorities and (d) after the date hereof no amendment or supplement to the Offering Statement or the Final Offering Circular shall have been filed unless a copy thereof was first submitted to the Selling Agent and the Selling Agent did not object thereto in good faith, and the Selling Agent shall have received certificates of the Company, dated as of each Closing Date and signed by the President and Chief Executive Officer of the Company, and the Chief Financial Officer of the Company, to the effect of clauses (a), (b) and (c).

 

(ii) Since the respective dates as of which information is given in the Offering Statement, the Pricing Disclosure Materials and the Final Offering Circular, (a) there shall not have been a Material Adverse Change, whether or not arising from transactions in the ordinary course of business, in each case other than as set forth in or contemplated by the Offering Statement, the Pricing Disclosure Materials and the Final Offering Circular and (b) the Company shall not have sustained any material loss or interference with its business or properties from fire, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not set forth in the Offering Statement, the Pricing Disclosure Materials and the Final Offering Circular, if in the reasonable judgment of the Selling Agent any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Shares to Investors and the delivery of the Selling Agent’s Securities as contemplated hereby.

 

(iii) Since the respective dates as of which information is given in the Offering Statement, the Pricing Disclosure Materials and the Final Offering Circular, there shall have been no litigation or other proceeding instituted against the Company or any of its officers or directors in their capacities as such, before or by any federal, state or local or foreign court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, which litigation or proceeding, in the reasonable judgment of the Selling Agent, would reasonably be expected to have a Material Adverse Effect.

 

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(iv) Each of the representations and warranties of the Company contained herein shall be true and correct as of each Closing Date in all respects for those representations and warranties qualified by materiality and in all material respects for those representations and warranties that are not qualified by materiality, as if made on such date, and all covenants and agreements herein contained to be performed on the part of the Company and all conditions herein contained to be fulfilled or complied with by the Company at or prior to such Closing Date shall have been duly performed, fulfilled or complied with in all material respects.

 

(v) The Selling Agent shall have received an opinion and 10b-5 negative assurances letter, dated as of each Closing Date, of Legal & Compliance, LLC, as counsel to the Company, substantially in the form of Exhibit B hereto.

 

(vi) The Selling Agent shall have received an opinion, dated as of each Closing Date, of Hunter Taubman Fischer & Li, LLC, as counsel to the Selling Agent.

 

(vii) At the Closing and at any Subsequent Closing, the Accountants shall have furnished to the Selling Agent a letter, dated the date of its delivery (the “Comfort Letter”), addressed to the Selling Agent and in form and substance reasonably satisfactory to the Selling Agent containing statements and information of the type ordinarily included in accountants’ “comfort letters” to Selling Agent with respect to the financial statements and certain financial information contained in the Offering Statement, the Pricing Disclosure Materials and the Final Offering Circular.

 

(viii) At the Closing and at any Subsequent Closing, there shall be furnished to the Selling Agent a certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and the Chief Financial Officer of the Company, in form and substance satisfactory to the Selling Agent to the effect that each signer has carefully examined the Offering Statement, the Final Offering Circular and the Pricing Disclosure Materials, and that to each of such person’s knowledge:

 

(a) (1) As of the date of each such certificate, (x) the Offering Statement does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading and (y) neither the Final Offering Circular nor the Pricing Disclosure Materials contains any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (2) no event has occurred as a result of which it is necessary to amend or supplement the Final Offering Circular in order to make the statements therein not untrue or misleading in any material respect.

 

(b) Each of the representations and warranties of the Company contained in this Agreement were, when originally made, and are, at the time such certificate is delivered, true and correct in all respects for those representations and warranties qualified by materiality and in all material respects for those representations and warranties that are not qualified by materiality.

 

(c) Each of the covenants required herein to be performed by the Company on or prior to the date of such certificate has been duly, timely and fully performed and each condition herein required to be complied with by the Company on or prior to the delivery of such certificate has been duly, timely and fully complied with.

 

(d) No stop order suspending the qualification of the Offering Statement or of any part thereof has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission.

 

(e) Subsequent to the date of the most recent financial statements in the Offering Statement and in the Final Offering Circular, there has been no Material Adverse Change.

 

(ix) The Company shall have furnished or caused to be furnished to the Selling Agent such certificates, in addition to those specifically mentioned herein, as the Selling Agent may have reasonably requested as to the accuracy and completeness on any Closing Date of any statement in the Offering Statement, the Preliminary Offering Circular, the Pricing Disclosure Materials or the Final Offering Circular, as to the accuracy on such Closing Date of the representations and warranties of the Company as to the performance by the Company of its obligations hereunder, or as to the fulfillment of the conditions concurrent and precedent to the obligations hereunder of the Selling Agent.

 

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(x) The Selling Agent shall have received the lock-up letters referred to in Section 4(m) hereof substantially in the form of Exhibit A from each director, officer and stockholder of the Company named in Schedule 2 hereto.

 

(xii) The Shares have been approved for quotation upon notice of issuance on the NYSE:MKT.

 

(xiii) The Company shall have furnished or caused to be furnished to the Selling Agent on each Closing Date satisfactory evidence of the good standing of the Company and the Subsidiaries in their respective jurisdiction of organization and their good standing as foreign entities in such other jurisdictions as the Selling Agent may reasonably request, in each case in writing or any standard form of telecommunication from the appropriate governmental authorities of such jurisdictions.

 

(xiv) FINRA shall not have raised any objection with respect to the fairness or reasonableness of the plan of distribution, or other arrangements of the transactions, contemplated hereby.

 

(xv) On or after the Applicable Time there shall not have occurred any of the following: (a) a suspension or material limitation in trading in securities generally on the New York Stock Exchange, Inc., NYSE:MKT or Nasdaq; (b) a general moratorium on commercial banking activities declared by either Federal or New York authorities or a material disruption in commercial banking or securities settlement or clearance services in the United States; (c) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war or (d) the occurrence of any other calamity or crisis or any change in financial, political or economic conditions in the United States or elsewhere, if the effect of any such event specified in clause (c) or (d) in the judgment of the Selling Agent makes it impracticable or inadvisable to proceed with the offering or the delivery of the Shares being delivered on any Closing Date on the terms and in the manner contemplated in the Final Offering Circular.

 

8. Indemnification.

 

(i) The Company shall indemnify and hold harmless the Selling Agent and each of the Dealers, and each of their directors, officers, employees and agents and each person, if any, who controls the Selling Agent within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (each an “Indemnified Party”), from and against any and all losses, claims, liabilities, expenses and damages, joint or several (including any and all investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted (whether or not such Indemnified Party is a party thereto)), to which it, or any of them, may become subject under the Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based on (a) any untrue statement or alleged untrue statement made by the Company in Section 3 of this Agreement, (b) any untrue statement or alleged untrue statement of any material fact contained in (1) any Preliminary Offering Circular, the Offering Statement or the Final Offering Circular or any amendment or supplement thereto, (2) the Pricing Disclosure Materials, (3) any Written Testing-the-Waters Communication or (4) any application or other document, or any amendment or supplement thereto, executed by the Company based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Shares under the securities or Blue Sky laws thereof or filed with the Commission or any securities association or securities exchange (each, an “Application”), or (c) the omission or alleged omission to state in any Preliminary Offering Circular, the Offering Statement, the Final Offering Circular, the Pricing Disclosure Materials, or any Written Testing-the-Waters Communication, or any amendment or supplement thereto, or in any Permitted Issuer Information or any Application a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable to the extent that such loss, claim, liability, expense or damage arises from the sale of the Shares in the offering to any person and is based solely on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with written information furnished to the Company by any Indemnified Party through the Selling Agent expressly for inclusion in the Offering Statement, any Preliminary Offering Circular, the Final Offering Circular, or Written Testing-the-Waters Communication, or in any amendment or supplement thereto or in any Application, it being understood and agreed that the only such information furnished by any Indemnified Party consists of the information described as such in subsection (ii) below. This indemnity agreement will be in addition to any liability which the Company may otherwise have.

 

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(ii) The Selling Agent will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) that (a) arise out of or are based upon any untrue statement made by the Selling Agent in Section 5 of this Agreement, (b) arise out of or are based upon any failure or alleged failure of the Selling Agent to pay any compensation to a Dealer or Dealers, or (c) arise out of or are based solely upon an untrue statement or alleged untrue statement of a material fact contained in the Offering Statement, any Preliminary Offering Circular or the Final Offering Circular, or any amendment or supplement thereto, or any Written Testing-the-Waters Communication, or arise out of or are based solely upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Offering Statement, any Preliminary Offering Circular or the Final Offering Circular, or any amendment or supplement thereto, or any Written Testing-the-Waters Communication, in reliance upon and in conformity with written information furnished to the Company by the Selling Agent expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. The Company acknowledges that, for all purposes under this Agreement, the statements set forth in the paragraphs under the caption “Underwriting” in any Preliminary Offering Circular and the Final Offering Circular constitute the only information relating to the Selling Agent furnished in writing to the Company by the Selling Agent expressly for inclusion in the Offering Statement, any Preliminary Offering Circular or the Final Offering Circular.

 

(iii) Promptly after receipt by an Indemnified Party under subsection (i) or (ii) above of notice of the commencement of any action, such Indemnified Party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any Indemnified Party otherwise than under such subsection. In case any such action shall be brought against any Indemnified Party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such Indemnified Party (who shall not, except with the consent of the Indemnified Party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such Indemnified Party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such Indemnified Party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such Indemnified Party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the Indemnified Party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the Indemnified Party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (a) includes an unconditional release of the Indemnified Party from all liability arising out of such action or claim and (b) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any Indemnified Party.

 

(iv) If the indemnification provided for in this Section 8 is unavailable or insufficient to hold harmless an Indemnified Party under subsection (i) or (ii) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Selling Agent on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the Indemnified Party failed to give the notice required under subsection (iii) above, then each indemnifying party shall contribute to such amount paid or payable by such Indemnified Party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Selling Agent on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Selling Agent on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the Fee received by the Selling Agent. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Selling Agent on the other and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Selling Agent agree that it would not be just and equitable if contribution pursuant to this subsection (iv) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (iv). The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (iv) shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (iv), the Selling Agent will not be required to contribute any amount in excess of the Fee received by the Selling Agent. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

 

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9. Termination.

 

(i) The obligations of the Selling Agent under this Agreement may be terminated at any time prior to the initial Closing Date, by notice to the Company from the Selling Agent, without liability on the part of the Selling Agent to the Company if, prior to delivery and payment for the Shares, in the sole judgment of the Selling Agent: (a) there has occurred any material adverse change in the securities markets or any event, act or occurrence that has materially disrupted, or in the opinion of the Selling Agent, will in the future materially disrupt, the securities markets or there shall be such a material adverse change in general financial, political or economic conditions or the effect of international conditions on the financial markets in the United States is such as to make it, in the judgment of the Selling Agent, inadvisable or impracticable to market the Shares or enforce contracts for the sale of the Shares; (b) there has occurred any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, including without limitation as a result of terrorist activities, such as to make it, in the judgment of the Selling Agent, inadvisable or impracticable to market the Shares or enforce contracts for the sale of the Shares; (c) trading in the Shares or any securities of the Company has been suspended or materially limited; (d) trading generally on the New York Stock Exchange, Inc., NYSE:MKT or Nasdaq has been suspended or materially limited, or minimum or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities have been required, by any of said exchanges or by such system or by order of the Commission, FINRA, or any other governmental or regulatory authority; (e) a banking moratorium has been declared by any state or Federal authority; or (f) in the judgment of the Selling Agent, there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Final Offering Circular, any material adverse change in the assets, properties, condition, financial or otherwise, or in the results of operations, business affairs or business prospects of the Company and its Subsidiaries considered as a whole, whether or not arising in the ordinary course of business.

 

(ii) If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 6 hereof.

 

10. Notices. Notice given pursuant to any of the provisions of this Agreement shall be in writing and, unless otherwise specified, shall be mailed or delivered (i) if to the Company, at the office of the Company, 2200 Space Park Drive, Suite 310, Houston, Texas 77058, Attention: Robert E. Morgan, with copies to Legal & Compliance, LLC, Attention: Laura Anthony, Esq., 330 Clematis Street, Suite 217, West Palm Beach, Florida 33401 or (ii) if to the Selling Agent, at the office of Tripoint Global Equities, LLC, 1450 Broadway, 26th Floor, New York, New York 10018 Attention: Mark Elenowitz, with copies to Hunter Taubman Fischer & Li, LLC, Attention: Louis Taubman, 1450 Broadway, 26th Floor, New York, New York 10018 Attention: Louis Taubman, Esq. Any such notice shall be effective only upon receipt. Any notice under Section 8 may be made by facsimile or telephone, but if so made shall be subsequently confirmed in writing.

 

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11. Survival. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company and the Selling Agent set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, the Selling Agent or any controlling person referred to in Section 8 hereof and (ii) delivery of and payment for the Shares. The respective agreements, covenants, indemnities and other statements set forth in Sections 6, 7, 8 and 10 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement.

 

12. Successors. This Agreement shall inure to the benefit of and shall be binding upon the Selling Agent, the Company and their respective successors, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemnification and contribution contained in Sections 8(i) and (iv) of this Agreement shall also be for the benefit of the directors, officers, employees and agents of the Selling Agent and any person or persons who control the Selling Agent within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnification and contribution contained in Sections 8(ii) and (iv) of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Offering Statement and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Shares shall be deemed a successor because of such purchase.

 

13. Governing Law Provisions. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed in such state. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby (“Related Proceedings”) may be instituted in the New York Courts, and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a “Related Judgment”), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party’s address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the New York Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. The Company has irrevocably appointed [_____]  pursuant to a Form U-2 Uniform Consent to Service of Process filed with the Secretary of State of the State of New York, as its agent to receive service of process or other legal summons for purposes of any such suit, action or proceeding that may be instituted in any state or federal court in the Borough of Manhattan in the City of New York.

 

With respect to any Related Proceeding, each party irrevocably waives, to the fullest extent permitted by applicable law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, service of process, attachment (both before and after judgment) and execution to which it might otherwise be entitled in the New York Courts, and with respect to any Related Judgment, each party waives any such immunity in the New York Courts or any other court of competent jurisdiction, and will not raise or claim or cause to be pleaded any such immunity at or in respect of any such Related Proceeding or Related Judgment, including, without limitation, any immunity pursuant to the United States Foreign Sovereign Immunities Act of 1976, as amended.

 

The obligations of the Company pursuant to this Agreement in respect of any sum due to the Selling Agent shall, notwithstanding any judgment in a currency other than United States dollars, not be discharged until the first business day following receipt by the Selling Agent of any sum adjudged to be so due in such other currency, on which the Selling Agent may in accordance with normal banking procedures purchase United States dollars with such other currency. If the United States dollars so purchased are less than the sum originally due to the Selling Agent in United States dollars hereunder, the Company agrees as a separate obligation and notwithstanding any such judgment, to indemnify the Selling Agent against such loss. If the United States dollars so purchased are greater than the sum originally due to the Selling Agent hereunder, the Selling Agent agrees to pay to the Company an amount equal to the excess of the dollars so purchased over the sum originally due to the Selling Agent hereunder.

 

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14. Acknowledgement. The Company acknowledges and agrees that the Selling Agent is acting solely in the capacity of an arm’s length contractual counterparty to the Company with respect to the offering of Shares contemplated hereby. Additionally, the Selling Agent is not advising the Company or any other person as to any legal, tax, investment, accounting or regulatory matters in any jurisdiction with respect to the offering contemplated hereby or the process leading thereto (irrespective of whether the Selling Agent has advised or is advising the Company on other matters). The Company has conferred with its own advisors concerning such matters and shall be responsible for making its own independent investigation and appraisal of the transactions contemplated hereby, and the Selling Agent shall have no responsibility or liability to the Company or any other person with respect thereto. The Selling Agent advises that it and its affiliates are engaged in a broad range of securities and financial services and that it or its affiliates may have business relationships or enter into contractual relationships with purchasers or potential purchasers of the Company’s securities. Any review by the Selling Agent of the Company, the transactions contemplated hereby or other matters relating to such transactions will be performed solely for the benefit of the Selling Agent and shall not be on behalf of, or for the benefit of, the Company.

 

15. Applicable Law. The validity and interpretations of this Agreement, and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any provisions relating to conflicts of laws.

 

16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

17. Entire Agreement. This Agreement constitutes the entire understanding between the parties hereto as to the matters covered hereby and supersedes all prior understandings, written or oral, relating to such subject matter.

 

[signature page follows]

 

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IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below.

 

MUSCLE MAKER, INC  
   
By:    
Name: Robert E. Morgan  
Title: Chief Executive Officer  

 

Accepted as of the date hereof:

 

TRIPOINT GLOBAL EQUITIES, LLC  
   
By:    
Name: Mark Elenowitz  
Title: Chief Executive Officer  

 

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CERTIFICATE OF AMENDMENT TO

 

ARTICLES OF INCORPORATION

 

OF

 

Muscle Maker, Inc

 

The undersigned hereby certify that:

 

1. They are the Chief Executive Officer and the Secretary, respectively, of Muscle Maker, Inc, a California corporation (the “Corporation”).
   
2. Article 5 of the Articles of Incorporation of the Corporation is deleted in its entirety and replaced with the following (the “Amendment”):
   
  “This corporation is authorized to issue only one class of stock. The total number of shares which this corporation is authorized to issue is 100,000,000.
   
  On the close of business on the date this Certificate of Amendment is filed with the California Secretary of State (the “Effective Time”), each seven (7) shares of stock issued and outstanding or held by the corporation in treasury stock, immediately prior to the Effective Time shall, automatically and without any action on the part of the respective holders thereof or the corporation, be combined and converted into one (1) share of validly issued, fully paid and non-assessable stock, subject to the treatment of fractional share interests as described below (the “Reverse Stock Split”). No fractional shares shall be issued in connection with the Reverse Stock Split, and any fractional shares resulting from the Reverse Stock Split will be rounded down to the nearest whole share of stock.”
   
3. The Amendment has been duly approved by the Board of Directors of the Corporation.
   
4. The Amendment has been duly approved by the required vote of shareholders of the Corporation in accordance with Sections 902 and 903 of the California Corporations Code. The Corporation has one class of stock outstanding and such class of stock is entitled to vote on the Amendment. The total number of outstanding shares entitled to vote on the Amendment at the time that shareholder approval was obtained was 71,721,130 shares of stock. The number of shares voting in favor of the Amendment equaled or exceeded the vote required, such required vote being more than 50% of the outstanding shares of Common Stock voting as a class.
   
  The undersigned further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of their own personal knowledge.

 

IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment, effective as of this 20th day of September, 2017.

 

  By: /s/ Robert E. Morgan
  Name: Robert E. Morgan
  Title: Chief Executive Officer

 

  By: /s/ Tim M.Betts
  Name: Tim M. Betts
  Title: Secretary

 

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EXHIBIT 3.1

 

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED, OR BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT, OR CALL TRANSACTION THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF SUCH SECURITIES BY ANY PERSON FOR A PERIOD OF ONE HUNDRED EIGHTY (180) DAYS IMMEDIATELY FOLLOWING THE DATE OF QUALIFICATION OF THE PUBLIC OFFERING OF THE COMPANY’S SECURITIES PURSUANT TO OFFERING STATEMENT NO. 024-10689, AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION, EXCEPT IN ACCORDANCE WITH FINRA RULE 5110(g)(2).

 

MUSCLE MAKER, INC

 

COMMON STOCK PURCHASE WARRANT

 

Warrant Shares: [●] Issuance Date: [●], 2017

 

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, Tripoint Global Equities, LLC or its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date that is 180 days after the qualification date of the Offering Statement (the “Initial Exercise Date”) and on or before the close of business on the five (5) year anniversary of the qualification date of the Offering Statement (the “Termination Date”) but not thereafter, to subscribe for and purchase from Muscle Maker, Inc, a California corporation (the “Company”), up to [●] shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

 

Section 1. Definitions.

 

Capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Selling Agency Agreement, dated [●], 2017 (the “Agreement”), between the Company and Tripoint Global Equities, LLC.

 

Section 2. Exercise.

 

(a) Method of Exercise. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy of the Notice of Exercise form annexed hereto (the “Notice of Exercise”). Within three (3) trading days after the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is available and specified in the applicable Notice of Exercise. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) trading days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases; provided that the records of the Company, absent manifest error, will be conclusive with respect to the number of Warrant Shares purchasable from time to time hereunder. The Company shall deliver any objection to any Notice of Exercise within one (1) business day after receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

 

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(b) Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $6.60, subject to adjustment hereunder (the “Exercise Price”). Except as where otherwise permitted in accordance with Section 2(c), this Warrant may only be exercised by means of payment by wire transfer or cashier’s check drawn on a United States bank.

 

(c) Cashless Exercise. This Warrant may at the option of the Holder be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

 

(A) = the VWAP on the trading day immediately preceding the date on which Holder elects to exercise this Warrant by means of a “cashless exercise,” as set forth in the applicable Notice of Exercise;

 

(B) = the Exercise Price of this Warrant, as adjusted hereunder; and

 

(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

 

VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market (as defined below), the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (“Bloomberg”) (based on a trading day from 9:30 a.m., Eastern time, to 4:00 p.m., Eastern time), (b) if the OTC Bulletin Board or any market, exchange or quotation system maintained by the OTC Markets Group, Inc., including, without limitation, OTCQB, OTCQX or OTC Pink (or any successors of the foregoing) is not a Trading Market and the Common Stock is then traded on such market, exchange or quotation system, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on such market, exchange or quotation system or (c) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the board of directors of the Company and reasonably acceptable to the Holder, the fees and expenses of which shall be paid by the Company.

 

Trading Market” means the NYSE:MKT, Nasdaq Capital Market, Nasdaq Global Market, Nasdaq Global Select Market, or any other national securities exchange, market, or trading or quotation facility on which the Common Stock is then listed or quoted.

 

(d) Mechanics of Exercise.

 

(i) Delivery of Warrant Shares Upon Exercise. The Company shall use best efforts to cause the Warrant Shares purchased hereunder to be transmitted by the Company’s stock transfer agent and registrar (the “Transfer Agent”) to the Holder by physical delivery to the address specified by the Holder in the Notice of Exercise by the date that is five (5) trading days after the latest of (A) the delivery to the Company of the Notice of Exercise, (B) surrender of this Warrant (if required) and (C) payment of the aggregate Exercise Price as set forth above (including by cashless exercise, if permitted) (such date, the “Warrant Share Delivery Date”). The Warrant Shares shall be deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(d)(vi) before the issuance of such shares, having been paid.

 

(ii) Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

 

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(iii) Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

 

(iv) Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

 

(v) No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

 

(vi) Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that, in the event Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the assignment form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise.

 

(vii) Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

 

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(e) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates (as defined below), and any other Persons (as defined below) acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents, as defined below) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether, and representation and certification to the Company that, this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Securities and Exchange Commission (the “Commission”), as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two (2) trading days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon not less than 61 days’ prior written notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

 

Affiliate” means any Person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, a Person.

 

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Common Stock Equivalents” means any securities of the Company which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

 

Person” means any natural person, corporation, limited liability company, partnership, joint venture, trust, unincorporated organization, or association.

 

Section 3. Certain Adjustments.

 

(a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

(b) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time during which this Warrant is outstanding the Company grants, issues or sells any Common Stock Equivalents or other rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation). The provisions of this Section 3(b) will not apply to any grant, issuance or sale of Common Stock Equivalents or other rights to purchase stock, warrants, securities or other property of the Company which is not made pro rata to the record holders of any class of shares of Common Stock.

 

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(c) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant after such Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction that is (1) an all cash transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Exchange Act, or (3) a Fundamental Transaction involving a person or entity not traded on a national securities exchange, including, but not limited to, the NYSE:MKT, the Nasdaq Global Select Market, the Nasdaq Global Market, or the Nasdaq Capital Market, the Company or any Successor Entity (as defined below) shall, at the option of the Holder or the Company or any Successor Entity, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction, purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction. “Black Scholes Value” means the value of this Warrant based on the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the trading day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(c), and to deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) before such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction). Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein.

 

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(d) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

 

(e) Notice to Holder.

 

(i) Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

 

(ii) Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register (as defined in Section 4(c)) of the Company, at least 10 business days before the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

 

Section 4. Transfer of Warrant.

 

(a) Transferability. This Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this original Warrant shall promptly be cancelled. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. Neither this Warrant nor any Warrant Shares issued upon exercise of this Warrant shall be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the date of qualification or commencement of sales of the offering pursuant to which this Warrant is being issued, except the transfer of any security:

 

(i) by operation of law or by reason of reorganization of the Company;

 

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(ii) to any FINRA member firm participating in the offering and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction in this Section 4(a) for the remainder of the time period; or

 

(iii) the exercise or conversion of any security, if all securities received remain subject to the lock-up restriction in this Section 4(a) for the remainder of the time period.

 

(b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

 

(c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

 

Section 5. Piggyback Registration Rights.

 

To the extent the Company does not maintain an effective registration statement for the Warrant Shares and in the further event that the Company files a registration statement with the Commission covering the sale of its shares of Common Stock (other than a registration statement on Form S-4 or S-8, or on another form, or in another context, in which such “piggyback” registration would be inappropriate), then, for a period commencing on the Initial Exercise Date and terminating on the second (2nd) anniversary of the Initial Exercise Date, the Company shall give written notice of such proposed filing to the holders of Warrant Shares as soon as practicable but in no event less than ten (10) business days before the anticipated filing date, which notice shall describe the amount and type of securities to be included in such offering, the intended method(s) of distribution, and the name of the proposed managing underwriter or underwriters, if any, of the offering, and offer to the holders of Warrant Shares in such notice the opportunity to register the sale of such number of shares of Warrant Shares as such holders may request in writing within five (5) business days after receipt of such notice (a “Piggyback Registration”). The Company shall cause such Warrant Shares to be included in such registration and shall use its best efforts to cause the managing underwriter or underwriters of a proposed underwritten offering to permit the Warrant Shares requested to be included in a Piggyback Registration on the same terms and conditions as any similar securities of the Company and to permit the sale or other disposition of such Warrant Shares in accordance with the intended method(s) of distribution thereof. All holders of Warrant Shares proposing to distribute their securities through a Piggyback Registration that involves an underwriter or underwriters shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such Piggyback Registration.

 

Section 6. Miscellaneous.

 

(a) No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividend rights or other rights as a stockholder of the Company before the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth herein.

 

(b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

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(c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a business day, then, such action may be taken or such right may be exercised on the next succeeding business day.

 

(d) Authorized Shares. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such commercially reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

 

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of the Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

 

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions therefor, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

 

(e) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the laws of the State of New York, without regard to conflict of laws principles, and federal or state courts sitting in the State of New York shall have exclusive jurisdiction over matters arising out of this Warrant.

 

(f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

 

(g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant or the Agreement, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any and all costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

 

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(h) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered to the Holder at its last address as it shall appear upon the Warrant Register.

 

(i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

 

(j) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages alone would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

 

(k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

 

(l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

 

(m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

 

(n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

 

  MUSCLE MAKER, INC
   
  By:  
   Name:  
  Title:  
     
[CORPORATE SEAL]    
     
ATTEST:    
     
     
Secretary    

 

[Signature Page to Selling Agent’s Warrant]

 

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NOTICE OF EXERCISE

 

TO: MUSCLE MAKER, INC

 

(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant, dated _______, 2017, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

(2) Payment shall take the form of (check applicable box):

 

[  ] in lawful money of the United States by wire transfer or cashier’s check drawn on a United States bank; or

 

[  ] if permitted by the terms of the Warrant, the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant pursuant to the cashless exercise procedure set forth in subsection 2(c).

