As filed with the U.S. Securities and Exchange Commission on November 26, 2019.

 

Registration No. 333-

  

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1 

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

Muscle Maker, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   5810   47-2555533

(State of other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

 

308 East Renfro Street, Suite 101

Burleson, Texas 76028

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

 

Michael J. Roper

Chief Executive Officer

Muscle Maker, Inc.

308 East Renfro Street, Suite 101

Burleson, Texas 76028

(682) 708-8250

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

 

With copies to:

 

Stephen M. Fleming, Esq.

Fleming PLLC

30 Wall Street, 8th Floor

New York, New York 10005

Tel. (516) 833-5034

Fax: (516) 977-1209

 

Christopher J. Bellini, Esq.

Cozen O’Connor P.C.

33 South 6th Street, Suite 3800

Minneapolis, MN 55402

Tel: (612) 260-9029

Fax: (612) 260-9091

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to Be Registered  

Proposed Maximum

Aggregate Offering

Price (1)

   

Amount of

Registration Fee

 
Common Stock, $0.0001 par value per share (2)(3)   $

7,000,000

    $

908.60

 
Common Stock, $0.0001 par value per share (4)   $

51,660,000

    $

6,705.47

 
Common Stock Underlying Representative’s Warrants (5)   $

584,348

    $

75.85

 
Total   $

59,244,348

    $

7,689.92

 

 

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

Represents shares of the Registrant’s common stock issuable upon (i) conversion of 15% Senior Secured Convertible Promissory Notes in the aggregate amount of $5,138,000 and exercise of the related common stock purchase warrants to acquire an aggregate of 2,549,000 shares of common stock and (ii) the conversion 12% Secured Convertible Promissory Notes in the aggregate amount of $3,500,000 and the exercise of the related common stock purchase warrants to acquire an amount of shares of common stock of the Company equal to 50% of the shares of common stock issuable upon conversion of the 12% Secured Convertible Promissory Notes.

     
  (5)

Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The warrants are exercisable at a per share exercise price equal to 120% of the public offering price. As estimated solely for the purpose of recalculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed maximum aggregate offering price of the Representative’s Warrant is $584,348, which is equal to 8% of $6,086,956 (120% of $486,956).

 

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

 

 

 

   
 

 

EXPLANATORY NOTE

 

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

 

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

 

  Selling Stockholder Prospectus. A prospectus to be used in connection with the potential resale by certain selling stockholders of up to an aggregate of             shares of the registrant’s common stock issuable upon mandatory conversion of certain of the registrant’s outstanding loans upon the effectiveness of the registration statement of which this prospectus forms a part.

 

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

 

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

 

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

 

   
 

 

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

 

     
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED November 26, 2019
     

 

SHARES

 

 

Common Stock

 

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

 

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

 

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

 

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

 

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

 

(1) The underwriter will receive compensation in addition to the underwriting discounts and commissions. See “Underwriting” beginning on page 92.

 

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

 

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

 

The underwriter expects to deliver the shares of common stock on or about            , 2019.

 

 

The date of this prospectus is            , 2019.

 

   
 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
   
THE OFFERING 6
   
SUMMARY FINANCIAL DATA 7
   
RISK FACTORS 8
   
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 33
   
EXPLANATORY NOTE REGARDING REDOMESTICATION 33
   
USE OF PROCEEDS 33
   
DIVIDEND POLICY 34
   
CAPITALIZATION 34
   
DILUTION 36
   
SELECTED HISTORICAL FINANCIAL DATA 38
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 39
   
BUSINESS 57
   
MANAGEMENT 67
   
EXECUTIVE COMPENSATION 72
   
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 80
   
PRINCIPAL STOCKHOLDERS 85
   
DESCRIPTION OF CAPITAL STOCK 88
   
SHARES ELIGIBLE FOR FUTURE SALE 90
   
UNDERWRITING 92
   
LEGAL MATTERS 96
   
EXPERTS 96
   
WHERE YOU CAN FIND MORE INFORMATION 96
   
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 97
   
INDEX TO FINANCIAL STATEMENTS 98

 

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

 

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

 

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

 

  i  
 

 


PROSPECTUS SUMMARY

 

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

 

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

 

Overview

 

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

 

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

 

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

 

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

 

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

 

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

 

1
 

 

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

 

Our Strategy

 

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

 

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

 

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

 

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

 

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

 

2
 

 

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

 

Our Competitive Strengths

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

3
 

 

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

 

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

 

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

 

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

 

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

 

Risk Factors

 

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

 

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

 

4
 

 

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

 

Re-domestication

 

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

 

Implications of Being an Emerging Growth Company

 

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

 

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

 

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

 

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

 

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

 

Company Information

 

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

 

5
 

 

THE OFFERING

 

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

 

Common stock offered by us                          shares of our common stock.
     
Common stock outstanding after this offering                          shares.
     
Over-allotment option   We have granted the underwriter a 30-day option to purchase up to                 additional shares of our common stock from us at the public offering price less underwriting discounts and commissions.
     
Use of proceeds  

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

 

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

 

  implementation of our business plan, including but not limited to (i) growth initiatives through opening new corporate stores, launching a franchise sales program and technology improvements, (ii) funding possible acquisition opportunities and (iii) funding a corporate marketing campaign; and
  the remaining $         (or approximately $               if the underwriter exercises its over-allotment option in full) will be used for general corporate purposes including working capital requirements.

 

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

 

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

 

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

 

The number of shares of our common stock to be outstanding after this offering is based on             shares of our common stock outstanding as of September 30, 2019 and excludes the following:

 

 

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

     
 

                shares of our common stock issuable upon the exercise of common stock purchase warrants as of September 30, 2019 with a weighted average exercise price of $             per share;

     
 

                  shares of our common stock issuable upon conversion of 15% Senior Secured Convertible Promissory Notes, which we refer to as the 15% Notes, having a principal amount $5,138,000 as of September 30, 2019, the principal amount and any accrued interest on the 15% Notes will be convertible at the election of the holder of each 15% Note at a conversion price equal to such public offering price multiplied by 25%, provided that the holders of 15% Notes are required to execute a lock up agreement concurrent with a public offering at the time of listing of the shares of our common stock on an exchange, then the conversion price shall be reset to 17.5% of the per share offering price paid by the investors in the public offering in conjunction with an uplisting to a national exchange;

     
 

                shares of our common stock issuable upon conversion of 12% Secured Convertible Promissory Notes, which we refer to as the 12% Notes, having a principal amount $3,500,000 as of September 30, 2019, provided that in the event the per share purchase price in this offering or any other public offering multiplied by 50% is less than $          per share, the principal amount and any accrued interest on the 12% Notes will be convertible at the election of the holder of each such 12% Notes at a conversion price equal to the lesser of such public offering price multiplied by 50% and a price per share equal to a $20 million valuation;

     
  the issuance of an estimated                   shares of common stock underlying the warrant to be issued to the underwriter in connection with this offering with an exercise price of $                ; and
     
 

               shares of our common stock reserved for future issuance under the 2017 Stock Option and Stock Issuance Plan, or the 2017 Plan.

 

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

 

 

a -for- reverse split of our outstanding capital stock to be effective prior to the completion of this offering

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

 

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SUMMARY FINANCIAL DATA

 

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

 

Statement of Operations Data:

 

    For the Nine Months Ended     For the Year Ended  
    September 30,     December 31,  
    2019     2018     2018     2017  
    (unaudited)              
Revenues   $ 3,681,248     $ 4,620,646     $ 6,022,669     $ 7,929,137  
Operating Costs and Expenses     6,451,638       8,183,873       9,608,515       19,860,161  
(Loss) Income from Operations     (2,770,390 )     (3,563,227 )     (3,585,846 )     (11,931,024 )
Total Other (Expense) Income     (2,604,524 )     (3,136,048 )     (3,618,694 )     (3,883,254 )
Loss Before Income Tax     (5,374,914 )     (6,699,275 )     (7,204,540 )     (15,814,278 )
Income tax provision     -       -       -       246,527  
Net Loss     (5,374,914 )     (6,699,275 )     (7,204,540 )     (15,567,751 )
Net loss attributable to the non-controlling interests     -       (2,071 )     (2,071 )     (2,357,303 )
Net Loss Attributable to Controlling Interest   $ (5,374,914 )   $ (6,697,204 )   $ (7,202,469 )   $ (13,210,448 )
                                 
Net Loss Attributable to Controlling Interest Per Share:   $ (0.50 )   $ (0.81 )   $ (5.67 )   $ (15.33 )

 

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

 

Balance Sheet Data:

 

    As of September 30, 2019  
    Actual     Pro Forma (1)(2)  
          (unaudited)  
Cash and cash equivalents   $ 1,983,306     $ -  
Working capital deficit     5,484,122       -  
Total assets     6,985,106       -  
Total liabilities     13,470,999       -  
Accumulated deficit     (29,777,110 )     -  
Stockholders’ deficit   $ (6,485,893 )   $ -  

 

(1)

on a pro forma basis to give further effect to our issuance and sale of shares of common stock in this offering at an assumed public offering price of $         per share, the midpoint of the price range listed on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

   
(2)

Each $1.00 increase (decrease) in the assumed initial public offering price of $          per share, the midpoint of the price range listed on the cover page of this prospectus, would increase (decrease) the pro forma amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $         , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price per share, the midpoint of the price range listed on the cover page of this prospectus, would increase (decrease) the pro forma amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $         .

 

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RISK FACTORS

 

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

 

Risks Related to Our Business and Industry

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The level of comparable restaurant sales, which reflect the change in year-over-year sales for restaurants in the fiscal month following 15 months of operation using a mid-month convention, will affect our sales growth and will continue to be a critical factor affecting our ability to generate profits because the profit margin on comparable restaurant sales is generally higher than the profit margin on new restaurant sales. Our future financial projection model anticipates a 2% comparable same store sales increase year-over-year. While we have experienced negative comparable same store sales in 2018 and year-to-date 2019, we have developed new sales and marketing efforts including new menu strategy/evolution, new marketing initiatives designed to increase brand awareness, new operating platforms which improve speed of service and other tactics with the goal of providing positive same store sales in future years. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement these initiatives. It is possible such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in sales growth and ability to achieve profitability that would have a material adverse effect on our business, financial condition and results of operations.

 

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

 

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

 

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

 

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

 

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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, dairy products, packaging and other proteins, could have a material adverse effect on our results of operations. Although we try to manage the impact that these fluctuations have on our operating results, we remain susceptible to increases in food costs as a result of factors beyond our control, such as general economic conditions, seasonal fluctuations, weather conditions, demand, food safety concerns, generalized infectious diseases, product recalls, fuel prices and other government regulations. Therefore, material increases in the prices of the ingredients most critical to our menu could adversely affect our operating results or cause us to consider changes to our product delivery strategy and adjustments to our menu pricing.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Federal, State and Local Regulation and Compliance

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Risks Related to this Offering and Ownership of our Common Stock

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  actual or anticipated fluctuations in our results of operations;

 

  announcement or expectation of additional financing efforts;

 

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

 

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

 

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

 

  our involvement in litigation;

 

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

 

  market conditions in our industry;

 

  changes in key personnel;

 

  the trading volume of our common stock;

 

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

 

  the recruitment or departure of key personnel;

 

  general economic, industry, and market conditions; and

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

EXPLANATORY NOTE REGARDING REDOMESTICATION

 

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

 

USE OF PROCEEDS

 

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

 

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

 

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

 

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

 

  the balance of net proceeds for general corporate purposes, including working capital requirements.

 

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

 

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

 

DIVIDEND POLICY

 

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

 

CAPITALIZATION

 

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

 

  an actual basis;

 

 

a pro forma basis, to give effect to our sale of                  shares of common stock in this offering, at an assumed public offering price of $                  per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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

 

    As of September 30, 2019  
    (unaudited)  
    Actual(1)     Pro Forma(1)(2)  
             
Cash and cash equivalents   $ 1,983,306     $              -  
Total debt at face value     10,311,458       -  
Stockholders’ equity:                
Common stock, $0.0001 par value; 100,000,000 shares authorized and 11,585,226 shares issued and outstanding on an actual basis     1,159       -  
Additional paid-in capital     23,290,058       -  
Accumulated deficit     (29,777,110 )     -  
Total stockholders’ equity     (6,485,893 )     -  
Total capitalization   $ 3,825,565     $ -  

 

(1) The table set forth above gives effect to the Redomicile and the -for- reverse stock split to be effective prior to the completion of this offering.

 

(2) The table set forth above is based on                 shares of our common stock outstanding as of September 30, 2019.

 

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

 

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

 

 

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

     
 

              shares of our common stock issuable upon the exercise of common stock purchase warrants as of September 30, 2019, with a weighted average exercise price of $             per share;

 

                   shares of common stock reserved for issuance pursuant to future awards under the 2017 Plan;
     
 

                 shares of our common stock issuable upon conversion of 15% Notes, having a principal amount $5,138,000 as of September 30, 2019, the principal amount and any accrued interest on the 15% Notes will be convertible at the election of the holder of each 15% Note at a conversion price equal to such public offering price multiplied by 25%, provided that the holders of 15% Notes are required to execute a lock up agreement concurrent with a public offering at the time of listing of the shares of our common stock on an exchange, then the conversion price shall be reset to 17.5% of the per share offering price paid by the investors in the public offering in conjunction with an uplisting to a national exchange;

     
 

                shares of our common stock issuable upon conversion of 12% Notes, having a principal amount $3,500,000 as of September 30, 2019, provided that in the event the per share purchase price in this offering or any other public offering multiplied by 50% is less than $          per share, the principal amount and any accrued interest on the 12% Notes will be convertible at the election of the holder of each such 12% Notes at a conversion price equal to the lesser of such public offering price multiplied by 50% and a price per share equal to a $20 million valuation; and

 

  the issuance of an estimated                   shares of common stock underlying the warrant to be issued to the underwriter in connection with this offering with an exercise price of $                  .

 

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DILUTION

 

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after this offering. The historical net tangible book value (deficit) of our common stock as of September 30, 2019 was $(6,485,893) million, or $(0.56) per share. Historical net tangible book value (deficit) per share represents our total tangible assets less our total liabilities, divided by the number of shares of outstanding common stock at September 30, 2019.

 

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

 

After giving effect to the receipt of the net proceeds from our sale of                  shares of common stock in this offering at an assumed public offering price of $                  per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, pro forma net tangible book value as of September 30, 2019 would have been $                  million, or $                  per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $                  per share to new investors purchasing common stock in this offering.

 

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

 

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

 

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

 

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

 

    Shares
Purchased
    Total
Consideration
   

Average Price Per

 

 

    Number     %     Amount     %    

Share

 
Existing stockholders                      $                        $  
Shares issues in concurrent private placement                                                    
New investors                                        
Total                   $             $  

 

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

 

If the underwriter exercises its option to purchase                  additional shares of our common stock in this offering in full, the percentage of shares of common stock held by existing stockholders will be reduced to                  % of the total number of shares of common stock to be outstanding after this offering, and the percentage of shares of common stock to be owned by parties who will receive shares of common stock outside of this offering concurrently with the closing of this offering will be reduced to                  % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to                  , or                  % of the total number of shares of common stock to be outstanding after this offering.

 

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

 

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

 

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

 

 

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

     
 

               shares of our common stock issuable upon the exercise of common stock purchase warrants as of September 30, 2019 with a weighted average exercise price of $              per share;

 

 

               shares of common stock reserved for issuance pursuant to future awards under the 2017 Plan;

     
 

               shares of our common stock issuable upon conversion of 15% Notes, having a principal amount $5,138,000 as of September 30, 2019, the principal amount and any accrued interest on the 15% Notes will be convertible at the election of the holder of each 15% Note at a conversion price equal to such public offering price multiplied by 25%, provided that the holders of 15% Notes are required to execute a lock up agreement concurrent with a public offering at the time of listing of the shares of our common stock on an exchange, then the conversion price shall be reset to 17.5% of the per share offering price paid by the investors in the public offering in conjunction with an uplisting to a national exchange;

     
 

               shares of our common stock issuable upon conversion of 12% Notes, having a principal amount $3,500,000 as of September 30, 2019, provided that in the event the per share purchase price in this offering or any other public offering multiplied by 50% is less than $             per share, the principal amount and any accrued interest on the 12% Notes will be convertible at the election of the holder of each such 12% Notes at a conversion price equal to the lesser of such public offering price multiplied by 50% and a price per share equal to a $20 million valuation; and

 

  the issuance of an estimated                   shares of common stock underlying the warrant to be issued to the underwriter in connection with this offering with an exercise price of $                  .

 

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

 

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SELECTED HISTORICAL FINANCIAL DATA

 

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

 

Statement of Operations Data:

 

   

For the Nine Months Ended

September 30,

   

For the Year Ended

December 31,

 
    2019     2018     2018     2017  
    (unaudited)              
Revenues   $ 3,681,248     $ 4,620,646     $ 6,022,669     $ 7,929,137  
Operating Costs and Expenses     6,451,638       8,183,873       9,608,515       19,860,161  
(Loss) Income from Operations     (2,770,390 )     (3,563,227 )     (3,585,846 )     (11,931,024 )
Total Other (Expense) Income     (2,604,524 )     (3,136,048 )     (3,618,694 )     (3,883,254 )
Loss Before Income Taxes     (5,374,914 )     (6,699,275 )     (7,204,540 )     (15,814,278 )
Income tax provision     -       -       -       246,527  
Net Loss     (5,374,914 )     (6,699,275 )     (7,204,540 )     (15,567,751 )
Net loss attributable to the non-controlling interests     -       (2,071 )     (2,071 )     (2,357,303 )
Net Loss Attributable to Controlling Interest   $ (5,374,914 )   $ (6,697,204 )   $ (7,202,469 )   $ (13,210,448 )
                                 
Net Loss Attributable to Controlling Interest Per Share:   $ (0.50 )   $ (0.81 )   $ (0.81 )   $ (2.19 )

 

Net loss per share—basic and diluted(1)

Weighted average shares outstanding—basic and diluted(1)

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

 

Balance Sheet Data:

 

    As of September 30, 2019  
    Actual     Pro Forma (1)(2)  
             
Cash and cash equivalents   $ 1,983,306     $ -  
Working capital deficit     5,484,122       -  
Total assets     6,985,106       -  
Total liabilities     13,470,999       -  
Accumulated deficit     (29,777,110 )     -  
Stockholders’ deficit   $ (6,485,893 )   $ -  

 

(1)

on a pro forma basis to give further effect to our issuance and sale of shares of common stock in this offering at an assumed public offering price of $         per share, the midpoint of the price range listed on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

   
(2)

Each $1.00 increase (decrease) in the assumed initial public offering price of $          per share, the midpoint of the price range listed on the cover page of this prospectus, would increase (decrease) the pro forma amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $         , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price per share, the midpoint of the price range listed on the cover page of this prospectus, would increase (decrease) the pro forma amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $         .

 

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

 

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

 

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

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

 

OVERVIEW

 

We operate under the name Muscle Maker Grill as a franchisor and owner-operator of Muscle Maker Grill restaurants. As of September 30, 2019, our restaurant system included eight company-owned restaurants and thirty-one franchised restaurants.

 

Muscle Maker Grill is a fast-casual restaurant concept that specializes in preparing healthy-inspired, high-quality, fresh, made-to-order lean, protein-based meals featuring chicken, seafood, pasta, hamburgers, wraps and flat breads. In addition, we feature freshly prepared entrée salads and an appealing selection of sides, protein shakes and fruit smoothies. We operate in the approximately $47 billion fast casual restaurant segment, which we believe has created significant recent disruption in the restaurant industry and is rapidly gaining market share from adjacent restaurant segments, resulting in significant growth opportunities for healthy-inspired restaurant concepts such as Muscle Maker Grill.

 

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We believe our healthy-inspired restaurant concept delivers a highly differentiated customer experience by combining the quality and hospitality that customers commonly associate with our full service and fast casual restaurant competitors with the convenience and value customers generally expect from traditional fast food restaurants. The foundation of our brand is based on our core values of quality, empowerment, respect, service and value.

 

As of September 30, 2019, we had an accumulated deficit of $29,777,110 and expect to continue to incur substantial operating and net losses for the foreseeable future. In its report on our consolidated financial statements for the fiscal year ended December 31, 2018, our independent registered public accounting firm included an explanatory paragraph relating to our ability to continue as a going concern. See “Liquidity and Capital Resources – Availability of Additional Funds and Going Concern” and Note 1 – Business Organization and Nature of Operations, Going Concern and Management’s Plans to Notes to Consolidated Financial Statements for additional information describing the circumstances that led to the inclusion of this explanatory paragraph.

 

Key Financial Definitions

 

Total Revenues

 

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

 

Food and Beverage Costs

 

Food and beverage costs include the direct costs associated with food, beverage and packaging of our menu items at company-operated restaurants partially offset by vendor rebates from company-owned stores. The components of food, beverages and supplies are variable in nature, change with sales volume, are affected by menu mix and are subject to fluctuations in commodity costs. The current management team has begun implementing multiple operational changes to lower food and paper costs.