 

(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:

 

   

 

The Warrant Shares shall be delivered to the following DWAC Account Number:

 

   
   
   

 

[SIGNATURE OF HOLDER]

 

Name of Investing Entity:  
   
Signature of Authorized Signatory of Investing Entity:  
   
Name of Authorized Signatory:  
   
Title of Authorized Signatory:  
   
Date:  

 

  1  
     

 

ASSIGNMENT FORM

 

(To assign the foregoing Warrant, execute
this form and supply required information.
Do not use this form to exercise the Warrant.)

 

FOR VALUE RECEIVED, ____ all of or _______ shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

  whose address is:

 

 

 

 

 

Date: ______________, _______

 

Holder’s Signature:  
   
Holder’s Address:  
   
   

 

Signature Guaranteed:  

 

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

  2  
     

 

 

EXHIBIT 3.2

 

THIS WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES ACT OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACTS COVERING THIS WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACTS.

 

MUSCLE MAKER, INC

 

FORM OF WARRANT TO PURCHASE COMMON STOCK

 

WARRANT NO. ______   ISSUED: __________, 2017

 

THIS CERTIFIES THAT, for value received, ___________________ (the “Holder”), is entitled to subscribe for and purchase from Muscle Maker, Inc, a corporation organized under the laws of the state of California (the “Company”), subject to Section 1(b) hereof, commencing at the time periods prescribed herein and ending at 5:00 p.m. California time on _______, 2020 (the “Warrant”), _______ shares (the “Shares”) of common stock of the Company (the “Common Stock”). The exercise price for each Share subject to this Warrant (the “Warrant Price”) is $_____.

 

This Warrant is issued in connection with and as consideration for the Common Stock underlying the Convertible Note dated the date hereof and issued by the in favor of the Holder, which Common Stock has been issued pursuant to the Holder’s investment in the Muscle Maker Brands, Inc.

 

1.       Method of Exercise; Payment; Issuance of New Warrant. (a) The purchase right represented by this Warrant may be exercised by the Holder, in whole or in part, subject to the limitation set forth below, and from time to time, by (i) the surrender of this Warrant (with a notice of exercise in the form attached hereto as Exhibit B, duly executed) at the principal office of the Company and (ii) the payment to the Company, by check or wire transfer of funds to an account specified in writing by the Company, of an amount equal to the aggregate Warrant Price. The Shares so purchased, representing the aggregate number of shares specified in the executed Exhibit B, shall be delivered to the Holder within a reasonable time, not exceeding ten (10) business days, after this Warrant shall have been so exercised. Upon receipt by the Company of this Warrant at the office of the Company, in proper form for exercise and accompanied by the amount equal to the aggregate Warrant Price, the Holder shall be deemed to be the holder of record of the Shares issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Shares shall not then be actually delivered to the Holder.

 

(b)       If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of such Shares, deliver to the Holder a new Warrant evidencing the right to purchase the remaining Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of Holder, appropriate notation may be made on this Warrant which shall then be returned to Holder.

 

     
 

 

2.       Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and non-assessable, and free from all preemptive rights, taxes, liens and charges with respect to the issue thereof; provided, however, that the Company shall not be required to pay any transfer taxes with respect to the issue of shares in any name other than that of the registered holder hereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. The Company shall at all times take all such action and obtain all such permits or orders as may be necessary to enable the Company lawfully to issue such Common Stock as duly and validly issued, fully paid and nonassessable shares upon exercise in full of this Warrant.

 

3.       Fractional Shares. No fractional shares of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Fair Market Value of such Shares.

 

4.       Adjustment. This Warrant shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:

 

(a)       Adjustment for Stock Splits and Combinations. If the Company shall at any time or from time to time after the date hereof effect a subdivision of the outstanding Common Stock, the Warrant Price then in effect immediately before that subdivision shall be proportionately decreased. If the Company shall at any time or from time to time after the date hereof combine the outstanding Common Stock, the Warrant Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this subsection shall become effective at the close of business on the date the subdivision or combination becomes effective.

 

5.       Notice of Record Date. In the event:

 

  (1) that the Company declares a dividend (or any other distribution) on any of its capital stock (including without limitation, its Common Stock);
     
  (2) that the Company repurchases or redeems any of its capital stock (including without limitation, its Common Stock) or any rights to acquire such capital stock;
     
  (3) that the Company subdivides or combines its outstanding shares of Common Stock;
     
  (4) of any reclassification of the Common Stock, or of any consolidation, merger or share exchange of the Company into or with another entity, or of the sale of all or substantially all of the assets of the Company;
     
  (5) of the involuntary or voluntary dissolution, liquidation or winding up of the Company; or

 

then the Company shall notify the Holder at least 10 days prior to the date specified in (A) or (B) below, in writing stating:

 

(A)       the record date of such dividend, distribution, repurchase, redemption, subdivision or combination, or, if a record is not to be taken, the date as to which the holders of Common Stock of record to be entitled to such dividend, distribution, repurchase, redemption, subdivision or combination are to be determined;

 

  2  
 

 

(B)       the date on which such reclassification, consolidation, merger, share exchange, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up; or

 

6.       Compliance with Securities Act. The Holder, by acceptance hereof, agrees that this Warrant and the Shares to be issued upon exercise hereof are being acquired for investment and that such Holder will not offer, sell or otherwise dispose of this Warrant or any Common Stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended (the “Act”). Unless and until the Company has filed a registration statement (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) registering the Shares and such Registration Statement is declared effective by the SEC, all Shares issued upon exercise of this Warrant (unless registered under the Act or sold or transferred pursuant to Rule 144 promulgated under the Act) shall be stamped or imprinted with a legend in substantially the following form:

 

“THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES ACTS OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACTS COVERING THIS SECURITY OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACTS.”

 

7.       Rights as Shareholders. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein.

 

8.       Representations and Warranties. The Company represents and warrants to the Holder as follows:

 

(a)       This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms;

 

(b)       The Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable;

 

(c)       The rights, preferences, privileges and restrictions granted to or imposed upon the Shares and the holders thereof are as set forth in the Company’s Certificate of Incorporation;

 

  3  
 

 

(d)       The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company’s Articles of Incorporation or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and, except for consents that have already been obtained by the Company, do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any federal, state or local government authority or agency or other person; and

 

9.       Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought.

 

10.       Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, telecopier or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered to the applicable party at its address specified opposite its signature below, or at such other address as shall be designated by such party in a written notice to the other. All such notices and communications shall, when mailed, telegraphed, telexed, telecopied or cabled or sent by overnight courier, be effective when deposited in the mails, delivered to the telegraph company, cable company or overnight courier, as the case may be, or sent by telex or telecopier.

 

11.       Descriptive Headings. The descriptive headings of the several sections of this Warrant are inserted for convenience only and do not constitute a part of this Warrant.

 

12.       Governing Law. THIS WARRANT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.

 

13.       Binding Effect on Successors. This Warrant shall be binding upon any entity succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company’s assets, and all of the obligations of the Company relating to the Common Stock issuable upon the exercise of this Warrant shall survive the exercise, and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the Holder.

 

14.       Severability. In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

 

15.       Lost Warrants or Stock Certificates. The Company covenants to the Holder that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate.

 

[Signature Page Follows]

 

  4  
 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed and delivered by its duly authorized officer on the day and year first above written.

 

  MUSCLE MAKER, INC
     
  By:  
  Title:  
  Address: Muscle Maker, Inc.
    200 Space Park Drive, Suite 310, Houston, Texas 77058
    tel: 949-825-5090
    fax: 949-825-5099

 

  5  
 

 

EXHIBIT B

 

NOTICE OF EXERCISE

 

TO: MUSCLE MAKER, INC

 

(1)       The undersigned hereby elects to purchase _____________ shares of Common Stock of MUSCLE MAKER, INC pursuant to the terms of the attached Warrant, and tenders herewith payment of the Warrant Price for such shares in full.

 

(2)       Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below:

 

   
  (Name)
   
   
  (Name)
   
   
  (Address)
   
   
  (Federal Tax ID or SS No.)
   
   
  (Signature)
   
   
  (Date)

 

(3)       Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below:

 

   
  (Name)
   
   
  (Address)
   
   
  (Signature)
   
   
  (Date)

 

     
 

 

 

 

 

EXHIBIT 3.3

 

CONVERTIBLE PROMISSORY NOTE AND WARRANTS

 

$_______________ Houston, Texas
   __________ 2017

 

FOR VALUE RECEIVED, the undersigned maker(s) Muscle Maker, Inc, a California corporation having an address of 2200 Space Park Drive, Suite 310, Houston, Texas 77058 (“MMI”), (the “Borrower”), promises to pay to the order of _____________________, an individual investor having an address of ________________________________ (“Investor”), at such address or at such other place as the Investor or subsequent holder of this Promissory Note (the “Lender”) in the sum of ___________________, to be paid with interest of 10%.

 

  1. The note is convertible into the Borrower’s common stock at a 50% discount to the initial public offering price of MMI stock. For example, if the initial public offering price is $6.00 per share then the conversion price per share will be $3.00.
     
  2. 10% interest with a term of 6 months if not converted. If not converted into common stock after 6 months, then the note plus the 10% interest amount will be repaid in full.
     
  3. The note carries 50% warrant coverage exercisable at the conversion price (see Exhibit A).
     
  4. The Borrower shall maintain the confidentiality of the provisions of this Convertible Promissory Note and shall not disclose any information regarding these matters to any person, except to their attorneys, accountants, financial advisors or taxing authorities as necessary.
     
  5. THIS PROMISSORY NOTE IS DELIVERED AND SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
     
  6. There will be no Prepayment penalty.

 

IN WITNESS WHEREOF, the Borrower has caused this Promissory Note to be executed as an instrument under seal by its duly authorized officer as of the date first above written.

 

    BORROWER:
       
    Muscle Maker, Inc
WITNESS      
       
    By:  
    Print Name: Robert Morgan
    Its: President
       
WITNESS   LENDER:
       
    By:
    Print Name:  

 

     
 

 

 

 

EXHIBIT 4.1

 

SUBSCRIPTION AGREEMENT

 

Common Stock
In
Muscle Maker, Inc

 

This Subscription Agreement relates to my/our agreement to purchase ________ shares of common stock, no par value per share (the “Shares”), to be issued by Muscle Maker, Inc, a California corporation (the “Company”), for a purchase price of $6.00 per Share, for a total purchase price of $___________ (“Subscription Price”), subject to the terms, conditions, acknowledgments, representations and warranties stated herein and in the Final Offering Circular for the sale of the Shares, dated ________, 2017 (the “Circular”). Capitalized terms used but not defined herein shall have the meanings given to them in the Circular.

 

Simultaneously with or subsequent to the execution and delivery hereof, if I have an account with BANQ®, I am authorizing the Selling Agent to debit funds equal to the amount of the Subscription Price from my account at BANQ®; or, if I do not have an account with BANQ® , making either an ACH authorization or a wire transfer pursuant to the escrow instructions set forth in the Offering Circular, or delivered to me by my broker-dealer, in the amount of my Subscription Price, provided that if my broker-dealer or the Selling Agent have arranged to facilitate the funding of the Subscription Price to the escrow account (as described below) through a clearing agent, then I agree to deliver the funds for the Subscription Price pursuant to the instructions provided by such clearing agent, such broker-dealer or the Selling Agent. I understand that if I wish to purchase Shares, I must complete this Subscription Agreement and, if I have an account with BANQ®, have sufficient funds in my account at the time of the execution and delivery of this Subscription Agreement; or, if I do not maintain an account with Banq.co®, submit the applicable Subscription Price as set forth herein. Subscription funds submitted by Investors who do not have an account with BANQ® will be held by and at an FDIC insured bank in compliance with SEC Rule 15c2-4, with funds released to the Company at closing, as described in the Circular. The escrow account will be maintained by Wilmington Trust as escrow agent. In the event that the Offering is terminated, then the Offered Shares will not be sold to investors pursuant to this offering and all funds will be returned to investors from escrow together with interest, if any. If any portion of the Shares is not sold in the offering, any funds paid by me for such portion of the Shares will be returned to me promptly; or, if I have an account with BANQ®, funds for such unsold Shares will not be debited from my account at closing.

 

In order to induce the Company to accept this Subscription Agreement for the Shares and as further consideration for such acceptance, I hereby make, adopt, confirm and agree to all of the following covenants, acknowledgments, representations and warranties with the full knowledge that the Company and its affiliates will expressly rely thereon in making a decision to accept or reject this Subscription Agreement:

 

1. Type of Ownership

 

[  ] Individual

 

[  ] Joint [  ] Institution

 

2. Investor Information (You must include a permanent street address even if your mailing address is a P.O. Box.)

 

Individual/Beneficial Owner:   Joint-Owner/Minor: (If applicable.)

 

Name:

Social Security/Tax ID Number:

Street Address:

City:

State:

Postal Code:

Country:

Phone Number:

Email Address:

 

 

Name:

Social Security/Tax ID Number:

Street Address:

City:

State:

Postal Code:

Country:

Phone Number:

Email Address:

 

1
 

 

3. Investor Eligibility Certifications

 

I understand that to purchase Shares, I must either be an "accredited investor" as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933 (the “Act”), or, unless the securities issued in the offering initially trade on a national securities exchange, I must limit my investment in the Shares to a maximum of: (i) 10% of my net worth or annual income, whichever is greater, if I am a natural person; or (ii) 10% of my revenues or net assets, whichever is greater, for my most recently completed fiscal year, if I am a non-natural person. I understand that if I am a natural person I should determine my net worth for purposes of these representations by calculating the difference between my total assets and total liabilities. I understand this calculation must exclude the value of my primary residence and may exclude any indebtedness secured by my primary residence (up to an amount equal to the value of my primary residence). In the case of fiduciary accounts, net worth and/or income suitability requirements may be satisfied by the beneficiary of the account or by the fiduciary, if the fiduciary directly or indirectly provides funds for the purchase of the Shares.

 

I hereby represent and warrant that I meet the qualifications to purchase Shares because:

 

[  ] The aggregate purchase price for the Common Stock I am purchasing in the Offering does not exceed 10% of my net worth or annual income, whichever is greater.

 

[  ] The aggregate purchase price for the Common Stock I am purchasing in the Offering does exceed 10% of my net worth or annual income, whichever is greater. I understand that my full subscription may only be accepted if the securities trade on a national securities exchange.

 

[  ] I am an accredited investor.

 

4. I understand that the Company reserves the right to, in its sole discretion, accept or reject this subscription, in whole or in part, for any reason whatsoever, and to the extent not accepted, unused funds maintained in my account at BANQ® or transmitted herewith shall either not be debited from my account at BANQ® or be returned to the undersigned in full, with any interest accrued thereon.

 

5. I have received the Circular.

 

6. I accept the terms of the Articles of Incorporation of the Company.

 

7. I am purchasing the Shares for my own account.

 

8. I hereby represent and warrant that I am not on, and am not acting as an agent, representative, intermediary or nominee for any person identified on, the list of blocked persons maintained by the Office of Foreign Assets Control, U.S. Department of Treasury. In addition, I have complied with all applicable U.S. laws, regulations, directives, and executive orders relating to anti-money laundering, including but not limited to the following laws: (1) the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56; and (2) Executive Order 13224 (Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism) of September 23, 2001. By making the foregoing representations you have not waived any right of action you may have under federal or state securities law. Any such waiver would be unenforceable. The Company will assert your representations as a defense in any subsequent litigation where such assertion would be relevant. This subscription agreement and all rights hereunder shall be governed by, and interpreted in accordance with, the laws of the State of California without giving effect to the principles of conflict of laws.

 

2
 

 

9. Digital (“electronic”) signatures, often referred to as an “e-signature”, enable paperless contracts and help speed up business transactions. The 2001 E-Sign Act was meant to ease the adoption of electronic signatures. The mechanics of this Subscription Agreement’s electronic signature include your signing this Agreement below by typing in your name, with the underlying software recording your IP address, your browser identification, the timestamp, and a securities hash within an SSL encrypted environment. This electronically signed Subscription Agreement will be available to both you and the Company, as well as any associated brokers, so they can store and access it at any time, and it will be stored and accessible on Banq.co®. You and the Company each hereby consent and agree that electronically signing this Agreement constitutes your signature, acceptance and agreement as if actually signed by you in writing. Further, all parties agree that no certification authority or other third party verification is necessary to validate any electronic signature; and that the lack of such certification or third party verification will not in any way affect the enforceability of your signature or resulting contract between you and the Company. You understand and agree that your e-signature executed in conjunction with the electronic submission of this Subscription Agreement shall be legally binding and such transaction shall be considered authorized by you. You agree your electronic signature is the legal equivalent of your manual signature on this Subscription Agreement and you consent to be legally bound by this Subscription Agreement’s terms and conditions. Furthermore, you and the Company each hereby agree that all current and future notices, confirmations and other communications regarding this Subscription Agreement specifically, and future communications in general between the parties, may be made by email, sent to the email address of record as set forth in this Subscription Agreement or as otherwise from time to time changed or updated and disclosed to the other party, without necessity of confirmation of receipt, delivery or reading, and such form of electronic communication is sufficient for all matters regarding the relationship between the parties. If any such electronically sent communication fails to be received for any reason, including but not limited to such communication being diverted to the recipient’s spam filters by the recipient’s email service provider, or due to a recipient’s change of address, or due to technology issues by the recipient’s service provider, the parties agree that the burden of such failure to receive is on the recipient and not the sender, and that the sender is under no obligation to resend communications via any other means, including but not limited to postal service or overnight courier, and that such communications shall for all purposes, including legal and regulatory, be deemed to have been delivered and received. No physical, paper documents will be sent to you, and if you desire physical documents then you agree to be satisfied by directly and personally printing, at your own expense, the electronically sent communication(s) and maintaining such physical records in any manner or form that you desire.

 

10. Delivery Instructions. If you are funding outside of your BANQ® account via escrow through either an ACH authorization or a wire transfer pursuant to the escrow instructions set forth in the Offering Circular, or delivered to me by my broker-dealer, in the amount of my Subscription Price, provided that if my broker-dealer or the Selling Agent have arranged to facilitate the funding of the Subscription, please fill out the information below to have your shares delivered to your broker, held at the transfer agent or delivered to your residence. All orders entered on BANQ® will have shares delivered directly to BANQ®

 

[  ] Retain at the transfer agent

 

[  ] Deliver to the address of record above.

 

[  ] Deliver to my brokerage account at the following instructions:

 

DWAC INSTRUCTIONS

 

Name of DTC Participant (broker-dealer at which the account or accounts to be credited with the Common Stock are maintained): _______________________________

 

DTC Participant Number: _______________________________

 

Name of Account at DTC Participant being credited with the Common Stock: _____________________________

 

Account Number at DTC Participant being credited with the Common Stock: _____________________________

 

Your Consent is Hereby Given: By signing this Subscription Agreement electronically, you are explicitly agreeing to receive documents electronically including your copy of this signed Subscription Agreement as well as ongoing disclosures, communications and notices.

 

SIGNATURES:

 

THE UNDERSIGNED HAS THE AUTHORITY TO ENTER INTO THIS SUBSCRIPTION AGREEMENT ON BEHALF OF THE PERSON(S) OR ENTITY REGISTERED ABOVE.

 

Subscriber:   Issuer:
     
     
Name:   Name: Robert E. Morgan
Email:   Company: Muscle Maker, Inc
Date:   Title: Chief Executive Officer

 

3
 

 

 

EXHIBIT 4.2

 

SUBSCRIPTION AGREEMENT

 

Common Stock
In
Muscle Maker, Inc.

 

This Subscription Agreement relates to my/our agreement to purchase _____________________________ shares of common stock, no par value per share (the “Shares”), to be issued by Muscle Maker, Inc., a California corporation (the “Company”), for a purchase price of $6.00 per Share, for a total purchase price of $____________________________ (“Subscription Price”), subject to the terms, conditions, acknowledgments, representations and warranties stated herein and in the Final Offering Circular for the sale of the Shares, dated ________, 2017 (the “Circular”). Capitalized terms used but not defined herein shall have the meanings given to them in the Circular.

 

Simultaneously with or subsequent to the execution and delivery hereof, if I have an account with Banq.co®, I am authorizing the Selling Agent to debit funds equal to the amount of the Subscription Price from my account at Banq.co®; or, if I do not have an account with Banq.co® , making either an ACH authorization or a wire transfer pursuant to the escrow instructions set forth in the Offering Circular, or delivered to me by my broker-dealer, in the amount of my Subscription Price, provided that if my broker-dealer or the Selling Agent have arranged to facilitate the funding of the Subscription Price to the escrow account (as described below) through a clearing agent, then I agree to deliver the funds for the Subscription Price pursuant to the instructions provided by such clearing agent, such broker-dealer or the Selling Agent. I understand that if I wish to purchase Shares, I must complete this Subscription Agreement and, if I have an account with Banq.co®, have sufficient funds in my account at the time of the execution and delivery of this Subscription Agreement; or, if I do not maintain an account with Banq.co®, submit the applicable Subscription Price as set forth herein. Subscription funds submitted by Investors who do not have an account with Banq.co® will be held by and at an FDIC insured bank in compliance with SEC Rule 15c2-4, with funds released to the Company at closing ,as described in the Circular. The escrow account will be maintained by Wilmington Trust as escrow agent. In the event that the Offering is terminated, then the Offered Shares will not be sold to investors pursuant to this offering and all funds will be returned to investors from escrow together with interest, if any. If any portion of the Shares is not sold in the offering, any funds paid by me for such portion of the Shares will be returned to me promptly; or, if I have an account with Banq.co®, funds for such unsold Shares will not be debited from my account at closing.

 

In order to induce the Company to accept this Subscription Agreement for the Shares and as further consideration for such acceptance, I hereby make, adopt, confirm and agree to all of the following covenants, acknowledgments, representations and warranties with the full knowledge that the Company and its affiliates will expressly rely thereon in making a decision to accept or reject this Subscription Agreement:

 

1. Type of Ownership

 

[  ] Individual

[  ] Institution

 

2. Investor Information (You must include a permanent street address even if your mailing address is a P.O. Box.)

 

Individual/Beneficial Owner:  
Name: Social Security/Tax ID Number:
Street Address: City:
Region: Postal Code:
Country: Phone Number:
Email Address:  

 

     
 

 

Joint-Owner/Minor: (If applicable.)  
Name: Social Security/Tax ID Number:
Street Address: City:
Region: Postal Code:
Country: Phone Number:
Email Address:  

 

3. Investor Eligibility Certifications

 

I understand that to purchase Shares, I must either be an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933 (the “Act”), or I must limit my investment in the Shares to a maximum of: (i) 10% of my net worth or annual income, whichever is greater, if I am a natural person; or (ii) 10% of my revenues or net assets, whichever is greater, for my most recently completed fiscal year, if I am a non-natural person.

 

I understand that if I am a natural person I should determine my net worth for purposes of these representations by calculating the difference between my total assets and total liabilities. I understand this calculation must exclude the value of my primary residence and may exclude any indebtedness secured by my primary residence (up to an amount equal to the value of my primary residence). In the case of fiduciary accounts, net worth and/or income suitability requirements may be satisfied by the beneficiary of the account or by the fiduciary, if the fiduciary directly or indirectly provides funds for the purchase of the Shares.

 

I hereby represent and warrant that I meet the qualifications to purchase Shares because:

 

[  ] The aggregate purchase price for the Common Stock I am purchasing in the Offering does not exceed 10% of my net worth or annual income, whichever is greater.

 

[  ] I am an accredited investor.

 

4. I understand that the Company reserves the right to, in its sole discretion, accept or reject this subscription, in whole or in part, for any reason whatsoever, and to the extent not accepted, unused funds maintained in my account at Banq.co® or transmitted herewith shall either not be debited from my account at Banq.co® or be returned to the undersigned in full, with any interest accrued thereon.

 

5. I have received the Circular.

 

6. I accept the terms of the Articles of Incorporation of the Company.

 

7. I am purchasing the Shares for my own account.

 

8. I hereby represent and warrant that I am not on, and am not acting as an agent, representative, intermediary or nominee for any person identified on, the list of blocked persons maintained by the Office of Foreign Assets Control, U.S. Department of Treasury. In addition, I have complied with all applicable U.S. laws, regulations, directives, and executive orders relating to anti-money laundering, including but not limited to the following laws: (1) the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56; and (2) Executive Order 13224 (Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism) of September 23, 2001.

 

By making the foregoing representations you have not waived any right of action you may have under federal or state securities law. Any such waiver would be unenforceable. The Company will assert your representations as a defense in any subsequent litigation where such assertion would be relevant. This subscription agreement and all rights hereunder shall be governed by, and interpreted in accordance with, the laws of the State of California without giving effect to the principles of conflict of laws.

 

     
 

 

9. Digital (“electronic”) signatures, often referred to as an “e-signature”, enable paperless contracts and help speed up business transactions. The 2001 E-Sign Act was meant to ease the adoption of electronic signatures. The mechanics of this Subscription Agreement’s electronic signature include your signing this Agreement below by typing in your name, with the underlying software recording your IP address, your browser identification, the timestamp, and a securities hash within an SSL encrypted environment. This electronically signed Subscription Agreement will be available to both you and the Company, as well as any associated brokers, so they can store and access it at any time, and it will be stored and accessible on Banq.co®. You and the Company each hereby consent and agree that electronically signing this Agreement constitutes your signature, acceptance and agreement as if actually signed by you in writing. Further, all parties agree that no certification authority or other third party verification is necessary to validate any electronic signature; and that the lack of such certification or third party verification will not in any way affect the enforceability of your signature or resulting contract between you and the Company. You understand and agree that your e-signature executed in conjunction with the electronic submission of this Subscription Agreement shall be legally binding and such transaction shall be considered authorized by you. You agree your electronic signature is the legal equivalent of your manual signature on this Subscription Agreement and you consent to be legally bound by this Subscription Agreement’s terms and conditions. Furthermore, you and the Company each hereby agree that all current and future notices, confirmations and other communications regarding this Subscription Agreement specifically, and future communications in general between the parties, may be made by email, sent to the email address of record as set forth in this Subscription Agreement or as otherwise from time to time changed or updated and disclosed to the other party, without necessity of confirmation of receipt, delivery or reading, and such form of electronic communication is sufficient for all matters regarding the relationship between the parties. If any such electronically sent communication fails to be received for any reason, including but not limited to such communication being diverted to the recipient’s spam filters by the recipient’s email service provider, or due to a recipient’s change of address, or due to technology issues by the recipient’s service provider, the parties agree that the burden of such failure to receive is on the recipient and not the sender, and that the sender is under no obligation to resend communications via any other means, including but not limited to postal service or overnight courier, and that such communications shall for all purposes, including legal and regulatory, be deemed to have been delivered and received. No physical, paper documents will be sent to you, and if you desire physical documents then you agree to be satisfied by directly and personally printing, at your own expense, the electronically sent communication(s) and maintaining such physical records in any manner or form that you desire.

 

10. Delivery Instructions. If you are funding outside of your BANQ® account via escrow through either an ACH authorization or a wire transfer pursuant to the escrow instructions set forth in the Offering Circular, or delivered to me by my broker-dealer, in the amount of my Subscription Price, provided that if my broker-dealer or the Selling Agent have arranged to facilitate the funding of the Subscription, please fill out the information below to have your shares delivered to your broker, held at the transfer agent or delivered to your residence. All orders entered on BANQ® will have shares delivered directly to BANQ®

 

[  ] Retain at the transfer agent

 

[  ] Deliver to the address of record above.

 

[  ] Deliver to my brokerage account at the following instructions:

 

DWAC INSTRUCTIONS

 

  Name of DTC Participant (broker-dealer at which the account  

 

  or accounts to be credited with the Common Stock are maintained):  

 

  DTC Participant Number:  

 

Name of Account at DTC Participant being

  credited with the Common Stock  

 

Account Number at DTC Participant being credited

  with the Common Stock:  

 

     
 

 

Your Consent is Hereby Given: By signing this Subscription Agreement electronically, you are explicitly agreeing to receive documents electronically including your copy of this signed Subscription Agreement as well as ongoing disclosures, communications and notices.

 

SIGNATURES:

 

THE UNDERSIGNED HAS THE AUTHORITY TO ENTER INTO THIS SUBSCRIPTION AGREEMENT ON BEHALF OF THE PERSON(S) OR ENTITY REGISTERED ABOVE.

 

Subscriber:  
   
Name:  
Email:  
Date:  

 

     
Issuer:    
     
 
Name: Robert Morgan  
Email:  Muscle Maker, Inc.  
Date: Chief Executive Officer  

 

     
 

 

 

 

EXHIBIT 6.1

 

MUSCLE MAKER, INC

 

2017 STOCK OPTION AND STOCK ISSUANCE PLAN

 

ARTICLE ONE

 

GENERAL PROVISIONS

 

I. PURPOSE OF THE PLAN

 

This 2017 Stock Option and Stock Issuance Plan is intended to promote the interests of Muscle Maker, Inc, a California corporation, by providing eligible persons in the Corporation’s employ or service with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to continue in such employ or service.

 

Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix.

 

II. STRUCTURE OF THE PLAN

 

A. The Plan shall be divided into two separate equity programs:

 

(i) the Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, and

 

(ii) the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary).

 

B. The provisions of Articles One and Four shall apply to both equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan.

 

III. ADMINISTRATION OF THE PLAN

 

A. The Plan shall be administered by the Plan Administrator. However, any or all administrative functions otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee by majority vote of the Committee.

 

B. The Plan Administrator shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any option grant or stock issuance thereunder.

 

IV. ELIGIBILITY

 

A. The persons eligible to participate in the Plan are as follows:

 

(i) employees,

 

(ii) non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary, and

 

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(iii) consultants and other independent contractors who provide services to the Corporation (or any Parent or Subsidiary).

 

B. The Plan Administrator shall have full authority to determine, (i) with respect to the grants made under the Option Grant Program, which eligible persons are to receive such grants, the time or times when those grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding, and (ii) with respect to stock issuances made under the Stock Issuance Program, which eligible persons are to receive such issuances, the time or times when those issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid by the Participant for such shares.

 

C. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program.

 

V. STOCK SUBJECT TO THE PLAN

 

A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 10,000,000 shares.

 

B. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent: (i) the options expire or terminate for any reason prior to exercise in full; or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently repurchased by the Corporation, at the option exercise or direct issue price paid per share, pursuant to the Corporation’s repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan.

 

C. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to: (i) the maximum number and/or class of securities issuable under the Plan; and (ii) the number and/or class of securities and the exercise price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding, and conclusive. In no event shall any such adjustments be made in connection with the conversion of one or more outstanding shares of the Corporation’s preferred stock into shares of Common Stock.

 

ARTICLE TWO

 

OPTION GRANT PROGRAM

 

I. OPTION TERMS

 

Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options.

 

A. Exercise Price.

 

1. The exercise price per share shall be fixed by the Plan Administrator in accordance with the following provisions:

 

(i) The exercise price per share shall not be less than 100% of the Fair Market Value per share of Common Stock on the option grant date.

 

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(ii) If the person to whom the option is granted is a 10% Stockholder, then the exercise price per share shall not be less than 110% of the Fair Market Value per share of Common Stock on the option grant date.

 

2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Four and the documents evidencing the option, be payable in cash or check made payable to the Corporation. Should the Common Stock be registered under Section 12 of the 1934 Act at the time the option is exercised, then the exercise price may also be paid as follows:

 

(i) in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date; or

 

(ii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions (A) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (B) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale.

 

Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

 

B. Exercise and Term of Options. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option grant. However, no option shall have a term in excess of ten years measured from the option grant date.

 

C. Effect of Termination of Service.

 

1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death:

 

(i) Should the Optionee cease to remain in Service for any reason other than death, Disability or Misconduct, then the Optionee shall have a period of three months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee.

 

(ii) Should Optionee’s Service terminate by reason of Disability, then the Optionee shall have a period of 12 months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee.

 

(iii) If the Optionee dies while holding an outstanding option, then the personal representative of his or her estate or the person or persons to whom the option is transferred pursuant to the Optionee’s will or the laws of inheritance or the Optionee’s designated beneficiary or beneficiaries of that option shall have a 12-month period following the date of the Optionee’s death to exercise such option.

 

(iv) Under no circumstances, however, shall any such option be exercisable after the specified expiration of the option term.

 

(v) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee’s cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee’s cessation of Service, terminate and cease to be outstanding with respect to any and all option shares for which the option is not otherwise at the time exercisable or in which the Optionee is not otherwise at that time vested.

 

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(vi) Should Optionee’s Service be terminated for Misconduct or should Optionee otherwise engage in Misconduct while holding one or more outstanding options under the Plan, then all those options shall terminate immediately and cease to remain outstanding.

 

2. The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to:

 

(i) extend the period of time for which the option is to remain exercisable following Optionee’s cessation of Service or death from the limited period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term; and

 

(ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee’s cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service.

 

D. Stockholder Rights. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price, and become the recordholder of the purchased shares.

 

E. Unvested Shares. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. The Plan Administrator may not impose a vesting schedule upon any option grant or the shares of Common Stock subject to that option which is more restrictive than 20% per year vesting, with the initial vesting to occur not later than one year after the option grant date. However, such limitation shall not be applicable to any option grants made to individuals who are officers of the Corporation, non-employee Board members, or independent contractors.

 

F. Limited Transferability of Options. An Incentive Stock Option shall be exercisable only by the Optionee during his or her lifetime and shall not be assignable or transferable other than by will or by the laws of inheritance following the Optionee’s death. A Non-Statutory Option may be assigned in whole or in part during the Optionee’s lifetime to one or more members of the Optionee’s family or to a trust established exclusively for one or more such family members or to Optionee’s former spouse, to the extent such assignment is in connection with the Optionee’s estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the Non-Statutory Option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. Notwithstanding the foregoing, the Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under the Plan and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee’s death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee’s death.

 

II. INCENTIVE OPTIONS

 

The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Four shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options shall not be subject to the terms of this Section II.

 

A. Eligibility. Incentive Options may only be granted to Employees.

 

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B. Exercise Price. The exercise price per share shall not be less than 100% of the Fair Market Value per share of Common Stock on the option grant date.

 

C. Dollar Limitation. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of $100,000. To the extent the Employee holds two or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted.

 

III. CORPORATE TRANSACTION

 

A. The shares subject to each option outstanding under the Plan at the time of a Corporate Transaction shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all of the shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, the shares subject to an outstanding option shall not vest on such an accelerated basis if and to the extent: (i) such option is assumed by the successor corporation (or parent thereof) in the Corporate Transaction and any repurchase rights of the Corporation with respect to the unvested option shares are concurrently assigned to such successor corporation (or parent thereof); or (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those unvested option shares; or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant.

 

B. All outstanding repurchase rights under the Option Grant Program shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction; or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued.

 

C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof).

 

D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to: (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction; and (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of the outstanding options under this Plan, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction.

 

E. The Plan Administrator shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure one or more options so that those options shall automatically accelerate and vest in full (and any repurchase rights of the Corporation with respect to the unvested shares subject to those options shall immediately terminate) upon the occurrence of a Corporate Transaction, whether or not those options are to be assumed in the Corporate Transaction.

 

F. The Plan Administrator shall also have full power and authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure such option so that the shares subject to that option will automatically vest on an accelerated basis should the Optionee’s Service terminate by reason of an Involuntary Termination within a designated period (not to exceed 18 months) following the effective date of any Corporate Transaction in which the option is assumed and the repurchase rights applicable to those shares do not otherwise terminate. Any option so accelerated shall remain exercisable for the fully-vested option shares until the expiration or sooner termination of the option term. In addition, the Plan Administrator may provide that one or more of the Corporation’s outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate on an accelerated basis, and the shares subject to those terminated rights shall accordingly vest at that time.

 

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G. The portion of any Incentive Option accelerated in connection with a Corporate Transaction shall remain exercisable as an Incentive Option only to the extent the applicable $100,000 limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws.

 

H. The grant of options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

 

IV. CANCELLATION AND REGRANT OF OPTIONS

 

The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Plan and to grant in substitution therefor new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new option grant date.

 

ARTICLE THREE

 

STOCK ISSUANCE PROGRAM

 

I. STOCK ISSUANCE TERMS

 

Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below.

 

A. Purchase Price.

 

1. The purchase price per share shall be fixed by the Plan Administrator but shall not be less than 100% of the Fair Market Value per share of Common Stock on the issue date. However, the purchase price per share of Common Stock issued to a 10% Stockholder shall not be less than 110% of such Fair Market Value.

 

2. Subject to the provisions of Section I of Article Four, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance:

 

(i) cash or check made payable to the Corporation; or

 

(ii) past services rendered to the Corporation (or any Parent or Subsidiary).

 

B. Vesting Provisions.

 

1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant’s period of Service or upon attainment of specified performance objectives. However, the Plan Administrator may not impose a vesting schedule upon any stock issuance effected under the Stock Issuance Program which is more restrictive than 20% per year vesting, with initial vesting to occur not later than one year after the issuance date. Such limitation shall not apply to any Common Stock issuances made to the officers of the Corporation, non-employee Board members, or independent contractors.

 

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2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant’s unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant’s unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

 

3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant’s interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares.

 

4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant’s purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to such surrendered shares.

 

5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the non-completion of the vesting schedule applicable to those shares. Such waiver shall result in the immediate vesting of the Participant’s interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant’s cessation of Service or the attainment or non-attainment of the applicable performance objectives.

 

II. CORPORATE TRANSACTION

 

A. Upon the occurrence of a Corporate Transaction, all outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction; or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued.

 

B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation’s repurchase rights with respect to those shares remain outstanding, to provide that those rights shall automatically terminate on an accelerated basis, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant’s Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed 18 months) following the effective date of any Corporate Transaction in which those repurchase rights are assigned to the successor corporation (or parent thereof).

 

III. SHARE ESCROW/LEGENDS

 

Unvested shares may, in the Plan Administrator’s discretion, be held in escrow by the Corporation until the Participant’s interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares.

 

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ARTICLE FOUR

 

MISCELLANEOUS

 

I. FINANCING

 

The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Option Grant Program or the purchase price for shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments and secured by the purchased shares. However, any promissory note delivered by a consultant must be secured by collateral in addition to the purchased shares of Common Stock. In no event may the maximum credit available to the Optionee or Participant exceed the sum of: (i) the aggregate option exercise price or purchase price payable for the purchased shares; plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase.

 

II. EFFECTIVE DATE AND TERM OF PLAN

 

A. The Plan shall become effective when adopted by the Board, but no option granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation’s stockholders. If such stockholder approval is not obtained within 12 months after the date of the Board’s adoption of the Plan, then all options previously granted under the Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. Subject to such limitation, the Plan Administrator may grant options and issue shares under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan.

 

B. The Plan shall terminate upon the earliest of: (i) the expiration of the ten year period measured from the date the Plan is adopted by the Board; (ii) the date on which all shares available for issuance under the Plan shall have been issued as vested shares; or (iii) the termination of all outstanding options in connection with a Corporate Transaction. All options and unvested stock issuances outstanding at the time of a clause (i) termination event shall continue to have full force and effect in accordance with the provisions of the documents evidencing those options or issuances.

 

III. AMENDMENT OF THE PLAN

 

A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws and regulations.

 

B. Options may be granted under the Option Grant Program and shares may be issued under the Stock Issuance Program which are in each instance in excess of the number of shares of Common Stock then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within 12 months after the date the first such excess grants or issuances are made, then: (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding; and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding.

 

IV. USE OF PROCEEDS

 

Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes.

 

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V. WITHHOLDING

 

The Corporation’s obligation to deliver shares of Common Stock upon the exercise of any options granted under the Plan or upon the issuance or vesting of any shares issued under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements.

 

VI. REGULATORY APPROVALS

 

The implementation of the Plan, the granting of any options under the Plan and the issuance of any shares of Common Stock: (i) upon the exercise of any option; or (ii) under the Stock Issuance Program shall be subject to the Corporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it.

 

VII. NO EMPLOYMENT OR SERVICE RIGHTS

 

Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person’s Service at any time for any reason, with or without cause.

 

ATTACHMENTS

 

Appendix - Definitions Section

Notice of Grant of Stock Option

Exhibit A - Stock Option Agreement

Exhibit B - Stock Purchase Agreement

Exhibit C - 2017 Stock Option and Stock Issuance Plan

Stock Option Agreement

Stock Purchase Agreement

Spousal Acknowledgement

Assignment Separate from Certificate

Federal Income Tax Consequences and Section 83(b) Election

Section 83(b) Election

Stock Issuance Agreement

Spousal Acknowledgement

Section 83(b) Election

[The Plan is also an attachment.]

Appendix

 

DEFINITIONS SECTION

 

The following definitions shall be in effect under the Plan:

 

A. Agreement shall mean the Stock Option Agreement attached hereto.

 

B. Board shall mean the Corporation’s Board of Directors.

 

C. Code shall mean the Internal Revenue Code of 1986, as amended.

 

D. Committee shall mean a committee of two or more Board members appointed by the Board to exercise one or more administrative functions under the Plan.

 

E. Common Stock shall mean the Corporation’s common stock.

 

F. Corporate Transaction shall mean either of the following stockholder-approved transactions to which the Corporation is a party:

 

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(i) a merger or consolidation in which securities possessing more than 50% of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction; or

 

(ii) the sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation or dissolution of the Corporation.

 

G. Corporation shall mean Muscle Maker, Inc, a California corporation, and any successor corporation to all or substantially all of the assets or voting stock of Muscle Maker, Inc which shall by appropriate action adopt the Plan.

 

H. Disability shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances.

 

I. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

 

J. Exercise Date shall mean the date on which the Corporation shall have received written notice of the option exercise.

 

K. Exercise Price shall mean the exercise price payable per Option Share as specified in the Grant Notice.

 

L. Expiration Date shall mean the date on which the option expires as specified in the Grant Notice.

 

M. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

 

(i) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange and published in The Wall Street Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

 

(ii) If the Common Stock was traded over-the-counter on the date in question, then the Fair Market Value shall be equal to the last transaction price quoted for such date by the OTC Bulletin Board or, if not so quoted, shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which the Stock is quoted, or if the Stock is not quoted on any such system, by the Pink OTC Markets Inc.

 

(iii) If the Common Stock is at the time not listed on any Stock Exchange, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate.

 

N. Grant Date shall mean the date of grant of the option as specified in the Grant Notice.

 

O. Grant Notice shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the Option evidenced hereby.

 

P. Incentive Option shall mean an option which satisfies the requirements of Code Section 422.

 

Q. Involuntary Termination shall mean the termination of the Service of any individual which occurs by reason of:

 

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(i) such individual’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct; or

 

(ii) such individual’s voluntary resignation following (A) a change in his or her position with the Corporation (or Parent or Subsidiary employing such individual) which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonus under any corporate-performance based bonus or incentive programs) by more than 15% or (C) a relocation of such individual’s place of employment by more than 50 miles, provided and only if such change, reduction or relocation is effected without the individual’s consent.

 

R. Market Stand-Off shall mean the market stand-off restriction specified in Paragraph C.3 of the Stock Purchase Agreement and Paragraph C.3 of the Stock Issuance Agreement.

 

S. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not in any way preclude or restrict the right of the Corporation (or any Parent or Subsidiary) to discharge or dismiss any Optionee or Participant or other person in the Service of the Corporation (or any Parent or Subsidiary) for any other acts or omissions, but such other acts or omissions shall not be deemed, for purposes of the Plan, to constitute grounds for termination for Misconduct.

 

T. 1933 Act shall mean the Securities Act of 1933, as amended.

 

U. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.

 

V. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422.

 

W. Option shall have the meaning assigned to such term as set forth in Paragraph A.1 of the Stock Purchase Agreement.

 

X. Option Agreement shall mean all agreements and other documents evidencing the Option.

 

Y. Optionee shall mean the person to whom the Option is granted under the Plan.

 

Z. Owner shall mean Optionee and all subsequent holders of the Purchased Shares who derive their chain of ownership through a Permitted Transfer from Optionee.

 

AA. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

 

BB. Participant shall mean any person who is issued shares of Common Stock under the Stock Issuance Program.

 

CC. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased Shares, provided and only if Optionee obtains the Corporation’s prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to Optionee’s will or the laws of inheritance following Optionee’s death or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by Optionee in connection with the acquisition of the Purchased Shares.

 

DD. Plan shall mean the Corporation’s 2017 Stock Option and Stock Issuance Plan.

 

EE. Plan Administrator shall mean either the Board or a committee of the Board acting in its capacity as administrator of the Plan.

 

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FF. Purchase Agreement shall mean the Stock Purchase Agreement in substantially the form of Exhibit B to the Grant Notice.

 

GG. Recapitalization shall mean any stock split, stock dividend, recapitalization, combination of shares, exchange of shares, or other change affecting the Corporation’s outstanding Common Stock as a class without the Corporation’s receipt of consideration.

 

HH. Reorganization shall mean any of the following transactions:

 

(i) a merger or consolidation in which the Corporation is not the surviving entity;

 

(ii) a sale, transfer or other disposition of all or substantially all of the Corporation’s assets;

 

(iii) a reverse merger in which the Corporation is the surviving entity but in which the Corporation’s outstanding voting securities are transferred in whole or in part to a person or persons different from the persons holding those securities immediately prior to the merger; or

 

(iv) any transaction effected primarily to change the state in which the Corporation is incorporated or to create a holding company structure.

 

II. Repurchase Right shall mean the right granted to the Corporation in accordance with Paragraph D of the Stock Purchase Agreement.

 

JJ. SEC shall mean the Securities and Exchange Commission.

 

KK. Service shall mean the Optionee’s performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an employee, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance, a non-employee member of the board of directors or an independent consultant.

 

LL. Stock Exchange shall mean the Nasdaq Stock Exchange, NYSE American LLC, or the New York Stock Exchange.

 

MM. Stock Issuance Agreement shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program.

 

NN. Stock Issuance Program shall mean the stock issuance program in effect under the Plan.

 

OO. 10% Stockholder shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than 10% of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary).

 

PP. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

 

QQ. Vesting Schedule shall mean the vesting schedule specified in the Grant Notice pursuant to which the Optionee is to vest in the Option Shares in a series of installments over his or her period of Service.

 

RR. Unvested Shares shall have the meaning assigned to such term in accordance with Paragraph D.1 of the Stock Purchase Agreement.

 

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MUSCLE MAKER, INC

 

NOTICE OF GRANT OF STOCK OPTION

 

Notice is hereby given of the following Option grant to purchase shares of the Common Stock of Muscle Maker, Inc:

 

Optionee:_____________________________________________________________  
   
Grant Date: ____________________________________________________________  
   
Vesting Commencement Date: ______________________________________________  
   
Exercise Price: $_________________________ per share  
   
Number of Option Shares: _________________ shares of Common Stock  
   
Expiration Date: _________________________________________________________  

 

  Type of Option:   Incentive Stock Option
         
      Non-Statutory Stock Option

 

Date Exercisable: Immediately Exercisable

 

Vesting Schedule: The Option Shares shall initially be unvested and subject to repurchase by the Corporation at the Exercise Price paid per share. Optionee shall acquire a vested interest in, and the Corporation’s repurchase right shall accordingly lapse with respect to: (i) twenty percent (20%) of the Option Shares upon Optionee’s completion of one (1) year of Service measured from the Vesting Commencement Date and (ii) the balance of the Option Shares in a series of forty-eight (48) successive equal monthly installments upon Optionee’s completion of each additional month of Service over the forty-eight (48)-month period measured from the first anniversary of the Vesting Commencement Date. The Option shall not become exercisable for any additional Option Shares following the Optionee’s cessation of Service, except to the extent (if any) specifically authorized by the Plan Administrator in its sole discretion pursuant to an express written agreement with Optionee.

 

Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the Muscle Maker, Inc 2017 Stock Option and Stock Issuance Plan. Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit A.

 

Optionee understands that any Option Shares purchased under the Option will be subject to the terms set forth in the Stock Purchase Agreement attached hereto as Exhibit B. Optionee hereby acknowledges receipt of a copy of the Plan in the form attached hereto as Exhibit C.

 

REPURCHASE RIGHTS. OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO CERTAIN REPURCHASE RIGHTS AND RIGHTS OF FIRST REFUSAL EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS. THE TERMS OF SUCH RIGHTS ARE SPECIFIED IN THE ATTACHED STOCK PURCHASE AGREEMENT.

 

At Will Employment. Nothing in this Notice or in the attached Stock Option Agreement or Plan shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee’s Service at any time for any reason, with or without cause.

 

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Definitions. All capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Stock Option Agreement.

 

DATED: __________________, ___________

 

  MUSCLE MAKER, INC
   
   
  By:
  ITS:  
      
     
    OPTIONEE  
     
  Address: 
     

 

Attachments:

 

Exhibit A - Stock Option Agreement

 

Exhibit B - Stock Purchase Agreement

 

Exhibit C - 2017 Stock Option and Stock Issuance Plan

 

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MUSCLE MAKER, INC

 

STOCK OPTION AGREEMENT

 

RECITALS

 

A. The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board or the board of directors of any Parent or Subsidiary and consultants and other independent advisors in the service of the Corporation (or any Parent or Subsidiary).

 

B. Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Corporation’s grant of an option to Optionee.

 

C. All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix.

 

NOW, THEREFORE, it is hereby agreed as follows:

 

1. Grant of Option. The Corporation hereby grants to Optionee, as of the Grant Date, an option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price.

 

2. Option Term. This option shall have the term specified in the Notice of Grant of Stock Option which shall not exceed ten years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5 or 6.

 

3. Limited Transferability.

 

(a) This option shall be neither transferable nor assignable by Optionee other than by will or the laws of inheritance following Optionee’s death and may be exercised, during Optionee’s lifetime, only by Optionee. However, Optionee may designate one or more persons as the beneficiary or beneficiaries of this option and this option shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee’s death while holding this option. Such beneficiary or beneficiaries shall take the transferred option subject to all the terms and conditions of this Agreement, including (without limitation) the limited time period during which this option may, pursuant to Paragraph 5, be exercised following Optionee’s death.

 

(b) If this option is designated a Non-Statutory Option in the Grant Notice, then this option may be assigned in whole or in part during Optionee’s lifetime to one or more members of Optionee’s family or to a trust established for the exclusive benefit of one or more such family members or to Optionee’s former spouse, to the extent such assignment is in connection with the Optionee’s estate plan or pursuant to a domestic relations order. The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment. The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment.

 

4. Dates of Exercise. This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice. As the option becomes exercisable for such installments, those installments shall accumulate, and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5 or 6.

 

5. Cessation of Service. The option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable:

 

(a) Should Optionee cease to remain in Service for any reason (other than death, Disability or Misconduct) while holding this option, then Optionee shall have a period of three months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date.

 

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(b) Should Optionee die while holding this option, then the personal representative of Optionee’s estate or the person or persons to whom the option is transferred pursuant to Optionee’s will or the laws of inheritance shall have the right to exercise this option. However, if Optionee has designated one or more beneficiaries of this option, then those persons shall have the exclusive right to exercise this option following Optionee’s death. Any such right to exercise this option shall lapse, and this option shall cease to be outstanding, upon the earlier of (i) the expiration of the 12 month period measured from the date of Optionee’s death or (ii) the Expiration Date.

 

(c) Should Optionee cease Service by reason of Disability while holding this option, then Optionee shall have a period of 12 months (commencing with the date of such cessation of Service) during which to exercise this option. In no event shall this option be exercisable at any time after the Expiration Date.

 

Note: Exercise of this option on a date later than three months following cessation of Service due to Disability will result in loss of favorable Incentive Option treatment, unless such Disability constitutes Permanent Disability. In the event that Incentive Option treatment is not available, this option will be taxed as a Non-Statutory Option upon exercise.

 

(d) During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of Option Shares in which Optionee is, at the time of Optionee’s cessation of Service, vested pursuant to the Vesting Schedule specified in the Grant Notice or the special vesting acceleration provisions of Paragraph 6. Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any vested Option Shares for which the option has not been exercised. To the extent Optionee is not vested in one or more Option Shares at the time of Optionee’s cessation of Service, this option shall immediately terminate and cease to be outstanding with respect to those shares.

 

(e) Should Optionee’s Service be terminated for Misconduct or should Optionee otherwise engage in Misconduct while this option is outstanding, then this option shall terminate immediately and cease to remain outstanding.

 

6. Accelerated Vesting.

 

(a) In the event of any Corporate Transaction, the Option Shares at the time subject to this option but not otherwise vested shall automatically vest in full so that this option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all of the Option Shares as fully-vested shares and may be exercised for any or all of those Option Shares as vested shares. However, the Option Shares shall not vest on such an accelerated basis if and to the extent: (i) this option is assumed by the successor corporation (or parent thereof) in the Corporate Transaction and the Corporation’s repurchase rights with respect to the unvested Option Shares are assigned to such successor corporation (or parent thereof) or (ii) this option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested Option Shares at the time of the Corporate Transaction (the excess of the Fair Market Value of those Option Shares over the Exercise Price payable for such shares) and provides for subsequent payout in accordance with the same Vesting Schedule applicable to those unvested Option Shares as set forth in the Grant Notice.

 

(b) Immediately following the Corporate Transaction, this option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with the Corporate Transaction.

 

(c) If this option is assumed in connection with a Corporate Transaction, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Exercise Price, provided the aggregate Exercise Price shall remain the same. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of this option, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction.

 

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(d) If the Option is assumed by the successor corporation (or parent thereof) in connection with a Corporate Transaction, but an Involuntary Termination of Optionee’s Service occurs within 18 months following such Corporate Transaction, all the Option Shares at the time subject to the Option shall automatically vest in full on an accelerated basis so that the Option shall immediately become exercisable for all the Option Shares as fully-vested shares and may be exercised for any or all of those Option Shares as vested shares. The Option shall remain so exercisable until the earlier of: (i) the Expiration Date; or (ii) the expiration of the one year period measured from the date of the Involuntary Termination.

 

(e) This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

 

7. Adjustment in Option Shares. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to: (i) the total number and/or class of securities subject to this option; and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

 

8. Stockholder Rights. The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price, and become the record holder of the purchased shares.

 

9. Manner of Exercising Option.

 

(a) In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or any other person or persons exercising the option) must take the following actions:

 

(i) Execute and deliver to the Corporation the Stock Purchase Agreement for the Option Shares for which the option is exercised.

 

(ii) Pay the aggregate Exercise Price for the purchased shares in one or more of the following forms:

 

(A) cash or check made payable to the Corporation; or

 

(B) a promissory note payable to the Corporation, but only to the extent authorized by the Plan Administrator in accordance with Paragraph 14.