 

Labor

 

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

 

Rent

 

Restaurant rent, including preopening rental charges, consist of company-operated restaurant-level rental or lease payments applicable to executed rental or lease agreements. In many cases these rental payments may include payments for common area maintenance as well as property tax assessments. Our rent strategy consists of a variable rent structure calculated on net sales of the restaurant. While this can have a negative effect on higher volume locations where we cannot leverage a fixed rent, it provides downside protection for lower volume locations. While we cannot guarantee a favorable variable rent expense in all future leases, we have forecasted average rental costs as a percentage of total sales at 8%.

 

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Other restaurant operating expenses

 

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

 

Other Expenses Incurred for Closed Locations

 

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

 

Depreciation and Amortization

 

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

 

General and Administrative Expenses

 

General and administrative expenses include expenses associated with corporate and administrative functions that support our operations, including wages, benefits, travel expense, stock-based compensation expense, legal and professional fees, training, and other corporate costs. We expect to incur incremental general and administrative expenses as a result of this offering and as a public company. A certain portion of these expenses are related to the preparation of an initial stock offering and should be considered one-time expenses.

 

Other Income (Expense), net

 

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

 

Income Taxes

 

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

 

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Consolidated Results of Operations

 

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

 

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

 

    For the Three Months Ended  
    September 30,  
    2019     2018  
Revenues:            
Company restaurant sales, net of discounts   $ 821,684     $ 721,300  
Franchise royalties and fees     252,744       324,080  
Franchise advertising fund contributions     39,030       -  
Other revenues     -       -  
Total Revenues     1,113,458       1,045,380  
                 
Operating Costs and Expenses:                
Restaurant operating expenses:                
Food and beverage costs     339,454       266,678  
Labor     347,786       266,817  
Rent     96,832       66,599  
Other restaurant operating expenses     113,292       60,084  
Total restaurant operating expenses     897,364       660,178  
Costs of other revenues     -       -  
Depreciation and amortization     59,033       47,663  
Other expenses incurred for closed locations     -       473,375  
Franchise advertising fund expenses     39,030       -  
General and administrative expenses     1,514,123       267,358  
Total Costs and Expenses     2,509,550       1,893,768  
Loss from Operations     (1,396,092 )     (848,388 )
                 
Other (Expense) Income:                
Other income (expense), net     112,673     65,933  
Interest expense, net     (614,100 )     (94,655 )
Loss on sale of CTI     -       -  
Amortization of debt discount     (451,310 )     (267,358 )
Total Other Expense, net     (952,737 )     (296,080 )
                 
Loss Before Income Tax     (2,348,829 )     (1,144,468 )
Income tax provision     -       -  
Net Loss     (2,348,829 )     (1,144,468 )
Net loss attributable to the non-controlling interest     -       -  
Net Loss Attributable to Controlling Interest   $ (2,348,829 )   $ (1,144,468 )

 

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Revenues

 

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

 

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

 

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

 

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

 

The level of comparable restaurant sales, which reflect the change in year-over-year sales for restaurants in the fiscal month following 15 months of operation using a mid-month convention, will affect our sales growth and will continue to be a critical factor affecting our ability to generate profits because the profit margin on comparable restaurant sales is generally higher than the profit margin on new restaurant sales. Our future financial projection model anticipates a 2% comparable same store sales increase year-over-year. While we have experienced negative comparable same store sales in 2018 and year-to-date 2019, we have developed new sales and marketing efforts including new menu strategy/evolution, new marketing initiatives designed to increase brand awareness, new operating platforms which improve speed of service and other tactics with the goal of providing positive same store sales in future years. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement these initiatives. It is possible such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in sales growth and ability to achieve profitability that would have a material adverse effect on our business, financial condition and results of operations.

 

Operating Costs and Expenses

 

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

 

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

 

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

 

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

 

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

 

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

 

Loss from Operations

 

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

 

Other Expense, net

 

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

 

Net Loss

 

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

 

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

 

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

 

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

 

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Revenues

 

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

 

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

 

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

 

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

 

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

 

Operating Costs and Expenses

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The level of comparable restaurant sales, which reflect the change in year-over-year sales for restaurants in the fiscal month following 15 months of operation using a mid-month convention, will affect our sales growth and will continue to be a critical factor affecting our ability to generate profits because the profit margin on comparable restaurant sales is generally higher than the profit margin on new restaurant sales. Our future financial projection model anticipates a 2% comparable same store sales increase year-over-year. While we have experienced negative comparable same store sales in 2018 and year-to-date 2019, we have developed new sales and marketing efforts including new menu strategy/evolution, new marketing initiatives designed to increase brand awareness, new operating platforms which improve speed of service and other tactics with the goal of providing positive same store sales in future years. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement these initiatives. It is possible such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in sales growth and ability to achieve profitability that would have a material adverse effect on our business, financial condition and results of operations.

 

Loss from Operations

 

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

 

Other Expense, net

 

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

 

Net Loss

 

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

 

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

 

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

 

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

 

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

 

Revenues

 

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

 

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

 

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

 

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

 

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Operating Costs and Expenses

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The level of comparable restaurant sales, which reflect the change in year-over-year sales for restaurants in the fiscal month following 15 months of operation using a mid-month convention, will affect our sales growth and will continue to be a critical factor affecting our ability to generate profits because the profit margin on comparable restaurant sales is generally higher than the profit margin on new restaurant sales. Our future financial projection model anticipates a 2% comparable same store sales increase year-over-year. While we have experienced negative comparable same store sales in 2018 and year-to-date 2019, we have developed new sales and marketing efforts including new menu strategy/evolution, new marketing initiatives designed to increase brand awareness, new operating platforms which improve speed of service and other tactics with the goal of providing positive same store sales in future years. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement these initiatives. It is possible such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in sales growth and ability to achieve profitability that would have a material adverse effect on our business, financial condition and results of operations.

 

Loss from Operations

 

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

 

Other (Expense) Income

 

Other expense for the year ended December 31, 2018 and December 31, 2017 totaled $3,618,694 and $3,883,254, respectively. The $264,560 decrease in expense was primarily attributable to a decrease in amortization of debt discounts of approximately $1,682,000 in connection with convertible notes payable as compared to the prior year, partially offset by an increase in interest expense of approximately $968,000 incurred in connection with the default of a notes payable, accrued interest on notes and interest expense incurred in connection with warrants and the loss on sale of CTI of approximately $456,000.

 

Net Loss

 

Our net loss for the year ended December 31, 2018 decreased by $8,363,211 to $7,204,540 as compared to 15,567,751 for the year ended December 31, 2017, resulting primarily from a significant decrease in loss of operations and a decrease in other (expense) income as discussed above. Our net loss attributable to the controlling interest was $7,202,469 and $13,210,448 for the year ended December 31, 2018 and December 31, 2017, respectively.

 

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Liquidity and Capital Resources

 

Liquidity

 

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

 

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

 

Availability of Additional Funds and Going Concern

 

Based upon our working capital deficiency and accumulated deficit of $5,484,122 and $29,777,110, respectively, as of September 30, 2019, plus our use of $2,013,398 of cash in operating activities during the nine months ended September 30, 2019, we require additional equity and/or debt financing to continue our operations. These conditions raise substantial doubt about our ability to continue as a going concern for at least one year from the date of this filing.

 

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

 

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

 

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

 

We expect to have ongoing needs for working capital in order to fund operations and expand operations by opening additional corporate-owned restaurants. To that end, we intend to raise additional capital in 2019 and 2020 to raise additional funds through equity or debt financing. The amount required will be dependent on current operations, future investment and the execution of our business plan. We estimate our cash needs for the balance of 2019 and 2020 is approximately $7.2 million which will allow us to open 18 company owned and operated locations in 2020 and execute on our franchise sales program. However, there can be no assurance that we will be successful in securing additional capital. If we are unsuccessful, we may need to initiate cost reductions, forego business development opportunities, seek extensions of time to fund our liabilities, or seek protection from creditors.

 

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

 

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

 

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

 

Sources and Uses of Cash for the nine months ended September 30, 2019 and September 30, 2018

 

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

 

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

 

Net cash provided by financing activities for the nine months ended September 30, 2019 was $5,854,000 of which $191,000 proceeds from convertible notes, related party and notes payable from other related party and $6,373,000 proceeds from convertible notes to various parties, partially offset by repayments of various convertible notes, including a related party, of $150,000 and $560,000 of repayments of other notes payables, including related parties. Net cash provided by financing activities for the nine months ended September 30, 2018 was $2,474,117 of which $650,000 proceeds from convertible notes from other related parties, $1,331,000 proceeds from convertible notes to various parties, $460,000 proceeds from other notes payable, $85,576 net proceeds from initial public offering and $180,000 proceeds from the sale of restricted common stock, offset by $100,000 repayments of convertible notes payable and other note payable and $132,459 net repayments of advances to Former Parent.

 

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Critical Accounting Policies

 

Use of Estimates

 

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

 

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

 

  the fair value of assets acquired, and liabilities assumed in a business combination;
  the assessment of recoverability of long-lived assets, including property and equipment, goodwill and intangible assets;
  the estimated useful lives of intangible and depreciable assets;
  the recognition of revenue; and
  the recognition, measurement and valuation of current and deferred income taxes

 

Estimates and assumptions are periodically reviewed, and the effects of any material revisions are reflected in the financial statements in the period that they are determined to be necessary. Actual results could differ from those estimates and assumptions.

 

Intangible Assets

 

We account for recorded intangible assets in accordance with ASC 350 “Intangibles - Goodwill and Other”. In accordance with ASC 350, we do not amortize intangible assets with indefinite useful lives. Our goodwill and trademarks are deemed to have indefinite lives, and accordingly are not amortized, but are evaluated for impairment at least annually, or more often whenever changes in facts and circumstances may indicate that the carrying value may not be recoverable. The Accounting Standards Codification (“ASC”) requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment). Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgment is required to estimate the fair value of reporting units which includes estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment.

 

Other intangible assets include franchise agreements and a non-compete agreement which are amortized on a straight-line basis over their estimated useful lives of 13 years and 5 years, respectively.

 

Impairment of Long-Lived Assets

 

When circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, we perform an analysis to review the recoverability of the asset’s carrying value, which includes estimating the undiscounted cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors. If the analysis indicates that the carrying value is not recoverable from future cash flows, an impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value. Any impairment losses are recorded as operating expenses, which reduce net income.

 

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Revenue Recognition

 

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

 

Restaurant Sales

 

Retail store revenue at company-operated restaurants is recognized when payment is tendered at the point of sale, net of sales tax, discount and other sales related taxes. We recorded retail store revenues of $821,684 and $2,438,284 during the three and nine months ended September 30, 2019, respectively. We recorded retail store revenues of $721,300 and $3,246,041 during the three and nine months ended September 30, 2018, respectively.

 

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

 

Franchise Royalties and Fees

 

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

 

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

 

We have supply agreements with certain food and beverage vendors. Pursuant to the terms of these agreements, rebates are provided to us based upon the dollar volume of purchases for all company-owned and franchised restaurants from these vendors. Rebates earned on purchases by franchise stores are recorded as revenue during the period in which the related food and beverage purchases are made. We recorded revenue from rebates of $71,200 and $220,120 during the three and nine months ended September 30, 2019, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. We recorded revenue from rebates of $59,260 and $268,588 during the three and nine months ended September 30, 2018, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. Rebates earned on purchases by company-owned stores are recorded as a reduction of cost of goods sold during the period in which the related food and beverage purchases are made.

 

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Other Revenues

 

Through our subsidiary, CTI, which was sold in May 2018, we derived revenue from the sale of point of sale computer systems, cash registers and camera systems, and from the provision of related consulting and support services, which generally include implementation, installation and training services. We recognize revenue when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, the fee is fixed or determinable and collectability is reasonably assured. We recorded $0 and $244,633, respectively, of revenues from these technology sales and services during the three and nine months ended September 30, 2018.

 

Deferred Revenue

 

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

 

Customer deposits received for technology sales or services are recorded as deferred revenue and recognized when the sale is complete, or the service is performed.

 

Franchise Advertising Fund Contributions

 

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

 

Income Taxes

 

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

 

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

 

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

 

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

 

Recently Issued Accounting Pronouncements

 

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

 

Off-Balance Sheet Arrangements

 

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

 

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BUSINESS

 

Our Business Overview

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our Industry

 

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

 

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

 

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Our Strategy

 

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

 

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

 

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

 

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

 

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

 

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

 

Our Strengths

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Grab-and-Go Kiosks: Muscle Maker Grill 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.

 

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Our Properties

 

Rent Structure: Our restaurants are typically in-line or food court locations. A typical restaurant generally ranges from 1,200 to 2,500 square feet with seating for approximately 40 people. Our leases for company-operated locations generally have terms of 10 years, with one or two renewal terms of 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. New leases for our non-traditional locations usually have rent calculated as a percentage of net sales and have terms of 10 years. We do not guarantee performance or have any liability regarding franchise location leases.

 

System-Wide Restaurant Counts: As of December 31, 2018, our restaurant system consisted of 40 restaurants comprised of six company-operated restaurants and 34 franchised restaurants located in Arizona, California, Florida, Georgia, Illinois, Kansas, Massachusetts, North Carolina, Nebraska, Nevada, New Jersey, New York, Oklahoma, Pennsylvania, Texas, Virginia and Kuwait.

 

During the year ended December 31, 2018, we closed 8 of the 14 company-operated locations as a cost saving measure while opening one new corporate-operated location at Fort Sill. The opening of the Fort Sill location represents a strategy shift for company-operated locations to focus on non-traditional restaurants such as universities, office buildings, military bases, airports, and other locations.

 

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

 

A typical Muscle Maker Grill may be free standing or located in malls, airports, gyms, strip shopping centers, health clubs, military bases, non-traditional or highly concentrated business and residential demographic areas. Customers order their food at the counter and food servers deliver the food to the appropriate table. A typical restaurant located in urban and suburban settings ranges from 1,200 to 2,500 square feet. Based on our experience and results, we are currently focused on developing inline sites for franchising and non-traditional locations such as military bases for company-operated locations.

 

Our Restaurant Design

 

After identifying a lease site, we commence our restaurant buildout. Our typical restaurant is an inline retail space or food court that ranges in size from 1,200 to 2,500 square feet. Our restaurants are characterized by a unique exterior and interior design, color schemes, and layout, including specially designed decor and furnishings. Restaurant interiors incorporate modern designs and rich colors in an effort to provide a clean and inviting environment and fun, family-friendly atmosphere. Each restaurant is designed in accordance with plans we develop; and constructed with a similar design motif and trade dress. Restaurants are generally located near other business establishments that will attract customers who desire healthier food at fair prices served in a casual, fun environment.

 

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Our new restaurants are typically inline or food court buildouts. We estimate that each inline or food court buildout of a restaurant will require an average total cash investment of approximately $200,000 to $350,000 net of tenant allowances. On average, it takes us approximately four to six months from identification of the specific site to opening the restaurant. In order to maintain consistency of food and customer service, as well as our colorful, bright and contemporary restaurant environment, we have set processes and timelines to follow for all restaurant openings.

 

Our restaurants are built-out in approximately 10 weeks and the development and construction of our new sites is the responsibility of our Development Department. Real estate managers are responsible for locating and leasing potential restaurant sites. Construction managers are then responsible for building the restaurants, and several staff members manage purchasing, budgeting, scheduling and other related administrative functions. We leverage in-house personnel as well as consultants and independent contractors in the real estate, design and construction process.

 

Our Restaurant Management and Operations

 

Service: We are extremely focused on customer service. We aim to provide fast, friendly service on a solid foundation of dedicated, driven team members and managers. Our cashiers are trained on the menu items we offer and provide customers thoughtful suggestions to enhance the ordering process. Our team members and managers are responsible for our dining room environment, personally visiting tables to ensure every customer’s satisfaction. In our non-food court locations, meals are brought to the customers table using actual dishes and customers are free to leave their dishes when finished as team members clear and clean tables as guests leave the restaurant.

 

Operations: We intend to measure the execution of our system standards within each restaurant through an audit program for quality, service and cleanliness. The goal is to conduct these audits quarterly and may be more or less frequent based upon restaurant performance. Additionally, we have food safety and quality assurance programs designed to maintain the highest standards for food and food preparation procedures used by both company-operated and franchised restaurants.

 

Managers and Team Members: Each of our restaurants typically has a general manager, and shift leaders. At each location there are between six and 10 total team members who prepare our food fresh daily and provide customer service.

 

We are selective in our hiring processes, aiming to staff our restaurants with team members that are friendly, customer-focused, and driven to provide high-quality products. Our team members are cross-trained in several disciplines to maximize depth of competency and efficiency in critical restaurant functions.

 

Training: The majority of our company-operated restaurant management staff is comprised of former team members who have advanced along the Muscle Maker Grill career path. Skilled team members who display leadership qualities are encouraged to enter the team leader training program. Successive steps along the management path add increasing levels of duties and responsibilities. Our Franchisee training generally consists of 10 to 14 days in a certified training location, and an additional seven to 10 days post opening training. Our operational team members provide consistent, ongoing training through follow up restaurant visits, inspections, or email or phone correspondences.

 

Our Franchise Program

 

Overview: We use a franchising strategy to increase new restaurant growth in certain United States and international markets, leveraging the ownership of entrepreneurs with specific local market expertise and requiring a relatively minimal capital commitment by us. We believe the franchise revenue generated from our franchise base has historically served as an important source of stable and recurring cash flows to us and, as such, we plan to expand our base of franchised restaurants. In existing markets, we encourage growth from current franchisees. In our expansion markets, we seek highly qualified and experienced new franchisees for multi-unit development opportunities. We seek franchisees of successful, non-competitive brands operating in our expansion markets. Through strategic networking and participation in select franchise conferences, we aim to identify highly-qualified prospects. Additionally, we market our franchise opportunities with the support of a franchising section on our website and printed brochures.

 

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As of November 2019, in order to ensure substantial legal compliance and to appropriately fund the program, we are not actively selling franchise locations, multi-unit development agreements or area representative agreements but anticipate a new effort in franchise sales beginning in the first quarter of 2020 with the update of the Franchise Disclosure Document and current audited financial statements as part of our ongoing strategy. Upon completion of the update to the Franchise Disclosure Document and closing on this Offering to provide the required capital to fund the franchise program, the Company will begin executing our new franchise sales strategy and begin offering franchise locations, multi-unit development agreements or Area Representative Agreements to qualified franchisees. The franchise sales strategy will consist of hiring franchise sales professionals and support personnel, creating franchise sales marketing programs and materials, acquire prospective franchisee tracking software, training programs and other franchise support functions.

 

Franchise Owner Support: We believe creating a foundation of initial and on-going support is important to future success for both our franchisees and our brand.

 

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

 

We also provide numerous opportunities for communication and shared feedback between us and franchise owners. Currently, we communicate on a frequent basis through email and system wide conference calls allowing for questions and answers with all franchisees. In addition, our operations and marketing teams conduct phone calls and on-site visits on a frequent basis with franchisees on current operational changes, new products, revenue generating ideas, cost savings, and local store marketing.

 

Franchise Arrangements: 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, 2018, Muscle Maker Development franchises the operation of a total of 34 Muscle Maker Grill restaurants.

 

The franchise agreements currently:

 

  Have terms for 15 years, with termination dates ranging from 2023 until 2033. These agreements are generally renewable for terms ranging from five 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 net sales at the franchise location. In addition, franchisees contribute 2% (total) of net sales to the marketing and brand development/advertising fund.

 

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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 Net sales at the franchise location, payable weekly.
     
  Franchisees pay a weekly amount equal to 2% (total) of net sales at the franchise location into a cooperative advertising fund and brand development/advertising fund. The cooperative advertising fee is used by franchisees for local store marketing efforts and the brand development/advertising fund is for the benefit of all locations and is administered by Muscle Maker.
     
  A company affiliated with Muscle Maker in 2017 and through June 2018 received a software license fee of $3,500 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. As of the second quarter of 2018 Muscle Maker is no longer affiliated with this entity but continues to receive the software license fee of $3,500 per new location. As of July 2019, Muscle Maker no longer receives the $3,500 per location and has discontinued this arrangement.
     
  Franchisees are required to offer only those food products that are authorized by Muscle Maker Development, prepared using our proprietary recipes; and may obtain most supplies only from suppliers that are approved or designated by Muscle Maker Development. Muscle Maker receives rebates from various vendors or distributors based on total system wide purchases.
     
  As partial consideration for payment of the initial franchise fee and on-going royalties, Muscle Maker Development loans its franchisees a copy of its confidential operating manual, administers the advertising/brand development fund, and provides franchisees with pre-opening and on-going assistance including site selection assistance, pre-opening training, and in-term training.

 

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

 

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Area Representative Agreements: 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.

 

Our Marketing and Advertising

 

We promote our restaurants and products through multiple advertising campaigns. The campaigns aim to deliver our message of fresh and healthy-inspired product offerings. The campaign emphasizes our points of differentiation, from our fresh ingredients and in-house preparation, to the preparation of our healthy inspired meals.