 

Should the Common Stock be registered under Section 12 of the 1934 Act at the time the option is exercised, then the Exercise Price may also be paid as follows:

 

(C) in shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date; or

 

(D) to the extent the option is exercised for vested Option Shares, through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable instructions (a) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale.

 

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Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Purchase Agreement delivered to the Corporation in connection with the option exercise.

 

(iii) Furnish to the Corporation appropriate documentation that the person or persons exercising the option (if other than Optionee) have the right to exercise this option.

 

(iv) Execute and deliver to the Corporation such written representations as may be requested by the Corporation in order for it to comply with the applicable requirements of Federal and state securities laws.

 

(v) Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all Federal, state and local income and employment tax withholding requirements applicable to the option exercise.

 

(b) As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends affixed thereto.

 

(c) In no event may this option be exercised for any fractional shares.

 

10. REPURCHASE RIGHTS. ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THIS OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION AND ITS ASSIGNS TO REPURCHASE THOSE SHARES IN ACCORDANCE WITH THE TERMS SPECIFIED IN THE PURCHASE AGREEMENT.

 

11. Compliance with Laws and Regulations.

 

(a) The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which the Common Stock may be listed for trading at the time of such exercise and issuance.

 

(b) The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals.

 

12. Successors and Assigns. Except to the extent otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee’s assigns and the legal representatives, heirs, and legatees of Optionee’s estate.

 

13. Notices. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee’s signature line on the Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

 

14. Financing. The Plan Administrator may, in its absolute discretion and without any obligation to do so, permit Optionee to pay the Exercise Price for the purchased Option Shares by delivering a full-recourse, interest-bearing promissory note secured by those Option Shares. The payment schedule in effect for any such promissory note shall be established by the Plan Administrator in its sole discretion.

 

Note: If the Optionee is an independent contractor, then the promissory note delivered in payment of the Exercise Price must be secured by collateral other than the purchased Option Shares.

 

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15. Construction. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option.

 

16. Governing Law. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State’s conflict-of-laws rules.

 

17. Exclusive Jurisdiction and Venue. The Parties agree that the Courts of the County of Orange, State of California shall have sole and exclusive jurisdiction and venue for the resolution of all disputes arising under the terms of this Agreement and the transactions contemplated herein.

 

18. Stockholder Approval. If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may be issued under the Plan as last approved by the stockholders, then this option shall be void with respect to such excess shares, unless stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of the Plan.

 

19. Additional Terms Applicable to an Incentive Option. In the event this option is designated an Incentive Option in the Grant Notice, the following terms and conditions shall also apply to the grant:

 

(a) This option shall cease to qualify for favorable tax treatment as an Incentive Option if (and to the extent) this option is exercised for one or more Option Shares: (i) more than three months after the date Optionee ceases to be an Employee for any reason other than death or Permanent Disability or (ii) more than 12 months after the date Optionee ceases to be an Employee by reason of Permanent Disability.

 

(b) This option shall not become exercisable in the calendar year in which granted if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which this option would otherwise first become exercisable in such calendar year would, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock and any other securities for which one or more other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed $100,000 in the aggregate. To the extent the exercisability of this option is deferred by reason of the foregoing limitation, the deferred portion shall become exercisable in the first calendar year or years thereafter in which the $100,000 limitation of this Paragraph 18(b) would not be contravened, but such deferral shall in all events end immediately prior to the effective date of a Corporate Transaction in which this option is not to be assumed, whereupon the option shall become immediately exercisable as a Non-Statutory Option for the deferred portion of the Option Shares.

 

(c) Should Optionee hold, in addition to this option, one or more other options to purchase Common Stock which become exercisable for the first time in the same calendar year as this option, then the foregoing limitations on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted.

 

(SIGNATURE PAGE IMMEDIATELY FOLLOWS)

 

IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated in the Grant Notice.

 

  MUSCLE MAKER, INC
   
   
  By:
  ITS:  
      
  Address:
     
     
     
    OPTIONEE  
     
  Address:
     

 

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MUSCLE MAKER, INC

 

STOCK PURCHASE AGREEMENT

 

This Stock Purchase Agreement is made this _____ day of ____________, _____ by and between Muscle Maker, Inc, a California corporation, and _______________ ______________, Optionee under the Corporation’s 2017 Stock Option and Stock Issuance Plan.

 

All capitalized terms in this Purchase Agreement shall have the meaning assigned to them in this Purchase Agreement or in the above Definitions Section.

 

A. Exercise of Option

 

1. Exercise. Optionee hereby purchases _______ shares of Common Stock (the “Purchased Shares”) pursuant to that certain Option granted Optionee on ______________, _______, the Grant Date, to purchase up to _______________ shares of Common Stock (the “Option Shares”) under the Plan at the Exercise Price of $___________ per share.

 

2. Payment. Concurrently with the delivery of this Purchase Agreement to the Corporation, Optionee shall pay the Exercise Price for the Purchased Shares in accordance with the provisions of the Option Agreement and shall deliver whatever additional documents may be required by the Option Agreement as a condition for exercise, together with a duly-executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased Shares.

 

3. Stockholder Rights. Until such time as the Corporation exercises the Repurchase Right, Optionee (or any successor in interest) shall have all the rights of a stockholder (including voting, dividend and liquidation rights) with respect to the Purchased Shares, subject, however, to the transfer restrictions of Articles B and C.

 

B. Securities Law Compliance

 

1. Restricted Securities. The Purchased Shares have not been registered under the 1933 Act and are being issued to Optionee in reliance upon the exemption from such registration provided by SEC Rule 701 for stock issuances under compensatory benefit plans such as the Plan. Optionee hereby confirms that Optionee has been informed that the Purchased Shares are restricted securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. Accordingly, Optionee hereby acknowledges that Optionee is prepared to hold the Purchased Shares for an indefinite period and that Optionee is aware that SEC Rule 144 issued under the 1933 Act which exempts certain resales of unrestricted securities is not presently available to exempt the resale of the Purchased Shares from the registration requirements of the 1933 Act.

 

2. Restrictions on Disposition of Purchased Shares. Optionee shall make no disposition of the Purchased Shares (other than a Permitted Transfer) unless and until there is compliance with all of the following requirements:

 

(a) Optionee shall have provided the Corporation with a written summary of the terms and conditions of the proposed disposition.

 

(b) Optionee shall have complied with all requirements of this Purchase Agreement applicable to the disposition of the Purchased Shares.

 

(c) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, which may include a legal opinion if requested by the Corporation, that (a) the proposed disposition does not require registration of the Purchased Shares under the 1933 Act or (b) all appropriate action necessary for compliance with the registration requirements of the 1933 Act or any exemption from registration available under the 1933 Act (including Rule 144) has been taken.

 

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The Corporation shall not be required (i) to transfer on its books any Purchased Shares which have been sold or transferred in violation of the provisions of this Purchase Agreement or (ii) to treat as the owner of the Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom the Purchased Shares have been transferred in contravention of this Purchase Agreement.

 

3. Restrictive Legends. The stock certificates for the Purchased Shares shall be endorsed with one or more of the following restrictive legends:

 

“The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold or offered for sale in the absence of (a) an effective registration statement for the shares under such Act, (b) a “no action” letter of the Securities and Exchange Commission with respect to such sale or offer or (c) satisfactory assurances to the Corporation that registration under such Act is not required with respect to such sale or offer.”

 

“The shares represented by this certificate are subject to certain repurchase rights and rights of first refusal granted to the Corporation and accordingly may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in conformity with the terms of a written agreement dated ____________, ______ between the Corporation and the registered holder of the shares (or the predecessor in interest to the shares). A copy of such agreement is maintained at the Corporation’s principal corporate offices.”

 

C. Transfer Restrictions

 

1. Restriction on Transfer. Except for any Permitted Transfer, Optionee shall not transfer, assign, encumber, or otherwise dispose of any of the Purchased Shares which are subject to the Repurchase Right. In addition, Purchased Shares which are released from the Repurchase Right shall not be transferred, assigned, encumbered, or otherwise disposed of in contravention of the First Refusal Right or the Market Stand-Off.

 

2. Transferee Obligations. Each person (other than the Corporation) to whom the Purchased Shares are transferred by means of a Permitted Transfer must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Corporation that such person is bound by the provisions of this Purchase Agreement and that the transferred shares are subject to (i) the Repurchase Right, (ii) the First Refusal Right and (iii) the Market Stand-Off, to the same extent such shares would be so subject if retained by Optionee.

 

3. Market Stand-Off.

 

(a) In connection with any underwritten public offering by the Corporation of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Corporation’s initial public offering, Owner shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Purchased Shares without the prior written consent of the Corporation or its underwriters. Such restriction shall be in effect for such period of time from and after the effective date of the final prospectus for the offering as may be requested by the Corporation or such underwriters. In no event, however, shall such period exceed 180 days, and the Market Stand-Off shall in no event be applicable to any underwritten public offering effected more than two years after the effective date of the Corporation’s initial public offering.

 

(b) Owner shall be subject to the Market Stand-Off provided and only if the officers and directors of the Corporation are also subject to similar restrictions.

 

(c) Any new, substituted, or additional securities which are by reason of any Recapitalization or Reorganization distributed with respect to the Purchased Shares shall be immediately subject to the Market Stand-Off, to the same extent the Purchased Shares are at such time covered by such provisions.

 

(d) In order to enforce the Market Stand-Off, the Corporation may impose stop-transfer instructions with respect to the Purchased Shares until the end of the applicable stand-off period.

 

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D. Repurchase Right

 

1. Grant. The Corporation is hereby granted the right (the “Repurchase Right”), exercisable at any time during the 60 day period following the date Optionee ceases for any reason to remain in Service or (if later) during the 60 day period following the execution date of this Purchase Agreement, to repurchase at the Exercise Price any or all of the Purchased Shares in which Optionee is not, at the time of his or her cessation of Service, vested in accordance with the Vesting Schedule applicable to those shares or the special vesting acceleration provisions of Paragraph D.6 of this Purchase Agreement (such shares to be hereinafter referred to as the Unvested Shares).

 

2. Exercise of the Repurchase Right. The Repurchase Right shall be exercisable by written notice delivered to each Owner of the Unvested Shares prior to the expiration of the 60 day exercise period. The notice shall indicate the number of Unvested Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than 30 days after the date of such notice. The certificates representing the Unvested Shares to be repurchased shall be delivered to the Corporation on the closing date specified for the repurchase. Concurrently with the receipt of such stock certificates, the Corporation shall pay to Owner, in cash or cash equivalents (including the cancellation of any purchase-money indebtedness), an amount equal to the Exercise Price previously paid for the Unvested Shares which are to be repurchased from Owner.

 

3. Termination of the Repurchase Right. The Repurchase Right shall terminate with respect to any Unvested Shares for which it is not timely exercised under Paragraph D.2. In addition, the Repurchase Right shall terminate and cease to be exercisable with respect to any and all Purchased Shares in which Optionee vests in accordance with the Vesting Schedule. All Purchased Shares as to which the Repurchase Right lapses shall, however, remain subject to: (i) the First Refusal Right; and (ii) the Market Stand-Off.

 

4. Aggregate Vesting Limitation. If the Option is exercised in more than one increment so that Optionee is a party to one or more other Stock Purchase Agreements (the “Prior Purchase Agreements”) which are executed prior to the date of this Agreement, then the total number of Purchased Shares as to which Optionee shall be deemed to have a fully-vested interest under this Purchase Agreement and all Prior Purchase Agreements shall not exceed in the aggregate the number of Purchased Shares in which Optionee would otherwise at the time be vested, in accordance with the Vesting Schedule, had all the Purchased Shares (including those acquired under the Prior Purchase Agreements) been acquired exclusively under this Purchase Agreement.

 

5. Recapitalization. Any new, substituted or additional securities or other property (including cash paid other than as a regular cash dividend) which is by reason of any Recapitalization distributed with respect to the Purchased Shares shall be immediately subject to the Repurchase Right and any escrow requirements hereunder, but only to the extent the Purchased Shares are at the time covered by such right or escrow requirements. Appropriate adjustments to reflect such distribution shall be made to the number and/or class of Purchased Shares subject to this Purchase Agreement and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such Recapitalization upon the Corporation’s capital structure; provided, however, that the aggregate purchase price shall remain the same.

 

6. Corporate Transaction.

 

(a) The Repurchase Right shall automatically terminate in its entirety, and all the Purchased Shares shall vest in full, immediately prior to the consummation of any Corporate Transaction, except to the extent the Repurchase Right is to be assigned to the successor entity in such Corporate Transaction.

 

(b) To the extent the Repurchase Right remains in effect following a Corporate Transaction, such right shall apply to any new securities or other property (including any cash payments) received in exchange for the Purchased Shares in consummation of the Corporate Transaction, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the Corporate Transaction upon the Corporation’s capital structure; provided, however, that the aggregate purchase price shall remain the same. The new securities or other property (including any cash payments) issued or distributed with respect to the Purchased Shares in consummation of the Corporate Transaction shall be immediately deposited in escrow with the Corporation (or the successor entity) and shall not be released from escrow until Optionee vests in such securities or other property in accordance with the same Vesting Schedule in effect for the Purchased Shares.

 

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(c) If the Repurchase Right is assumed by the successor corporation (or parent thereof) in connection with a Corporate Transaction, but an Involuntary Termination of Optionee’s Service occurs within 18 months following such Corporate Transaction, the Repurchase Right shall terminate automatically, and all the Purchased Shares shall immediately vest in full at that time. Any unvested escrow account maintained on Optionee’s behalf pursuant to Paragraph D.6 shall also vest at the time of such Involuntary Termination and shall be paid to Optionee promptly thereafter.

 

E. Special Tax Election

 

The acquisition of the Purchased Shares may result in adverse tax consequences which may be avoided or mitigated by filing an election under Code Section 83(b). Such election must be filed within 30 days after the date of this Agreement. A description of the tax consequences applicable to the acquisition of the Purchased Shares and the form for making the Code Section 83(b) election are set forth in Exhibit II. OPTIONEE SHOULD CONSULT WITH HIS OR HER TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE PURCHASED SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b) ELECTION. OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE’S SOLE RESPONSIBILITY, AND NOT THE CORPORATION’S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.

 

F. General Provisions

 

1. Assignment. The Corporation may assign the Repurchase Right and/or the First Refusal Right to any person or entity selected by the Board, including (without limitation) one or more stockholders of the Corporation.

 

2. At Will Employment. Nothing in this Purchase Agreement or in the Plan shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee’s Service at any time for any reason, with or without cause.

 

3. Notices. Any notice required to be given under this Purchase Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice at the address indicated below such party’s signature line on this Purchase Agreement or at such other address as such party may designate by ten calendar days advance written notice under this paragraph to all other parties to this Purchase Agreement.

 

4. No Waiver. The failure of the Corporation in any instance to exercise the Repurchase Right or the First Refusal Right shall not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently arise under the provisions of this Purchase Agreement or any other agreement between the Corporation and Optionee. No waiver of any breach or condition of this Purchase Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature.

 

5.Cancellation of Shares. If the Corporation shall make available, at the time and place and in the amount and form provided in this Purchase Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Purchase Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Purchase Agreement). Such shares shall be deemed purchased in accordance with the applicable provisions hereof, and the Corporation shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Purchase Agreement.

 

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G. Miscellaneous Provisions

 

1. Optionee Undertaking. Optionee hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either Optionee or the Purchased Shares pursuant to the provisions of this Purchase Agreement.

 

2. Agreement is Entire Contract. This Purchase Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Purchase Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed in conformity with the terms of the Plan.

 

3. Governing Law. This Purchase Agreement shall be governed by, and construed in accordance with, the laws of the State of California without resort to that State’s conflict-of-laws rules.

 

4. Exclusive Jurisdiction and Venue. The Parties agree that the Courts of the County of Orange, State of California shall have sole and exclusive jurisdiction and venue for the resolution of all disputes arising under the terms of this Purchase Agreement and the transactions contemplated herein.

 

5. Counterparts. This Purchase Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

 

6. Successors and Assigns. The provisions of this Purchase Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and upon Optionee, Optionee’s permitted assigns and the legal representatives, heirs and legatees of Optionee’s estate, whether or not any such person shall have become a party to this Purchase Agreement and have agreed in writing to join herein and be bound by the terms hereof.

 

[Signatures on the Following Page.]

 

IN WITNESS WHEREOF, the parties have executed this Purchase Agreement on the day and year first indicated above.

 

  MUSCLE MAKER, INC
       
     
  BY:  
  ITS:  
     
  Address:  
     
       
       
    OPTIONEE  
       
  Address:    
       

 

SPOUSAL ACKNOWLEDGMENT

 

The undersigned spouse of Optionee has read and hereby approves the foregoing Stock Purchase Agreement. In consideration of the Corporation’s granting Optionee the right to acquire the Purchased Shares in accordance with the terms of such Purchase Agreement, the undersigned hereby agrees to be irrevocably bound by all the terms of such Purchase Agreement, including (without limitation) the right of the Corporation (or its assigns) to purchase any Purchased Shares in which Optionee is not vested at time of his or her cessation of Service.

 

     
    OPTIONEE’S SPOUSE  
       
  Address:  
     

 

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EXHIBIT I

 

ASSIGNMENT SEPARATE FROM CERTIFICATE

 

FOR VALUE RECEIVED __________ hereby sell(s), assign, and transfer(s) unto Muscle Maker, Inc, ___________ (_________) shares of the Common Stock of the Corporation standing in his or her name on the books of the Corporation represented by Certificate No. _____________ herewith and do(es) hereby irrevocably constitute and appoint __________________ Attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises.

 

Dated: __________________  
   
Signature ________________________

 

Instruction: Please do not fill in any blanks other than the signature line. Please sign exactly as you would like your name to appear on the issued stock certificate. The purpose of this assignment is to enable the Corporation to exercise the Repurchase Right without requiring additional signatures on the part of Optionee.

 

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EXHIBIT II

 

FEDERAL INCOME TAX CONSEQUENCES AND
SECTION 83(b) TAX ELECTION

 

A. Federal Income Tax Consequences and Section 83(b) Election for Exercise of Non-Statutory Option. If the Purchased Shares are acquired pursuant to the exercise of a Non-Statutory Option, as specified in the Grant Notice, then under Code Section 83, the excess of the Fair Market Value of the Purchased Shares on the date any forfeiture restrictions applicable to such shares lapse over the Exercise Price paid for those shares will be reportable as ordinary income on the lapse date. For this purpose, the term “forfeiture restrictions” includes the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right. However, Optionee may elect under Code Section 83(b) to be taxed at the time the Purchased Shares are acquired, rather than when and as such Purchased Shares cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within 30 days after the date of the Agreement. Even if the Fair Market Value of the Purchased Shares on the date of the Agreement equals the Exercise Price paid (and thus no tax is payable), the election must be made to avoid adverse tax consequences in the future. The form for making this election is attached as part of this exhibit. FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE 30-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE.

 

B. Federal Income Tax Consequences and Conditional Section 83(b) Election For Exercise of Incentive Option. If the Purchased Shares are acquired pursuant to the exercise of an Incentive Option, as specified in the Grant Notice, then the following tax principles shall be applicable to the Purchased Shares:

 

1. For regular tax purposes, no taxable income will be recognized at the time the Option is exercised

 

2. The excess of (a) the Fair Market Value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over (b) the Exercise Price paid for the Purchased Shares will be includible in Optionee’s taxable income for alternative minimum tax purposes.

 

3. If Optionee makes a disqualifying disposition of the Purchased Shares, then Optionee will recognize ordinary income in the year of such disposition equal in amount to the excess of (a) the Fair Market Value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over (b) the Exercise Price paid for the Purchased Shares. Any additional gain recognized upon the disqualifying disposition will be either short-term or long-term capital gain depending upon the period for which the Purchased Shares are held prior to the disposition.

 

4. For purposes of the foregoing, the term “forfeiture restrictions” will include the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right. The term “disqualifying disposition” means any sale or other disposition[1] of the Purchased Shares within two years after the Grant Date or within one year after the exercise date of the Option.

 

5. In the absence of final Treasury Regulations relating to Incentive Options, it is not certain whether Optionee may, in connection with the exercise of the Option for any Purchased Shares at the time subject to forfeiture restrictions, file a protective election under Code Section 83(b) which would limit Optionee’s ordinary income upon a disqualifying disposition to the excess of the Fair Market Value of the Purchased Shares on the date the Option is exercised over the Exercise Price paid for the Purchased Shares. Accordingly, such election if properly filed will only be allowed to the extent the final Treasury Regulations permit such a protective election.

 

6. The Code Section 83(b) election will be effective in limiting the Optionee’s alternative minimum taxable income to the excess of the Fair Market Value of the Purchased Shares at the time the Option is exercised over the Exercise Price paid for those shares.

 

Page 2 of the attached form for making the election should be filed with any election made in connection with the exercise of an Incentive Option.

 

 

1 Generally, a disposition of shares purchased under an Incentive Option includes any transfer of legal title, including a transfer by sale, exchange or gift, but does not include a transfer to the Optionee’s spouse, a transfer into joint ownership with right of survivorship if Optionee remains one of the joint owners, a pledge, a transfer by bequest or inheritance or certain tax -free exchanges permitted under the Code.

 

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SECTION 83(b) ELECTION

 

This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2.

 

(1) The taxpayer who performed the services is:

 

Name:  _____________________________________________

   

Address:  ___________________________________________

   

Taxpayer Ident. No.: ____________________________________

 

(2) The property with respect to which the election is being made is _____________ shares of the common stock of Muscle Maker, Inc
   
(3) The property was issued on ______________, _____.
   
(4) The taxable year in which the election is being made is the calendar year _____.
   
(5) The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the original purchase price if for any reason taxpayer’s service with the issuer terminates. The issuer’s repurchase right will lapse in a series of annual and monthly installments over a four year period ending on ___________, 20___.
   
(6) The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $__________per share.
   
(7) The amount paid for such property is $___________ per share.
   
(8) A copy of this statement was furnished to Muscle Maker, Inc for whom taxpayer rendered the services underlying the transfer of property.
   
(9) This statement is executed on _________________, ______.

 

 

Spouse (if any)   Taxpayer  

 

This election must be filed with the Internal Revenue Service Center with which taxpayer files his or her Federal income tax returns and must be made within 30 days after the execution date of the Stock Purchase Agreement. This filing should be made by registered or certified mail, return receipt requested. Optionee must retain two copies of the completed form for filing with his or her Federal and state tax returns for the current tax year and an additional copy for his or her records.

 

The property described in the above Section 83(b) election is comprised of shares of common stock acquired pursuant to the exercise of an incentive stock option under Section 422 of the Internal Revenue Code. Accordingly, it is the intent of the Taxpayer to utilize this election to achieve the following tax results:

 

1. One purpose of this election is to have the alternative minimum taxable income attributable to the purchased shares measured by the amount by which the fair market value of such shares at the time of their transfer to the Taxpayer exceeds the purchase price paid for the shares. In the absence of this election, such alternative minimum taxable income would be measured by the spread between the fair market value of the purchased shares and the purchase price which exists on the various lapse dates in effect for the forfeiture restrictions applicable to such shares.

 

2. Section 421(a)(1) of the Code expressly excludes from income any excess of the fair market value of the purchased shares over the amount paid for such shares. Accordingly, this election is also intended to be effective in the event there is a disqualifying disposition of the shares, within the meaning of Section 421(b) of the Code, which would otherwise render the provisions of Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer hereby elects to have the amount of disqualifying disposition income measured by the excess of the fair market value of the purchased shares on the date of transfer to the Taxpayer over the amount paid for such shares. Since Section 421(a) presently applies to the shares which are the subject of this Section 83(b) election, no taxable income is actually recognized for regular tax purposes at this time, and no income taxes are payable, by the Taxpayer as a result of this election. The foregoing election is to be effective to the full extent permitted under the Code.

 

THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.

 

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MUSCLE MAKER, INC

 

STOCK ISSUANCE AGREEMENT

 

This Stock Issuance Agreement is made this ____ day of ____________, _____ by and between Muscle Maker, Inc, a California corporation, and ___________________ _______________________, Participant in the Corporation’s 2017 Stock Option and Stock Issuance Plan.

 

All capitalized terms in this Stock Issuance Agreement shall have the meaning assigned to them in this Stock Issuance Agreement or in the above Definitions Section.

 

  A. PURCHASE OF SHARES

 

1. Purchase. Participant hereby purchases ___________________ shares of Common Stock pursuant to the provisions of the Stock Issuance Program at the Purchase Price of $_____________ per share; it being understood that the issuance of any stock under this Stock Issuance Agreement shall be subject to the terms and conditions of the Shareholders Agreement between Participant and the Corporation.

 

2. Payment. Concurrently with the delivery of this Stock Issuance Agreement to the Corporation, Participant shall pay the Purchase Price for the Purchased Shares in cash or cash equivalent.

 

3. Stockholder Rights. Until such time as the Corporation exercises the First Refusal Right, Participant (or any successor in interest) shall have all stockholder rights (including voting, dividend, and liquidation rights) with respect to the Purchased Shares, subject, however, to the transfer restrictions of Articles B and C.

 

B. SECURITIES LAW COMPLIANCE

 

1. Restricted Securities. The Purchased Shares have not been registered under the 1933 Act and are being issued to Participant in reliance upon the exemption from such registration provided by SEC Rule 701 for stock issuances under compensatory benefit plans such as the Plan. Participant hereby confirms that Participant has been informed that the Purchased Shares are restricted securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. Accordingly, Participant hereby acknowledges that Participant is prepared to hold the Purchased Shares for an indefinite period and that Participant is aware that SEC Rule 144 issued under the 1933 Act which exempts certain resales of unrestricted securities is not presently available to exempt the resale of the Purchased Shares from the registration requirements of the 1933 Act.

 

2. Disposition of Purchased Shares. Participant shall make no disposition of the Purchased Shares (other than a Permitted Transfer) unless and until there is compliance with all of the following requirements:

 

(a) Participant shall have provided the Corporation with a written summary of the terms and conditions of the proposed disposition.

 

(b) Participant shall have complied with all requirements of this Stock Issuance Agreement applicable to the disposition of the Purchased Shares.

 

(c) Participant shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, which may include a legal opinion if requested by the Corporation, that (a) the proposed disposition does not require registration of the Purchased Shares under the 1933 Act or (c) all appropriate action necessary for compliance with the registration requirements of the 1933 Act or any exemption from registration available under the 1933 Act (including Rule 144) has been taken.

 

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The Corporation shall not be required (i) to transfer on its books any Purchased Shares which have been sold or transferred in violation of the provisions of this Stock Issuance Agreement or (ii) to treat as the owner of the Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom the Purchased Shares have been transferred in contravention of this Stock Issuance Agreement.

 

3. Restrictive Legends. The stock certificates for the Purchased Shares shall be endorsed with one or more of the following restrictive legends:

 

“The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold or offered for sale in the absence of (a) an effective registration statement for the shares under such Act, (b) a “no action” letter of the Securities and Exchange Commission with respect to such sale or offer or (c) satisfactory assurances to the Corporation that registration under such Act is not required with respect to such sale or offer.”

 

“The shares represented by this certificate are subject to certain rights of first refusal granted to the Corporation and accordingly may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in conformity with the terms of a written agreement dated __________, ______, between the Corporation and the registered holder of the shares (or the predecessor in interest to the shares). A copy of such agreement is maintained at the Corporation’s principal corporate offices.”

 

C. TRANSFER RESTRICTIONS

 

1. Restriction on Transfer. Except for any Permitted Transfer, Participant shall not transfer, assign, encumber, or otherwise dispose of any of the Purchased Shares in contravention of the First Refusal Right or the Market Stand-Off.

 

2. Transferee Obligations. Each person (other than the Corporation) to whom the Purchased Shares are transferred by means of a Permitted Transfer must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Corporation that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (i) the First Refusal Right and (ii) the Market Stand-Off, to the same extent such shares would be so subject if retained by Participant.

 

3. Market Stand-Off.

 

(a) In connection with any underwritten public offering by the Corporation of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Corporation’s initial public offering, Owner shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Purchased Shares without the prior written consent of the Corporation or its underwriters. Such restriction shall be in effect for such period of time from and after the effective date of the final prospectus for the offering as may be requested by the Corporation or such underwriters. In no event, however, shall such period exceed 180 days, and the Market Stand-Off shall in no event be applicable to any underwritten public offering effected more than two years after the effective date of the Corporation’s initial public offering.

 

(b) Owner shall be subject to the Market Stand-Off provided and only if the officers and directors of the Corporation are also subject to similar restrictions.

 

(c) Any new, substituted, or additional securities which are by reason of any Recapitalization or Reorganization distributed with respect to the Purchased Shares shall be immediately subject to the Market Stand-Off, to the same extent the Purchased Shares are at such time covered by such provisions.

 

(d) In order to enforce the Market Stand-Off, the Corporation may impose stop-transfer instructions with respect to the Purchased Shares until the end of the applicable stand-off period.

 

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D. SPECIAL TAX ELECTION

 

1. Section 83(b) Election. Under Code Section 83, the excess of the Fair Market Value of the Purchased Shares on the date any forfeiture restrictions applicable to such shares lapse over the Purchase Price paid for those shares will be reportable as ordinary income on the lapse date. Participant may elect under Code Section 83(b) to be taxed at the time the Purchased Shares are acquired, rather than when and as such Purchased Shares cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within 30 calendar days after the date of this Agreement. Even if the Fair Market Value of the Purchased Shares on the date of this Stock Issuance Agreement equals the Purchase Price paid (and thus no tax is payable), the election must be made to avoid adverse tax consequences in the future.

 

THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT I HERETO.PARTICIPANT UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE 30 DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME AS THE FORFEITURE RESTRICTIONS LAPSE.

 

2. FILING RESPONSIBILITY. PARTICIPANT ACKNOWLEDGES THAT IT IS PARTICIPANT’S SOLE RESPONSIBILITY, AND NOT THE CORPORATION’S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN IF PARTICIPANT REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.

 

E. GENERAL PROVISIONS

 

1. Assignment. The Corporation may assign the First Refusal Right to any person or entity selected by the Board, including (without limitation) one or more stockholders of the Corporation.

 

2. At Will Employment. Nothing in this Stock Issuance Agreement or in the Plan shall confer upon Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Participant) or of Participant, which rights are hereby expressly reserved by each, to terminate Participant’s Service at any time for any reason, with or without cause.

 

3. Notices. Any notice required to be given under this Stock Issuance Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice at the address indicated below such party’s signature line on this Stock Issuance Agreement or at such other address as such party may designate by ten days advance written notice under this paragraph to all other parties to this Stock Issuance Agreement.

 

4. No Waiver. The failure of the Corporation in any instance to exercise the First Refusal Right shall not constitute a waiver of any other rights of first refusal that may subsequently arise under the provisions of this Stock Issuance Agreement or any other agreement between the Corporation and Participant. No waiver of any breach or condition of this Stock Issuance Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature.

 

5. Cancellation of Shares. If the Corporation shall make available, at the time and place and in the amount and form provided in this Stock Issuance Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Stock Issuance Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Stock Issuance Agreement). Such shares shall be deemed purchased in accordance with the applicable provisions hereof, and the Corporation shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Stock Issuance Agreement.

 

F. MISCELLANEOUS PROVISIONS

 

1. Governing Law. This Stock Issuance Agreement shall be governed by, and construed in accordance with, the laws of the State of California without resort to that State’s conflict-of-laws rules.

 

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2. Exclusive Jurisdiction and Venue. The Parties agree that the Courts of the County of Orange, State of California shall have sole and exclusive jurisdiction and venue for the resolution of all disputes arising under the terms of this Stock Issuance Agreement and the transactions contemplated herein.

 

3. Participant Undertaking. Participant hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either Participant or the Purchased Shares pursuant to the provisions of this Stock Issuance Agreement.

 

4. Agreement is Entire Contract. This Stock Issuance Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Stock Issuance Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed in conformity with the terms of the Plan.

 

5. Counterparts. This Stock Issuance Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

 

6. Successors and Assigns. The provisions of this Stock Issuance Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and upon Participant, Participant’s assigns and the legal representatives, heirs and legatees of Participant’s estate, whether or not any such person shall have become a party to this Stock Issuance Agreement and have agreed in writing to join herein and be bound by the terms hereof.

 

[Signatures on succeeding page.]

 

IN WITNESS WHEREOF, the parties have executed this Stock Issuance Agreement on the day and year first indicated above.

 

  Muscle Maker, Inc  
     
  BY:  
  ITS:  
     
  Address:  
     
     
    PARTICIPANT  
     
  Address:  
     

 

SPOUSAL ACKNOWLEDGMENT

 

The undersigned spouse of Participant has read and hereby approves the foregoing Stock Issuance Agreement. In consideration of the Corporation’s granting Participant the right to acquire the Purchased Shares in accordance with the terms of such Stock Issuance Agreement, the undersigned hereby agrees to be irrevocably bound by all the terms of such Stock Issuance Agreement.

 

     
    PARTICIPANT’S SPOUSE  
     
  Address:  
     

 

 

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EXHIBIT I

 

SECTION 83(b) TAX ELECTION

 

This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2.

 

(1) The taxpayer who performed the services is:

 

Name:    
     
     
Address:    
     
     
Taxpayer Ident. No.:

 

 

(2) The property with respect to which the election is being made is ______________ shares of the common stock of Muscle Maker, Inc
   
(3) The property was issued on __________________, _____.
   
(4) The taxable year in which the election is being made is the calendar year _____.
   
(5) The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $_____ per share.
   
(6) The amount paid for such property is $ _______ per share.
   
(7) A copy of this statement was furnished to Muscle Maker, Inc for whom taxpayer rendered the services underlying the transfer of property.
   
(8) This statement is executed on _______________, _____.

 

     
Spouse (if any)   Taxpayer

 

This election must be filed with the Internal Revenue Service Center with which taxpayer files his or her Federal income tax returns and must be made within 30 days after the execution date of the Stock Issuance Agreement. This filing should be made by registered or certified mail, return receipt requested. Participant must retain two copies of the completed form for filing with his or her Federal and state tax returns for the current tax year and an additional copy for his or her records.

 

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EXHIBIT II

 

2017 STOCK OPTION AND STOCK ISSUANCE PLAN

 

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EXHIBIT 6.2

 

Muscle Maker, Inc

Employment Agreement

 

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into effective as of the Effective Date (as defined below), by and between Robert E. Morgan (“Employee”) and Muscle Maker, Inc, a California corporation (the “Company”). The Employee and the Company are sometimes referred to herein, each individually as a “Party” or collectively as the “Parties”.

 

WHEREAS, the Company desires to (i) continue to employ Employee as Chief Executive Officer of the Company and (ii) have the Employee continue to serve as a member of the Board of Directors of the Company (the “Board”), and the Employee desires to continue to serve in such capacities on behalf of the Company, on the terms and conditions set forth in this Agreement.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

Section 1. Position and Duties.

 

1.1 During the Initial Employment Term (as defined below), the Employee shall serve as the Chief Executive Officer of the Company and a member of the Board (until his successor is appointed or elected and shall qualify) and shall report solely and directly to the Board. The Employee shall be responsible for oversight and management of all operations and activities of the Company. In addition, the Employee shall perform all other duties and accept all other responsibilities incident to such position as may be reasonably assigned to him by the Board. For as long as and during such period in which the Employee is serving as the Chief Executive Officer of the Company, the Company shall cause the Employee to be nominated to serve as a member of the Board. The Employee shall serve as a member of the Board until his successor is appointed or elected and shall qualify. However, neither the Company, nor any other person, shall be required to cause the continuation, election, or re-appointment of the Employee as a member of the Board.

 

1.2 During the Initial Employment Term, Employee shall serve the Company faithfully and to the best of his ability and shall devote substantially all of his business time, attention and efforts to the performance of such duties as may be assigned to him from time to time by the Board. Employee shall confer with the Board and must have the written approval prior to any mergers, acquisitions or significant contracts by the company or prior to entering into any new financial agreements on behalf of the company outside of his normal day to day responsibilities.

 

1.3 Employee expressly represents and warrants to the Company that Employee is not a party to any contract or agreement and is not otherwise obligated in any way, and is not subject to any rules or regulations, whether governmentally imposed or otherwise, which will or may restrict in any way the Employee’s ability to fully perform his duties and responsibilities under this Agreement. Employee further expressly represents and warrants that he is eligible to work in the United States and shall take all necessary action to comply with requests for verification of employment eligibility.

 

1.4 Employee will perform his duties and responsibilities located at the corporate headquarters or elsewhere within reason to perform the position’s responsibilities.

 

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1.5 To the extent Employee is asked to serve as an officer, director or manager of the subsidiaries (“Subsidiaries”) of the Company (such as Muscle Maker Development, LLC and Muscle Maker Corp., LLC), Employee’s duties to the Subsidiaries shall be deemed to have been included in this Agreement, shall not be entitled to any additional compensation hereunder, and shall be covered by all provisions of the Agreement mutatis mutandis.

 

Section 2. Term. Employee shall be employed by the Company (the “Initial Employment Term”) under this Agreement commencing as of the date the Company successfully receives at least $5,000.000 in gross proceeds from a Securities and Exchange Commission (“SEC”) qualified offering under Offering Statement File No. 024-10689 under Regulation A+ under the Securities Act of 1933, as amended (“Effective Date”), and for a period of two (2) years, subject to earlier termination or extension as provided herein. The term of this Agreement may be extended by mutual written agreement between the Parties. If the Parties agree to any such extension, the Parties shall specify the terms and conditions of the Employee’s continuing employment, and the provisions of this Agreement that applied during the Initial Term shall not apply during any extension period except as explicitly provided under this Agreement or by the Parties in connection with the extension.

 

Section 3. Compensation and Benefits.

 

3.1 Base Salary. Commencing on the Effective Date, the Company shall pay Employee during the Initial Employment Term an annual salary of $270,000, less ordinary withholdings (the “Annual Salary”). Such Annual Salary will be payable in equal monthly installments of $22,500, less ordinary withholdings, in accordance with the normal payroll cycle as presently exists or may hereafter be adopted by the Company.

 

3.2 Bonus. As additional compensation and as further consideration for Employee entering into this Agreement for services to be rendered by Employee, the Company may pay Employee annually following the end of each fiscal year, a cash bonus. The Company’s Board, together with the Compensation Committee of the Company’s Board, if any, will review Employee’s performance and may award Employee performance-based compensation (“Bonus”) in its sole discretion, if deemed warranted. Any such Bonus may be in cash or in securities of the Company, or any combination thereof, and shall be subject to such timing of receipt, vesting and any other conditions (including but not limited to conditions which may extend beyond the termination of this contract) as imposed by the Board at the time of such grant and at the time of adoption of any plan under which such Bonus may be granted, if any.

 

3.3 Housing Allowance. During the Initial Employment Term, the Company shall pay Employee a housing allowance of $3,000 per month.

 

3.4 Auto Allowance. During the Initial Employment Term, the Company will pay to Employee an auto allowance of $400 per month.

 

3.5 Health Care Allowance. During the Initial Employment Term, the Company will pay to Employee a health care allowance of $2,000 per month.

 

3.6 Equity Awards. Employee shall be eligible to receive restricted stock, stock options and other equity-based compensation awards under the Company’s 2017 Stock Option and Stock Issuance Plan and otherwise, which equity awards may be granted by the Company’s Board, together with the Compensation Committee of the Company’s Board, pursuant to the authority and sole discretion of the Board, together with the Compensation Committee.

 

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3.7 Employee Benefits. Effective as of the Effective Date and during the Initial Employment Term, Employee shall be eligible for employee benefits available to regular full-time executive management employees of the Company provided that Employee meets the eligibility requirements for such benefits. The Company provides no assurance as to the adoption or continuance of any particular employee benefit plan or program; and Employee’s participation in any such plan or program shall be subject to the provisions, rules, conditions, exclusions, regulations and plan documents or policies applicable thereto. The Company remains free to change the terms of any benefit plan in its sole discretion with or without notice.

 

3.8 Reimbursement of Expenses. Employee shall be entitled to reimbursement of reasonable expenses incurred by Employee in the course of Employee’s duties, in accordance with applicable policies and documentation requirements of the Company.

 

3.9 Tax Withholding. Notwithstanding anything in this Agreement to the contrary, the Company may withhold from any amounts payable or benefits provided under this Agreement all federal, state, city, or other taxes as are legally required to be withheld.

 

Section 4. Termination.

 

4.1 Termination by Company for Cause. The Company may terminate Employee’s employment for Cause immediately upon written notice stating the basis for such termination. If Employee is terminated for Cause, he shall be entitled to receive all earned but unpaid compensation, bonuses (not subject to a pro-rate adjustment), and benefits through the date of termination by the Company for Cause. A termination of Employee by the Company for “Cause” occurs if Employee is terminated for any of the following reasons:

 

(i) Employee’s refusal to comply with a lawful instruction of the Company’s Board of Directors;

 

(ii) Any act or omission knowingly undertaken or omitted by Employee without a reasonable belief that such action was in the best interests of the Company, its properties, assets or business or its officers, directors or employees, as determined by the Board in its commercially reasonable discretion (including disparagement of the Company);

 

(iii) Theft, dishonesty or intentional falsification of any employment or Company records;

 

(iv) Any fraud or embezzlement involving properties, assets or funds of the Company;

 

(v) A material breach of this Agreement if Employee fails to cure such breach within thirty (30) days after written notice from the Company specifying the action which constitutes the breach and demanding its discontinuance;

 

(vi) Negligence in performing his duties, which has been brought to Employee’s attention in writing, and which (if curable) has not been cured within thirty (30) days of the notice thereof;

 

(vii) Intentional and improper disclosure of the Company’s confidential or proprietary information;

 

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(viii) Employee’s conviction (including any plea of guilty or nolo contendere) to any criminal offense which constitutes a felony, or is punishable by more than one year in jail, in the jurisdiction where the conviction or plea occurred; or

 

(ix) Employee’s commission of an act of discrimination or harassment based on race, sex, national origin, religious, disability, age or other protected classification in the state where the act occurs.

 

4.2 Termination upon Death or Disability. This Agreement shall automatically terminate upon the death or disability of Employee unless employees’ death occurs while on Company business in which event the employees’ estate will receive all compensation and benefits through the date of death or disability. For purposes of this Agreement, the term “disability” shall mean the inability of Employee to perform with or without reasonable accommodation, the essential functions of his job duties due to physical or mental disablement which continues for a period of ninety (90) consecutive days during any six (6) month period, as determined by an independent qualified physician mutually acceptable to Employee and the Company. Notwithstanding the foregoing, nothing in this Agreement shall alleviate any legal responsibility of the Company to provide reasonable accommodations to Employee as may be required by applicable law.

 

4.3 Termination by Employee with Good Reason or by Company Without Cause. This Employment Agreement and Employee’s employment with the Company may be terminated by Employee for good reason (“Good Reason”), or by the Company without cause (“Without Cause”), upon prior providing sixty (60) days written notice to the Company (which notice describes such good reason with reasonable detail) or Employee, respectively. The Company shall pay Employee all earned but unpaid compensation, bonuses and benefits through the date of termination by Employee with Good Reason or by the Company Without Cause as well as continue to pay Employee the per month rate of salary then in effect and provide Employee with benefits (unless the terms of the applicable benefit plans expressly prohibit the continuation of such benefits after such termination) for the balance of the Initial Employment Term that would have remained hereunder had such termination not occurred. Good Reason shall mean the occurrence of any one or more of the following events provided Employee has notified the Company in writing of the occurrence of such event and the event has continued uncured for thirty (30) days after the Company’s receipt of such notice, unless Employee specifically agrees in writing that such event shall not be Good Reason:

 

  (i) Any material breach of this Employment Agreement by the Company; or
     
  (ii) the failure of the Company to assign this Employment Agreement to a successor to the Company or the failure of a successor to explicitly assume and agree to be bound by this Employment Agreement or a similar Employment Agreement.

 

4.4 Termination by Employee Without Cause. Employee may terminate this Employment Agreement and his employment with the Company Without Cause upon providing sixty (60) days prior written notice to the Company. The Company shall pay Employee all earned but unpaid compensation, bonuses (not subject to a pro-rate adjustment), and benefits through the date of termination Without Cause by Employee. The Company shall have no further obligation to pay compensation or benefits to Employee for the remainder of the balance of the Initial Employment Term.

 

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4.5 Return of Property. Employee agrees, upon the termination of his employment with the Company, to return all physical, computerized, electronic or other types of records, documents, proposals, notes, lists, files and any and all other materials including, without limitation, computerized and/or electronic information that refers, relates or otherwise pertains to the Company and/or its affiliates, and any and all business dealings of said persons and entities. In addition, Employee shall return to the Company all property or equipment that Employee has been issued during the course of his employment or which he otherwise currently possesses, including, but not limited to, any computers, cellular phones, and/or similar items. Employee shall immediately deliver to the Company any such physical, computerized, electronic or other types of records, documents, proposals, notes, lists, files, materials, property and equipment that are in Employee’s possession. Employee acknowledges that Employee is not authorized to retain any physical, computerized, electronic or other types of copies of any such physical, computerized, electronic or other types of records, documents, proposals, notes, lists, files or materials, and is not authorized to retain any other property or equipment of the Company and/or its affiliates. Employee further agrees that he will immediately forward to the Company any business information regarding the Company and/or any of its affiliates that has been or is inadvertently directed to Employee following Employee’s last day of employment with the Company. The provisions of this Section are in addition to any other written agreements on this subject that Employee may have with the Company and/or any of its affiliates, and are not meant to and do not excuse any additional obligations that Employee may have under such agreements.

 

Section 5. Miscellaneous Provisions.

 

5.1 Assignment by Employee. This Agreement may not be assigned by Employee in whole or in part; provided, however, if Employee should die or become disabled while any amount is owed but unpaid to him hereunder, all such amounts, unless otherwise provided herein, shall be paid to his devisees, legatees, legal guardian or other designees, or if there is no such designees, to his estate.

 

5.2 Assignment by Employer. Employee hereby acknowledges and agrees that the Company may, in its sole discretion assign this Agreement to a comparable affiliate, successor, assign (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the assets or business of the Company). This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective spouses, heirs and personal and legal representatives. Any such successor or assign of the Company shall be included in the term “Company” as used in this Agreement

 

5.3 Notices. Any notice required to be delivered hereunder shall be in writing and shall be addressed as follows:

 

If to the Company, to:

2200 Space Park Drive, Suite 310

Houston, TX 77058

Attention: Chairman of the Board

 

If to Employee:

2200 Space Park Drive, Suite 310

Houston, TX 77058

Attention: Robert E. Morgan

 

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or, in each case, to such other address as such party may hereafter specify for the purpose by written notice to the other party hereto. Any such notice shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice shall be deemed not to have been received until the next succeeding business day in the place of receipt.

 

5.4 Entire Agreement. This Agreement represents the entire agreement between Employee and the Company and its affiliates with respect to Employee’s employment, and supersedes all prior discussions, negotiations, and agreements, written or oral. 

 

5.5 Waiver of Rights. The waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a continuing waiver or as a consent to or waiver of any subsequent breach hereof.

 

5.6 Severability. In the event any provision of the Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, and the Agreement shall be construed and enforced as if the illegal or invalid provision had not been included.

 

5.7 Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to principles of conflict of laws. Any action at law, suit in equity or judicial proceeding arising directly, indirectly, or otherwise in connection with, out of, related to or from this Agreement, or any provision hereof, shall be litigated only in the courts of the State of California.

 

5.8 Counterparts. This Agreement may be signed in several counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were on the same instrument.

 

5.9 Employee Counsel. Employee acknowledges that he has had the opportunity to review this Agreement and the transactions contemplated hereby with his own legal counsel.

 

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IN WITNESS WHEREOF, the Company and Employee have executed this Employment Agreement effective as of the date first set forth above.

 

COMPANY: Muscle Maker, Inc
     
  By:   /s/ Tim M. Betts
    Tim M. Betts, Chairman of the Board
     
EMPLOYEE:    
     
  By:  /s/ Robert E. Morgan
    Robert E. Morgan

 

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EXHIBIT 6.3

 

Muscle Maker, Inc

Employment Agreement

 

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into effective as of the Effective Date (as defined below), by and between Grady Metoyer (“Employee”) and Muscle Maker, Inc, a California corporation (the “Company”). The Employee and the Company are sometimes referred to herein, each individually as a “Party” or collectively as the “Parties”.

 

WHEREAS, the Company desires to continue to employ Employee as Chief Financial Officer of the Company, and the Employee desires to continue to serve in such capacity on behalf of the Company, on the terms and conditions set forth in this Agreement.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

Section 1. Position and Duties.

 

1.1 During the Initial Employment Term (as defined below), the Employee shall serve as the Chief Financial Officer of the Company and shall report solely and directly to the Chief Executive Officer. The Employee shall have such duties and responsibilities as are consistent with her position as Chief Financial Officer of the Company. In addition, the Employee shall perform all other duties and accept all other responsibilities incident to such position as may be reasonably assigned to him by the Chief Executive Officer.

 

1.2 During the Initial Employment Term, Employee shall serve the Company faithfully and to the best of his ability and shall devote substantially all of his business time, attention and efforts to the performance of such duties as may be assigned to him from time to time by the Chief Executive Officer. Employee shall confer with the Chief Executive Officer and must have the written approval by the Board of Directors (the “Board”) prior to any mergers, acquisitions or significant contracts by the company or prior to entering into any new financial agreements on behalf of the company outside of his normal day to day responsibilities.

 

1.3 Employee expressly represents and warrants to the Company that Employee is not a party to any contract or agreement and is not otherwise obligated in any way, and is not subject to any rules or regulations, whether governmentally imposed or otherwise, which will or may restrict in any way the Employee’s ability to fully perform his duties and responsibilities under this Agreement. Employee further expressly represents and warrants that he is eligible to work in the United States and shall take all necessary action to comply with requests for verification of employment eligibility.

 

1.4 Employee will perform his duties and responsibilities located at the corporate headquarters or elsewhere within reason to perform the position’s responsibilities.

 

1.5 To the extent Employee is asked to serve as an officer, director or manager of the subsidiaries (“Subsidiaries”) of the Company (such as Muscle Maker Development, LLC and Muscle Maker Corp., LLC), Employee’s duties to the Subsidiaries shall be deemed to have been included in this Agreement, shall not be entitled to any additional compensation hereunder, and shall be covered by all provisions of the Agreement mutatis mutandis.

 

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Section 2. Term. Employee shall be employed by the Company (the “Initial Employment Term”) commencing as of the date the Company successfully receives at least $5,000.000 in gross proceeds from a Securities and Exchange Commission (“SEC”) qualified offering under Offering Statement File No. 024-10689 under Regulation A+ under the Securities Act of 1933, as amended (“Effective Date”), and for a period of one (1) year, subject to earlier termination or extension as provided herein. The term of this Agreement may be extended by mutual written agreement between the Parties. If the Parties agree to any such extension, the Parties shall specify the terms and conditions of the Employee’s continuing employment, and the provisions of this Agreement that applied during the Initial Term shall not apply during any extension period except as explicitly provided under this Agreement or by the Parties in connection with the extension.

 

Section 3. Compensation and Benefits.

 

3.1 Base Salary. Commencing on the Effective Date, the Company shall pay Employee during the Initial Employment Term an annual salary of $200,000, less ordinary withholdings (the “Annual Salary”). Such Annual Salary will be payable in equal monthly installments of $16,666.66, less ordinary withholdings, in accordance with the normal payroll cycle as presently exists or may hereafter be adopted by the Company.

 

3.2 Bonus. As additional compensation and as further consideration for Employee entering into this Agreement for services to be rendered by Employee, the Company may pay Employee annually following the end of each fiscal year, a cash bonus. The Company’s Board, together with the Compensation Committee of the Company’s Board, if any, will review Employee’s performance and may award Employee performance-based compensation (“Bonus”) in its sole discretion, if deemed warranted. Any such Bonus may be in cash or in securities of the Company, or any combination thereof, and shall be subject to such timing of receipt, vesting and any other conditions (including but not limited to conditions which may extend beyond the termination of this contract) as imposed by the Board at the time of such grant and at the time of adoption of any plan under which such Bonus may be granted, if any.

 

3.3 Equity Awards. Employee shall be eligible to receive restricted stock, stock options and other equity-based compensation awards under the Company’s 2017 Stock Option and Stock Issuance Plan and otherwise, which equity awards may be granted by the Company’s Board, together with the Compensation Committee of the Company’s Board, pursuant to the authority and sole discretion of the Board, together with the Compensation Committee.

 

3.4 Employee Benefits. Effective as of the Effective Date and during the Initial Employment Term, Employee shall be eligible for employee benefits available to regular full-time executive management employees of the Company provided that Employee meets the eligibility requirements for such benefits. The Company provides no assurance as to the adoption or continuance of any particular employee benefit plan or program; and Employee’s participation in any such plan or program shall be subject to the provisions, rules, conditions, exclusions, regulations and plan documents or policies applicable thereto. The Company remains free to change the terms of any benefit plan in its sole discretion with or without notice.

 

3.5 Reimbursement of Expenses. Employee shall be entitled to reimbursement of reasonable expenses incurred by Employee in the course of Employee’s duties, in accordance with applicable policies and documentation requirements of the Company.

 

3.6 Tax Withholding. Notwithstanding anything in this Agreement to the contrary, the Company may withhold from any amounts payable or benefits provided under this Agreement all federal, state, city, or other taxes as are legally required to be withheld.

 

   2  
     

 

Section 4. Termination.

 

4.1 Termination by Company for Cause. The Company may terminate Employee’s employment for Cause immediately upon written notice stating the basis for such termination. If Employee is terminated for Cause, he shall be entitled to receive all earned but unpaid compensation, bonuses (not subject to a pro-rate adjustment), and benefits through the date of termination by the Company for Cause. A termination of Employee by the Company for “Cause” occurs if Employee is terminated for any of the following reasons:

 

(i) Employee’s refusal to comply with a lawful instruction of the Company’s Board of Directors;

 

(ii) Any act or omission knowingly undertaken or omitted by Employee without a reasonable belief that such action was in the best interests of the Company, its properties, assets or business or its officers, directors or employees, as determined by the Board in its commercially reasonable discretion (including disparagement of the Company);

 

(iii) Theft, dishonesty or intentional falsification of any employment or Company records;

 

(iv) Any fraud or embezzlement involving properties, assets or funds of the Company;

 

(v) A material breach of this Agreement if Employee fails to cure such breach within thirty (30) days after written notice from the Company specifying the action which constitutes the breach and demanding its discontinuance;

 

(vi) Negligence in performing his duties, which has been brought to Employee’s attention in writing, and which (if curable) has not been cured within thirty (30) days of the notice thereof;

 

(vii) Intentional and improper disclosure of the Company’s confidential or proprietary information;

 

(viii) Employee’s conviction (including any plea of guilty or nolo contendere) to any criminal offense which constitutes a felony, or is punishable by more than one year in jail, in the jurisdiction where the conviction or plea occurred; or

 

(ix) Employee’s commission of an act of discrimination or harassment based on race, sex, national origin, religious, disability, age or other protected classification in the state where the act occurs.