 

We use multiple marketing channels, including social media such as Facebook, Instagram and Twitter, email, app notifications, local store marketing, public relations/press releases and other methods to broadly drive brand awareness and purchases of our featured products. We complement this periodically with direct mail and our Muscle Maker Grill Rewards mobile app and e-mail marketing program, which allows us to reach more than 55,000 members. Muscle Maker Grill Rewards is our e-club and loyalty program. We engage members via e-mails and push notifications featuring news of promotional offers, member rewards and product previews.

 

Our Purchasing and Distribution

 

Maintaining a high degree of quality in our restaurants depends in part on our ability to acquire fresh ingredients and other necessary supplies that meet our specifications from reliable suppliers. We contract with Sysco, a major foodservice distributor, for substantially all of our food and supplies. Food and supplies are delivered to most of our restaurants one to two times per week. Our distributor relationship with Sysco has been in place since 2007; a copy of each of this agreement and the amendment thereto is filed as an exhibit to the registration statement of which this prospectus forms a part. Our franchisees are required to use our primary distributor, or an approved regional distributor and franchisees must purchase food and supplies from approved suppliers. In our normal course of business, we evaluate bids from multiple suppliers for various products. Fluctuations in supply and prices can significantly impact our restaurant service and profit performance.

 

Our Intellectual Property

 

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

 

In July 2019, we filed for a trademark for “Healthy Joe’s” as well as secured healthy-joes.com and cheaterjoes.com for future concept development.

 

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Our Competition

 

We operate in the restaurant industry, which is highly competitive and fragmented. The number, size and strength of competitors vary by region. Our competition includes a variety of locally owned restaurants and national and regional chains that offer dine-in, carry-out and delivery services. Our competition in the broadest perspective includes restaurants, pizza parlors, convenience food stores, delicatessens, supermarkets, third party delivery services and club stores. However, we indirectly compete with fast casual restaurants, including Chipotle and Panera Bread, among others, and with healthy inspired fast casual restaurants, such as the Protein Bar, Freshii and Veggie Grill, among others.

 

We believe competition within the fast-casual restaurant segment is based primarily on ambience, price, taste, quality and the freshness of the menu items. We also believe that QSR competition is based primarily on quality, taste, speed of service, value, brand recognition, restaurant location and customer service.

 

As consumer preferences continue to evolve into healthier eating options, most restaurants are developing healthier menu options. As more restaurants offer healthier options, the competition for our product offerings becomes more intense and could pose a significant threat to future revenues. However, we believe our experience, size and flexibility allows Muscle Maker to adapt faster than many other restaurant chains.

 

Our Management Information Systems

 

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

 

Our in-restaurant back office computer system is designed to assist in the management of our restaurants 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.

 

Our Corporate Structure

 

Muscle Maker, Inc. was originally incorporated in California in December 2013. We reincorporated as a Nevada corporation in November 2019. Our principal executive offices are located at 308 East Renfro Street, Suite 101, Burleson, Texas 76028 and our telephone number is (682) 708-8250. Our website is musclemakergrill.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.

 

We serve as a holding company of the following subsidiaries:

 

  Muscle Maker Development, LLC, a directly wholly owned subsidiary, which was formed in Nevada on July 18, 2017 for the purpose of running our existing franchise operations and continuing to franchise the Muscle Maker Grill name and business system to qualified franchisees
     
  Muscle Maker Corp., LLC, a directly wholly owned subsidiary, which was formed in Nevada on July 18, 2017 for the purposes of developing new corporate stores and to also operate these new and existing corporate restaurants.
     
  Muscle Maker USA, Inc., a directly wholly owned subsidiary, which was formed in Texas on March 14, 2019 for the purpose of holding specific assets related to a company financing arrangement.

 

Prior to May 2018 we had a direct ownership interest in Custom Technology, Inc. Custom Technology, Inc., is a technology and point of sale systems dealer and technology consultant. Muscle Maker Corp., LLC had a direct 70% ownership interest in Custom Technology, Inc., which was formed in New Jersey on July 29, 2015. On May 24, 2018, we entered into a stock purchase agreement between John Guild, JohnG Solutions LLC and Custom Technology, Inc. in which we agreed to sell their 70% ownership in Custom Technology, Inc. for a total purchase price of $1.00.

 

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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.

 

As of November 21, 2019, our current directors and executive officers and their ages are:

 

Name   Age   Principal Positions Held With Us
Kevin Mohan   46   Chief Investment Officer and Chairman of the Board
Michael J. Roper   55   Chief Executive Officer, Secretary
Kenneth Miller   50   Chief Operating Officer
Ferdinand Groenewald   35   Chief Financial Officer
Aimee Infante   33   Chief Marketing Officer
Noel DeWinter   80   Director, Treasurer
A.B. Southall III   58   Director
Paul L. Menchik   72   Director
John Marques   59   Director
Peter S. Petrosian   67   Director
Omprakash Vajinapalli   48   Director
Jeff Carl   64   Director

 

Executive Officers and Directors

 

Kevin Mohan. Mr. Mohan has served as Chairman of the Board and a director of Muscle Maker, Inc. since April, 2018. From April, 2018 through May, 2018, he also served as our Interim President. He has also served as the Chief Investment Officer since May, 2018. From June 2012 through January, 2018, Mr. Mohan served as the VP of Capital Markets for American Restaurant Holdings, Inc., a company focused on acquiring and expanding fast casual restaurant brands.

 

Based on his experience we have deemed Mr. Mohan fit to serve on the Board and as Chairman of the Board.

 

Michael J. Roper. Mr. Roper has served as Chief Executive Officer, of Muscle Maker, Inc. since May 1, 2018. Mr. Roper has unique experience ranging from owning and operating several franchise locations through the corporate executive levels. From May 2015 through October 2017, Mr. Roper served as Chief Executive Officer of Taco Bueno where he was responsible for defining strategy and providing leadership to 162 company-owned and operated locations along with 23 franchised locations. From March 2014 through May 2015, Mr. Roper served as the Chief Operating Officer of Taco Bueno and from July 2013 through March 2014 as the Chief Development and Technology Officer of Taco Bueno. Prior to joining Taco Bueno, Mr. Roper was a franchise owner and operator of a IMS Barter franchise and held several roles with Quiznos Sub from 2000 to 2012 starting as a franchise owner and culminating in his appointment as the Chief Operating Officer/Executive Vice President of Operations in 2009. Mr. Roper received a Bachelor of Science in Business and General Management from Northern Illinois University.

 

Based on his education and extensive experience in the restaurant/franchise industry, we have deemed Mr. Roper fit to serve as our principal executive officer.

 

Kenneth Miller. Mr. Miller has served as Chief Operating Officer of Muscle Maker, Inc. since September, 2018. Mr. Miller has served in the restaurant business for an extensive portion of his career. Prior to joining us as Chief Operating Officer in September, 2018, Mr. Miller served as the Senior Vice President of Operations for Dickey’s BBQ Restaurant from April 2018 through September 2018 and in various capacities with Taco Bueno Restaurants, LP from October 2013 through April 2018 culminating in the position of Senior Vice President of Operations. Mr. Miller received a Bachelor of Arts in Business/Exercise Science from Tabor College in 1991.

 

Based on his education and extensive experience in the restaurant/franchise industry, we have deemed Mr. Miller fit to serve as our Chief Operating Officer.

 

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Ferdinand Groenewald. Mr. Groenewald has served as the Chief Financial Officer of Muscle Maker, Inc. since September 2018. Mr. Groenewald had previously served as our Vice President of Finance, Principal Financial Officer and Principal Accounting Officer, Muscle Maker Development, LLC and Muscle Maker Corp., LLC from January 25, 2018 through May 29, 2018. In addition, Mr. Groenewald has served as our controller from October 2017 through May 29, 2018. Mr. Groenewald is a certified public accountant with significant experience in finance and accounting. From July 2018 through August 2018, Mr. Groenwald serves as senior financial reporting accountant of Wrinkle Gardner & Company, a full service tax, accounting and business consulting firm. From February 2017 to October 2017, Mr. Groenewald served as Senior Financial Accounting Consultant at Pharos Advisors, Inc. serving a broad range of industries. From November 2013 to February 2017, he served as a Senior Staff Accountant at Financial Consulting Strategies, LLC where he provided a broad range of accounting, financial reporting, and pre-auditing services to various industries. From August 2015 to December 2015, Mr. Groenewald served as a Financial Reporting Analyst at Valley National Bank. Mr. Groenewald holds a Bachelor of Science in accounting from the University of South Africa.

 

Based on his education and extensive experience in the financial and accounting industries, we have deemed Mr. Groenewald fit to serve as our Chief Financial Officer.

 

Aimee Infante. Ms. Infante has served in various roles with us since 2014 starting as Marketing and Communications Manager in October 2014 and then as a Marketing Director from February 2015 through April 2016. Ms. Infante was then promoted to Vice President of Marketing in April 2016 prior to her appointment as Chief Marketing Officer in May 2019. Prior to joining us, Ms. Infante served in various marketing roles including Regional Marketing Manager for Qdoba Mexican Grill from November 2010 through April 2014. Ms. Infante holds a Bachelor of Science in Marketing from Rider University.

 

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. Mr. DeWinter received his MBA from the University of Pennsylvania. Mr. DeWinter served as the Chief Financial Officer of American Restaurant Holdings, Inc. from April 2013 until June 2018. 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.

 

Based on his education and extensive experience in financial and accounting matters, we have deemed Mr. DeWinter fit to serve on the Board.

 

A.B. Southall III. Mr. Southall has served as director of Muscle Maker, Inc. since February 2017. He has over 35 years of experience managing construction and land developing businesses. From December 1997 until December 2017 he was the President of a custom home building company. From March 2011 to current, Mr. Southall has been the President of Third Generation Builders, Inc. In addition, since 2001, Mr. Southall has been the President of Southall Landings Marina, Inc., a 189 boat slip marina complex. His involvement in the marina business led him to co-found a local Waterway Association. He has diversely invested across multiple sectors including private placements, oil & gas, real estate, restaurant businesses and commodities. Mr. Southall is an advocate of a healthy approach to the food industry and the restaurant business.

 

Based on his vast business and financial experience with real estate and restaurants, we have deemed Mr. Southall fit to serve on the Board.

 

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

 

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Based on his education and extensive experience in economic and financial matters, we have deemed Mr. Menchik fit to serve on the Board.

 

John Marques Mr. Marques has served as director of Muscle Maker, Inc. since April 2018. Since June 1992, Mr. Marques is self-employed and has owned and operated various businesses in the trucking and real estate industries. Mr. Marques currently serves as the President of Continental Transportation Corp., a motor freight transportation company.

 

Based on his experience in various business entities, we have deemed Mr. Marques fit to serve on the Board.

 

Peter S. Petrosian. Mr. Petrosian has served as director of Muscle Maker, Inc. since May 2018. Mr. Petrosian is a senior level food service executive with diversified leadership experience in casual dining, contract management, quick service and quick casual segments with a background in growth and turnaround situations, demonstrated expertise in operations, mergers and acquisitions, profit improvement, strategic planning and business development. Since 2005 to the present, Mr. Petrosian owned and operated PSP Management Consulting providing interim executive support in areas of organizational development, business, franchise and operational planning and valuation assistance to private equity firms in the restaurant industry. From November 2013 to January 2017, Mr. Petrosian served as the Chief Development Officer of Franchise Sports Concepts, LLC, a franchisor of Beef ‘O’ Brady’s and the Brass Tap. From April, 2007 to November, 2013, Mr. Petrosian was the Chief Operation Officer of Steak-Out Franchising, Inc., a franchisor of a char-broiled steak and full meal delivery concept. Prior to 2007, Mr. Petrosian held various positions with McAlister’s Corporation, AFC Enterprises (Church’s Chicken), Service America Corporation (wholly owned subsidiary of GE Capital) and Marriott Corporation.

 

Based on his experience with various restaurant concepts and senior executive level positions, we have deemed Mr. Petrosian fit to serve on the Board.

 

Omprakash Vajinapalli. Mr. Vajinapalli has served as director of Muscle Maker, Inc. since July 2018. Mr. Vajinapalli, since July 2007, has served as the CEO/President of HighRise IT Consultancy LLC. Mr. Vajinapalli received a Bachelor of Engineering from Bangalore University in 1993.

 

Based on his experience with various technology and IT related industries and education, we deem Mr. Vajinapalli fit to serve on the Board.

 

Jeff Carl. Mr. Carl has served as director of Muscle Maker, Inc. since September 3, 2019. Since February, 2017, Mr. Carl has served as Executive Director of Nice & Company, an ad agency with a focus on print, TV, digital, experiential and mobile, and as an independent consultant to the restaurant industry. From June, 2013 to January, 2017, Mr. Carl served as the Chief Marketing Officer for Taco Bueno Restaurants and from 2009 to 2013 as the Chief Marketing Officer of Tavistock Restaurants LLC. Mr. Carl received a BA from Wake Forest University in 1977 and a MBA from University of North Carolina Chapel Hill in 1979.

 

Based on his experience within the restaurant industry and due to the fact that he has held senior level executive positions with a focus on advertising and marketing, we have deemed Mr. Carl a fit to serve on the Board.

 

Family Relationships

 

There are no family relationships among any of our executive officers and directors.

 

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Corporate Governance

 

Board of Directors and Board Committees

 

We intend to apply to list our common stock on the Nasdaq capital market. Under the rules of Nasdaq, “independent” directors must make up a majority of a listed company’s board of directors. In addition, applicable Nasdaq rules require that, subject to specified exceptions, each member of a listed company’s audit and compensation committees be independent within the meaning of the applicable Nasdaq rules. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act.

 

Our board of directors currently consists of eight (8) members. Our board of directors has determined that Noel DeWinter, A.B. Southall III, Paul L. Menchik, John Marques, Peter S. Petrosian, Omprakash Vajinapalli and Jeff Carl, qualify as independent directors in accordance with the Nasdaq Capital Market, or Nasdaq listing requirements. Kevin Mohan is not considered independent. Nasdaq’s independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three (3) years, one of our employees and that neither the director nor any of his or her family members has engaged in various types of business dealings with us. In addition, as required by Nasdaq rules, our board of directors has made a subjective determination as to each independent director that no relationships exist that, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, our board of directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management. There are no family relationships among any of our directors or executive officers.

 

As required under Nasdaq rules and regulations and in expectation of listing on Nasdaq, our independent directors meet in regularly scheduled executive sessions at which only independent directors are present.

 

If we are not approved for listing on Nasdaq or such other acceptable exchange, or the Exchange, we intend to apply for quotation of our common stock on the OTC Markets by having a market maker file an application with FINRA for our common stock to be eligible for trading on the OTC Marketplace of the OTC Markets. We are not required to comply with the corporate governance rules of the Exchange, and instead may comply with less stringent corporate governance standards while listed on the OTC. The OTC 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 OTC, 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 OTC, we have elected to voluntarily comply with the corporate governance rules of Nasdaq.

 

Board Leadership Structure and Board’s Role in Risk Oversight

 

Kevin Mohan is the Chairman of the Board. The Chairman has authority, among other things, to preside over 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 and Chief Executive Officer ensures appropriate oversight by the Board of our business and affairs. However, no single leadership model is right for all companies and at all times. The Board recognizes that depending on the circumstances, other leadership models, such as the appointment of a lead independent director, might be appropriate. Accordingly, the Board may periodically review its leadership structure. In addition, following the qualification of the offering, the Board will hold executive sessions in which only independent directors are present.

 

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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 us.

 

Committees of the Board of Directors

 

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

 

Audit Committee

 

The Audit Committee has three members, including Messrs. DeWinter, Marques and Petrosian. Mr. DeWinter serves as the chairman of the Audit Committee and satisfies the definition of “audit committee financial expert”.

 

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 two members, including Messrs. DeWinter and Southall. Mr. DeWinter serves as the chairman of the Compensation Committee.

 

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;
     
  review the independence of any compensation advisers.

 

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Nominating and Corporate Governance Committee

 

The Governance Committee has three members, including Messrs. Menchik, Southall and DeWinter. Mr. Menchik serves as the chairman of the Governance Committee.

 

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.

 

Our goal is to assemble a Board that brings together a variety of skills derived from high quality business and professional experience.

 

Compensation Committee Interlocks and Insider Participation

 

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

 

Code of Business Conduct and Ethics

 

We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting.

 

EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following Summary Compensation Table sets forth all compensation earned in all capacities during the fiscal years ended December 31, 2018 and 2017 by (i) our principal executive officer, (ii) our two most highly compensated executive officers, other than our principal executive officer, who were serving as executive officers as of December 31, 2018 and whose total compensation for the 2018 fiscal year, as determined by Regulation S-K, Item 402, exceeded $100,000, (iii) a person who would have been included as one of our two most highly compensated executive officers, other than our principal executive officer, but for the fact that he was not serving as one of our executive officers as of December 31, 2018 (the individuals falling within categories (i), (ii) and (iii) are collectively referred to as the “Named Executive Officers”):

 

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Summary Compensation Table

 

    Year   Salary     Bonus     Stock
Award (3)
    Option
Awards
    Non-Equity
Incentive Plan
Compensation
    Non-Qualified
Deferred
Compensation
Earnings
    All Other
Compensation (4)
    Total  
Michael J. Roper   2018   $ 144,231     $ -     $ -     $ -     $ -     $ -     $ -     $ 144,231  
Chief Executive Officer of Muscle Maker, Inc.   2017   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                     
Ferdinand Groenewald   2018   $ 106,463     $ 5,000     $ -     $ -     $ -     $ -     $ -     $ 111,463  
Chief Financial Officer of Muscle Maker, Inc.   2017   $ 22,423     $ 10,000     $ -     $ -     $ -     $ -     $ -     $ 32,423  
                                                                     
Rodney C. Silva (1)   2018   $ 150,000     $ -     $ 29,913     $ -     $ -     $ -     $ 7,421     $ 187,334  
Chief Culture Officer of Muscle Maker Brands, LLC   2017   $ 150,000     $ -     $ 59,864     $ -     $ -     $ -     $ 28,800     $ 238,664  
                                                                     

Robert E. Morgan (2)

  2018   $ 36,000     $ -     $ -     $ -     $ -     $ -     $ -     $ 36,000  

Former

Chief Executive Officer, President, and Director of Muscle Maker, Inc. (principal executive officer of Muscle Maker, Inc)

  2017   $ 270,000     $ -     $ -     $ -     $ -     $ -     $ 64,800     $ 334,800  

 

(1) Mr. Silva 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. Mr. Silva was appointed as the Vice President of Brand Development/Franchise Sales on May 5, 2019.

 

(2) Mr. Morgan served as Chief Executive Officer and President of Muscle Maker, Inc. from October 2015 through April 11, 2018. He also served as the Chief Executive Officer and President of each of Muscle Maker Development, LLC and Muscle Maker Corp., LLC from August 25, 2017 and September 15, 2017, respectively through April 11, 2018. 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.

 

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(3) On May 11, 2017, Muscle Maker, Inc. issued 16,071 restricted shares to Mr. Silva. The restricted common stock awards granted will vest in five equal installments with the first installment vesting on the date of grant and the remaining installments vesting on the first day of each of the next four calendar years thereafter. The grant date value of the shares was $149,942.

 

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

 

  Housing Allowance: For 2018, $0 per month ($0 per year) for Mr. Morgan and $0 for Mr. Silva and for 2017, $3,000 per month ($36,000 per year) for Mr. Morgan and $0 for Mr. Silva.
     
  Healthcare Allowance: For 2018, $0 per month ($0 per year) for Mr. Morgan and $0 per month ($0 per year) for Mr. Silva and; and for 2017, $2,000 per month ($24,000 per year) for Mr. Morgan and $2,000 per month ($24,000 per year) for Mr. Silva.
     
  Auto Allowance: For 2018, $0 per month ($0 per year) for Mr. Morgan and $400 ($4,800 per year) per month for Mr. Silva; For 2017, $400 per month ($4,800 per year) for Mr. Morgan and $400 ($4,800 per year) per month for Mr. Silva

 

Employment Agreements

 

Robert Morgan

 

We entered into an employment agreement with Robert Morgan for a two-year term that was to commence as of the date Muscle Maker successfully received at least $5,000,000 in gross proceeds from an SEC qualified offering under Regulation A+ under the Securities Act. The term of the employment agreement is two years and is automatically extended for successive one-year periods unless either party delivers a 60-day notice of termination. The employment agreements did not become effective since we terminated our Regulation A+ offering on March 29, 2018, yielding proceeds of approximately $143,497.

 

Rodney C. Silva

 

We entered into an employment agreement with Rodney Silva for a one-year term that was to commence as of the date Muscle Maker successfully received at least $5,000,000 in gross proceeds from an SEC qualified offering under Regulation A+ under the Securities Act. The term of the employment agreement is two years and is automatically extended for successive one-year periods unless either party delivers a 60-day notice of termination. The employment agreements did not become effective since we terminated our Regulation A+ offering on March 29, 2018, yielding proceeds of approximately $143,497.