 

4.2 Termination upon Death or Disability. This Agreement shall automatically terminate upon the death or disability of Employee unless employees’ death occurs while on Company business in which event the employees’ estate will receive all compensation and benefits through the date of death or disability. For purposes of this Agreement, the term “disability” shall mean the inability of Employee to perform with or without reasonable accommodation, the essential functions of his job duties due to physical or mental disablement which continues for a period of ninety (90) consecutive days during any six (6) month period, as determined by an independent qualified physician mutually acceptable to Employee and the Company. Notwithstanding the foregoing, nothing in this Agreement shall alleviate any legal responsibility of the Company to provide reasonable accommodations to Employee as may be required by applicable law.

 

   3  
     

 

4.3 Termination by Employee with Good Reason or by Company Without Cause. This Employment Agreement and Employee’s employment with the Company may be terminated by Employee for good reason (“Good Reason”), or by the Company without cause (“Without Cause”), upon prior providing sixty (60) days written notice to the Company (which notice describes such good reason with reasonable detail) or Employee, respectively. The Company shall pay Employee all earned but unpaid compensation, bonuses and benefits through the date of termination by Employee with Good Reason or by the Company Without Cause as well as continue to pay Employee the per month rate of salary then in effect and provide Employee with benefits (unless the terms of the applicable benefit plans expressly prohibit the continuation of such benefits after such termination) for the balance of the Initial Employment Term that would have remained hereunder had such termination not occurred. Good Reason shall mean the occurrence of any one or more of the following events provided Employee has notified the Company in writing of the occurrence of such event and the event has continued uncured for thirty (30) days after the Company’s receipt of such notice, unless Employee specifically agrees in writing that such event shall not be Good Reason:

 

  (i) Any material breach of this Employment Agreement by the Company; or
     
  (ii) the failure of the Company to assign this Employment Agreement to a successor to the Company or the failure of a successor to explicitly assume and agree to be bound by this Employment Agreement or a similar Employment Agreement.

 

4.4 Termination by Employee Without Cause. Employee may terminate this Employment Agreement and his employment with the Company Without Cause upon providing sixty (60) days prior written notice to the Company. The Company shall pay Employee all earned but unpaid compensation, bonuses, and benefits through the date of termination Without Cause by Employee. The Company shall have no further obligation to pay compensation or benefits to Employee for the remainder of the balance of the Initial Employment Term.

 

4.5 Return of Property. Employee agrees, upon the termination of his employment with the Company, to return all physical, computerized, electronic or other types of records, documents, proposals, notes, lists, files and any and all other materials including, without limitation, computerized and/or electronic information that refers, relates or otherwise pertains to the Company and/or its affiliates, and any and all business dealings of said persons and entities. In addition, Employee shall return to the Company all property or equipment that Employee has been issued during the course of his employment or which he otherwise currently possesses, including, but not limited to, any computers, cellular phones, and/or similar items. Employee shall immediately deliver to the Company any such physical, computerized, electronic or other types of records, documents, proposals, notes, lists, files, materials, property and equipment that are in Employee’s possession. Employee acknowledges that Employee is not authorized to retain any physical, computerized, electronic or other types of copies of any such physical, computerized, electronic or other types of records, documents, proposals, notes, lists, files or materials, and is not authorized to retain any other property or equipment of the Company and/or its affiliates. Employee further agrees that he will immediately forward to the Company any business information regarding the Company and/or any of its affiliates that has been or is inadvertently directed to Employee following Employee’s last day of employment with the Company. The provisions of this Section are in addition to any other written agreements on this subject that Employee may have with the Company and/or any of its affiliates, and are not meant to and do not excuse any additional obligations that Employee may have under such agreements.

 

   4  
     

 

Section 5. Miscellaneous Provisions.

 

5.1 Assignment by Employee. This Agreement may not be assigned by Employee in whole or in part; provided, however, if Employee should die or become disabled while any amount is owed but unpaid to him hereunder, all such amounts, unless otherwise provided herein, shall be paid to his devisees, legatees, legal guardian or other designees, or if there is no such designees, to his estate.

 

5.2 Assignment by Employer. Employee hereby acknowledges and agrees that the Company may, in its sole discretion assign this Agreement to a comparable affiliate, successor, assign (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the assets or business of the Company). This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective spouses, heirs and personal and legal representatives. Any such successor or assign of the Company shall be included in the term “Company” as used in this Agreement

 

5.3 Notices. Any notice required to be delivered hereunder shall be in writing and shall be addressed as follows:

 

  If to the Company, to:
  2200 Space Park Drive, Suite 310
  Houston, TX 77058
  Attention: Chief Executive Officer
   
  If to Employee:
  2200 Space Park Drive, Suite 310
  Houston, TX 77058
  Attention: Grady Metoyer

 

or, in each case, to such other address as such party may hereafter specify for the purpose by written notice to the other party hereto. Any such notice shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice shall be deemed not to have been received until the next succeeding business day in the place of receipt.

 

5.4 Entire Agreement. This Agreement represents the entire agreement between Employee and the Company and its affiliates with respect to Employee’s employment, and supersedes all prior discussions, negotiations, and agreements, written or oral. 

 

5.5 Waiver of Rights. The waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a continuing waiver or as a consent to or waiver of any subsequent breach hereof.

 

5.6 Severability. In the event any provision of the Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, and the Agreement shall be construed and enforced as if the illegal or invalid provision had not been included.

 

   5  
     

 

5.7 Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to principles of conflict of laws. Any action at law, suit in equity or judicial proceeding arising directly, indirectly, or otherwise in connection with, out of, related to or from this Agreement, or any provision hereof, shall be litigated only in the courts of the State of California.

 

5.8 Counterparts. This Agreement may be signed in several counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were on the same instrument.

 

5.9 Employee Counsel. Employee acknowledges that he has had the opportunity to review this Agreement and the transactions contemplated hereby with his own legal counsel.

 

   6  
     

 

IN WITNESS WHEREOF, the Company and Employee have executed this Employment Agreement effective as of the date first set forth above.

 

COMPANY: Muscle Maker, Inc
     
  By:

/s/ Robert E. Morgan

    Robert E. Morgan, Chief Executive Officer
     
EMPLOYEE:    
     
  By: /s/ Grady Metoyer
    Grady Metoyer

 

   7  
     

 

 

EXHIBIT 6.4

 

Muscle Maker, Inc

Employment Agreement

 

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into effective as of the Effective Date (as defined below), by and between Rodney C. Silva (“Employee”) and Muscle Maker, Inc, a California corporation (the “Company”). The Employee and the Company are sometimes referred to herein, each individually as a “Party” or collectively as the “Parties”.

 

WHEREAS, the Company desires to continue to employ Employee as Chief Culture Officer of its two principal subsidiaries, namely Muscle Maker Development, LLC and Muscle Maker Corp., LLC (the “Subsidiaries”), and the Employee desires to continue to serve in such capacity on behalf of the Subsidiaries, on the terms and conditions set forth in this Agreement.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

Section 1. Position and Duties.

 

1.1 During the Initial Employment Term (as defined below), the Employee shall serve as the Chief Culture Officer of the Subsidiaries and shall report solely and directly to the Chief Executive Officer of the Subsidiaries. The Employee shall have such duties and responsibilities as are consistent with her position as Chief Culture Officer of the Subsidiaries. In addition, the Employee shall perform all other duties and accept all other responsibilities incident to such position as may be reasonably assigned to him by the Chief Executive Officer of the Subsidiaries.

 

1.2 During the Initial Employment Term, Employee shall serve the Subsidiaries faithfully and to the best of his ability and shall devote substantially all of his business time, attention and efforts to the performance of such duties as may be assigned to him from time to time by the Chief Executive Officer of the Subsidiaries. Employee shall confer with the Chief Executive Officer of the Subsidiaries and must have the written approval by the Board of Directors of the Company (the “Board”) prior to any mergers, acquisitions or significant contracts by the Subsidiaries or prior to entering into any new financial agreements on behalf of the Subsidiaries outside of his normal day to day responsibilities.

 

1.3 Employee expressly represents and warrants to the Company that Employee is not a party to any contract or agreement and is not otherwise obligated in any way, and is not subject to any rules or regulations, whether governmentally imposed or otherwise, which will or may restrict in any way the Employee’s ability to fully perform his duties and responsibilities under this Agreement. Employee further expressly represents and warrants that he is eligible to work in the United States and shall take all necessary action to comply with requests for verification of employment eligibility.

 

1.4 Employee will perform his duties and responsibilities located at the Company’s corporate headquarters or elsewhere within reason to perform the position’s responsibilities.

 

1.5 To the extent Employee is asked to serve as an officer, director or manager of the Company, Employee’s duties to the Company shall be deemed to have been included in this Agreement, shall not be entitled to any additional compensation hereunder, and shall be covered by all provisions of the Agreement mutatis mutandis.

 

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Section 2. Term. Employee shall be employed by the Company (the “Initial Employment Term”) under this Agreement commencing as of the date the Company successfully receives at least $5,000.000 in gross proceeds from a Securities and Exchange Commission (“SEC”) qualified offering under Offering Statement File No. 024-10689 under Regulation A+ under the Securities Act of 1933, as amended (“Effective Date”), and for a period of one (1) year, subject to earlier termination or extension as provided herein. The term of this Agreement may be extended by mutual written agreement between the Parties. If the Parties agree to any such extension, the Parties shall specify the terms and conditions of the Employee’s continuing employment, and the provisions of this Agreement that applied during the Initial Term shall not apply during any extension period except as explicitly provided under this Agreement or by the Parties in connection with the extension.

 

Section 3. Compensation and Benefits.

 

3.1 Base Salary. Commencing on the Effective Date, the Company shall pay Employee during the Initial Employment Term an annual salary of $150,000, less ordinary withholdings (the “Annual Salary”). Such Annual Salary will be payable in equal monthly installments of $12,500, less ordinary withholdings, in accordance with the normal payroll cycle as presently exists or may hereafter be adopted by the Company.

 

3.2 Bonus. As additional compensation and as further consideration for Employee entering into this Agreement for services to be rendered by Employee, the Company may pay Employee annually following the end of each fiscal year, a cash bonus. The Company’s Board, together with the Compensation Committee of the Company’s Board, if any, will review Employee’s performance and may award Employee performance-based compensation (“Bonus”) in its sole discretion, if deemed warranted. Any such Bonus may be in cash or in securities of the Company, or any combination thereof, and shall be subject to such timing of receipt, vesting and any other conditions (including but not limited to conditions which may extend beyond the termination of this contract) as imposed by the Board at the time of such grant and at the time of adoption of any plan under which such Bonus may be granted, if any.

 

3.3 Auto Allowance. During the Initial Employment Term, the Company will pay to Employee an auto allowance of $400 per month.

 

3.4 Health Care Allowance. During the Initial Employment Term, the Company will pay to Employee a health care allowance of $2,000 per month.

 

3.5 Equity Awards. Employee shall be eligible to receive restricted stock, stock options and other equity-based compensation awards under the Company’s 2017 Stock Option and Stock Issuance Plan and otherwise, which equity awards may be granted by the Company’s Board, together with the Compensation Committee of the Company’s Board, pursuant to the authority and sole discretion of the Board, together with the Compensation Committee.

 

3.6 Employee Benefits. Effective as of the Effective Date and during the Initial Employment Term, Employee shall be eligible for employee benefits available to regular full-time executive management employees of the Company provided that Employee meets the eligibility requirements for such benefits. The Company provides no assurance as to the adoption or continuance of any particular employee benefit plan or program; and Employee’s participation in any such plan or program shall be subject to the provisions, rules, conditions, exclusions, regulations and plan documents or policies applicable thereto. The Company remains free to change the terms of any benefit plan in its sole discretion with or without notice.

 

  2  

 

 

3.7 Reimbursement of Expenses. Employee shall be entitled to reimbursement of reasonable expenses incurred by Employee in the course of Employee’s duties, in accordance with applicable policies and documentation requirements of the Company.

 

3.8 Tax Withholding. Notwithstanding anything in this Agreement to the contrary, the Company may withhold from any amounts payable or benefits provided under this Agreement all federal, state, city, or other taxes as are legally required to be withheld.

 

Section 4. Termination.

 

4.1 Termination by Company for Cause. The Company may terminate Employee’s employment for Cause immediately upon written notice stating the basis for such termination. If Employee is terminated for Cause, he shall be entitled to receive all earned but unpaid compensation, bonuses (not subject to a pro-rate adjustment), and benefits through the date of termination by the Company for Cause. A termination of Employee by the Company for “Cause” occurs if Employee is terminated for any of the following reasons:

 

(i) Employee’s refusal to comply with a lawful instruction of the Company’s Board of Directors;

 

(ii) Any act or omission knowingly undertaken or omitted by Employee without a reasonable belief that such action was in the best interests of the Company, its properties, assets or business or its officers, directors or employees, as determined by the Board in its commercially reasonable discretion (including disparagement of the Company);

 

(iii) Theft, dishonesty or intentional falsification of any employment or Company records;

 

(iv) Any fraud or embezzlement involving properties, assets or funds of the Company;

 

(v) A material breach of this Agreement if Employee fails to cure such breach within thirty (30) days after written notice from the Company specifying the action which constitutes the breach and demanding its discontinuance;

 

(vi) Negligence in performing his duties, which has been brought to Employee’s attention in writing, and which (if curable) has not been cured within thirty (30) days of the notice thereof;

 

(vii) Intentional and improper disclosure of the Company’s confidential or proprietary information;

 

(viii) Employee’s conviction (including any plea of guilty or nolo contendere) to any criminal offense which constitutes a felony, or is punishable by more than one year in jail, in the jurisdiction where the conviction or plea occurred; or

 

(ix) Employee’s commission of an act of discrimination or harassment based on race, sex, national origin, religious, disability, age or other protected classification in the state where the act occurs.

 

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4.2 Termination upon Death or Disability. This Agreement shall automatically terminate upon the death or disability of Employee unless employees’ death occurs while on Company business in which event the employees’ estate will receive all compensation and benefits through the date of death or disability. For purposes of this Agreement, the term “disability” shall mean the inability of Employee to perform with or without reasonable accommodation, the essential functions of his job duties due to physical or mental disablement which continues for a period of ninety (90) consecutive days during any six (6) month period, as determined by an independent qualified physician mutually acceptable to Employee and the Company. Notwithstanding the foregoing, nothing in this Agreement shall alleviate any legal responsibility of the Company to provide reasonable accommodations to Employee as may be required by applicable law.

 

4.3 Termination by Employee with Good Reason or by Company Without Cause. This Employment Agreement and Employee’s employment with the Company may be terminated by Employee for good reason (“Good Reason”), or by the Company without cause (“Without Cause”), upon prior providing sixty (60) days written notice to the Company (which notice describes such good reason with reasonable detail) or Employee, respectively. The Company shall pay Employee all earned but unpaid compensation, bonuses and benefits through the date of termination by Employee with Good Reason or by the Company Without Cause as well as continue to pay Employee the per month rate of salary then in effect and provide Employee with benefits (unless the terms of the applicable benefit plans expressly prohibit the continuation of such benefits after such termination) for the balance of the Initial Employment Term that would have remained hereunder had such termination not occurred. Good Reason shall mean the occurrence of any one or more of the following events provided Employee has notified the Company in writing of the occurrence of such event and the event has continued uncured for thirty (30) days after the Company’s receipt of such notice, unless Employee specifically agrees in writing that such event shall not be Good Reason:

 

  (i) Any material breach of this Employment Agreement by the Company; or
     
  (ii) the failure of the Company to assign this Employment Agreement to a successor to the Company or the failure of a successor to explicitly assume and agree to be bound by this Employment Agreement or a similar Employment Agreement.

 

4.4 Termination by Employee Without Cause. Employee may terminate this Employment Agreement and his employment with the Company Without Cause upon providing sixty (60) days prior written notice to the Company. The Company shall pay Employee all earned but unpaid compensation, bonuses (not subject to a pro-rate adjustment), and benefits through the date of termination Without Cause by Employee. The Company shall have no further obligation to pay compensation or benefits to Employee for the remainder of the balance of the Initial Employment Term.

 

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4.5 Return of Property. Employee agrees, upon the termination of his employment with the Company, to return all physical, computerized, electronic or other types of records, documents, proposals, notes, lists, files and any and all other materials including, without limitation, computerized and/or electronic information that refers, relates or otherwise pertains to the Company and/or its affiliates, and any and all business dealings of said persons and entities. In addition, Employee shall return to the Company all property or equipment that Employee has been issued during the course of his employment or which he otherwise currently possesses, including, but not limited to, any computers, cellular phones, and/or similar items. Employee shall immediately deliver to the Company any such physical, computerized, electronic or other types of records, documents, proposals, notes, lists, files, materials, property and equipment that are in Employee’s possession. Employee acknowledges that Employee is not authorized to retain any physical, computerized, electronic or other types of copies of any such physical, computerized, electronic or other types of records, documents, proposals, notes, lists, files or materials, and is not authorized to retain any other property or equipment of the Company and/or its affiliates. Employee further agrees that he will immediately forward to the Company any business information regarding the Company and/or any of its affiliates that has been or is inadvertently directed to Employee following Employee’s last day of employment with the Company. The provisions of this Section are in addition to any other written agreements on this subject that Employee may have with the Company and/or any of its affiliates, and are not meant to and do not excuse any additional obligations that Employee may have under such agreements.

 

Section 5. Miscellaneous Provisions.

 

5.1 Assignment by Employee. This Agreement may not be assigned by Employee in whole or in part; provided, however, if Employee should die or become disabled while any amount is owed but unpaid to him hereunder, all such amounts, unless otherwise provided herein, shall be paid to his devisees, legatees, legal guardian or other designees, or if there is no such designees, to his estate.

 

5.2 Assignment by Employer. Employee hereby acknowledges and agrees that the Company may, in its sole discretion assign this Agreement to a comparable affiliate, successor, assign (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the assets or business of the Company). This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective spouses, heirs and personal and legal representatives. Any such successor or assign of the Company shall be included in the term “Company” as used in this Agreement

 

5.3 Notices. Any notice required to be delivered hereunder shall be in writing and shall be addressed as follows:

 

If to the Company, to:

2200 Space Park Drive, Suite 310

Houston, TX 77058

Attention: Chief Executive Officer

 

If to Employee:

444 Buckingham Dr.

Piscataway, New Jersey 08854

Attention: Rodney C. Silva

 

or, in each case, to such other address as such party may hereafter specify for the purpose by written notice to the other party hereto. Any such notice shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice shall be deemed not to have been received until the next succeeding business day in the place of receipt.

 

  5  

 

 

5.4 Entire Agreement. This Agreement represents the entire agreement between Employee and the Company and its affiliates with respect to Employee’s employment, and supersedes all prior discussions, negotiations, and agreements, written or oral.

 

5.5 Waiver of Rights. The waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a continuing waiver or as a consent to or waiver of any subsequent breach hereof.

 

5.6 Severability. In the event any provision of the Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, and the Agreement shall be construed and enforced as if the illegal or invalid provision had not been included.

 

5.7 Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to principles of conflict of laws. Any action at law, suit in equity or judicial proceeding arising directly, indirectly, or otherwise in connection with, out of, related to or from this Agreement, or any provision hereof, shall be litigated only in the courts of the State of California.

 

5.8 Counterparts. This Agreement may be signed in several counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were on the same instrument.

 

5.9 Employee Counsel. Employee acknowledges that he has had the opportunity to review this Agreement and the transactions contemplated hereby with his own legal counsel.

 

  6  

 

 

IN WITNESS WHEREOF, the Company and Employee have executed this Employment Agreement effective as of the date first set forth above.

 

COMPANY: Muscle Maker, Inc
     
  By:   /s/ Robert E. Morgan
    Robert E. Morgan, Chief Executive Officer
     
EMPLOYEE:    
     
  By:  /s/ Rodney C. Silva
    Rodney C. Silva

 

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Restricted Stock Agreement

 

This Restricted Stock Award Agreement (this “Agreement”) is made and entered into as of May 3, 2017 (the “Grant Date”) by and between Muscle Maker, Inc, a California corporation (the “Company”), and Grady Metoyer [Employee or Consultant] (the “Grantee”).

 

WHEREAS, the Company’s Board of Directors (the “Board”) has determined that it is in the best interests of the Company and its shareholders to grant the award of Restricted Stock provided for herein.

 

NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows:

 

1. Grant of Restricted Stock. The Company hereby issues to the Grantee on the Grant Date a restricted stock award consisting of, in the aggregate, 150,000 shares of common stock, no par value per share (the “Common Stock”), of the Company at a value of $1.00 per share (the “Restricted Stock”), on the terms and conditions and subject to the restrictions set forth in this Agreement.

 

2. Consideration. The grant of the Restricted Stock is made in consideration of the services to be rendered by the Grantee to the Company as an employee or consultant.

 

3. Restricted Period; Vesting.

 

3.1 Except as otherwise provided herein, provided that the Grantee remains in Continuous Service (as defined below) through the applicable vesting date, the Restricted Stock will vest as follows:

 

20% on the Grant Date;

 

20% on January 1, 2018;

 

20% on January 1, 2019;

 

20% on January 1, 2020; and

 

20% on January 1, 2021.

 

For purposes of this Agreement, “Continuous Service” shall mean the Grantee remaining as an employee or consultant of the Company.

 

The period over which the Restricted Stock vests is referred to as the “Restricted Period”.

 

3.2 The foregoing vesting schedule notwithstanding, if the Grantee’s Continuous Service terminates for any reason at any time before all of his Restricted Stock has vested, the Grantee’s unvested Restricted Stock shall be automatically forfeited upon such termination of Continuous Service and neither the Company nor any affiliate shall have any further obligations to the Grantee under this Agreement.

 

3.3 The foregoing vesting schedule notwithstanding, upon the occurrence of a Change in Control (as defined below), 100% of the unvested Restricted Stock shall vest as of the date of the Change in Control. For purposes of this Agreement, the term “Change in Control” shall mean (i) the sale of all or substantially all of the assets of the Company, (ii) the sale of more than fifty percent of the outstanding capital stock of the Company in a non-public sale, (iii) the dissolution or liquidation of the Company or (iv) any merger, share exchange, tender offer, share acquisition, consolidation or other reorganization or business combination of the Company if immediately after such transaction either (A) persons who were directors of the Company immediately prior to such transaction do not constitute at least a majority of the directors of the surviving entity or (B) persons who hold a majority of the voting capital stock of the surviving entity are not persons who held a majority of the voting capital stock of the Company immediately prior to the transaction; provided, however, that the term “Change in Control” shall not include a public offering of capital stock of the Company that is effected pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended.

 

 
 

 

3.4 Notwithstanding any provision of this Agreement to the contrary, if the Board determines, after full consideration of the facts, that:

 

(a) the Grantee has been engaged in fraud, embezzlement or theft in the course of his involvement with the Company, has made unauthorized disclosure of trade secrets or other proprietary information of the Company or of a third party who has entrusted such information to the Company or has been convicted of a felony or any crime that reflects negatively upon the Company; or

 

(b) the Grantee has violated the terms of any noncompetition, nonsolicitation, confidentiality, nondisclosure or other agreement with the Company to which he is a party; or

 

(c) the involvement with the Company of the Grantee was terminated for “cause,” as defined in any agreement with the Grantee governing his Continuous Service, or if there is no such agreement, as determined by the Board, which may determine that “cause” includes among other matters the willful failure or refusal of the Grantee to perform and carry out his assigned duties and responsibilities diligently and in a manner satisfactory to the Board;

 

then as of the date of such act (in the case of (a) or (b)) or such termination (in the case of (c)), the Grantee shall forfeit the unvested Restricted Stock and the Company shall have the right to repurchase all or any part of the vested Restricted Stock, at a price equal to the lower of (x) $0.50 per share, or (y) the Fair Market Value (as defined below) of such shares at the time of repurchase. The decision of the Board as to the cause of the Grantee’s discharge and the damage done to the Company shall be final, binding and conclusive. No decision of the Board, however, shall affect in any manner the finality of the discharge of the Grantee by the Company. The “Fair Market Value” of a share of Common Stock at any particular date shall be determined according to the following rules: (i) if the Common Stock is listed or admitted to trading on a stock exchange, the Fair Market Value shall be the closing price of the Common Stock on the date in question, (ii) if the Common Stock is not at the time listed or admitted to trading on a stock exchange, the Fair Market Value shall be the closing bid price of the Common Stock on the date in question in the over-the-counter market; provided, however, that if the price of the Common Stock is not so reported, the Fair Market Value shall be determined in good faith by the Board.

 

4. Restrictions. Subject to any exceptions set forth in this Agreement, during the Restricted Period, the Restricted Stock or the rights relating thereto may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Grantee without the prior written consent of the Board. Any attempt to assign, alienate, pledge, attach, sell or otherwise transfer or encumber the Restricted Stock or the rights relating thereto during the Restricted Period in contravention of this section shall be wholly ineffective and, if any such attempt is made, the Restricted Stock will be forfeited by the Grantee and all of the Grantee’s rights to such shares shall immediately terminate without any payment or consideration by the Company.

 

 
 

 

5. Rights as Shareholder; Dividends.

 

5.1 The Grantee shall be the record owner of the Restricted Stock until the shares of Common Stock are sold or otherwise disposed of, and shall be entitled to all of the rights of a shareholder of the Company including, without limitation, the right to vote such shares and receive all dividends or other distributions paid with respect to such shares. Notwithstanding the foregoing, any dividends or other distributions shall be subject to the same restrictions on transferability as the shares of Restricted Stock with respect to which they were paid.

 

5.2 The Company may issue stock certificates or evidence the Grantee’s interest by using a restricted book entry account with the Company’s transfer agent. Physical possession or custody of any stock certificates that are issued shall be retained by the Company until such time as the Restricted Stock vests.

 

5.3 If the Grantee forfeits any rights he has under this Agreement in accordance with Section 3, the Grantee shall, on the date of such forfeiture, no longer have any rights as a shareholder with respect to the Restricted Stock and shall no longer be entitled to vote or receive dividends on such shares.

 

6. No Right to Continued Service. This Agreement shall not confer upon the Grantee any right to be retained in any position, as an employee, consultant or director of the Company. Further, nothing in this Agreement shall be construed to limit the discretion of the Company to terminate the Grantee’s Continuous Service at any time.

 

7. Adjustments. In the event that the outstanding shares of Common Stock are hereafter exchanged for a different number or kind of shares or other securities of the Company, by reason of a reorganization, recapitalization, exchange of shares, stock split, combination of shares or dividend payable in shares or other securities, a corresponding adjustment shall be made by the Board in the number of and/or kind of shares of Restricted Stock. Any such adjustment made by the Board shall be conclusive and binding upon all affected persons, including the Company and the Grantee. If the Restricted Stock is converted into or exchanged for, or stockholders of the Company receive by reason of any distribution in total or partial liquidation, securities of another corporation or other entity, or other property, pursuant to any merger or consolidation of the Company or acquisition of its assets, then the rights of the Company under this Agreement shall inure to the benefit of the Company’s successor and this Agreement shall apply to the securities received upon such conversion, exchange or distribution in the same manner and to the same extent as the Restricted Stock. Notwithstanding the foregoing, if the Restricted Stock is converted into cash pursuant to any such transaction, the Grantee will receive such cash free and clear of any restrictions imposed by this Agreement.

 

8. Tax Liability and Withholding.

 

8.1 The Grantee shall be required to pay to the Company, and the Company shall have the right to deduct from any compensation paid to the Grantee, the amount of any required withholding taxes in respect of the Restricted Stock and to take all such other action as the Board deems necessary to satisfy all obligations for the payment of such withholding taxes. The Board may permit the Grantee to satisfy any federal, state or local tax withholding obligation by any of the following means, or by a combination of such means:

 

(a) tendering a cash payment;

 

(b) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable or deliverable to the Grantee as a result of the vesting of the Restricted Stock; provided, however, that no shares of Common Stock shall be withheld with a value exceeding the minimum amount of tax required to be withheld by law; or

 

 
 

 

(c) delivering to the Company previously owned and unencumbered shares of Common Stock.

 

8.2 Notwithstanding any action the Company takes with respect to any or all income tax, social insurance, payroll tax, or other tax-related withholding (“Tax-Related Items”), the ultimate liability for all Tax-Related Items is and remains the Grantee’s responsibility and the Company (a) makes no representation or undertakings regarding the treatment of any Tax-Related Items in connection with the grant or vesting of the Restricted Stock or the subsequent sale of any shares; and (b) does not commit to structure the Restricted Stock to reduce or eliminate the Grantee’s liability for Tax-Related Items.

 

9.Section 83(b) Election. The Grantee may make an election under Code Section 83(b) (a “Section 83(b) Election”) with respect to the Restricted Stock. Any such election must be made within thirty (30) days after the Grant Date. If the Grantee elects to make a Section 83(b) Election, the Grantee shall provide the Company with a copy of an executed version and satisfactory evidence of the filing of the executed Section 83(b) Election with the US Internal Revenue Service. The Grantee agrees to assume full responsibility for ensuring that the Section 83(b) Election is actually and timely filed with the US Internal Revenue Service and for all tax consequences resulting from the Section 83(b) Election.

 

10. Compliance with Law. The issuance and transfer of shares of Common Stock shall be subject to compliance by the Company and the Grantee with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Company’s shares of Common Stock may be listed. No shares of Common Stock shall be issued or transferred unless and until any then applicable requirements of state and federal laws and regulatory agencies have been fully complied with to the satisfaction of the Company and its counsel. The Grantee understands that the Company is under no obligation to register the shares of Common Stock with the Securities and Exchange Commission, any state securities commission or any stock exchange to effect such compliance.\

 

11. Legends. A legend may be placed on any certificate(s) or other document(s) delivered to the Grantee indicating restrictions on transferability of the shares of Restricted Stock pursuant to this Agreement or any other restrictions that the Board may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any applicable federal or state securities laws or any stock exchange on which the shares of Common Stock are then listed or quoted. All certificates representing unvested Restricted Stock shall have affixed thereto a legend in substantially the following form, in addition to any other legends that may be required under federal or state securities laws or pursuant to Section 12 below:

 

THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND RIGHTS TO PURCHASE SET FORTH IN A CERTAIN RESTRICTED STOCK AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED OWNER OF THESE SHARES (OR HIS PREDECESSOR IN INTEREST). SUCH AGREEMENT IS AVAILABLE FOR INSPECTION WITHOUT CHARGE AT THE OFFICE OF THE SECRETARY OF THE CORPORATION.

 

12. Representations and Warranties of the Grantee. The Grantee hereby represents and warrants to the Company as follows:

 

(a) The Grantee has the legal right and capacity to enter into this Agreement and fully understands the terms and conditions of this Agreement;

 

 
 

 

(b) The Grantee is acquiring the Restricted Stock for investment purposes only and not with a view to their resale or distribution; and

 

(c) The Grantee will, at the request of the Company, execute an agreement in a form acceptable to the Company to the effect that the Restricted Stock shall be subject to any underwriter’s lock-up agreement in connection with a public offering of any securities of the Company that may from time to time apply to shares held by employees and consultants of the Company.

 

13. Notices. Any notice required to be delivered to the Company under this Agreement shall be in writing and addressed to the Secretary of the Company at the Company’s principal corporate offices. Any notice required to be delivered to the Grantee under this Agreement shall be in writing and addressed to the Grantee at the Grantee’s address as shown in the records of the Company. Either party may designate another address in writing (or by such other method approved by the Company) from time to time.

 

14. Governing Law. This Agreement will be construed and interpreted in accordance with the laws of the State of California without regard to conflict of law principles.

 

15. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by the Grantee or the Company to the Board for review. The resolution of such dispute by the Board shall be final and binding on the Grantee and the Company.

 

16. Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement will be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement will be binding upon the Grantee and the Grantee’s beneficiaries, executors, administrators and the person(s) to whom the Restricted Stock may be transferred by will or the laws of descent or distribution.

 

17. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, and each provision of this Agreement shall be severable and enforceable to the extent permitted by law.

 

18. Discretionary Nature. The grant of the Restricted Stock in this Agreement does not create any contractual right or other right to receive any Restricted Stock or other awards in the future. Future awards, if any, will be at the sole discretion of the Company. Any amendment, modification, or termination of this Agreement shall not constitute a change or impairment of the terms and conditions of the Grantee’s employment with the Company.

 

19. Amendment. The Board has the right to amend, alter, suspend, discontinue or cancel the Restricted Stock, prospectively or retroactively; provided, that, no such amendment shall adversely affect the Grantee’s material rights under this Agreement without the Grantee’s consent.

 

20. No Impact on Other Benefits. The value of the Grantee’s Restricted Stock is not part of his normal or expected compensation for purposes of calculating any severance, retirement, welfare, insurance or similar employee benefit.

 

21. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. Counterpart signature pages to this Agreement transmitted by facsimile transmission, by electronic mail in portable document format (.pdf), or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, will have the same effect as physical delivery of the paper document bearing an original signature.

 

 
 

 

22. Acceptance. The Grantee hereby acknowledges receipt of a copy of this Agreement. The Grantee has read and understands the terms and provisions thereof, and accepts the Restricted Stock subject to all of the terms and conditions of this Agreement. The Grantee acknowledges that there may be adverse tax consequences upon the grant or vesting of the Restricted Stock or disposition of the underlying shares and that the Grantee has been advised to consult a tax advisor prior to such grant, vesting or disposition.

 

[SIGNATURE PAGE FOLLOWS]

 

 
 

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

 

  MUSCLE MAKER, INC
   
  By: /s/ Robert Morgan
  Name:  Robert Morgan
  Title: Chief Executive Officer
     
  [Employee or Consultant]
   
  By: /s/ Grady Metoyer
  Name: Grady Metoyer

 

 
 

 

 

 

 
 

 

 

 
 

 

 

 
 

 

AGREEMENT OF CONVEYANCE, TRANSFER AND ASSIGNMENT

OF

ASSETS AND ASSUMPTION OF OBLIGATIONS

 

Dated as of September 15, 2017

 

This Agreement of Conveyance, Transfer and Assigning of Assets and Assumptions of Obligations (this “Agreement”) dated as of the date first set forth above (the “Effective Date”), is made and entered into by and among Muscle Maker, Inc, a California corporation (“Assignor”) and Muscle Maker Corp., LLC, a Nevada limited liability company (“Assignee”). Each of Assignor and Assignee may be referred to herein as a “Party” and collectively as the “Parties.”

 

WHEREAS, Assignor desires to convey, transfer and assign to Assignee, and Assignee desires to acquire from Assignor, certain assets of Assignor relating to the operation of the business of Assignor and Assignee (the “Business”), on the terms and conditions set forth herein.

 

NOW, THEREFORE, in consideration of the above premises, the mutual covenants of the Parties set forth herein and other good and valuable consideration, the receipt, adequacy, and sufficiency of which are hereby acknowledged, the Parties hereto, each intending to be legally bound hereby, do agree as follows:

 

  1. Recitals. The recitations as set forth above are true and correct and are incorporated herein by this reference.
     
  2. Assignment of Assets. For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by Assignor, Assignor does hereby assign, grant, bargain, sell, convey, transfer and deliver to Assignee, and its successors and assigns, all of Assignor’s right, title and interest in, to and under the assets, properties and business listed on Exhibit A hereto (the “Assets”).
     
  3. Assumption of Liabilities. As of the date hereof, Assignee hereby assumes and agrees to pay, perform and discharge, fully and completely, the liabilities, commitments, contracts, agreements, obligations or other claims of Assignor as set forth on Exhibit B (the “Liabilities”).

 

  4. Further Assurances.

 

  (a) Each Party agrees to do all acts necessary to effectuate the intent of the Parties in connection with the transaction contemplated herein. In furtherance of the forgoing, Assignor shall from time to time after the date hereof at the request of Assignee and without further consideration execute and deliver to Assignee such additional instruments of transfer and assignment, including, without limitation any bills of sale, assignments of leases, deeds, and other recordable instruments of assignment, transfer and conveyance, in addition to this Agreement, as Assignee shall reasonably request to evidence more fully the assignment by Assignor to Assignee of the Assets, and Assignee shall from time to time after the date hereof at the request of Assignor and without further consideration execute and deliver to Assignor such additional instruments of assumption as Assignor shall reasonably request to evidence more fully the assumption by Assignee of the Liabilities.
     
  (b) To the extent that any request to undertake action necessary to effectuate the intent of the Parties pursuant to this Agreement shall not require an expenditure of funds or create any additional liability, each Party shall do such other or further acts and deliver such additional instruments as the other Party (or the other Party’s counsel) shall reasonably request for the effectuation and implementation of such Party’s duties and obligations hereunder.

 

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  5. Notices. All notices and other communications hereunder will be in writing and will be deemed given (a) on the date of delivery if delivered personally, or upon confirmation of receipt if delivered by email, (b) on the first Business Day following the date of dispatch if delivered by a recognized next-day courier service, or (c) on the fifth Business Day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. For purposes of this Agreement, a “Business Day” will mean any day that is not a Saturday, a Sunday or other day on which the offices of the Secretary of State of the State of California are closed. All notices hereunder must be delivered as set forth below, or pursuant to instructions as may be designated in writing by the Party to receive such notice:

 

  (a) If to Assignor, to:
     
    Muscle Maker, Inc
    Attn: Robert E. Morgan
    2200 Space Park Drive, Suite 310
    Houston, TX 77058
    Email: mrem1@aol.com
     
  (b) if to Assignee to:
     
    Muscle Maker Corp., LLC
    Attn: Robert E. Morgan
    2200 Space Park Drive, Suite 310
    Houston, TX 77058
    Email: mrem1@aol.com

 

  6. Miscellaneous.

 

  (a) This Agreement embodies the entire agreement and understanding of the Parties hereto in respect of the subject matter contained herein and supersede all prior agreements and the understandings between the Parties with respect to such subject matter. No discussions regarding or exchange of drafts or comments in connection with the transactions contemplated herein will constitute an agreement among the Parties hereto. Any agreement among the Parties will exist only when the Parties have fully executed and delivered this Agreement. This Agreement may only be amended by a writing executed by each of the Parties.
     
  (b) If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms and provisions of this Agreement will nevertheless remain in full force and effect so long as the economics or legal substance of the transactions contemplated hereby are not affected in any manner materially adverse to any Party. Upon determination that any term or other provision hereof is invalid, illegal or incapable of being enforced, the Parties hereto will negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.

 

  (c) This Agreement may be executed in two or more counterparts, each of which when so executed shall be deemed an original, but all of which together shall constitute but one (1) and the same agreement. This Agreement may be executed and delivered via facsimile.
     
  (d) This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of California, without application of the conflicts of laws provisions thereof.

 

[Signatures appear on the following page.]

 

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IN WITNESS WHEREOF, the Parties hereto have duly executed this Assignment as of the date first above written.

 

  Muscle Maker, Inc
     
  By: /s/ Robert E. Morgan
  Name: Robert E. Morgan
  Title: President
     
  Muscle Maker Corp., LLC
     
  By: /s/ Robert E. Morgan
  Name: Robert E. Morgan
  Title: President

 

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INDEMNIFICATION AGREEMENT

 

This Indemnification Agreement (the “Agreement”) is made and entered into as of [___________], 2017 between Muscle Maker, Inc., a California corporation (the “Company”), and [___________] (“Indemnitee”).

 

WHEREAS, highly competent persons have become more reluctant to serve corporations as directors, officers or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation;

 

WHEREAS, the Board of Directors of the Company (the “Board”) has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities and, although the furnishing of such insurance has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions and, at the same time, directors, officers, and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the Company or business enterprise itself;

 

WHEREAS, the uncertainties relating to such insurance and to indemnification have increased the difficulty of attracting and retaining such persons;

 

WHEREAS, the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company’s stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future;

 

WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified;

 

WHEREAS, this Agreement is a supplement to and in furtherance of the Bylaws and Articles of Incorporation of the Company and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder; and

 

WHEREAS, Indemnitee does not regard the protection available under the Company’s Bylaws and Articles of Incorporation and insurance as adequate in the present circumstances, and may not be willing to serve as an officer or director without adequate protection, and the Company desires Indemnitee to serve in such capacity. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that Indemniteebe so indemnified; and

 

NOW, THEREFORE, in consideration of Indemnitee’s agreement to serve as an [officer] [director] of [the Company/subsidiary] from and after the date hereof, the parties hereto agree as follows:

 

1. Indemnity of Indemnitee. The Company hereby agrees to hold harmless and indemnify Indemnitee to the fullest extent permitted by law, as such may be amended from time to time. In furtherance of the foregoing indemnification, and without limiting the generality thereof Indemnity shall be entitled to the indemnification as set forth herein.

 

     
     

 

  (a) Proceedings Other Than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(a) if, by reason of Indemnitee’s Corporate Status (as hereinafter defined), the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him, or on Indemnitee’s behalf, in connection with such Proceeding or any claim, issue or matter therein, if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal Proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful.
     
  (b) Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of Indemnitee’s Corporate Status, the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by the Indemnitee, or on the Indemnitee’s behalf, in connection with such Proceeding if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company; provided, however, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that any court of the State of California shall determine that such indemnification may be made.
     
  (c) Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of Indemnitee’s Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, Indemnitee shall be indemnified to the maximum extent permitted by law, as such may be amended from time to time, against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

 

2. Additional Indemnity. In addition to, and without regard to any limitations on, the indemnification provided for in Section 1, the Company shall and hereby does indemnify and hold harmless Indemnitee against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf if, by reason of Indemnitee’s Corporate Status, Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee. The only limitation that shall exist upon the Company’s obligations pursuant to this Agreement shall be that the Company shall not be obligated to make any payment to Indemnitee that is finally determined (under the procedures, and subject to the presumptions, set forth in Section 6 and Section 7) to be unlawful.

 

3. Contribution.

 

  (a) Whether or not the indemnification provided in Section 1 and Section 2 hereof is available, in respect of any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring Indemnitee to contribute to such payment and the Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. The Company shall not enter into any settlement of any action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee.

 

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  (b) Without diminishing or impairing the obligations of the Company set forth in Section 3(a), if, for any reason, Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall contribute to the amount of Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, from the transaction or events from which such action, suit or proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of the Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, in connection with the transaction or events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which applicable law may require to be considered. The relative fault of the Company and all officers, directors or employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary and the degree to which their conduct is active or passive.
     
  (c) The Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims of contribution which may be brought by officers, directors, or employees of the Company, other than Indemnitee, who may be jointly liable with Indemnitee.
     
  (d) To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).

 

4. Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of Indemnitee’s Corporate Status, a witness, or is made (or asked) to respond to discovery requests, in any Proceeding to which Indemnitee is not a party, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith.

 

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5. Advancement of Expenses. Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee’s Corporate Status within thirty (30) days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free.
   
6. Procedures and Presumptions for Determination of Entitlement to Indemnification. It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable as may be permitted under the California Corporations Code (the “CCC”) and public policy of the State of California. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether Indemnitee is entitled to indemnification under this Agreement:

 

  (a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. Notwithstanding the foregoing, any failure of Indemnitee to provide such a request to the Company, or to provide such a request in a timely fashion, shall not relieve the Company of any liability that it may have to Indemnitee unless, and to the extent that, such failure actually and materially prejudices the interests of the Company.
     
  (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 6(a) hereof, a determination with respect to Indemnitee’s entitlement thereto shall be made in the specific case by one of the following four methods, which shall be at the election of the Board (1) by a majority vote of the disinterested directors, even though less than a quorum, (2) by a committee of disinterested directors designated by a majority vote of the disinterested directors, even though less than a quorum, (3) if there are no disinterested directors or if the disinterested directors so direct, by independent legal counsel in a written opinion to the Board, a copy of which shall be delivered to the Indemnitee, or (4) if so directed by the Board, by the stockholders of the Company. For purposes hereof, disinterested directors are those members of the Board who are not parties to the action, suit or proceeding in respect of which indemnification is sought by Indemnitee.
     
  (c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent Counsel shall be selected as provided in this Section 6(c). The Independent Counsel shall be selected by the Board. Indemnitee may, within ten (10) days after such written notice of selection shall have been given, deliver to the Company a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 13, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section 6(a), no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the any court of competent jurisdiction for resolution of any objection which shall have been made by the Indemnitee to the Company’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 6(b). The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 6(b), and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6(c), regardless of the manner in which such Independent Counsel was selected or appointed.

 

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  (d) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence. Neither the failure of the Company (including by its directors or independent legal counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.
     
  (e) Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Enterprise (as hereinafter defined), including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 6(e) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.
     
  (f) If the person, persons or entity empowered or selected under Section 6 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within sixty (60) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such sixty (60) day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making such determination with respect to entitlement to indemnification in good faith requires such additional time to obtain or evaluate documentation and/or information relating thereto; and provided further, that the foregoing provisions of this Section 6(f) shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6(b) and if (A) within fifteen (15) days after receipt by the Company of the request for such determination, the Board or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat.

 

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  (g) Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board or stockholder of the Company shall act reasonably and in good faith in making a determination regarding the Indemnitee’s entitlement to indemnification under this Agreement. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.
     
  (h) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.
     
  (i) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that Indemnitee’s conduct was unlawful.

 

7. Remedies of Indemnitee.

 

  (a) In the event that (i) a determination is made pursuant to Section 6 that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5, (iii) no determination of entitlement to indemnification is made pursuant to Section 6(b) within ninety (90) days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 6, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of California, or in any other court of competent jurisdiction, of Indemnitee’s entitlement to such indemnification. Indemnitee shall commence such proceeding seeking an adjudication within one hundred eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 7(a). The Company shall not oppose Indemnitee’s right to seek any such adjudication.

 

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  (b) In the event that a determination shall have been made pursuant to Section 6(b) that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 7 shall be conducted in all respects as a de novo trial on the merits, and Indemnitee shall not be prejudiced by reason of the adverse determination under Section 6(b).
     
  (c) If a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 7, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s misstatement not materially misleading in connection with the application for indemnification, or (ii) a prohibition of such indemnification under applicable law.
     
  (d) In the event that Indemnitee, pursuant to this Section 7, seeks a judicial adjudication of Indemnitee’s rights under, or to recover damages for breach of, this Agreement, or to recover under any directors’ and officers’ liability insurance policies maintained by the Company, the Company shall pay on Indemnitee’s behalf, in advance, any and all expenses (of the types described in the definition of Expenses in Section 13) actually and reasonably incurred by Indemnitee in such judicial adjudication, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery.
     
  (e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 7 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement. The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefore) advance, to the extent not prohibited by law, such expenses to Indemnitee, which are incurred by Indemnitee in connection with any action brought by Indemnitee for indemnification or advance of Expenses from the Company under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of Expenses or insurance recovery, as the case may be.
     
  (f) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding.

 

8. Non-Exclusivity; Survival of Rights; Insurance; Primacy of Indemnification; Subrogation.

 

  (a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Articles of Incorporation of the Company, the Bylaws of the Company, any agreement, a vote of stockholders, a resolution of directors of the Company, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in Indemnitee’s Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the CCC, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Articles of Incorporation of the Company, the Bylaws of the Company and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

 

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  (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any director, officer, employee, agent or fiduciary under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has directors’ and officers’ liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.
     
  (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
     
  (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.
     
  (e) The Company’s obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise.

 

9. Exception to Right of Indemnification. Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against Indemnitee:

 

  (a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision, provided, that the foregoing shall not affect the rights of Indemnitee set forth in Section 8(c); or
     
  (b) for an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law; or
     
  (c) in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or other indemnitees, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation, or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.

 

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10. Duration of Agreement. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer or director of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 7) by reason of Indemnitee’s Corporate Status, whether or not Indemnitee is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. Indemnitee may not assign this Agreement without the prior written consent of the Company.
   
11. Security. To the extent requested by Indemnitee and approved by the Board, the Company may at any time and from time to time provide security to Indemnitee for the Company’s obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee.

 

12. Enforcement.

 

  (a) The Company expressly confirms and agrees that it has entered into this Agreement and assumes the obligations imposed on it hereby in order to induce Indemnitee to serve as an officer or director of the Company or one of its subsidiaries, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as an officer or director of the Company or one of its subsidiaries.
     
  (b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.
     
  (c) The Company shall not seek from a court, or agree to, a “bar order” which would have the effect of prohibiting or limiting the Indemnitee’s rights to receive advancement of expenses under this Agreement.

 

13. Definitions. For purposes of this Agreement:

 

  (a) “Corporate Status” describes the status of a person who is or was a director, officer, employee, agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving at the express written request of the Company.
     
  (b) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.
     
  (c) “Enterprise” shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that Indemnitee is or was serving at the express written request of the Company as a director, officer, employee, agent or fiduciary.
     
  (d) “Expenses” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding, or responding to, or objecting to, a request to provide discovery in any Proceeding. Expenses also shall include Expenses incurred in connection with any appeal resulting from any Proceeding and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement, including without limitation the premium, security for, and other costs relating to any cost bond, supersede as bond, or other appeal bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

 

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  (e) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.
     
  (f) “Proceeding” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of Indemnitee’s Corporate Status, by reason of any action taken by Indemnitee or of any inaction on Indemnitee’s part while acting in Indemnitee’s Corporate Status; in each case whether or not Indemnitee is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement, but excluding one initiated by an Indemnitee pursuant to Section 7 of this Agreement to enforce Indemnitee’s rights under this Agreement.

 

14. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. Without limiting the generality of the foregoing, this Agreement is intended to confer upon Indemnitee indemnification rights to the fullest extent permitted by applicable laws. In the event any provision hereof conflicts with any applicable law, such provision shall be deemed modified, consistent with the aforementioned intent, to the extent necessary to resolve such conflict.
   
15. Modification and Waiver. No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
   
16. Notice By Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with or otherwise receiving any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company.

 

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17. Notices. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail with return receipt requested, if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent:

 

  (a) To Indemnitee at the address set forth below Indemnitee’s signature hereto.
     
  (b) To the Company at:

 

  _______________________________________  
  _______________________________________  
  _______________________________________  
  Attention:_______________________________  
  Email:__________________________________  

 

   

or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

 

18. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
   
19. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.
   
20. Governing Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of California, without regard to its conflict of laws rules. The Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the State and Federal Courts of the State of California (the “California Courts”), and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the California Courts for purposes of any action or proceeding arising out of or in connection with this Agreement; (iii) waive any objection to the laying of venue of any such action or proceeding in the California Courts, and (iv) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the California Courts has been brought in an improper or inconvenient forum.

 

[Signatures appear on following page]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement on and as of the day and year first above written.

 

  Muscle Maker, Inc.
     
  By:                                            
     
  Name:
     
  Title:
     
  [Indemnitee name]
     
  By:
     
  Title:
     
  Address:
  __________________________________
  __________________________________
  __________________________________
  __________________________________
  Email: ____________________________

 

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STAND ALONE NON-QUALIFIED STOCK OPTION AGREEMENT FOR FRANCHISEES

 

Name of Optionee:    
     
No. of Option Shares (“Option Shares”):    
     
Option Exercise Price per Share (the “Exercise Price”):   $
    FMV on Grant Date
     
Grant Date:    
     
Expiration Date:   years after the Grant Date

 

MUSCLE MAKER, INC, a California corporation, located at 2200 Space Park Drive, Suite 310, Houston, Texas 77058 (the “Company”), hereby grants to ______________ (the “Optionee”), a franchisee of the Company, a non-qualified stock option (the “Stock Option”) to purchase on or prior to the Expiration Date specified above all or part of the number of shares of Common Stock, no par per share (the “Stock”), of the Company specified above (the “Option Shares”) at the Option Exercise Price per Share specified above (the “Exercise Price”) subject to the terms and conditions set forth herein.

 

1. Exercisability Schedule. No portion of this Stock Option may be exercised until such portion shall have become exercisable. Except as set forth below, and subject to the discretion of the Company to accelerate the exercisability schedule hereunder, this Stock Option shall be exercisable with respect to the following number of Option Shares on the dates indicated so long as the Optionee remains a franchisee on such dates or as otherwise provided for in Section 3 below:

 

Incremental Number of
Option Shares Exercisable
  Exercisability Date
     
____________ (__%)    
     
____________ (__%)    
     
____________ (__%)    

 

Once exercisable, this Stock Option shall continue to be exercisable at any time or times prior to the close of business on the Expiration Date except as provided for in Section 3 below.

 

2. Manner of Exercise.

 

(a)The Optionee may exercise this Stock Option only in the following manner: from time to time on or prior to the Expiration Date of this Stock Option, the Optionee may give written notice to the Company of his or her election to purchase some or all of the Option Shares purchasable at the time of such notice. This notice shall specify the number of Option Shares to be purchased.

 

(b) Payment of the purchase price for the Option Shares may be made by one or more of the following methods: (i) in cash, by certified or bank check or other instrument acceptable to the Company; (ii) through the delivery (or attestation to the ownership) of shares of Stock that have been purchased by the Optionee on the open market or that are beneficially owned by the Optionee and are not then subject to any restrictions under any Company plan and that otherwise satisfy any holding periods as may be required by the Company; (iii) by the Optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the option purchase price, provided that in the event the Optionee chooses to pay the option purchase price as so provided, the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Company shall prescribe as a condition of such payment procedure; (iv) by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; or (v) a combination of (i), (ii), (iii) and (iv) above. Payment instruments will be received subject to collection.

 

  1  
 

 

(c) The transfer to the Optionee on the records of the Company or of the transfer agent of the Option Shares will be contingent upon (i) the Company’s receipt from the Optionee of the full purchase price for the Option Shares, as set forth above, (ii) the fulfillment of any other requirements contained herein or in the Plan or in any other agreement or provision of laws, and (iii) the receipt by the Company of any agreement, statement or other evidence that the Company may require to satisfy itself that the issuance of Stock to be purchased pursuant to the exercise of Stock Options under the Plan and any subsequent resale of the shares of Stock will be in compliance with applicable laws and regulations. In the event the Optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the Optionee upon the exercise of the Stock Option shall be net of the Shares attested to.

 

(d) The shares of Stock purchased upon exercise of this Stock Option shall be transferred to the Optionee on the records of the Company or of the transfer agent upon compliance to the satisfaction of the Company with all requirements under applicable laws or regulations in connection with such transfer and with the requirements hereof and of the Plan. The determination of the Company as to such compliance shall be final and binding on the Optionee. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Stock subject to this Stock Option unless and until this Stock Option shall have been exercised pursuant to the terms hereof, the Company or the transfer agent shall have transferred the shares to the Optionee, and the Optionee’s name shall have been entered as the stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such shares of Stock.

 

(e) The minimum number of shares with respect to which this Stock Option may be exercised at any one time shall be ______ shares, unless the number of shares with respect to which this Stock Option is being exercised is the total number of shares subject to exercise under this Stock Option at the time.

 

(f) Notwithstanding any other provision hereof, no portion of this Stock Option shall be exercisable after the Expiration Date hereof.