 

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On May 5, 2019, we appointed Mr. Silva as our Vice President of Brand Development/Franchise Sales and entered into an Employment Agreement with Rodney Silva. Pursuant to the Employment Agreement, Mr. Silva will be engaged as our Vice President of Brand Development/Franchise Sales for a period of eighteen months unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon the IPO. During the term of the Employment Agreement, Mr. Silva will be entitled to a base salary at the annualized rate of $150,000. Mr. Silva will be eligible for a discretionary performance bonus to be paid in cash following the closing of the IPO. Mr. Silva is also eligible to participate in employee benefits plans as we may institute from time to time that are available for full-time employees.

 

Ferdinand Groenewald

 

On September 26, 2018, we appointed Ferdinand Groenewald as our Chief Financial Officer and entered into an Employment Agreement with Mr. Groenewald. Pursuant to the agreement, Mr. Groenewald will be employed as our Chief Financial Officer for a period of two years unless earlier terminated pursuant to the terms of the agreement. During the term of the agreement, Mr. Groenewald will be entitled to a base salary at the annualized rate of $150,000 and will be eligible for a discretionary performance cash bonuses which will include $10,000 upon completion of the audit for the year ended December 31, 2017 and $25,000 and up to 10,000 shares of common stock upon completion of a public offering of not less than $3 million together with listing on a national exchange (the “Public Offering”), which may be increased to 25,000 in the event $5 million is raised. Mr. Groenewald’s salary will increase to $175,000 upon closing of the Public Offering. Mr. Groenewald is also eligible to participate in employee benefits plans as we may institute from time to time that are available for full-time employees. In addition, pursuant to board approval, Mr. Groenewald is entitled to 110,000 shares of our common stock that will be issued upon a Public Offering of at least $3,000,000.

 

Michael Roper

 

On October 26, 2018, we entered into an Employment Agreement with Michael Roper, which replaced his employment agreement from May 2018. Pursuant to the Employment Agreement, Mr. Roper will continue to be employed as our Chief Executive Officer for a period of two years unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon our listing on a national exchange and raising $3,000,000 (the “IPO”). During the term of the Employment Agreement, Mr. Roper will be entitled to a base salary at the annualized rate of $250,000, which will be increased to $275,000 upon achieving various milestones required by the Investors that participated in the September 2018 Offering and again to $350,000 upon our completing the IPO. Mr. Roper will be eligible for a discretionary performance bonus to be paid in cash or equity, provided, however, no cash bonus will be paid until the closing of the IPO. Mr. Roper is entitled to $100,000 bonus upon closing of the IPO. Mr. Roper is also entitled to 100,000 shares of our common stock that will be issued upon a Public offering of at least $3,000,000. In addition, pursuant to board approval on June 29, 2019, Mr. Roper is entitled to 250,000 shares of our restricted common stock awards that will be issued upon a Public Offering of at least $3,000,000. In the event we raise $3 million or $5 million, then Mr. Roper will receive 150,000 restricted common stock awards or 250,000 restricted common stock awards, respectively. In addition, Mr. Roper will receive 100,000 restricted common stock awards upon the one- and two-year anniversaries of his employment.

 

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Elements of Compensation

 

Each of our named executive officers was compensated in 2018, and except for Mr. Roper was compensated in 2017, by us or Muscle Maker Brands.

 

Base Salary

 

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

 

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

 

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Bonus

 

In fiscal 2017 and 2018, Mr. Groenewald received $10,000 and $5,000 respectively in cash bonus payments. These payments were provided as an incentive towards moving his residence from New Jersey to Texas.

 

Stock Award

 

In fiscal 2017, we issued an aggregate of 16,071 restricted shares of our common stock to Rod Silva. The restricted common stock awards granted will vest in five equal installments with the first installment vesting on the date of grant and the remaining installments vesting on the first day of each of the next four calendar years thereafter. The value of the shares issued were $9.33 per share of which the vested and partially vested shares had an aggregate fair value amount of $89,777 from the date of issuance through December 31, 2018.

 

In fiscal 2018, we did not issue any restricted shares of our common stock to our named executive officers.

 

Other Benefits

 

In 2017, Mr. Morgan, our former CEO & 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 2017 in respect of these benefits is reflected above in the “Summary Compensation Table” section.

 

In 2018, Mr. Silva was 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 included a car allowance f. These benefits are reflected above in the “All Other Compensation section” of the Summary Compensation Table.

 

Equity Incentive Plans

 

Our board of directors and shareholders approved 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. We have reserved a total of 1,071,428 shares of common stock for issuance under the Plan. Of these shares, approximately 32,142 shares were issued to the directors (5,356 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. Our stock options have a contractual life not to exceed ten years. We issue 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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Equity Compensation Plan Information

 

The following table provides information, as of December 31, 2018, 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     $            -       1,039,286  
Equity compensation plans not approved by security holders     0     $ -       -  
                         
TOTAL     0     $ -       1,039,286  

 

Director Compensation

 

During 2018, the directors did not receive any compensation.

 

On July 16, 2019, we entered into letter agreements with each of our existing non-executive directors, Noel DeWinter, John Marques, Paul Menchik, Peter Petrosian, AB Southall III and Omprakash Vajinapalli. On September 3, 2019, we entered into a letter agreement with Jeff Carl under the same terms as the letter agreements dated July 16, 2019 entered into with each of the other Directors. Directors that also serve as executives will not be entitled to any additional compensation for serving as our directors. The letter agreements set forth certain terms pursuant to which the directors will serve as our directors. As directors have not received compensation for services to date, we agreed to provide equity in lieu of cash compensation and equity compensation for services rendered during 2017, 2018 and 2019. For past director services in lieu of cash unpaid to date: (i) directors that served as directors during the year ended December 31, 2017 will each receive shares of common stock valued at $4,500 to be priced at the price per share of our public offering in connection with our uplisting, which we refer to in this prospectus as the Uplisting Offering, (ii) directors that served as directors during the year ended December 31, 2018 will each receive shares of common stock valued at $9,000, which shall be prorated for a partial year of service, to be priced at the price per share of the Uplisting Offering and (iii) directors that served as directors during the year ended December 31, 2019 through the date of the Uplisting Offering will each receive shares of common stock valued at $9,000, which shall be prorated for a partial year of service, to be priced at the price per share of the Uplisting Offering. Following the public offering, directors will be paid cash for the balance of 2019. Within 30 days from the Uplisting Offering and assuming a $5.00 per share price, we will issue 7,575 shares of common stock to Messrs. Menchik and Southall, 5,901 shares of common stock to Mr. Marques, 5,799 shares of common stock to Mr. Petrosian, 8,150 shares of common stock to Mr. De Winter and 5,231 shares of common stock to Mr. Vajinapalli.

 

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The letter agreements provide that each director will receive an annual cash fee of $9,000 as consideration for their service as a director. In addition, each director will receive 10,000 shares of common stock per year for service as a director, 1,300 shares of common stock per year for service on each committee and 1,000 shares of common stock per year for service as chair for such committee. The shares of common stock for committee service will be limited to two committees.

 

As directors have not received compensation for services to date, we agreed to provide equity in lieu of cash compensation and equity compensation for services rendered during 2017, 2018 and 2019. For past director services in lieu of cash unpaid to date: (i) directors that served as directors during the year ended December 31, 2017 will each receive shares of common stock valued at $4,500 to be priced at the price per share of our public offering in connection with the Uplisting Offering, (ii) directors that served as directors during the year ended December 31, 2018 will each receive shares of common stock valued at $9,000, which shall be prorated for a partial year of service, to be priced at the price per share of the Uplisting Offering and (iii) directors that served as directors during the year ended December 31, 2019 through the date of the Uplisting Offering will each receive shares of common stock valued at $9,000, which shall be prorated for a partial year of service, to be priced at the price per share of the Uplisting Offering. Following the public offering, directors will be paid cash for the balance of 2019.

 

As further compensation for past director services, we will issue shares of common stock as follows, which shall be prorated for a partial year: (i) directors that served as directors during the year ended December 31, 2017 will each receive 5,000 shares of common stock, (ii) directors that served as directors during the year ended December 31, 2018 will each receive 10,000 shares of common stock and (iii) directors that served as directors during the year ended December 31, 2019 will each receive 10,000 shares of common stock.

 

On September 21, 2017, Muscle Maker granted 5,356 shares of common stock under our Muscle Maker 2017 Stock Option and Stock Issuance Plan to each of our six directors of Muscle Maker (32,142 shares of common stock in the aggregate) at a value of $9.33 per share. Such share grants are subject to graduated vesting in the following installments on each of the following dates: (i) 66.666% as of the date of grant and (ii) 8.333% as of (a) October 1, 2017, (b) November 1, 2017, (c) December 1, 2017, and (d) January 1, 2018.

 

Kevin Mohan is an employee-director and does not receive compensation for serving in his role as a director.

 

Executive Compensation Philosophy

 

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

 

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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 our 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 our 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 33,750 shares of our common stock to our franchisees. The options are fully vested, have an exercise price of $9.33 per share and expire three years after the date of grant.

 

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Other than compensation agreements and other arrangements which are described as required under “Executive Compensation” and the transactions described below, since January 1, 2017, there has not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed the lesser of $120,000 or the average of our total assets at year end for the last two completed fiscal years and in which any director, executive officer, holder of 5% or more of any class of our capital stock, or any member of their immediate family had or will have a direct or indirect material interest. Our audit committee is responsible for approving all future transactions between us and our officers, directors and principal stockholders and their affiliates.

 

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 4,339,285 shares of Common Stock to American Restaurant Holdings in exchange for cash of $3,645,000 and an obligation to repay an aggregate of $604,000 of principal due under MM Note and MMB Note.

 

On March 9, 2015, the American Restaurant Holdings repaid MMB Note in full. On July 21, 2015, January 23, 2016 and July 23, 2016, installments of $100,000, $150,000 and $150,000 were repaid on the balance of MM Note by the American Restaurant Holdings. As of July 23, 2016, there is no balance outstanding related to MM Note.

 

On December 31, 2015, we issued a promissory note in the amount of $1,082,620 to American Restaurant (the “2015 ARH Note”). The note bore no stated interest or maturity date and was convertible into shares of Common Stock of Muscle Maker at a conversion price of $4.67 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 231,990 shares of Common Stock of Muscle Maker at a conversion price of $4.67 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 $3.73 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 245,797 shares of our common stock at an exercise price of $9.33 per share. On March 14, 2017, the American Restaurant Holdings elected to convert the 2016 ARH Note into 702,279 shares of Common Stock of Muscle Maker.

 

On February 15, 2017, we issued a promissory note in the amount of $980,949 (the “First 2017 ARH Note”) and on March 15, 2017, MMI issued a promissory note in the amount of $338,834 (the “Second 2017 ARH Note”), both to ARH. The First 2017 ARH Note and the Second 2017 ARH Note bear no stated interest rate or maturity date and are convertible into 262,753 and 72,606 shares of our common stock at a conversion price of $3.73 per share and $4.67 per share, respectively, at a time to be determined by the Former Parent. On March 14, 2017, the American Restaurant Holdings elected to convert the First 2017 ARH Note into 262,753 shares of our common stock.

 

The First 2017 ARH Note and the Second 2017 ARH note include a three-year warrant for the purchase of 91,963 and 15,793 shares, respectively, of Muscle Maker common stock at an exercise price of $9.33 per share. The warrants issued in connection with the First 2017 ARH Note and the Second 2017 ARH note had a grant date value of $122,820 and $23,120, respectively. Muscle Maker allocated the proceeds to the First 2017 ARH Note and the Second 2017 ARH and related warrants based on the relative fair values at the time of issuance, resulting in an effective conversion price of $3.27 and $4.35 per share, respectively. The fair value of Muscle Maker common stock on the dates the notes were issued was $7.15 per share, creating an intrinsic value of $3.88 and $2.80 per share, respectively.

 

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On March 14, 2017, American Restaurant Holdings elected to convert aggregate principal of $4,685,411 under the 2015 ARH Note, the 2016 ARH Note and the First 2017 ARH Note into an aggregate 1,197,022 shares of Muscle Makers common stock.

 

On July 18, 2017, we issued a convertible promissory note (the “Third 2017 ARH Note”) to American Restaurant Holdings in exchange for cash proceeds of $336,932. The Third 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of our common stock at a conversion price of $7.47 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 15,793 shares of our common stock at an exercise price of $9.33 per share.

 

On September 19, 2017, American Restaurant Holdings elected to convert aggregate principal of $675,766 under the Second 2017 ARH Note and the Third 2017 Note into an aggregate 117,731 shares of Muscle Makers common stock.

 

On April 6, 2018, we issued a $475,000 convertible promissory note (the “2018 ARH Note”) to American Restaurant Holdings. The 2018 ARH Note has no stated interest rate or maturity date and is convertible into shares of Muscle Makers common stock at a conversion price of $0.50 per share at a time to be determined by the lender.

 

On April 11, 2018, American Restaurant Holdings elected to partially convert the 2018 ARHI Note for the principal of $392,542 into 785,084 shares of our common stock.

 

The 2015 ARH Note, 2016 ARH Note, First 2017 ARH Note, Second 2017 ARH Note, Third 2017 ARH Note and 2018 ARH Note are together, the “ARH Notes”.

 

Transactions with Officers, Directors and Executives of Muscle Maker

 

On December 22, 2014, we issued 10,713 shares of our 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.

 

On January 24, 2015, we granted 21,428 shares of our common stock valued at $1.31 per share to our Director of Brand Development, in connection with his employment agreement. On January 24, 2015, we issued 45,918 shares of our common stock to the Director of Brand Development in exchange for cash proceeds of $1.31 per share, or $60,000.

 

In May 2017, we granted 119,709 shares of our common stock to our 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 16,071 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 298,262 shares of our common stock to Robert Morgan, our chief executive officer, in connection with the merger of MMBC into us.

 

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We 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. The employment agreements did not become effective since we terminated our Regulation A+ offering on March 29, 2018, yielding proceeds of approximately $143,497.

 

On September 21, 2017, we granted 5,356 shares of common stock under our Muscle Maker 2017 Stock Option and Stock Issuance Plan to each of our six directors of Muscle Maker (32,142 shares of common stock in the aggregate) at a value of $9.33 per share. Such share grants are subject to graduated vesting in the following installments on each of the following dates: (i) 66.666% as of the date of grant and (ii) 8.333% as of (a) October 1, 2017, (b) November 1, 2017, (c) December 1, 2017, and (d) January 1, 2018.

 

On May 1, 2018, Muscle Maker board of directors agreed to issue 100,000 shares of common stock upon a Public Offering of at least $3,000,000, to Michael Roper, our Chief Executive Officer, as part of his initial employment agreement. Mr. Roper is also eligible to receive 100,000 restricted common stock awards on each anniversary of his employment date during the employment contract period as well as up to 250,000 additional restricted common stock awards upon the successful completion of an initial public offering of at least $5,000,000.

 

During April 2019, we repaid other notes payable in the aggregate principal amount of $710,000, of which $435,000 belong to related parties. In addition, we issued 590,989 of our common stock as payment for the interest incurred on the other notes payable repaid in the aggregate amount of $590,989.

 

On May 14, 2019, we issued a $91,000 promissory note to a related party. The note has a stated interest rate of 15% over the original term of one year with monthly interest payments. The note becomes due in one year or the first day our common stock trades publicly on an exchange.

 

On June 29, 2018, Muscle Maker board of directors agreed to issue Kevin Mohan and Michael Roper an additional 250,000 restricted common stock awards. The terms of the restricted common stock awards have not been finalized as of the date of the issuance of these consolidated financial statements and has not been issued.

 

On September 26, 2018, we rehired Ferdinand Groenewald as our Chief Financial Officer and entered into an Employment Agreement with Mr. Groenewald. Pursuant to the agreement, Mr. Groenewald will be employed as our Chief Financial Officer for a period of two years unless earlier terminated pursuant to the terms of the agreement. During the term of the agreement, Mr. Groenewald will be entitled to a base salary at the annualized rate of $150,000 and will be eligible for a discretionary performance cash bonuses which will include $10,000 upon completion of the audit for the year ended December 31, 2017 and $25,000 and up to 10,000 shares of common stock upon completion of a public offering of not less than $3 million together with listing on a national exchange (the “Public Offering”), which may be increased to 25,000 shares of common stock in the event $5 million is raised. Mr. Groenewald’s salary will increase to $175,000 upon closing of the Public Offering. Mr. Groenewald is also eligible to participate in employee benefits plans as we may institute from time to time that are available for full-time employees. In addition, pursuant to board approval, Mr. Groenewald is entitled to 110,000 shares of our common stock that will be issued upon a Public Offering of at least $3,000,000.

 

On September 26, 2018, we appointed Kenneth Miller as our Chief Operating Officer and entered into an Employment Agreement with Mr. Miller. Pursuant to the agreement, Mr. Miller will be employed as our Chief Operating Officer for a period of two years unless earlier terminated pursuant to the terms of the agreement. During the term of the agreement, Mr. Miller will be entitled to a base salary at the annualized rate of $200,000, which will be increased to $275,000 upon successful closing of the Public Offering. Mr. Miller is also entitled to 100,000 shares of our common stock that will be issued upon a Public offering of at least $3,000,000. Mr. Miller is eligible for a discretionary performance cash and equity bonuses which will include cash of $50,000 and 75,000 shares of common stock upon completion of the Public Offering, which may be increased to 125,000 shares in the event $5 million is raised. Mr. Miller is also eligible to participate in employee benefits plans as we may institute from time to time that are available for full-time employees.

 

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On October 26, 2018, we entered into an Employment Agreement with Michael Roper, which replaced his employment agreement from May 2018. Pursuant to the Employment Agreement, Mr. Roper will continue to be employed as our Chief Executive Officer for a period of two years unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon listing our common stock on a national exchange and raising $3,000,000 (the “IPO”). During the term of the Employment Agreement, Mr. Roper will be entitled to a base salary at the annualized rate of $250,000, which was increased to $275,000 upon achieving various milestones required by the Investors that participated in the September 2018 Offering and will be increased to $350,000 upon our completing the IPO. Mr. Roper will be eligible for a discretionary performance bonus to be paid in cash or equity, provided, however, no cash bonus will be paid until the closing of the IPO. Mr. Roper is entitled to $100,000 bonus upon closing of the IPO. Mr. Roper is also entitled to 100,000 shares of our common stock that will be issued upon a Public offering of at least $3,000,000. In addition, pursuant to board approval on June 29, 2019, Mr. Roper is entitled to 250,000 shares of our common stock that will be issued upon a Public Offering of at least $3,000,000. In the event we raise $3 million or $5 million upon completion of a public offering together with listing on a national exchange, then Mr. Roper will receive 150,000 restricted common stock awards or 250,000 restricted common stock awards, respectively. In addition, Mr. Roper will receive 100,000 restricted common stock awards upon the one- and two-year anniversaries of his employment.

 

We have entered into indemnification agreements with each of our directors and entered into such agreements with certain of our executive officers. These agreements require us, among other things, to indemnify these individuals for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts reasonably incurred by such person in any action or proceeding, including any action by or in our right, on account of any services undertaken by such person on behalf of our company or that person’s status as a member of our Board of Directors to the maximum extent allowed under Nevada law.

 

On October 26, 2018, we entered into an Employment Agreement with Kevin Mohan. Pursuant to the Employment Agreement, Mr. Mohan will be engaged as our Chief Investment Officer for a period of two years unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon the IPO. During the term of the Employment Agreement, Mr. Mohan will be entitled to a base salary at the annualized rate of $156,000, which will be increased to $175,000 upon the IPO. Mr. Mohan will be eligible for a discretionary performance bonus to be paid in cash following the closing of the IPO. Mr. Mohan is entitled to $50,000 bonus upon closing of the IPO. In the event we raise $3 million or $5 million, then Mr. Mohan will receive 100,000 restricted common stock awards or 200,000 restricted common stock awards, respectively. In addition, pursuant to board approval on June 29, 2019, Mr. Mohan is entitled to 250,000 shares of our common stock that will be issued upon a Public Offering of at least $3,000,000.

 

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PRINCIPAL STOCKHOLDERS

 

The following table sets forth the beneficial ownership of our common stock as of November 22, 2019 by:

 

  each person, or group of affiliated persons, whom we know to beneficially own more than 5% of our common stock;
     
  each of our named executive officers;
     
  each of our directors; and
     
  all of our executive officers and directors as a group.

 

The percentage ownership information shown in the column labeled “Percentage of Shares Outstanding” as of November 22, 2019 is based upon 11,836,425 shares of common stock outstanding as of November 22, 2019.

 

We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options or warrants or upon conversion of a security that are either exercisable or convertible on or before a date that is 60 days after November 22. These shares are deemed to be outstanding and beneficially owned by the person holding those options or warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

 

Except as otherwise noted below, the address for persons listed in the table is c/o Muscle Maker, Inc., 308 East Renfro Street, Suite 101, Burleson, Texas 76028.

 

Name of Beneficial Owner   Number of Shares
Beneficially
Owned (1)
    Percentage of Shares
Outstanding (1)
 
5% Stockholders:                
P. John, LLC (2)     1,085,915       9.05 %
Catalytic Holdings 1 LLC (12)     5,104,500       30.13 %
Thoroughbred Diagnostics, LLC (12)     2,250,000       15.97 %
Directors and Named Executive Officers:                
Kevin Mohan** (4)     874,116       7.10 %
Michael J. Roper** (13)     700,000       5.58 %
Ferdinand Groenewald** (15)     135,000       1.13 %
Robert E. Morgan (14)     338,025       2.86 %
Rod Silva (5)     141,600       1.20 %
Noel DeWinter** (6)     80,631       *  
A.B. Southall, III** (7)     362,515       3.02 %
Paul L. Menchik** (8)     236,265       1.98 %
John Marques** (3)     1,272,644       10.50 %
Peter S. Petrosian** (9)     20,470       *  
Omprakash Vajinapalli** (10)     149,019       1.26 %
Jeff Carl** (11)     3,735       *  
All executive officers and directors as a group (12 persons) (16)     4,652,045       38.36 %

 

* denotes less than 1%

** Executive officer and/or director.

 

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(1) Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended, and is not necessarily indicative of beneficial ownership for any other purpose. The number of shares of common stock shown as beneficially owned includes shares of common stock issuable upon (i) the exercise of stock options that will become exercisable within sixty (60) days of November 22, 2019, (ii) the conversion of the convertible promissory notes into shares of our common stock, and (iii) the exercise of warrants that will become exercisable within sixty (60) days of November 22, 2019. Shares of common stock issuable pursuant to the foregoing methods are deemed outstanding for purposes of calculating the percentage of beneficial ownership of the person or entity holding such securities. Accordingly, the total percentages of beneficial ownership are in excess of one hundred percent (100%).
   
(2) P. John, LLC directly beneficially owns 927,468 shares of Common Stock of Muscle Maker, and (ii) 125,000 shares of Common Stock of Muscle Maker subject to presently exercisable purchase warrants. 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) 2,678 shares of Common Stock of Muscle Maker subject to presently exercisable purchase warrants issued to John Feeney, (ii) 30,769 shares of Common Stock of Muscle Maker subject to presently convertible debt held by John Feeney.
   
(3) John Marques beneficially owns (i) indirectly 974,692 shares of Common Stock of Muscle Maker through Membership, LLC, (ii) directly 168,974 shares of Common Stock of Muscle Maker of which 155,356 are subject to presently exercisable purchase warrants issued to John Marques and (iii) indirectly 123,077 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. Mr. Marques is also to be issued 5,901 shares of common stock at the price of the Company’s public offering as compensation for serving as a director during 2018 and through the fourth quarter 2019. The shares were priced assuming a public offering of $5.00 per share.
   
(4) Kevin Mohan beneficially owns (i) indirectly 39,000 shares of Common Stock of Muscle Maker through various family members that reside in the same household as Kevin Mohan, (ii) directly 351,669 shares of common stock of Muscle Maker of which 2,678 are subject to presently exercisable purchase warrants issued to Kevin Mohan and (iii) directly 30,769 shares of Common Stock of Muscle Maker subject to presently convertible debt held by Kevin Mohan. Pursuant to his employment agreement, Mr. Mohan is to be issued 250,000 shares of Common Stock upon the successful completion of an uplisting to a national exchange with a public offering of at least $3,000,000 with an additional 200,000 shares of Common Stock in the event the public offering is at least $5,000,000.
   
(5) Rodney Silva beneficially owns (i) indirectly 58,695 shares of Common Stock of Muscle Maker through JSOS, LLC, an entity he controls and (ii) directly 82,905 shares of Common Stock of Muscle Maker.
   
(6) Noel De Winter beneficially owns (i) indirectly 29,250 shares of Common Stock of Muscle Maker as trustee of the Arthur Noel DeWinter Trust; (ii) directly 43,231 shares of Common Stock of Muscle Maker. Mr. DeWinter is also to be issued 8,150 shares of common stock at the price of the Company’s public offering as compensation for serving as a director during 2018 and through third quarter 2019. The shares were priced assuming a public offering of $5.00 per share.

 

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(7) A.B. Southall III beneficially owns (i) directly 212,571 shares of Common Stock of Muscle Maker, (ii) directly 30,356 shares of Common Stock of Muscle Maker subject to presently exercisable purchase warrants issued to A.B. Southall, and (iii) directly 111,538 shares of Common Stock of Muscle Maker subject to presently convertible debt held by A.B. Southall. Mr. Southall is also to be issued 7,650 shares of common stock at the price of the Company’s public offering as compensation for serving as a director during 2018 and through third quarter 2019. The shares were priced assuming a public offering of $5.00 per share.
   
(8) Paul L. Menchik beneficially owns (i) directly 153,690 shares of Common Stock of Muscle Maker, (ii) directly 50,000 shares of Common Stock of Muscle Maker subject to presently convertible debt held by Paul L. Menchik and (iii) 25,000 shares of Common Stock of Muscle Maker subject to presently exercisable purchase warrants issued to Paul L. Menchik. Mr. Menchik is also to be issued 7,575 shares of common stock at the price of the Company’s public offering as compensation for serving as a director during 2018 and through third quarter 2019. The shares were priced assuming a public offering of $5.00 per share.
   
(9) Peter S. Petrosian beneficially owns directly 14,671 shares of Common Stock of Muscle Maker issued for serves rendered as a board of director. Mr. Petrosian is also to be issued 5,799 shares of common stock at the price of the Company’s public offering as compensation for serving as a director during 2018 and through third quarter 2019. The shares were priced assuming a public offering of $5.00 per share.
   
(10) Omprakash Vajinapalli beneficially owns (i) directly 75,606 shares of Common Stock of Muscle Maker and (ii) indirectly 68,182 shares of Common Stock of Muscle Maker through a family member that reside in the same household as Omprakash Vajinapalli. Mr. Vajinapalli is also to be issued 5,231 shares of common stock at the price of the Company’s public offering as compensation for serving as a director during 2018 and through third quarter 2019. The shares were priced assuming a public offering of $5.00 per share.
   
(11) Mr. Carl beneficially owns (i) directly 742 shares of  Common Stock of Muscle Maker and (ii) is to be issued 2,993 shares of common stock at the price of the Company’s public offering as compensation for serving as a director during the third quarter 2019. The shares were priced assuming a public offering of $5.00 per share.
   
(12) Represents shares of common stock issuable upon conversion of convertible notes and exercise of common stock purchase warrants. The natural person with voting and investment control for Catalytic Holdings, LLC is Dmitriy Shapiro. The natural person with voting and investment control for Thoroughbred Diagnostics, LLC is Joey Giamichael.
   
(13) Pursuant to his employment agreement, Mr. Roper is to be issued 450,000 shares of Common Stock upon the successful completion of an uplisting to a national exchange with a public offering of at least $3,000,000 with an additional 250,000 shares of Common Stock in the event the public offering is at least $5,000,000.
   
(14)

Robert E. Morgan (the Former CEO of the Company) beneficially owns directly 388,025 shares of Common Stock of Muscle Maker.

   
(15) Pursuant to his employment agreement, Mr. Groenewald is to be issued 110,000 shares of Common Stock upon the successful completion of an uplisting to a national exchange with a public offering of at least $3,000,000 with an additional 25,000 shares of Common Stock in the event the public offering is at least $5,000,000.
   
(16)

Includes 810,000 shares of Common Stock to be issued upon the successful completion of an uplisting to a national exchange with a public offering of at least $3,000,000 with an additional 475,000 shares of Common Stock in the event the public offering is at least $5,000,000.

 

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DESCRIPTION OF CAPITAL STOCK

 

General

 

The following descriptions of our capital stock and certain provisions of our articles of incorporation and bylaws are summaries and are qualified by reference to the articles of incorporation and bylaws that will be in effect upon completion of this offering. Copies of these documents will be filed with the Securities and Exchange Commission as exhibits to our registration statement, of which this prospectus forms a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occur upon the completion of this offering and Nevada law.

 

Upon the completion of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock with a par value of $0.0001 per share.

 

As of November 25, 2019, we had outstanding 11,836,425 shares of common stock held of record by 653 stockholders. As of November 25, 2019, we had outstanding no shares of preferred stock. As of September 30, 2019, we also had outstanding options to acquire 33,750 shares of common stock held by employees, directors and consultants.

 

Common Stock

 

Dividend Rights

 

Subject to preferences that may be applicable to any then outstanding preferred stock, holders of our common stock are entitled to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds. See “Dividend Policy.”

 

Voting Rights

 

Except as required by law or matters relating solely to the terms of preferred stock, each outstanding share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders of shares of our common stock shall have no cumulative voting rights. Except in respect of matters relating to the election and removal of directors on our board of directors and as otherwise provided in our articles of incorporation or required by law, all matters to be voted on by our stockholders must be approved by a majority of the shares present in person or by proxy at the meeting and entitled to vote on the subject matter. In the case of election of directors, all matters to be voted on by our stockholders must be approved by a plurality of the voting power of the shares present in person or by proxy at the meeting and entitled to vote thereon.

 

Liquidation

 

In the event of the liquidation, dissolution or winding up of our company, holders of our common stock are entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then outstanding shares of preferred stock.

 

Rights and Preferences

 

Holders of our common stock have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our preferred stock that we may designate in the future.

 

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Options

 

As of September 30, 2019, we had options to purchase 33,750 shares of our common stock outstanding pursuant to the 2017 Plan with an exercise price of $9.33.

 

Warrants

 

As of September 30, 2019, we had outstanding warrants to purchase 4,546,048 shares of common stock issued in connection with certain financings, with an approximate weighted average exercise price of $2.46 per share.

 

We have agreed to issue to the underwriter, as additional compensation, a warrant to purchase 8% of the aggregate shares sold in this offering, excluding the over-allotment option. The shares issuable upon exercise of the warrant are identical to those offered by this prospectus. The warrant is exercisable for cash or on a cashless basis at a per share exercise price equal to 120% of the public offering price per share in this offering commencing on a date which is one year from the date of this prospectus and expiring on the date which is five years after the date of this prospectus.

 

Anti-Takeover Effects of Our Articles of Incorporation and Bylaws

 

Our articles of incorporation and bylaws contain certain provisions that could have the effect of delaying, deferring or discouraging another party from acquiring control of us. These provisions, which are summarized below, could discourage takeovers, coercive or otherwise. These provisions are also designed, in part, to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us.

 

Authorized but Unissued Capital Stock

 

We have authorized but unissued shares of preferred stock and common stock, and our board of directors may authorize the issuance of one or more series of preferred stock without stockholder approval. These shares could be used by our board of directors to make it more difficult or to discourage an attempt to obtain control of us through a merger, tender offer, proxy contest or otherwise.

 

Limits on Stockholder Action to Call a Special Meeting

 

Our bylaws will provide that special meetings of the stockholders may be called only by the affirmative vote of a majority of the whole board, chairperson of the board, the chief executive officer or our board of directors. A stockholder may not call a special meeting, which may delay the ability of our stockholders to force consideration of a proposal or for holders controlling a majority of our capital stock to take any action, including the removal of directors.

 

Requirements for Advance Notification of Stockholder Nominations and Proposals

 

Our amended and restated bylaws will establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of our board of directors or a committee of the board of directors. These may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed and may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect our own slate of directors or otherwise attempt to obtain control of our company.

 

Limitation on Liability and Indemnification Matters

 

Our articles of incorporation, which will be in effect upon the completion of this offering, contains provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Nevada law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:

 

  any breach of the director’s duty of loyalty to us or our stockholders;
     
  any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
     
  any transaction from which the director derived an improper personal benefit.

 

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Our articles of incorporation and bylaws to be in effect upon the completion of this offering provide that we are required to indemnify our directors and officers, in each case to the fullest extent permitted by Nevada law. Our amended and restated bylaws also will provide that we are obligated to advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under the provisions of Nevada law. We have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by our board of directors. With specified exceptions, these agreements provide for indemnification for related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors’ and officers’ liability insurance.

 

The limitation of liability and indemnification provisions in our articles of incorporation and bylaws may discourage stockholders from bringing a lawsuit against our directors and officers for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.

 

Listing

 

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

 

Transfer Agent and Registrar

 

Computershare, Inc. will serve as our transfer agent and registrar. Its address is 8742 Lucent Boulevard, Suite 225, Highlands Ranch, CO 80129, and its telephone number is 1 303 262 0702.

 

SHARES ELIGIBLE FOR FUTURE SALE

 

Prior to this offering, there has been no public market for shares of our common stock. Future sales of substantial amounts of shares of common stock, including shares issued upon the conversion of convertible notes or the exercise of outstanding warrants and options, in the public market after this offering, or the possibility of these sales occurring, could adversely affect the then prevailing market price for our common stock or impair our ability to raise equity capital.

 

Upon the completion of this offering, a total of               shares of common stock will be outstanding. All               shares of common stock sold in this offering by us, plus any shares sold upon exercise of the underwriter over-allotment option, will be freely tradable in the public market without restriction or further registration under the Securities Act, unless these shares are held by “affiliates,” as that term is defined in Rule 144 under the Securities Act.

 

The remaining shares of common stock are denominated “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below.

 

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Subject to the lock-up agreements described below and the provisions of Rules 144 and 701 under the Securities Act, all of these restricted securities will be available for sale in the public market after the expiration of a one-year lock-up beginning upon execution of the underwriting agreement with the book running manager of this offering.

 

Rule 144

 

In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell such shares without complying with the manner of sale, volume limitation, or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then such person is entitled to sell such shares without complying with any of the requirements of Rule 144.

 

In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon expiration of the lock-up agreements described below, within any three-month period beginning 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:

 

  1% of the number of shares of common stock then outstanding; or
     
  the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

 

Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.

 

Rule 701

 

Rule 701 generally allows a stockholder who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been one of our affiliates during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation, or notice provisions of Rule 144. Rule 701 also permits our affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. However, all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling such shares pursuant to Rule 701.

 

Lock-Up Agreements

 

Pursuant to certain “lock-up” agreements, we, our executive officers, directors and holders of substantially all of our common stock and securities exercisable for or convertible into our common stock outstanding immediately upon the closing of this offering, have agreed, subject to certain exceptions, not to offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of or announce the intention to otherwise dispose of, or enter into any swap, hedge or similar agreement or arrangement that transfers, in whole or in part, the economic risk of ownership of, directly or indirectly, engage in any short selling of any common stock or securities convertible into or exchangeable or exercisable for any common stock, whether currently owned or subsequently acquired, without the prior written consent of the underwriters, for a period of one-year from the date of effectiveness of the offering.

 

The lock-up period described in the preceding paragraph will be automatically extended if: (1) during the last 17 days of the restricted period, we issue an earnings release or announce material news or a material event; or (2) prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the lock-up period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the date of the earnings release, unless the underwriters waive this extension in writing; provided, however, that this lock-up period extension shall not apply to the extent that FINRA has amended or repealed NASD Rule 2711(f)(4), or has otherwise provided written interpretive guidance regarding such rule, in each case, so as to eliminate the prohibition of any broker, dealer, or member of a national securities association from publishing or distributing any research report, with respect to the securities of an emerging growth company (as defined in the JOBS Act) prior to or after the expiration of any agreement between the broker, dealer, or member of a national securities association and the emerging growth company or its stockholders that restricts or prohibits the sale of securities held by the emerging growth company or its stockholders after an initial public offering date.

 

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Resale Prospectus

 

After the date of this Prospectus, an aggregate of up to 10,088,250 shares will have been registered under a separate prospectus (“Resale Prospectus”) and will be freely distributable and tradable by selling shareholders. These shares consist of 6,725,500 shares underlying convertible notes, subject to the terms of the lock-up agreement between the book running manager of this offering and certain of our shareholders and 3,362,750 shares underlying common stock purchase warrants. We will not receive any proceeds in connection with the sales, if any, of the resale shares.

 

Registration Statements on Form S-8

 

We intend to file a registration statement on Form S-8 under the Securities Act to register all of the shares of common stock to be issued or reserved for issuance under our 2019 Stock Incentive plan and the 2017 Stock Option Plan. Shares covered by that registration statement will be eligible for sale in the public market, upon the expiration or release from the terms of the lock-up agreements and subject to vesting of such shares.

 

UNDERWRITING

 

Alexander Capital, L.P. is acting as the book running manager of the offering, and we have entered into an underwriting agreement on the date of this prospectus, with them as underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters and the underwriters have agreed to purchase from us, at the public offering price per share less the underwriting discounts set forth on the cover page of this prospectus.

 

The underwriters are committed to purchase all the shares of common stock offered by us other than those covered by the option to purchase additional shares described below, if they purchase any shares. The obligations of the underwriters may be terminated upon the occurrence of certain events specified in the underwriting agreement. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations are subject to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions.

 

We have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect thereof.

 

The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel and other conditions specified in the underwriting agreement. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

 

Over-allotment Option

 

We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriters to purchase a maximum of             additional shares (15% of the shares sold in this offering) from us to cover over-allotments, if any. If the underwriters exercise all or part of this option, it will purchase shares covered by the option at the public offering price per share that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total offering price to the public will be $            and the total net proceeds, before expenses, to us will be $           .

 

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Discount

 

The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.

 

    Per Share     Total
Without
Over-
Allotment
Option
    Total
With
Over-
Allotment
Option
 
Public offering price   $           $                $             
Underwriting discount (9%)   $       $       $    
Proceeds, before expenses, to us   $       $       $    

 

The underwriters propose to offer the shares offered by us to the public at the public offering price per share set forth on the cover of this prospectus. In addition, the underwriters may offer some of the shares to other securities dealers at such price less a concession of $            per share. If all of the shares offered by us are not sold at the public offering price per share, the underwriters may change the offering price per share and other selling terms by means of a supplement to this prospectus.

 

We will pay the out-of-pocket accountable expenses of the underwriters in connection with this offering. The underwriting agreement, however, provides that in the event the offering is terminated, any advance expense deposits paid to the underwriters will be returned to the extent that offering expenses are not actually incurred in accordance with FINRA Rule 5110(f)(2)(C).

 

We have agreed to pay the underwriters’ non-accountable expenses allowance equal to 1% of the public offering price of the shares (excluding shares that we may sell to the underwriters to cover over-allotments). We have also agreed to pay the underwriters’ expenses relating to the offering, including (a) all filing fees incurred in clearing this offering with FINRA; (b) fees, expenses and disbursements relating to background checks of our officers and directors; (c) all fees, expenses and disbursements relating to the registration, qualification or exemption of securities offered under the securities laws of foreign jurisdictions designated by the underwriters; (d) stock transfer and/or stamp taxes, if any, payable upon the transfer of shares of our common stock to the underwriters; (e) up to $2,500 for the costs associated with bound volumes of the public offering materials as well as Lucite cube mementos; (f) the cost associated with the underwriter’s use of book-building and compliance software for the offering, (g) the underwriters’ actual accountable road show expenses for the offering; and (h) up to $75,000 for the fees of the underwriters’ counsel; provided, the maximum amount we have agreed to pay the underwriters for items (b), (e), (f), (g) and (h) above is $175,000.

 

We have granted to the underwriters an irrevocable right of first refusal to act as sole investment banker, sole book-runner and/or sole underwriter in connection with any public underwriting or private placement of debt or equity securities until nine (9) months after completion of this offering.

 

We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $           .

 

Discretionary Accounts

 

The underwriters do not intend to confirm sales of the securities offered hereby to any accounts over which they have discretionary authority.

 

93
 

 

Underwriter Warrants

 

We have agreed to issue to the underwriters warrants to purchase up to a total of 8% of the shares of common stock sold in this offering (excluding the shares sold through the exercise of the over-allotment option). The warrants are exercisable at $            per share (120% of the public offering price) commencing on a date which is one year from the effective date of the offering under this prospectus supplement and expiring on a date which is no more than five (5) years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(G). The 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 underwriters (or their permitted assignees under the Rule) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from effectiveness. In addition, the warrants provide for registration rights upon request, in certain cases. We will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants other than underwriting commissions incurred and payable by the holders. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price.

 

Electronic Offer, Sale and Distribution of Shares

 

A prospectus in electronic format may be made available on the websites maintained by the underwriters, if any, participating in this offering and the underwriters participating in this offering may distribute prospectuses electronically. The underwriters may agree to allocate a number of shares for sale to its online brokerage account holders. Internet distributions will be allocated by the underwriters that will make internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on these websites is not part of, nor incorporated by reference into, this prospectus or the Registration Statement of which this prospectus forms a part, has not been approved or endorsed by us or the underwriters in their capacity as underwriters, and should not be relied upon by investors.

 

Stabilization

 

In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate-covering transactions, penalty bids and purchases to cover positions created by short sales.