 

3. Termination as Franchisee. If the Optionee ceases to be a franchisee, any portion of this Stock Option outstanding on such date may be exercised, to the extent exercisable on the date the Optionee ceased to be a franchisee, for a period of ______ (__) months from the date of ceasing to be a franchisee (the “Tail Option Exercise Period”) or until the Expiration Date. Any portion of this Stock Option that is not exercisable within the Tail Option Exercise Period shall terminate effective as of the end of such period and be of no further force or effect.

 

4. Transferability. This Agreement is personal to the Optionee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. This Stock Option is exercisable, during the Optionee’s lifetime, only by the Optionee, and thereafter, only by the Optionee’s legal representative or legatee.

 

  2  
 

 

5. No Obligation to Continue as an Franchisee. This Stock Option does not confer upon the Optionee any rights with respect to continuance as a franchisee.

 

6. Integration. This Agreement constitutes the entire agreement between the parties with respect to this Stock Option and supersedes all prior agreements and discussions between the parties concerning such subject matter.

 

7. Data Privacy Consent. In order to administer this Agreement and to implement or structure future equity grants, the Company, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Optionee (i) authorizes the Company to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Optionee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Optionee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

 

8. Arbitration. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California. Any controversies or claims between the parties, whether arising in contract, tort or by statute, including but not limited to controversies or claims that arise out of or relate to: (i) this Agreement (including any renewals, extensions or modifications); or (ii) any document related to this Agreement (collectively a “Claim”), shall be settled by binding arbitration administered by the American Arbitration Association under its Employment Arbitration Rules and Mediation Procedures and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The parties acknowledge that this Agreement evidences a transaction involving interstate commerce. The Federal Arbitration Act (Title 9, U.S. Code) shall govern the interpretation, enforcement, and proceedings pursuant to the arbitration clause in this Agreement. The arbitration shall be administered by the AAA and conducted, unless otherwise required by law, in Irvine, California. By agreeing to binding arbitration, the parties irrevocably and voluntarily waive any right they may have to a trial by jury in respect of any Claim. THE PARTIES AGREE AND UNDERSTAND THAT THE EFFECT OF THIS AGREEMENT IS THAT THEY ARE GIVING UP THE RIGHT TO TRIAL BY JURY TO THE EXTENT PERMITTED BY LAW.

 

9. Notices. Notices hereunder shall be mailed or delivered to the Company at its principal place of business and shall be mailed or delivered to the Optionee at the address on file with the Company or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

 

  MUSCLE MAKER, INC
     
  By:  
  Name: Robert E. Morgan
  Title: Chief Executive Officer

 

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Electronic acceptance of this Agreement pursuant to the Company’s instructions to the Optionee is acceptable.

 

Dated: ________, 2017  
 
  Optionee’s Signature
   
  Optionee’s name and address:
   
 
 
 
 

 

  3  
 

 

EXHIBIT 8.1

 

CLOSING ESCROW AGREEMENT

 

This CLOSING ESCROW AGREEMENT (this “Agreement”) dated as of this 17th day of September 2017 by and among Muscle Maker, Inc, a California corporation (the “Company”), having an address at 2200 Space Park Drive, Suite 310, Houston, Texas 77058; TriPoint Global Equities, LLC, having an address at 1450 Broadway, 26th Floor, New York, NY 10018 (“Placement Agent”), and WILMINGTON TRUST, NATIONAL ASSOCIATION (the “Escrow Agent”), with its principal corporate trust office at 1100 North Market Street, Wilmington, Delaware 19890.

 

All capitalized terms not herein defined shall have the meaning ascribed to them in that certain Subscription Agreement, dated as of or about _______, 2017, as amended or supplemented from time-to-time, including all attachments, schedules and exhibits thereto (the “Subscription Agreement”).

 

W I T N E S S E T H:

 

WHEREAS, the Company proposes to sell (the “Financing Transaction”) a maximum of 3,333,333 shares of our common stock, no par value (“Common Stock”), at an offering price of $6.00 per share (the “Shares”) for an offering amount of $19,999,998, in a public offering (the “Offering”) to investors (each, an “Investor”); and

 

WHEREAS, subject to all conditions to closing being satisfied or waived, the closing(s) of the Offering shall take place from time to time until the earlier of (a) the date which is one year after this Offering being qualified by the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”), or (b) the date on which this Offering is earlier terminated by the Company in its sole discretion (the “Termination Date”) (the earlier of (a) or (b), the “Final Termination Date”); and

 

WHEREAS, there is no minimum offering amount and all funds shall only be returned to the potential Investors in the event the Offering is not consummated or if the Company, in its sole discretion, rejects all or a part of a particular potential Investor’s subscription; and

 

WHEREAS, in connection with the Financing Transaction contemplated by the Subscription Agreement, the Company entered into a Placement Agent Agreement between the Company and the Placement Agent, and certain other agreements, documents, instruments and certificates necessary to carry out the purposes thereof, including without limitation the Subscription Agreement (collectively, the “Transaction Documents”); and

 

WHEREAS, the Company and Placement Agent desire to establish an escrow account with the Escrow Agent into which the Company and Placement Agent shall instruct the Investors to deposit checks and other instruments for the payment of money made payable to the order of “WILMINGTON TRUST, N.A. as Escrow Agent for Muscle Maker Escrow,” and the Escrow Agent is willing to accept said checks and other instruments for the payment of money in accordance with the terms hereinafter set forth; and

 

WHEREAS, the Company and Placement Agent represent and warrant to the Escrow Agent that they have not stated to any individual or entity that the Escrow Agent’s duties will include anything other than those duties stated in this Agreement; and

 

WHEREAS, the Company and Placement Agent represent and warrant to the Escrow Agent that a copy of each document that has been delivered to the Investor and third parties that include Escrow Agent’s name and duties, has been attached hereto as Schedule I.

 

     
 

 

NOW, THEREFORE, IT IS AGREED as follows:

 

1. Delivery of Escrow Funds.

 

(a) Placement Agent and the Company shall instruct the Investor to deliver to Escrow Agent checks made payable to the order of “WILMINGTON TRUST, N.A. as Escrow Agent for Muscle Maker, Inc Escrow,” or wire transfer to:

 

Wilmington Trust Company

ABA #: 031100092

A/C #

A/C Name: Muscle Maker Escrow

Attn: Boris Treyger

 

International Wires:

 

M&T

Buffalo, New York

ABA: 022000046

SWIFT: MANTUS33

Beneficiary Bank: Wilmington Trust

Beneficiary ABA: 031100092

A/C #:

A/C Name: Muscle Maker Escrow

 

All such checks and wire transfers remitted to the Escrow Agent shall be accompanied by information identifying each Investor, subscription, the Investor’s social security or taxpayer identification number and address. In the event the Investor’s address and/or social security number or taxpayer identification number are not provided to Escrow Agent by the Investor, then Placement Agent and/or the Company agree to promptly upon request provide Escrow Agent with such information in writing. The checks or wire transfers shall be deposited into a non interest-bearing account at WILMINGTON TRUST, NATIONAL ASSOCIATION entitled “WILMINGTON TRUST, N.A. as Escrow Agent for Muscle Maker Escrow” (the “Escrow Account”).

 

(b) The collected funds deposited into the Escrow Account are referred to as the “Escrow Funds.”

 

(c) The Escrow Agent shall have no duty or responsibility to enforce the collection or demand payment of any funds deposited into the Escrow Account. If, for any reason, any check deposited into the Escrow Account shall be returned unpaid to the Escrow Agent, the sole duty of the Escrow Agent shall be to return the check to the Investor and advise the Company and Placement Agent promptly thereof.

 

2. Release of Escrow Funds. The Escrow Funds shall be paid by the Escrow Agent in accordance with the following:

 

(a) In the event that the Company advises the Escrow Agent in writing that the Offering has been terminated (the “Termination Notice”), the Escrow Agent shall promptly return the funds paid by each Investor to such Investor without interest or offset.

 

(b) Intentionally left blank

 

(c) At each Closing, the Company and the Placement Agent shall provide the Escrow Agent with written instructions regarding the disbursement of the Escrow Funds in accordance with Exhibit A attached hereto and made a part hereof and signed by the Company and the Placement Agent (the “Disbursement Instructions”).

 

(d) Intentionally left blank

 

(e) If by 5:00 P.M. Eastern Time on the Final Termination Date, the Escrow Agent has not received written Disbursement Instructions from the Company and Placement Agent regarding the disbursement of the Escrow Funds in the Escrow Account, if any, then the Escrow Agent shall promptly return such Escrow Funds, if any, to the Investors without interest or offset. The Escrow Funds returned to the Investors shall be free and clear of any and all claims of the Escrow Agent.

 

     
 

 

(f) The Escrow Agent shall not be required to pay any uncollected funds or any funds that are not available for withdrawal.

 

(g) Intentionally left blank

 

(h) The Placement Agent or the Company will provide the Escrow Agent with the payment instructions for each Investor, to whom the funds should be returned in accordance with this section.

 

3. Acceptance by Escrow Agent. The Escrow Agent hereby accepts and agrees to perform its obligations hereunder, provided that:

 

(a) The Escrow Agent may act in reliance upon any signature reasonably believed by it to be genuine, and may assume that any person who has been designated by Placement Agent or the Company to give any written instructions, notice or receipt, or make any statements in connection with the provisions hereof has been duly authorized to do so. Escrow Agent shall have no duty to make inquiry as to the genuineness, accuracy or validity of any statements or instructions or any signatures on statements or instructions. The names and true signatures of each individual authorized to act singly on behalf of the Company and Placement Agent are stated in Schedule II, which is attached hereto and made a part hereof. The Company and Placement Agent may each remove or add one or more of its authorized signers stated on Schedule II by notifying the Escrow Agent in writing of such change in accordance with this Agreement, which notice shall include the true signature for any new authorized signatories. The Escrow Agent shall be entitled to rely upon any order, judgment, opinion, or other writing delivered to it in compliance with the provisions of this Agreement without being required to determine the authenticity or the correctness of any fact stated therein or the propriety or validity of service thereof.

 

(b) The Escrow Agent may act relative hereto in reliance upon advice of counsel in reference to any matter connected herewith. The Escrow Agent shall not be liable for any mistake of fact or error of judgment or law, or for any acts or omissions of any kind, unless caused by its willful misconduct or gross negligence.

 

(c) Placement Agent and the Company agree, jointly and severally, to indemnify and hold the Escrow Agent and its employees, officers, directors and agents harmless from and against any and all claims, losses, costs, liabilities, damages, suits, demands, judgments or expenses (including but not limited to reasonable attorney’s fees) claimed against or incurred by Escrow Agent arising out of or related, directly or indirectly, to this Escrow Agreement unless caused by the Escrow Agent’s gross negligence or willful misconduct. Placement Agent and the Company agree, jointly and severally, to pay or reimburse the Escrow Agent upon request for any transfer taxes or other taxes relating to the Escrow Funds incurred in connection herewith and shall indemnify and hold harmless the Escrow Agent with respect to any amounts that it is obligated to pay in the way of such taxes. Escrow Agent shall not incur any liability for performing or not performing any act or fulfilling any duty, obligation or responsibility hereunder by reason of any occurrence beyond the control of Escrow Agent, including, without limitation, war (whether declared or existing), revolution, insurrection, riot, civil commotion, accident, fire, explosion, stoppage of labor, strikes and other differences with employees; the act, failure or neglect of the parties hereto (other than Escrow Agent) or any of their agents; any delay, error, omission or default of any mail, courier, facsimile or wireless agency or operator; or the acts or edicts of any government or governmental agency or other group or entity exercising governmental powers. The terms of this paragraph shall survive termination of this Agreement.

 

(d) In the event that the Escrow Agent shall be uncertain as to its duties or rights hereunder, the Escrow Agent shall be entitled to (i) refrain from taking any action other than to keep safely the Escrow Funds until it shall be directed otherwise by a court of competent jurisdiction, or (ii) deliver the Escrow Funds to a court of competent jurisdiction.

 

(e) The Escrow Agent shall have no duty, responsibility or obligation to interpret or enforce the terms of any agreement other than Escrow Agent’s obligations hereunder, and the Escrow Agent shall not be required to make a request that any monies be delivered to the Escrow Account, it being agreed that the sole duties and responsibilities of the Escrow Agent shall be to the extent not prohibited by applicable law (i) to accept checks or other instruments for the payment of money and wire transfers delivered to the Escrow Agent for the Escrow Account and deposit said checks and wire transfers into the non-interest bearing Escrow Account, and (ii) to disburse or refrain from disbursing the Escrow Funds as stated above, provided that the checks received by the Escrow Agent have been collected and are available for withdrawal. The Escrow Agent makes no representation as to the validity, value, genuineness or collectability of any security or other document or instrument held by or delivered to it.

 

     
 

 

(f) The Escrow Agent shall be obligated to perform only such duties as are expressly set forth in this Agreement. No implied covenants or obligations shall be inferred from this Agreement against the Escrow Agent, nor shall the Escrow Agent be bound by the provisions of any agreement by the Company beyond the specific terms hereof. Without limiting the foregoing, the Escrow Agent shall dispose of the Escrow Funds in accordance with the express provisions of this Agreement, and has not reviewed and shall not make, be required to make or be liable in any manner for its failure to make, any determination under the Transaction Documents, or any other agreement, including, without limitation, any determination of whether (i) the Company has complied with the terms of the Transaction Documents, (ii) an investment in the Shares is suitable for the proposed Investors, or (iii) the Transaction Documents complies with applicable securities laws.

 

(g) No provision of this Agreement shall require the Escrow Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder. The Escrow Agent is acting under this Agreement as a stakeholder only and shall be considered an independent contractor with respect to each party. No term or provision of this Agreement is intended to create, nor shall any such term or provision be deemed to have created, any trust, joint venture, partnership, or debtor/creditor relationship between or among the Escrow Agent and any of the parties.

 

(h) In no event shall the Escrow Agent be liable for any lost profits, lost savings or other special, exemplary, consequential or incidental damages even if the Escrow Agent has been advised of the likelihood of such loss or damage.

 

4. Resignation and Termination of the Escrow Agent. The Escrow Agent may resign at any time by giving 30 days’ prior written notice of such resignation to Placement Agent and the Company. Upon providing such notice, the Escrow Agent shall have no further obligation hereunder except to hold as depositary the Escrow Funds that it receives until the end of such 30-day period. In such event, the Escrow Agent shall not take any action, other than receiving and depositing the Investor’s checks and wire transfers in accordance with this Agreement, until the Company has designated a banking corporation, trust company, attorney or other person as successor. Upon receipt of such written designation signed by Placement Agent and the Company, the Escrow Agent shall promptly deliver the Escrow Funds to such successor and shall thereafter have no further obligations hereunder. If such instructions are not received within 30 days following the effective date of such resignation, then the Escrow Agent may deposit the Escrow Funds held by it pursuant to this Agreement with a clerk of a court of competent jurisdiction pending the appointment of a successor. In either case provided for in this paragraph, the Escrow Agent shall be relieved of all further obligations and released from all liability thereafter arising with respect to the Escrow Funds.

 

5. Termination. The Company and Placement Agent may terminate the appointment of the Escrow Agent hereunder upon written notice specifying the date upon which such termination shall take effect, which date shall be at least 30 days from the date of such notice. In the event of such termination, the Company and Placement Agent shall, within 30 days of such notice, appoint a successor escrow agent and the Escrow Agent shall, upon receipt of written instructions signed by the Company and Placement Agent, turn over to such successor escrow agent all of the Escrow Funds; provided, however, that if the Company and Placement Agent fail to appoint a successor escrow agent within such 30-day period, such termination notice shall be null and void and the Escrow Agent shall continue to be bound by all of the provisions hereof. Upon receipt of the Escrow Funds, the successor escrow agent shall become the escrow agent hereunder and shall be bound by all of the provisions hereof and the Escrow Agent shall be relieved of all further obligations and released from all liability thereafter arising with respect to the Escrow Funds and under this Agreement.

 

6. Investment. All funds received by the Escrow Agent shall be held only in non-interest bearing bank accounts at WILMINGTON TRUST, NATIONAL ASSOCIATION.

 

     
 

 

7. Compensation. Escrow Agent shall be entitled, for the duties to be performed by it hereunder, to a fee of $2,500,00, which fee shall be paid by the Company upon the signing of this Agreement. In addition, the Company shall be obligated to reimburse Escrow Agent for all fees, costs and expenses incurred or that become due in connection with this Agreement or the Escrow Account, including reasonable attorney’s fees. Neither the modification, cancellation, termination or rescission of this Agreement nor the resignation or termination of the Escrow Agent shall affect the right of Escrow Agent to retain the amount of any fee which has been paid, or to be reimbursed or paid any amount which has been incurred or becomes due, prior to the effective date of any such modification, cancellation, termination, resignation or rescission. To the extent the Escrow Agent has incurred any such expenses, or any such fee becomes due, prior to any closing, the Escrow Agent shall advise the Company and the Company shall direct all such amounts to be paid directly at any such closing. The terms of this paragraph shall survive termination of this Agreement.

 

8. Notices. All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if sent by hand-delivery, by facsimile (followed by first-class mail), by nationally recognized overnight courier service or by prepaid registered or certified mail, return receipt requested, to the addresses set forth below:

 

If to Placement Agent:

 

TriPoint Global Equities, LLC

1450 Broadway, 26th Floor

NY, NY 10018

Phone: (240) 864-0449

EMail: mark@tpglobal.com

 

If to the Company:

 

Robert E. Morgan

Chief Executive Officer

Muscle Maker, Inc

2200 Space Park Drive, Suite 310

Houston, Texas 77058

Phone: 732-669-1200

Email: MRem1@aol.com

 

Copy:

 

Laura Anthony, Esq.

Legal & Compliance, LLC

330 Clematis Street, Suite 217

West Palm Beach, FL 33401

Phone: 561-514-0936

Fax: 561-514-0832

Email: Lanthony@legalandcompliance.com

 

If to Escrow Agent:

 

WILMINGTON TRUST, NATIONAL ASSOCIATION

166 Mercer Street, Suite 2R

New York, New York

Attention: Boris Treyger

Phone: (212) 941-4416

Fax: (212) 343-1079

 

     
 

 

9. General.

 

(a) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to agreements made and to be entirely performed within such State, without regard to choice of law principles and any action brought hereunder shall be brought in the courts of the State of Delaware, located in the County of New Castle. Each party hereto irrevocably waives any objection on the grounds of venue, forum non-conveniens or any similar grounds and irrevocably consents to service of process by mail or in any manner permitted by applicable law and consents to the jurisdiction of said courts. Each of the parties hereto hereby waives all right to trial by jury in any action, proceeding or counterclaim arising out of the transactions contemplated by this Agreement.

 

(b) This Agreement sets forth the entire agreement and understanding of the parties with respect to the matters contained herein and supersedes all prior agreements, arrangements and understandings relating thereto.

 

(c) All of the terms and conditions of this Agreement shall be binding upon, and inure to the benefit of and be enforceable by, the parties hereto, as well as their respective successors and assigns.

 

(d) This Agreement may be amended, modified, superseded or canceled, and any of the terms or conditions hereof may be waived, only by a written instrument executed by each party hereto or, in the case of a waiver, by the party waiving compliance. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect its right at a later time to enforce the same. No waiver of any party of any condition, or of the breach of any term contained in this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of the breach of any other term of this Agreement. No party may assign any rights, duties or obligations hereunder unless all other parties have given their prior written consent.

 

(e) If any provision included in this Agreement proves to be invalid or unenforceable, it shall not affect the validity of the remaining provisions.

 

(f) This Agreement and any modification or amendment of this Agreement may be executed in several counterparts or by separate instruments and all of such counterparts and instruments shall constitute one agreement, binding on all of the parties hereto.

 

10. Form of Signature. The parties hereto agree to accept a facsimile or email PDF transmission copy of their respective actual signatures as evidence of their actual signatures to this Agreement and any modification or amendment of this Agreement; provided, however, that each party who produces a facsimile or email PDF signature agrees, by the express terms hereof, if requested by another party hereto, to place, promptly after transmission of his or her signature by fax, a true and correct original copy of his or her signature in overnight mail to the address of the other party.

 

11. Termination. This Agreement will terminate upon the Final Termination Date.

 

12. Automatic Succession. Any business entity into which the Escrow Agent may be merged or converted or with which it may be consolidated, or any entity resulting from any merger, conversion or consolidation to which the Escrow Agent shall be a party, or any entity succeeding to all or substantially all of the corporate trust business of the Escrow Agent, shall be the successor of the Escrow Agent hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto.

 

13. Anti-Terrorism/Anti-Money Laundering Laws.

 

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT - To help the United States government fight the funding of terrorism or money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens a new account. What this means for the parties to this Agreement: the Escrow Agent will ask for your name, address, date of birth, and other information that will allow the Escrow Agent to identify you (e.g., your social security number or tax identification number.) The Escrow Agent may also ask to see your driver’s license or other identifying documents (e.g., passport, evidence of formation of corporation, limited liability company, limited partnership, etc., certificate of good standing.)

 

Each party to this Agreement hereby agrees to provide the Escrow Agent, prior to the establishment of the Escrow Account, with the information identified above pertaining to it by completing the form attached as Exhibit B and returning it to the Escrow Agent. Exhibit B includes one form for individuals and another form for entities.

 

[The balance of this page intentionally left blank – signature page follows]

 

     
 

 

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first set forth above.

 

Muscle Maker, Inc   Tri-Point Global Equities, LLC
         
By:   By:
Name: Robert E. Morgan   Name: Mark Elenowitz
Title: Chief Executive Officer   Title: Chief Executive Officer

 

WILMINGTON TRUST, NATIONAL ASSOCIATION
   
By:  
Name: Boris Treyger  
Title: Vice President  

 

     
 

 

Schedule I

Form 1-A

 

     
 

 

 

Schedule II

 

The Escrow Agent is authorized to accept instructions signed or believed by the Escrow Agent to be signed by any one of the following on behalf of the Company and the Placement Agent.

 

Muscle Maker, Inc
Name   True Signature
     
Robert E. Morgan    
     
Tim Betts  
     

 

TriPoint Global Equities, LLC
 
Name   True Signature
     
Mark Elenowitz    

 

     
 

 

Exhibit A

 

FORM OF ESCROW DISBURSEMENT INSTRUCTIONS

AND RELEASE NOTICE

 

Date:

 

WILMINGTON TRUST, NATIONAL ASSOCIATION

1100 North Market Street

Wilmington, Delaware 19890

Attention: Boris Treyger

 

Dear Mr./Ms _______:

 

In accordance with the terms of paragraph 2(c) of a Closing Escrow Agreement dated as of September __, 2017 (the “Escrow Agreement”), by and between Muscle Maker, Inc. (the “Company”), TriPoint Global Equities, LLC (“Placement Agent”) and WILMINGTON TRUST, NATIONAL ASSOCIATION (the “Escrow Agent”), the Company and Placement Agent hereby direct the Escrow Agent to distribute all of the Escrow Funds (as defined in the Escrow Agreement) in accordance with the following wire instructions:

 

________________________:   $

 

________________________:   $

 

________________________:   $

 

Very truly yours,

 

Muscle Maker, Inc  
   
By:  
Name: Robert E. Morgan  
Title: Chief Executive Officer  

 

TriPoint Global Equities, LLC  
   
By:  
Name: Mark Elenowitz  
Title: Chief Executive Officer  

 

     
 

 

 

Independent Registered Public Accounting Firm’s Consent

 

We consent to the inclusion in this Offering Statement of Muscle Maker, Inc. and Subsidiaries (the “Company”) on Form 1-A/A of our report dated September 21, 2017, which includes an explanatory paragraph as to the Company’s ability to continue as a going concern, with respect to our audits of the consolidated financial statements of Muscle Maker, Inc. and Subsidiaries, as of December 31, 2016 and 2015, for the year ended December 31, 2016 and for the period from January 23, 2015 through December 31, 2015 (the Successor periods) and for the period from January 1, 2015 through January 22, 2015 (the Predecessor period), which report appears in the Offering Circular, which is part of this Offering Statement. We also consent to the reference to our Firm under the heading “Experts” in such Offering Circular.

 

/s/ Marcum llp  
   
Marcum llp  
New York, NY  
September 21, 2017  

 

     

 

 

EXHIBIT 12.1

 

LEGAL& COMPLIANCE, LLC

 

LAURA ANTHONY, ESQ.

LAZARUS ROTHSTEIN, ESQ.

CHAD FRIEND, ESQ., LLM

MARC S. WOOLF, ESQ.

JOHN CACOMANOLIS, ESQ.

 

 

OF COUNSEL:

CRAIG D. LINDER, ESQ.

PETER P. LINDLEY, ESQ., CPA, MBA

STUART REED, ESQ.

 

WWW.LEGALANDCOMPLIANCE.COM

WWW.SECURITIESLAWBLOG.COM

WWW.LAWCAST.COM

 

 

DIRECT E-MAIL:

LANTHONY@LEGALANDCOMPLIANCE.COM

 

September 21 , 2017

 

Muscle Maker, Inc

2200 Space Park Drive, Suite 310

Houston, Texas 77058

 

  Re: Muscle Maker, Inc
    Amendment No. 1 to Offering Statement on Form 1-A (File No. 024-10689)

 

Ladies and Gentlemen:

 

We have acted as securities counsel to Muscle Maker, Inc (the “Company”), in connection with the preparation and filing with the Securities and Exchange Commission of a Regulation A Offering Statement on Form 1-A, as filed on March 30, 2017, with the File No. 024-10689, as amended (the “Offering Statement”), relating to the offer by the Company of up to 3,333,333 shares of the Company’s common stock, no par value per share, for a purchase price of $6.00 per share (the “Shares”).

 

This opinion letter is being delivered in accordance with the requirements of Item 17(12) of Form 1-A under the Securities Act of 1933, as amended.

 

In connection with rendering this opinion, we have examined the originals, or certified, conformed or reproduction copies, of all such records, agreements, instruments and documents as we have deemed relevant or necessary as the basis for the opinion hereinafter expressed. In all such examinations, we have assumed the genuineness of all signatures on original or certified copies and the conformity to original or certified copies of all copies submitted to us as conformed or reproduction copies. As to various questions of fact relevant to this opinion, we have relied upon, and assumed the accuracy of, certificates and oral or written statements and other information of or from public officials, officers or representatives of the Company, and others.

 

We have reviewed: (a) the articles of incorporation , as amended, of the Company; (b) the bylaws , as amended, of the Company; (c) the offering circular; (d) two forms of Subscription Agreements ; and (e) such other corporate documents, records, papers and certificates as we have deemed necessary for the purposes of the opinions expressed herein.

 

Based upon and subject to the foregoing and to the other qualifications and limitations set forth herein, we are of the opinion that the Shares, when issued and delivered in the manner and/or the terms described in the Offering Statement as filed (after it is declared qualified), will be validly issued, fully paid and non-assessable.

 

We express no opinion with regard to the applicability or effect of the law of any jurisdiction other than, as in effect on the date of this letter, (a) the internal laws of the State of California and (b) the federal laws of the United States. We express no opinion as to laws of any other jurisdiction. We assume no obligation to revise or supplement this opinion should the laws be changed after the effective date of the Offering Statement by legislative action, judicial decision or otherwise.

 

We hereby consent to the filing of this opinion as an exhibit to the Offering Statement and to the reference to our firm under the caption “Legal Matters” in the Offering Statement. In giving this consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Act.

 

Sincerely yours,

 

/s/ Laura E. Anthony  
Laura E. Anthony,  
For the Firm  

 

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