 

  Stabilizing transactions permit bids to purchase shares so long as the stabilizing bids do not exceed a specified maximum and are engaged in for the purpose of preventing or retarding a decline in the market price of the shares while the offering is in progress.
     
  Over-allotment transactions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase. This creates a syndicate short position which may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by exercising their over-allotment option and/or purchasing shares in the open market.

 

94
 

 

  Syndicate covering transactions involve purchases of shares in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared with the price at which they may purchase shares through exercise of the over- allotment option. If the underwriters sell more shares than could be covered by exercise of the over-allotment option and, therefore, have a naked short position, the position can be closed out only by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that after pricing there could be downward pressure on the price of the shares in the open market that could adversely affect investors who purchase in the offering.
     
  Penalty bids permits the underwriters to reclaim a selling concession from a syndicate member when the shares originally sold by that syndicate member are purchased in stabilizing or syndicate covering transactions to cover syndicate short positions.

 

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our shares of common stock or preventing or retarding a decline in the market price of our shares of common stock. As a result, the price of our common stock or warrants in the open market may be higher than it would otherwise be in the absence of these transactions. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of our common stock. These transactions may be effected on The Nasdaq Capital Market, in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.

 

Passive Market Making

 

In connection with this offering, the underwriters may engage in passive market making transactions in our common stock on the Nasdaq Capital Market in accordance with Rule 103 of Regulation M under the Exchange Act, during a period before the commencement of offers or sales of the shares and extending through the completion of the distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, then that bid must then be lowered when specified purchase limits are exceeded.

 

Other Relationships

 

The underwriters and their respective affiliates may, in the future provide various investment banking, commercial banking and other financial services for us and our affiliates for which they have received, and may in the future receive, customary fees. However, except as disclosed in this prospectus, we have no present arrangements with the underwriters for any further services.

 

Offer Restrictions Outside the United States

 

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

95
 

 

Determination of Offering Price

 

Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated between the underwriters and us. In determining the initial public offering price of our common stock, the underwriters will consider, among other things:

 

  the prospects for our company and the industry in which we operate;
     
  our financial information;
     
  financial and operating information and market valuations of publicly traded companies engaged in activities similar to ours;
     
  the prevailing conditions of U.S. securities markets at the time of this offering;
     
  the recent market prices of, and the demand for, publicly traded shares of generally comparable companies;
     
  our past and present financial and operating performance; and
     
  other factors deemed relevant by us and the underwriters.

 

Neither we nor the underwriters can assure investors that an active trading market will develop for our common shares, or that the shares will trade in the public market at or above the initial public offering price.

 

LEGAL MATTERS

 

The validity of the shares offered by this prospectus will be passed upon for us by Fleming PLLC, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriter by Cozen O’Connor P.C., Minneapolis, Minnesota.

 

EXPERTS

 

Marcum LLP, our independent registered public accounting firm, has audited our balance sheets as of December 31, 2018 and 2017, and the related statements of operations, changes in shareholders’ deficit and cash flows for each of the two years in the period ended December 31, 2018, as set forth in their report, which report expresses an unqualified opinion and includes an explanatory paragraph relating to our ability to continue as a going concern. We have included our financial statements in this prospectus and in this registration statement in reliance on the report of Marcum LLP given on their authority as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the Securities and Exchange Commission a registration statement on Form S-1 (including the exhibits, schedules and amendments thereto) under the Securities Act, with respect to the shares of our common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to us and the common stock offered hereby, reference is made to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus as to the contents of any contract, agreement or other documents are summaries of the material terms of that contract, agreement or other document. With respect to each of these contracts, agreements or other documents filed as an exhibit to the registration statement, reference is made to the exhibits for a more complete description of the matter involved. Copies of the registration statement, and the exhibits and schedules thereto, may be accessed at the Securities and Exchange Commission’s website at www.sec.gov. The Securities and Exchange Commission maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the Securities and Exchange Commission’s website is http://www.sec.gov.

 

We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. We make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission available, free of charge, through our website at www.musclemakergrill.com/investor-relations, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the Securities and Exchange Commission. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus. You may read and copy any reports, statements or other information on file at the public reference rooms. You can also request copies of these documents, for a copying fee, by writing to the Securities and Exchange Commission, or you can review these documents on the Securities and Exchange Commission’s website, as described above. In addition, we will provide electronic or paper copies of our filings free of charge upon request.

 

96
 

 

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

 

The Securities and Exchange Commission allows us to “incorporate by reference” certain information we have filed with the Securities and Exchange Commission into this prospectus, which means we are disclosing important information to you by referring you to other information we have filed with the Securities and Exchange Commission. The information we incorporate by reference is considered part of this prospectus. All reports and definitive proxy or information statements subsequently filed by us pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, on or after the date of this prospectus and prior to the sale of all securities registered hereunder or termination of the registration statement of which this prospectus forms a part (excluding any disclosures that are furnished and not filed with the Securities and Exchange Commission) shall be deemed to be incorporated by reference into this prospectus and to be part hereof from the date of filing of such reports and other documents.

 

Notwithstanding the foregoing, we are not incorporating by reference any documents, portions of documents, exhibits or other information that is deemed to have been furnished to, rather than filed with, the Securities and Exchange Commission.

 

Any statement contained in a document incorporated by reference into this prospectus shall be deemed to be modified or superseded for the purposes of this prospectus or any prospectus supplement to the extent that a statement contained herein or any prospectus supplement or in any subsequently filed document that is also incorporated by reference in this prospectus or any prospectus supplement modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus or any prospectus supplement.

 

You may request a copy of the filings incorporated herein by reference, including exhibits to such documents that are specifically incorporated by reference, at no cost, by writing or calling us at the following address or telephone number:

 

Muscle Maker, Inc.

308 East Renfro Street, Suite 101
Burleson, Texas 76028

(682) 708-8250

 

Statements contained in this prospectus as to the contents of any contract or other documents are not necessarily complete, and in each instance investors are referred to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference and the exhibits and schedules thereto.

 

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Muscle Maker, Inc.

Index to Financial Statements

 

Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 F-1
   
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 F-2
   
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the Nine Months Ended September 30, 2018 F-3
   
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the Nine Months Ended September 30, 2019 F-4
   
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 F-5
   
Notes to Unaudited Condensed Consolidated Financial Statements F-7
   
Report of Independent Registered Public Accounting Firm F-29
   
Balance Sheets as of December 31, 2018 and 2017 F-30
   
Statements of Operations of the years ended December 31, 2018 and 2017 F-31
   
Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2018 and 2017 F-32
   
Statements of Cash Flows for the years ended December 31, 2018 and 2017 F-33
   
Notes to Consolidated Financial Statements F-35

 

98
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

 

    September 30, 2019     December 31, 2018  
    (unaudited)        
Assets                
Current Assets:                
Cash   $ 1,983,306     $ 357,842  
Accounts receivable, net of allowance for doubtful accounts of $75,000 and $45,000 as of September 30, 2019 and December 31, 2018, respectively     157,826       180,768  
Inventory     78,701       45,067  
Current portion of loans receivable, net of allowance of $55,000 at September 30, 2019 and December 31, 2018, respectively     19,092       37,155  
Current portion of loan receivable from related party     -       650  
Prepaid expenses and other current assets     48,664       16,412  
Total Current Assets     2,287,589       637,894  
Property and equipment, net     1,393,940       637,287  
Goodwill    

86,348

      -  
Intangible assets, net     3,054,898       -  
Loans receivable, non-current     127,324       3,102,621  
Security deposits and other assets     35,007       75,756  
Total Assets     6,985,106       33,532  
                 
Liabilities and Stockholders’ Deficit                
Current Liabilities:                
Accounts payable and accrued expenses   $ 2,720,598     $ 2,887,380  
Convertible notes payable     100,000       100,000  
Convertible notes payable to Former Parent, net of debt discount of $10,883 and $43,178 at September 30, 2019 and December 31, 2018, respectively     71,574       39,280  
Convertible notes payable, net of debt discount of $760,723 at September 30, 2019     3,638,328       -  
Convertible notes payable, related parties, net of debt discount of $70,806 at September 30, 2019     329,194       -  
Other notes payable, related party     91,000       -  
Deferred revenue, current     131,631       907,948  
Deferred rent, current     10,143       14,243  
Other current liabilities     679,243       607,486  
Total Current Liabilities     7,771,711       4,556,337  
Convertible notes payable, net of debt discount of $498,178 and $1,313,259 at September 30, 2019 and December 31, 2018, respectively     4,740,772       2,015,007  
Convertible notes payable, related parties, net of debt discount of $0 and $233,462 at September 30, 2019 and December 31, 2018, respectively     -       153,566  
Other notes payable     -       225,000  
Other notes payable, related parties     -       335,000  
Deferred revenue, non-current     902,778       -  
Deferred rent, non-current     55,738       45,315  
Total Liabilities     13,470,999       7,330,225  
                 
Commitments and Contingencies                
                 
Stockholders’ Deficit:                
Common stock, $0.0001 par value, 100,000,000 shares authorized, 11,585,226 and 10,427,803 shares issued and outstanding as of September 30, 2019, and December 31, 2018, respectively     1,159       1,043  
Additional paid-in capital     23,290,058       20,989,478  
Accumulated deficit     (29,777,110 )     (23,833,656 )
Total Stockholders’ Deficit     (6,485,893 )     (2,843,135 )
Total Liabilities and Stockholders’ Deficit   $ 6,985,106     $ 4,487,090  

 

See Notes to the Condensed Consolidated Financial Statements

 

F-1
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2019     2018     2019     2018  
                         
Revenues:                                
Company restaurant sales, net of discounts   $ 821,684     $ 721,300     $ 2,438,284     $ 3,246,041  
Franchise royalties and fees     252,744       324,080       1,126,541       1,129,972  
Franchise advertising fund contributions     39,030       -       116,423       -  
Other revenues     -       -       -       244,633  
Total Revenues     1,113,458       1,045,380       3,681,248       4,620,646  
                                 
Operating Costs and Expenses:                                
Restaurant operating expenses:                                
Food and beverage costs     339,454       266,678       915,063       1,193,908  
Labor     347,786       266,817       966,020       1,383,941  
Rent     96,832       66,599       283,667       537,588  
Other restaurant operating expenses     113,292       60,084       367,611       621,312  
Total restaurant operating expenses     897,364       660,178       2,532,361       3,736,749  
Costs of other revenues     -       -       -       114,388  
Depreciation and amortization     59,033       47,663       190,637       145,615  
Other expenses incurred for closed locations     -       269,659       27,519       473,378  
Franchise advertising fund expenses     39,030       -       116,423       -  
General and administrative expenses     1,514,123       916,268       3,584,698       3,713,743  
Total Costs and Expenses     2,509,550       1,893,768       6,451,638       8,183,873  
Loss from Operations     (1,396,092 )     (848,388 )     (2,770,390 )     (3,563,227 )
                                 
Other Income (Expense):                                
Other income, net     112,673       65,933       3,680       60,314  
Interest expense, net     (614,100 )     (94,655 )     (1,262,521 )     (826,155 )
Loss on sale of CTI     -       -       -       (456,169 )
Amortization of debt discounts     (451,310 )     (267,358 )     (1,345,683 )     (1,914,038 )
Total Other Expense, Net     (952,737 )     (296,080 )     (2,604,524 )     (3,136,048 )
                                 
Loss Before Income Tax     (2,348,829 )     (1,144,468 )     (5,374,914 )     (6,699,275 )
Income tax provision     -       -       -       -  
Net Loss     (2,348,829 )     (1,144,468 )     (5,374,914 )     (6,699,275 )
Net loss attributable to the non-controlling interest     -       -       -       (2,071 )
Net Loss Attributable to Controlling Interest   $ (2,348,829 )   $ (1,144,468 )   $ (5,374,914 )   $ (6,697,204 )
                                 
Net Loss Attributable to Controlling Interest Per Share:                                
Basic and Diluted   $ (0.22 )   $ (0.14 )   $ (0.50 )   $ (0.81 )
                                 
Weighted Average Number of Common Shares Outstanding:                                
Basic and Diluted     10,913,984       8,342,481       10,750,468       8,229,176  

 

See Notes to the Condensed Consolidated Financial Statements

 

F-2
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Unaudited)

 

    Common Stock     Additional Paid-in     Accumulated     Total Controlling     Non- Controlling        
    Shares     Amount     Capital     Deficit     Interest     Interest     Total  
Balance - December 31, 2017     7,637,855     $ 764     $ 13,919,455     $ (17,052,086 )   $ (3,131,867 )   $ (69,928 )   $ (3,201,795 )
Beneficial conversion feature - Convertible Notes     -       -       2,537,008       -       2,537,008       -       2,537,008  
Warrants issued in connection with convertible debt     -       -       12,332       -       12,332       -       12,332  
Warrants issued and recorded as debt discount in connection with notes payable     -       -       305,055       -       305,055       -       305,055  
Offering on March 29, 2018, net of underwriter’s discount and offering cost of $58,798     44,153       4       85,572       -       85,576       -       85,576  
Conversion of convertible notes payable into common stock     553,425       53       899,287       -       899,340       -       899,340  
Stock-based compensation: Amortization of restricted common stock     -       -       39,091       -       39,091       -       39,091  
Net loss     -       -       -       (3,183,726 )     (3,183,726 )     (7,257 )     (3,190,983 )
                                                         
Balance - March 31, 2018     8,235,433     $ 821     $ 17,797,800     $ (20,235,812 )   $ (2,437,191 )   $ (77,185 )   $ (2,514,376 )
Issuance of restricted stock     26,286       3       (3 )     -       -       -       -  
Shares issued for common stock     180,000       18       179,982       -       180,000       -       180,000  
Beneficial conversion feature - Convertible Notes     -       -       39,072       -       39,072       -       39,072  
Beneficial conversion feature - Convertible Note to Former Parent     -       -       475,000       -       475,000       -       475,000  
Warrants issued in connection with common stock and convertible debt     -       -       3,750       -       3,750       -       3,750  
Warrants issued and recorded as debt discount in connection with notes payable     -       -       38,763       -       38,763       -       38,763  
Conversion of convertible note payable to Former Parent into common stock     785,084       78       392,464       -       392,542       -       392,542  
Stock-based compensation: Amortization of restricted common stock     -       -       27,133       -       27,133       -       27,133  
Sale of interest in CTI     -       -       -       420,899       420,899       71,999       492,898  
Net loss     -       -       -       (2,368,921 )     (2,368,921 )     5,186       (2,363,735 )
                                                         
Balance – June 30, 2018     9,226,803     $ 920     $ 18,953,961     $ (22,183,834 )   $ (3,228,953 )   $ -     $ (3,228,953 )
                                                         
Restricted stock issued as compensation for services     250,000       25       249,975       -       250,000               250,000  
Beneficial conversion feature - Convertible Notes     -       -       143,591       -       143,591       -       143,591  
Warrants issued in connection with common stock and convertible debt     -       -       143,699       -       143,699       -       143,699  
Stock-based compensation Amortization of restricted common stock     -       -       33,876       -       33,876       -       33,876  
Net loss     -       -       -       (1,144,557 )     (1,144,557 )     -       (1,144,557 )
                                                         
Balance –September 30, 2018     9,476,803     $ 945     $ 19,525,102     $ (23,328,391 )   $ (3,802,344 )   $ -     $ (3,802,344 )

 

See Notes to the Condensed Consolidated Financial Statements

 

F-3
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

 

    Common Stock     Additional
Paid-in
    Accumulated        
    Shares     Amount     Capital     Deficit     Total  
Balance - December 31, 2018     10,427,803     $ 1,043     $ 20,989,478     $ (23,833,656 )   $ (2,843,135 )
Cumulative effect of change in accounting principle     -       -       -       (568,540 )     (568,540 )
Issuance of restricted stock     13,918       1       (1 )     -       -  
Restricted stock issued as compensation
for services
    140,000       14       139,986       -       140,000  
Beneficial conversion feature - Convertible Notes     -       -       217,800       -       217,800  
Warrants issued and recorded as debt discount in connection with convertible notes payable     -       -       217,641       -       217,641  
Stock-based compensation: Amortization of restricted common stock     -       16       165,117       -       165,133  
Net loss     -       -       -       (1,483,479 )     (1,483,479 )
                                         
Balance - March 31, 2019     10,581,721     $ 1,074     $ 21,730,021     $ (25,885,675 )   $ (4,154,580 )
Common stock issued in exchange for interest earned on other notes payable     111,666       11       111,655       -       111,666  
Common stock issued in exchange for interest earned on convertible notes payable     479,323       48       479,275       -       479,323  
Beneficial conversion feature - Convertible Notes     -       -       330,220       -       330,220  
Warrants issued and recorded as debt discount in connection with convertible notes payable     -       -       330,713       -       330,713  
Stock-based compensation: Amortization of restricted common stock     -       -       (123,431 )     -       (123,431 )
Net loss     -       -       -       (1,542,606 )     (1,542,606 )
                                         
Balance - June 30, 2019     11,172,710     $ 1,133     $ 22,858,453     $ (27,428,281 )   $ (4,568,695 )
Common stock issued as compensation to board of directors     119,046       12       119,034       -       119,046  
Restricted stock issued as compensation
for services
    290,000       29       289,971       -       290,000  
                                         
Common stock issued as compensation
for services
    3,500       -       3,500       -       3,500  
Stock-based compensation: Amortization of restricted common stock     -       -       19,085       -       19,085  
Net loss     -       -       -       (2,348,829 )     (2,348,829 )
                                         
Balance - September 30, 2019     11,585,256     $ 1,174     $ 23,290,043     $ (29,777,110 )   $ (6,485,893 )

 

See Notes to the Condensed Consolidated Financial Statements

 

F-4
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For the Nine Months Ended  
    September 30,  
    2019     2018  
             
Cash Flows from Operating Activities                
Net loss   $ (5,374,914 )   $ (6,699,275 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     190,637       145,615  
Accretion of interest expense     -       234,044  
Interest expense related to issuances of warrants     -       305,055  
Stock-based compensation     613,333       350,100  
Loss on sale of CTI     -       456,169  
Amortization of debt discounts     1,345,683       1,914,038  
Bad debt expense     147,922       52,170  
Deferred rent     6,323       (2,969 )
Expenses paid by Former Parent     -       620,464  
Changes in operating assets and liabilities:                
Accounts receivable     (125,274 )     (149,510 )
Inventory     (33,634 )     51,786  
Prepaid expenses and other current assets     (32,252 )     (1,257 )
Security deposits and other assets     (1,475 )     (12,131 )
Accounts payable and accrued expenses     337,859       698,984  
Deferred revenue     (442,079 )     53,312  
Other current liabilities     71,757       230,527  
Total Adjustments     2,078,800       4,946,397  
Net Cash Used in Operating Activities     (3,296,114 )     (1,752,878 )
                 
Cash Flows from Investing Activities                
Purchases of property and equipment     (864,451 )     (78,754 )
Issuance of loans receivable     (60,186 )     (9,689 )
Cash paid in connection with the acquisition of Midtown franchise store     (35,116 )     -  
Collections from loans receivable     26,681       48,655  
Collections from loans receivable - related party     650       6,667  
Net Cash Used in Investing Activities     (932,422 )     (33,121 )
                 
Cash Flows from Financing Activities                
Proceeds from issuance of restricted stock     -       180,000  
Proceeds from offering, net of underwriter’s discount and offering costs     -       85,576  
Repayments to Former Parent, net     -       (132,459 )
Repayments of convertible note payable     (50,000 )     (50,000 )
Proceeds from other notes payable - related party     91,000       (50,000 )
Proceeds from convertible notes payable     6,373,000       1,331,000  
Proceeds from convertible notes payable - related parties     100,000       650,000  
Repayments of convertible notes payable - related party     (100,000 )     -  
Repayments of other notes payable - related parties     (335,000 )     -  
Repayments of other notes payables     (225,000 )     -  
Proceeds from other notes payable     -       460,000  
Net Cash Provided by Financing Activities     5,854,000       2,474,117  
                 
Net Increase in Cash     1,625,464       688,118  
Cash - Beginning of Period     357,842       78,683  
Cash - End of Period   $ 1,983,306     $ 766,801  

 

See Notes to the Condensed Consolidated Financial Statements

 

F-5
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For the Nine Months Ended  
    September 30,  
    2019     2018  
             
Supplemental Disclosures of Cash Flow Information:                
Cash paid for interest   $ 471,774     $ 39,129  
                 
Supplemental disclosures of non-cash investing and financing activities                
Beneficial conversion feature   $ 548,020     $ 3,194,671  
Warrants issued in connection with convertible debt   $ 548,354     $ 159,781  
Conversion of convertible notes payable to Former Parent into common stock   $ -     $ 392,542  
Conversion of notes payable into common stock   $ -     $ 899,340  
Warrants issued and recorded as debt discount in connection with notes payable   $ -     $ 343,818  
Convertible Note issued to Former Parent in exchange for payable to Former Parent   $ -     $ 475,000  
Common stock issued in exchange for interest earned on other notes payable   $ 111,666     $ -  
Common stock issued in exchange for interest earned on convertible notes payable   $ 479,323     $ -  

 

See Notes to the Condensed Consolidated Financial Statements

 

F-6
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

On May 24, 2018, the Company entered into a stock purchase agreement among John Guild, JohnG Solutions LLC and CTI in which the Company agreed to sell its 70% ownership in CTI for a total purchase price of $1.00.

 

F-7
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

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

 

On March 14, 2019, MMI formed a wholly owned subsidiary, Muscle Maker USA, Inc. (“Muscle USA.”), in the State of Texas.

 

In November 2019, MMI formed Muscle Maker Inc., LLC (“MMI NV.”) in the state of Nevada. Pursuant to the Articles of Incorporation filed in the state of Nevada, MMI NV has authorized capital stock consisting of 100,000,000 shares of common stock, with a $0.0001 par value per share.

 

On November 13, 2019, Muscle Maker, Inc., a California corporation, merged with and into its wholly owned subsidiary, Muscle Maker, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Merger between Muscle Maker, Inc., a California corporation, and Muscle Maker, Inc., a Nevada corporation. Muscle Maker, Inc., a Nevada corporation, continued as the surviving entity of the migratory merger. Pursuant to the migratory merger, the Company changed its state of incorporation from California to Nevada and each share of its common stock converted into one share of common stock of the surviving entity in the migratory merger. No dissenters’ rights were exercised by any of the Company’s stockholders in connection with the migratory merger. All share and per share information has been retroactively adjusted to reflect merger with a $0.0001 par value per share.

 

MMI and its subsidiaries is the “Company”.

 

The Company operates under the name Muscle Maker Grill and is a franchisor and owner operator of Muscle Maker Grill restaurants. As of September 30, 2019, the Company’s restaurant system included eight company-owned restaurants, and thirty-one franchise restaurants. A Muscle Maker Grill restaurants offers quality food freshly prepared with the Company’s proprietary recipes created with the guest’s health in mind. The menu is protein based, and features various supplements, health food snacks, along with a nutritious children’s menu.

 

Going Concern and Management’s Plans

 

As of September 30, 2019, the Company had a cash balance, a working capital deficiency and an accumulated deficit of $1,983,306, $5,484,122, and $29,777,110, respectively. During the three and nine months ended September 30, 2019, the Company incurred a pre-tax net loss of $2,348,829 and $5,374,914, respectively. These conditions indicate that there is substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date of the issuance of these condensed consolidated financial statements.

 

Although management believes that the Company has access to capital resources, there are no commitments, other than aforementioned, in place for new financing as of the date of the issuance of these condensed consolidated financial statements and there can be no assurance that the Company will be able to obtain funds on commercially acceptable terms, if at all. The Company expects to have ongoing needs for working capital in order to (a) fund operations; plus (b) expand operations by opening additional corporate-owned restaurants. To that end, the Company may be required to raise additional funds through equity or debt financing. However, there can be no assurance that the Company will be successful in securing additional capital. If the Company is unsuccessful, the Company may need to (a) initiate cost reductions; (b) forego business development opportunities; (c) seek extensions of time to fund its liabilities, or (d) seek protection from creditors.

 

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

 

F-8
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 2 – REVERSE STOCK SPLIT

 

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

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of September 30, 2019, and for the three and nine months ended September 30, 2019 and 2018. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the operating results for the full year. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2018, included in this filing. The balance sheet as of December 31, 2018 has been derived from the Company’s audited financial statements.

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and majority-owned subsidiary. Any intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

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

 

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

 

  the fair value of assets acquired, and liabilities assumed in a business combination;
  the assessment of recoverability of long-lived assets, including property and equipment, goodwill and intangible assets;
  the estimated useful lives of intangible and depreciable assets;
  the recognition of revenue; and
  the recognition, measurement and valuation of current and deferred income taxes

 

F-9
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Use of Estimates, continued

 

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 September 30, 2019 and December 31, 2018.

 

Convertible Instruments

 

The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with Topic 815 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The accounting treatment of derivative financial instruments requires that the Company record embedded conversion options and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Embedded conversion options and any related freestanding instruments are recorded as a discount to the host instrument.

 

If the instrument is determined not to be a derivative liability, the Company then evaluates for the existence of a beneficial conversion feature by comparing the market price of the Company’s common stock as of the commitment date to the effective conversion price of the instrument.

 

As of September 30, 2019, and December 31, 2018, the Company did not have any derivative liabilities on its balance sheets.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its condensed consolidated financial statements and disclosures.

 

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815),” which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The guidance can be applied using a full or modified retrospective approach. The Company does not believe the adoption of the standard will have a material impact on its condensed consolidated financial statements or disclosures.

 

F-10
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Recent Accounting Pronouncements, continued

 

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

 

In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). These amendments provide clarifications and corrections to certain ASC subtopics including the following: Income Statement - Reporting Comprehensive Income – Overall (Topic 220-10), Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from Equity – Overall (Topic 480-10), Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations - Income Taxes (Topic 805-740), Derivatives and Hedging – Overall (Topic 815-10), and Fair Value Measurement – Overall (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

 

In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”). The amendments in ASU 2018-10 provide additional clarification and implementation guidance on certain aspects of the previously issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) and have the same effective and transition requirements as ASU 2016-02. Upon the effective date, ASU 2018-10 will supersede the current lease guidance in ASC Topic 840, Leases. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2018-10 is effective for emerging growth companies for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. The Company is currently assessing the impact this guidance will have on its condensed consolidated financial statements.

 

F-11
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Recent Accounting Pronouncements, continued

 

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

 

Revenue Recognition

 

During the first quarter 2019, the Company adopted Topic 606 “Revenue from Contracts with Customers” for revenue recognition related to contracts with customers and applied the guidance modified retrospectively. Under the new guidance, revenue is recognized in accordance with a five-step revenue model, as follows: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. In applying this five-step model, we have made significant judgments in identifying the promised goods or services in our contracts with franchisees that are distinct, and which represent separate performance obligations. The change between Topic 605 and Topic 606, primarily impacted the way the Company recognized franchise fees. Under Topic 605 franchise fees were recognized upon opening of a restaurant or granting of a new franchise term while under Topic 606 franchise fees are recognizes on a straight-line basis over the life of the related franchise agreements and any exercised renewal periods. The impact of the adoption of Topic 606 resulted in an adjustment of $568,540 in retained earnings and deferred revenues.

 

Restaurant Sales

 

Retail store revenue at Company operated restaurants is recognized when payment is tendered at the point of sale, net of sales tax, discount and other sales related taxes. The Company recorded retail store revenues of $821,684 and $2,438,284 during the three and nine months ended September 30, 2019, respectively. The Company recorded retail store revenues of $721,300 and $3,246,041 during the three and nine months ended September 30, 2018, respectively.

 

The Company sells gift cards which do not have an expiration date, and it does not deduct dormancy fees from outstanding gift card balances. The Company recognize revenues form gift cards as restaurant revenues once the Company performs obligation to provide food and beverage to the customer is satisfies upon redemption of the gift card.

 

Franchise Royalties and Fees

 

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

 

F-12
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Franchise Royalties and Fees, continued

 

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

 

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 $71,200 and $220,120 during the three and nine months ended September 30, 2019, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. The Company recorded revenue from rebates of $59,260 and $268,588 during the three and nine months ended September 30, 2018, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. Rebates earned on purchases by Company owned stores are recorded as a reduction of cost of goods sold during the period in which the related food and beverage purchases are made.

 

Other Revenues

 

Through its subsidiary CTI which was sold in May 2018, the Company derived revenue from the sale of POS computer systems, cash registers and camera systems, and from the provision of related consulting and support services, which generally include implementation, installation and training services. The Company recognized revenue when persuasive evidence of an arrangement existed, delivery of the product or service has occurred, the fee was fixed or determinable and collectability was reasonably assured. The Company recorded $0 and $244,633, respectively, of revenues from these technology sales and services during the three and nine months ended September 30, 2018.

 

Deferred Revenue

 

Deferred revenue primarily includes initial franchise fees received by the Company, which are being amortized over the life of the Company’s franchise agreements, as well as unearned vendor rebates and customer deposits received in connection with technology sales and services by CTI (see Note 10 – Deferred Revenue).

 

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-13
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Franchise Advertising Fund Contributions

 

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

 

Impacts on Financial Statements

 

The following table summarized the impact of the adoption of the new revenue standard on the Company’s previously reported consolidated financial statements:

 

    December 31, 2018     New Revenue
Standard
Adjustment
    January 1, 2019  
Deferred revenues   $ 907,948     $ 568,540     $ 1,476,488  
Accumulated deficit     23,833,656       568,540       24,402,196  

 

Advertising

 

Advertising costs are charged to expense as incurred. Advertising costs were approximately $14,624 and $18,237 for the three and nine months ended September 30, 2019, and approximately $3,638 and $23,237 for the three and nine months ended September 30, 2018 and are included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

 

Net Loss per Share

 

Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, plus the impact of potential common shares, if dilutive, resulting from the exercise of warrants.

 

The following securities are excluded from the calculation of weighted average diluted common shares at September 30, 2019 and 2018, respectively, because their inclusion would have been anti-dilutive:

 

F-14
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Net Loss per Share, continued

 

    September 30,  
    2019     2018  
Warrants     5,296,048       1,507,048  
Options     33,750       33,750  
Convertible debt     7,841,846       2,972,070  
Total potentially dilutive shares     13,171,644       4,512,868  

 

Major Vendor

 

The Company engages various vendors to distribute food products to their Company-owned restaurants. Purchases from the Company’s largest supplier totaled 75% and 81% of the Company’s purchases for the three and nine months ended September 30, 2019, respectively. Purchases from the Company’s largest supplier totaled 81% and 77% of the Company’s purchases for the three and nine months ended September 30, 2018, respectively.

 

Controlling and Non-Controlling Interest

 

The profits and losses of CTI were allocated among the controlling interest and the CTI non-controlling interest in the same proportions as their membership interests from January 1, 2018 through May 24, 2018.

 

Reclassifications

 

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

 

Subsequent Events

 

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

 

F-15
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 4 – ACQUISITION

 

Midtown Acquisition

 

On August 22, 2019, the Company acquired a franchisee store in Midtown, New York, as a corporate store (the “Midtown Acquisition”). The purchase price of the store was $121,464, of which $35,116 related to equipment purchased and the remaining $86,348 was accounted for as goodwill. The Company paid cash of approximately $35,000 and also assumed a liability of approximately $86,000 which is recorded in accounts payable and accrued expenses.

 

NOTE 5 - LOANS RECEIVABLE

 

At September 30, 2019 and December 31, 2018, the Company’s loans receivable consists of the following:

 

    September 30, 2019     December 31, 2018  
Loans receivable, net   $ 146,416     $ 112,911  
Less: current portion     (19,092 )     (37,155 )
Loans receivable, non-current   $ 127,324     $ 75,756  

 

During August 2019, the company advanced money to a former franchisee and issued a loan receivable in the amount of $60,186. The loan is payable in 120 monthly payments consisting of principal and interest of 12%, with the payments becoming due as of December 1, 2019.

 

Loans receivable includes loans to franchisees totaling, in the aggregate, $146,416 and $112,911, net of reserves for uncollectible loans of $55,000 and $55,000 at September 30, 2019 and December 31, 2018. The loans have original terms ranging up to 10 years, earn interest at rates ranging from 2% to 12%, and are being repaid on a weekly or monthly basis.

 

NOTE 6 – LOAN RECEIVABLE FROM RELATED PARTY

 

At September 30, 2019 and December 31, 2018, the Company’s loan receivable from related party consisted of the following:

 

    September 30, 2019     December 31, 2018  
Loans receivable from related party, net   $            -       650  
Less: current portion     -       (650 )
Loans receivable from related party, non-current   $ -       -  

 

NOTE 7 – PROPERTY AND EQUIPMENT, NET

 

As of September 30, 2019, and December 31, 2018 property and equipment consists of the following:

 

    September 30, 2019     December 31, 2018  
             
Furniture and equipment   $ 559,203     $ 282,896  
Leasehold improvements     1,249,628       626,368  
      1,808,831       909,264  
Less: accumulated depreciation and amortization     (414,891 )     (271,977 )
Property and equipment, net   $ 1,393,940     $ 637,287  

 

Depreciation expense amounted to $42,950 and $142,914 for the three and nine months ended September 30, 2019, respectively. Depreciation expense amounted to $31,580 and $95,526 for the three and nine months ended September 30, 2018, respectively.

 

F-16
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 8 – INTANGIBLE ASSETS, NET

 

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

 

A summary of the intangible assets is presented below:

 

Intangible Assets   Trademark     Franchise Agreements     Total  
Intangible assets, net at December 31, 2018   $ 2,524,000     $ 578,621     $ 3,102,621  
Amortization expense     -       (47,723 )     (47,723 )
Intangible assets, net at September 30, 2019   $ 2,524,000     $ 530,898     $ 3,054,898  
                         
Weighted average remaining amortization period at September 30, 2019 (in years)             8.6          

 

Amortization expense related to intangible assets amounted to $16,083 and $47,723 for the three and nine months ended September 30, 2019, respectively. Amortization expense related to intangible assets amounted to $16,083 and $50,089 for the three and nine months ended September 30, 2018, respectively.

 

NOTE 9 – ACCOUNTS PAYABLES AND ACCRUED EXPENSES

 

Accounts payables and accrued expenses consist of the following:

 

    September 30, 2019     December 31, 2018  
Accounts payable   $ 935,432     $ 841,334  
Accrued payroll     186,063       181,452  
Accrued vacation     18,757       -  
Accrued professional fees     257,994       296,518  
Accrued board members fees     125,187       143,108  
Accrued rent expense     307,769       618,120  
Sales taxes payable (1)     224,717       297,160  
Accrued interest     647,173       433,494  
Accrued interest, related parties     1,795       -  
Other accrued expenses     15,711       76,194  
    $ 2,720,598     $ 2,887,380  

 

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

 

F-17
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 10 – DEFERRED REVENUE

 

At September 30, 2019 and December 31, 2018, deferred revenue consists of the following:

 

    September 30, 2019     December 31, 2018  
Franchise fees   $ 958,998     $ 801,107  
Unearned vendor rebates     75,411       106,841  
Less: Unearned vendor rebates, current     (75,411)       (106,841 )
Less: Franchise fees, current     (56,220)       (801,107 )
Deferred revenues, non-current   $ 902,778     $ -  

 

NOTE 11 – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

    September 30, 2019     December 31, 2018  
Gift card liability   $ 126,089     $ 122,221  
Co-op advertising fund liability     287,927       240,226  
Advertising fund liability     265,227       245,039  
    $ 679,243     $ 607,486  

 

NOTE 12 – NOTES PAYABLE

 

Convertible Notes

 

15% Senior Secured Convertible Promissory Notes

 

From January 1, 2019 through September 30, 2019, the Company entered into Securities Purchase Agreements (“SPA”) with several accredited investors (the “Investors”) providing for the sale by the Company to the investors of 15% Senior Secured Convertible Promissory Notes (the “SPA Notes”) in the aggregate amount of $2,973,000, of which a $100,000 was to related parties. The SPA Notes bear interest at 15% per annum paid quarterly and mature 18 months from issuance.

 

As amended on April 10, 2019, the Investors may elect to convert all or part of the SPA Notes, plus accrued interest, at any time into shares of common stock of the Company at a conversion price of $1.00 (the “Fixed Conversion Price”); provided, however, in the event the per share price of a public offering multiplied by twenty five percent (25%) at the time of the listing of the shares of common stock on an exchange (the “Listing Event”) is less than $1.00 (the “Discounted Public Offering Price”) then the conversion price shall be reset to equal the Discounted Public Offering Price. In the event the Investors are required to execute a Lock Up Agreement concurrent with a public offering at the time of the Listing Event, then the Fixed Conversion Price shall be 17.5% of the per share offering price paid by the investors in the public offering in conjunction with an uplisting to a national exchange.

 

F-18
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 12 – NOTES PAYABLE, continued

 

Convertible Notes, continued

 

15% Senior Secured Convertible Promissory Notes, continued

 

In addition to the SPA Notes, the Investors also received warrants to purchase common stock of 1,486,500 shares of the Company (the “SPA Warrants”). The Investors are entitled to purchase a number of shares equal to 50% of the conversion shares of common stock of the Company. The SPA Warrants are exercisable for five years at an exercise price of $1.20. In the event the conversion price is adjusted as contemplated above, then the exercise price shall adjust to equal 120% of the adjusted conversion price. The Investors may exercise the SPA Warrants on a cashless basis.

 

The Company granted the Investors piggyback registration rights with respect to the shares of common stock underlying the SPA Notes and the SPA Warrants.

 

12% Secured Convertible Notes

 

During April 2019, Muscle USA entered into security purchase agreement (“April 2019 SPA”) with the several accredited investors (“April 2019 Investors”) providing for the sale by the Company to the investors of 12% secured convertible notes (“April 2019 Notes”) in the aggregate amount of $3,500,000 (the “April 2019 Offering”).

 

The April 2019 Notes bear interest at 12% per annum, paid quarterly, and mature 18 months from issuance. The April 2019 Investors may elect to convert all or part of the April 2019 Notes, plus accrued interest, at any time into shares of common stock of the Company at a conversion price of $2.00 per share (the “April 2019 Conversion Price”); provided, however, in the event the per share price of a public offering multiplied by fifty percent (50%) at the time of the Company listing on a national exchange (the “April 2019 Discounted Public Offering Price”) is less than $2.00 then the April 2019 Conversion Price shall be reset to equal the lesser of (i) April 2019 Discounted Public Offering Price or (ii) a price per share equal to a $20 million valuation.

 

In addition to the April 2019 Notes, the Investors also received 875,000 warrants to purchase common stock of the Company (the “April 2019 Warrants”) that entitle the holders to purchase a number of shares equal to 50% of the conversion shares of common stock of the Company. The April 2019 Warrants are exercisable for five years at an exercise price of 115% of the conversion price.

 

Upon the occurrence of the listing of the Company’s common stock on a national securities exchange, the sale of all or substantially all of the Company’s stock, the sale or licensing of all or substantially all of the Company’s assets or any combination of the foregoing, the entire unpaid and outstanding principal amount and any accrued interest thereon under the April 2019 Notes shall automatically convert in whole without any further action by the holders.

 

As long as the April 2019 Notes remain outstanding, the Company has agreed that, among other items, it will only use proceeds from the sale of the April 2019 Notes and exercise of the April 2019 Warrants for specific corporate purposes as set forth in the April 2019 SPA, will not incur or permit indebtedness or liens unless permitted and will not enter into variable priced transactions. The Company and the April 2019 Investors entered into Security and Pledge Agreements providing that the obligations to the April 2019 Investors are secured by substantially all of Muscle USA’s assets.

 

F-19
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 12 – NOTES PAYABLE, continued

 

Convertible Notes, continued

 

12% Secured Convertible Notes, continued

 

The Company granted the April 2019 Investors piggyback registration rights with respect to the shares of common stock underlying the April 2019 Notes and the April 2019 Warrants.

 

Other Convertible Notes

 

On or about January 23, 2019, the Company and certain note holders, including related parties, agreed to extend the maturity date of the convertible notes payable, as amended and extended on or about August 2018, in the aggregate principal amount of $1,550,000, of which $400,000 was to related parties, to be upon the earlier of (a) January 24, 2020 or (b) the first day the company’s stock is publicly traded. All interest due and payable on the notes, shall be converted into shares of common stock at a conversion price of $1.00 per share.

 

During April 2019, the Company repaid convertible notes payable in the aggregate principal amount of $150,000, of which $100,000 belong to related parties. In addition, the company issued 111,666 of the company’s common stock as payment for the interest incurred on the convertible notes payable repaid in the aggregate amount of $111,666.

 

In accordance with ASC 470-20 “Debt with Conversion and other Options”, the intrinsic value related to the convertible notes results in a beneficial conversion feature which is recorded as a debt discount with a corresponding credit to additional paid in capital. The relative fair value of the warrants at the date of grant is also recorded as a debt discount. For the nine months ended September 30, 2019 the Company recorded aggregate debt discounts of $548,354 and $548,020, related to the warrants and the beneficial conversion feature, respectively, on the convertible notes and for the nine months ended September 30, 2018 the Company recorded aggregate debt discounts of $359,900 and $3,051,080, related to the warrants and the beneficial conversion feature, respectively, on the convertible notes, which were amortized over the expected terms of the respective notes.

 

Other Notes Payable

 

On or about January 23, 2019, the Company and certain note holders, including related parties, agreed to extend the maturity date of the notes payable, as amended and extended on or about August 2018, in the aggregate principal amount of $560,000 to be upon the earlier of (a) January 24, 2020 or (b) the first day the company’s stock is publicly traded. All interest due and payable on the notes, shall be converted into shares of common stock at a conversion price of $1.00 per share.

 

During April 2019, the Company repaid other notes payable in the aggregate principal amount of $560,000, of which $335,000 belong to related parties. In addition, the company issued 479,323 of the company’s common stock as payment for the interest incurred on the other notes payable repaid in the aggregate amount of $479,323.

 

On May 14, 2019, the Company issued a $91,000 promissory note to a related party. The note has a stated interest rate of 15% over the original term of one year with monthly interest payments. The note becomes due in one year or the first day the Company trades publicly on an exchange.

 

F-20
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES

 

Employment Agreements

 

On May 1, 2018, the Company appointed Michael J. Roper as Chief Executive Officer (“CEO”) of the Company and entered into an Employment Agreement with Mr. Roper. During the term of the agreement, Mr. Roper will be entitled to a base salary at the annualized rate of $250,000 and will be eligible for a discretionary performance bonus to be paid in cash or equity. Mr. Roper is also entitled to 100,000 shares of common stock of the Company that will be issued upon a Public offering of at least $3,000,000. In addition, Mr. Mohan resigned as Interim President of the Company.

 

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

 

On September 26, 2018, the Company rehired Ferdinand Groenewald as Chief Financial Officer of the Company and entered into an Employment Agreement with Mr. Groenewald. Pursuant to the agreement, Mr. Groenewald will be employed as Chief Financial Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the agreement. During the term of the agreement, Mr. Groenewald will be entitled to a base salary at the annualized rate of $150,000 and will be eligible for a discretionary performance cash bonuses which will include $10,000 upon completion of the audit for the year ended December 31, 2017 and $25,000 and up to 10,000 shares of common stock upon completion of a public offering of not less than $3 million together with listing on a national exchange (the “Public Offering”), which may be increased to 25,000 in the event $5 million is raised. Mr. Groenewald’s salary will increase to $175,000 upon closing of the Public Offering. Mr. Groenewald is also eligible to participate in employee benefits plans as the Company may institute from time to time that are available for full-time employees. In addition, pursuant to board approval, Mr. Groenewald is entitled to 110,000 shares of common stock of the Company that will be issued upon a Public Offering of at least $3,000,000.

 

On September 26, 2018, the Company appointed Kenneth Miller as Chief Operating Officer of the Company and entered into an Employment Agreement with Mr. Miller. Pursuant to the agreement, Mr. Miller will be employed as Chief Operating Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the agreement. During the term of the agreement, Mr. Miller will be entitled to a base salary at the annualized rate of $200,000, which will be increased to $275,000 upon successful closing of the Public Offering. Mr. Miller is also entitled to 100,000 shares of common stock of the Company that will be issued upon a Public offering of at least $3,000,000. Mr. Miller is eligible for a discretionary performance cash and equity bonuses which will include cash of $50,000 and 75,000 shares of common stock upon completion of the Public Offering, which may be increased to 125,000 shares in the event $5 million is raised. Mr. Miller is also eligible to participate in employee benefits plans as the Company may institute from time to time that are available for full-time employees.

 

F-21
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES, continued

 

Employment Agreements, continued

 

On October 26, 2018, the Company entered into an Employment Agreement with Michael Roper, which replaced his employment agreement from May 2018. Pursuant to the Employment Agreement, Mr. Roper will continue to be employed as Chief Executive Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon listing the Company on a national exchange and raising $3,000,000 (the “IPO”). During the term of the Employment Agreement, Mr. Roper will be entitled to a base salary at the annualized rate of $250,000, which was increased to $275,000 upon achieving various milestones required by the Investors that participated in the September 2018 Offering and will be increased to $350,000 upon the Company completing the IPO. Mr. Roper will be eligible for a discretionary performance bonus to be paid in cash or equity, provided, however, no cash bonus will be paid until the closing of the IPO. Mr. Roper is entitled to $100,000 bonus upon closing of the IPO. Mr. Roper is also entitled to 100,000 shares of common stock of the Company that will be issued upon a Public offering of at least $3,000,000. In addition, pursuant to board approval on June 29, 2019, Mr. Roper is entitled to 250,000 shares of common stock of the Company that will be issued upon a Public Offering of at least $3,000,000. In the event the Company raises $3 million or $5 million upon completion of a public offering together with listing on a national exchange, then Mr. Roper will receive 150,000 restricted stock units or 250,000 restricted stock units, respectively. In addition, Mr. Roper will receive 100,000 restricted stock units upon the one- and two-year anniversaries of his employment.

 

On October 26, 2018, the Company entered into an Employment Agreement with Kevin Mohan. Pursuant to the Employment Agreement, Mr. Mohan will be engaged as Chief Investment Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon the IPO. During the term of the Employment Agreement, Mr. Mohan will be entitled to a base salary at the annualized rate of $156,000, which will be increased to $175,000 upon the IPO. Mr. Mohan will be eligible for a discretionary performance bonus to be paid in cash following the closing of the IPO. Mr. Mohan is entitled to $50,000 bonus upon closing of the IPO. In the event the Company raises $3 million or $5 million, then Mr. Mohan will receive 100,000 restricted stock units or 200,000 restricted stock units, respectively. In addition, pursuant to board approval on June 29, 2019, Mr. Mohan is entitled to 250,000 shares of common stock of the Company that will be issued upon a Public Offering of at least $3,000,000.

 

On May 5, 2019, the Company entered into an Employment Agreement with Rodney Silva. Pursuant to the Employment Agreement, Mr. Silva will be engaged as Vice President of Brand Development/Franchise Sales of the Company for a period of eighteen months unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon the IPO. During the term of the Employment Agreement, Mr. Silva will be entitled to a base salary at the annualized rate of $150,000. Mr. Silva will be eligible for a discretionary performance bonus to be paid in cash following the closing of the IPO. Mr. Silva is also eligible to participate in employee benefits plans as the Company may institute from time to time that are available for full-time employees.

 

F-22
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES, continued

 

Employment Agreements, continued

 

On May 6, 2019, the Company appointed Aimee Infante as Chief Marketing Officer of the Company and entered into an Employment Agreement with Ms. Infante. Pursuant to the Employment Agreement, Ms. Infante will be employed as Chief Marketing Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the Employment Agreement. During the term of the Employment Agreement, Ms. Infante will be entitled to a base salary at the annualized rate of $125,000, which will be increased to $150,000 upon the completion of a public offering of not less than $3 million together with listing on a national exchange (the “Public Offering”). Following the closing of the Public Offering, Ms. Infante will receive a one-time $10,000 cash bonus and will be entitled to an annual cash bonus based on 25% of her base salary subject to satisfying specific written criteria. The Company agreed to issue Ms. Infante 5,000 restricted stock units upon closing of the Public Offering, which may be increased to 10,000 restricted stock units if the Public Offering is in excess of $5 million. Ms. Infante is also eligible to participate in employee benefits plans as the Company may institute from time to time that are available for full-time employees.

 

Consulting Agreements

 

On September 12, 2018, the Company entered into a Consulting Agreement with a professional business and financial expert to provide the Company financial and business advice including, but not limited, to discussing financing, potential business opportunities and potential acquisition. In addition, the consultant will help the Company select an underwriter to conduct an offering and will work with Company to prepare for the offering. Pursuant to the terms of the agreement the Company agreed to pay $140,000 in cash and to issue 250,000 restricted shares of the Company’s common stock on or before September 30, 2018. In addition, the Company agrees to pay the following additional fees (i) $70,000 in cash and 70,000 in restricted shares upon performance of the first milestones per the SPA, (ii) $70,000 in cash and 70,000 in restricted shares upon performance of the second milestones per the SPA and (iii)$150,000 in cash and 200,000 in restricted shares upon the completion of both the contract and the Company’s offering. As of September 30, 2019, the company issued an aggregate of 390,000 shares of common stock pursuant to the agreement, paid a $280,000 in cash pursuant to the terms of the agreement.

 

On May 24, 2019, the Company entered into a Consulting Agreement with a project management group to assist with various financial matters, documentation and presentations as needed. Pursuant to the terms of the agreement, the Company will pay $5,000 per month until the contract is cancelled by either party with written notice.

 

During July 2019, the Company entered into a Consulting Agreement, effective as of July 1, 2019, with an advisory group to provide strategic business services in connection with a future offering. The term of the agreement is for one year. Pursuant to the terms of the agreement, the Company issued 290,000 restricted shares of common stock and agreed to pay a cash fee of $75,000 upon signing the agreement.

 

During July 2019, the Company entered into a Consulting Agreement with a consultant with a background in menu and recipe development to develop a new menu and recipes for a new healthy restaurant concept called Healthy Joe’s. The Company will issue an aggregate of 11,500 shares of common stock as payment pursuant to the terms of the agreement and reimburse the consultant for any out of pocket expenses in connection with the services provided pursuant to the agreement. As of September 30, 2019, the Company issued 3,500 shares to the consultant pursuant to the agreement.

 

Board Compensation

 

On July 16, 2019, the board of directors approved a board compensation plan that would compensate the board members for their deferred compensation for 2019, 2018 and 2017. The board members are eligible for cash compensation of $4,500 or $9,000 per year. To be paid as follows: (i) directors serving on the board during 2018 and 2017, will be granted shares is lieu of payment as the letter agreements set forth certain terms pursuant to which the directors will serve as directors of the Company.

 

In addition, on an ongoing basis pursuant to the approved board compensation plan each director will receive 10,000 shares of common stock per year for service as director, 1,300 shares of common stock per year for service on each committee and 1,000 shares of common stock per year for service as chair for such committee. The shares of common stock for committee service will be limited to two committees.

 

The Company will issue shares of common stock as follows, which shall be prorated for a partial year: (i) directors that served as directors during the year ended December 31, 2017 will each receive 5,000 shares of common stock, (ii) directors that served as directors during the year ended December 31, 2018 will each receive 10,000 shares of common stock and (iii) directors that served as directors during the year ended December 31, 2019 will each receive 10,000 shares of common stock.

 

As directors have not received compensation for services to date, the Company agreed to provide equity in lieu of cash compensation and equity compensation for services rendered during 2017, 2018 and 2019. For past director services in lieu of cash unpaid to date: (i) directors that served as directors during the year ended December 31, 2017 will each receive shares of common stock valued at $4,500 to be priced at the price per share of the Company’s public offering in connection with its uplisting (the “Uplisting Offering”), (ii) directors that served as directors during the year ended December 31, 2018 will each receive shares of common stock valued at $9,000, which shall be prorated for a partial year of service, to be priced at the price per share of the Uplisting Offering and (iii) directors that served as directors during the year ended December 31, 2019 through the date of the Uplisting Offering will each receive shares of common stock valued at $9,000, which shall be prorated for a partial year of service, to be priced at the price per share of the Uplisting Offering. Following the public offering, directors will be paid cash for the balance of 2019.

 

On August 5, 2019 the Company authorized the issuances of an aggregate of 119,046 shares of common stock, valued at a $1.00 per share, to the members of the board of directors. As of September 30, 2019 the Company accrued a total of $125,187 related to board compensation.

 

Litigations, Claims and Assessments

 

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

 

F-23
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES, continued

 

Litigations, Claims and Assessments, continued

 

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

 

On October 3, 2018, the Company, ARH and Mr. Morgan entered into a settlement agreement with Crownhall and Limestone agreeing to forfeit all security deposits, pay an upfront amount of $25,000 and an additional $175,000 to be paid over 20 months. This agreement settles litigation surrounding two closed locations, which the plaintiffs were seeking a total of $2,391,330 in past damages for rent, interest and other expenses. As of September 30, 2019, the Company has accrued for the liability in accounts payable and accrued expenses.

 

On March 27, 2018 a convertible note holder filed a complaint in the Iowa District Court for Polk County #CVCV056029 against the Company for failure to pay the remaining balance due on a promissory note in the amount of $100,000, together with interest, attorney fees and other costs of $171,035. On June 6, 2018 a default judgement was entered against the Company for the amount of $171,035. The Company repaid an aggregate amount of $71,035, consisting of principal and interest, as of the date of the filing of this report. As of September 30, 2019, the Company has accrued for the liability in convertible notes payable in the amount of $100,000 and accrued interest of $18,045 is included in accounts payable and accrued expenses.

 

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

 

On May 4, 2018, Stratford Road Partners, LLC (“Stratford”) filed suit against the Company’s subsidiary for non-payment of rent in the small Claims court in the State of North Carolina. Since then the property has been vacated and the landlord offered a settlement of $10,000 with no further lease obligation. On June 5, 2019 the Company signed the settlement agreement and made the payment to the landlord. As of September 30, 2019, the Company has accrued for the liability in accounts payable and accrued expenses.

 

In May 2018, Resolute Contractors, Inc., Quality Tile, MTL Construction, Genesis Electric, JNB Interiors and Captive Aire filed a Mechanics Lien for labor, service, equipment and materials in the total amount of $98,005. The Company intends to set up various payment plans with these vendors. As of September 30, 2019, the Company has accrued for the liability in accounts payable and accrued expenses.

 

F-24
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES, continued

 

Litigations, Claims and Assessments, continued

 

On December 12, 2018, the Company was listed as a defendant to a lawsuit filed by a landlord in the Superior Court of the State of California. Fountain Valley is seeking approximately $121,000 in damages for rent, interest and other expenses. On February 15, 2019, the Company entered into a settlement agreement and payment plan in the amount of $85,000. The Company agreed to make the following payments (i) $15,000 on or before March 15, 2019, and (ii) ten monthly installments of $7,000 commencing on April 15, 2019 and continuing monthly on the 15th day of each month though January 15, 2020. The company has accrued for the liability in accounts payable and accrued expenses and has been making repayments pursuant to the settlement agreement.

 

On January 18, 2019, the Company entered into an expense reimbursement agreement with an employee in connection with unreimbursed expenses incurred on behalf of the Company in the amount of $81,140 recorded in accounts payable and accrued expenses as of March 31, 2019. The Company shall pay the employee as follows (a) $1,750 upon execution of the agreement, (b) $1,000 a week commencing on January 25, 2019 ending May 24, 2019, (c) a onetime payment of $40,000 on the earlier of March 31, 2019 or when the Company fully received the anticipated funding from the a tranche of the 15% Senior Secured Convertible Notes and (d) a onetime payment of $21,390 on the earlier of May 31, 2019 or when the Company has fully received the anticipated funding from the second tranche of the 15% Senior Secured Convertible Notes. As of September 30, 2019, the full amount has been repaid.

 

On or about March 7, 2019, the Company was listed as a defendant to a lawsuit filed by a contractor in the State of Texas. The contractor is claiming a breach of contract and is seeking approximately $32,809 in damages for services claimed to be rendered by the contractor. The Company is working with legal counsel in order to reach a settlement. As of September 30, 2019, the Company accrued $30,000 for the liability in accounts payable and accrued expenses.

 

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

 

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.

 

Operating Lease

 

On August 1, 2019, the Company entered into a settlement agreement with a landlord in connection with the prior executive office in Houston, Texas as the Company vacated the property on April 30, 2018. The Company owed the landlord the sum of $58,522. The landlord agreed to accept $32,283 as full payment of the damages. Pursuant to the settlement we will make three equal payments of $10,761 with the first payment to be made on August 2, 2019, the second payment is to be made on September 1, 2019 and the final payment is to be made on October 1, 2019. As of September 30, 2019, the remaining unpaid amount of $10,761, is included in accounts payable and accrued expenses.

 

Trademark

 

During July 2019 the Company filed an application to register a trade name and service mark for “Healthy Joe’s” that will be used in connection with the development and operating of potential Healthy Joe’s restaurants. If the trademark is approved, the Company will license the rights to use the Healthy Joe’s trademark and intellectual property to its wholly-owned subsidiaries, Muscle Maker Development and Muscle Maker Corp., and to further sublicense them to our franchisees for use in connection with Healthy Joe’s restaurants.

 

Taxes

 

The Company failed in certain instances in paying sales taxes collected from customers in specific states that impose a tax on sales of the Company’s products. The Company had accrued $224,717 and $297,160 which includes penalties and interest as of September 30, 2019 and December 31, 2018, respectively, related to this matter.

 

F-25
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 14 – EQUITY

 

Common Stock

 

See Note 12 – Notes Payable – Convertible Notes, and Notes Payable – Other Notes Payable. See Note 13 – Commitments and Contingencies – Board Compensation and Commitments and Contingencies – Consulting Agreements for details related to stock issuances for the nine months ended September 30, 2019.

 

Warrant Valuation

 

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

 

Restricted Common Stock

 

At September 30, 2019, the unamortized value of the restricted common stock was $101,265. The unamortized amount will be expensed over a weighted average period of 1.26 years. A summary of the activity related to the restricted common stock for the nine months ended September 30, 2019 is presented below:

 

          Weighted
Average Grant
 
    Total     Date Fair Value  
Outstanding at January 1, 2019     42,442     $ 6.34  
Granted     430,000       1.00  
Forfeited     (11,470 )     9.33  
Vested     (443,918 )     1.23  
Outstanding at September 30, 2019     17,054     $ 5.94  

 

Stock-Based Compensation Expense

 

Stock-based compensation related to restricted stock issued to employees, directors and consultants amounted to $431,631 and $613,333 for the three and nine months ended September 30, 2019, respectively, of which $429,315 and $611,191 was recorded in general and administrative expenses and $2,316 and $2,142 was recorded in labor expense within restaurant operating expenses. Stock-based compensation related to restricted stock issued to employees, directors and consultants amounted to $33,876 and $350,100 for the three and nine months ended September 30, 2018, respectively, of which $33,102 and $347,779 was recorded in general and administrative expenses and $774 and $2,321 was recorded in labor expense within restaurant operating expenses.

 

F-26
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 14 – EQUITY, continued

 

Warrants

 

A summary of warrants activity during the nine months ended September 30, 2019 is presented below:

 

    Number of Warrants     Weighted Average
Exercise Price
    Weighted Average
Remaining Life
In Years
 
Outstanding, December 31, 2018     2,184,548     $ 3.38       3.3  
Issued     2,361,500       1.61       5.0  
Exercised     -       -       -  
Forfeited     -       -       -  
Outstanding, September 30, 2019     4,546,048     $ 2.46       3.6  
                         
Exercisable, September 30, 2019     4,546,048     $ 2.46       3.6  

 

The grant date fair value of warrants granted during the nine months ended September 30, 2019 and 2018 was determined on the date of issuance using the Black-Scholes option pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company calculates the expected volatility using the historical volatility of comparable companies over the most recent period equal to the expected term and evaluates the extent to which available information indicates that future volatility may differ from historical volatility. The expected dividend rate is zero as the Company does not expect to pay or declare any cash dividends on common stock. The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of the grant. The Company has not experienced significant exercise activity on stock options. Due to the lack of historical information, the Company determined the expected term of its stock option awards issued using the simplified method. In applying the Black-Scholes option pricing model, the Company used the following assumptions:

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2019     2018     2019     2018  
Risk free interest rate     1.61 - 2.32 %     2.67 - 2.96 %     1.61 - 2.62 %     2.20 - 3.13 %
Contractual term (years)     5.00       3.00-5.00       5.00       5.00-3.00  
Expected volatility     58.24-88.10 %     51.50-53.60 %     52.64 – 88.10 %     51.50 - 55.37 %
Expected dividend     0.00 %     0.00 %     0.00 %     0.00 %

 

F-27
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

NOTE 15 – SUBSEQUENT EVENTS

 

Acquisition of Bronx

 

On October 10, 2019, the Company acquired a former franchisee location in the Bronx, New York, as a corporate store (the “Bronx Acquisition”). The purchase price of the store was $600,000, of which $30,000 related to equipment purchased and the remaining $570,000 was accounted for as goodwill. The purchase price is payable as follows: $300,000 that was paid at closing and the remaining $300,000 is payable pursuant to a five year promissory note with an eight percent interest rate.

 

Board Compensation

 

On October 19, 2019 the Company authorized the issuances of an aggregate of 26,242 share of common stock to the members of the board of directors.

 

 

F-28
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

 

Muscle Maker, Inc. and Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Muscle Maker, Inc. and Subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph – Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. 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 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Marcum llp

 

 

Marcum llp

 

We have served as the Company’s auditor since 2016.

 

Melville, NY

August 20, 2019, except for Note 19 as to which the date is November 26, 2019

 

F-29
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

    December 31,     December 31,  
    2018     2017  
             
Assets                
Current Assets:                
Cash   $ 357,842     $ 78,683  
Accounts receivable, net of allowance for doubtful accounts of $45,000 and $4,500 as of December 31, 2018 and December 31, 2017, respectively     180,768       152,256  
Inventory     45,067       92,768  
Current portion of loans receivable, net of allowance of $55,000 at December 31, 2018 and December 31, 2017, respectively     37,155       20,146  
Loans receivable from related parties, net of allowance of $0 and $45,000 at December 31, 2018 and December 31, 2017, respectively     650       9,704  
Prepaid expenses and other current assets     16,412       23,287  
Total Current Assets     637,894       376,844  
Property and equipment, net     637,287       517,002  
Intangible assets, net     3,102,621       3,181,880  
Loans receivable - non current     75,756       150,522  
Security deposits and other assets     33,532       21,401  
Total Assets   $ 4,487,090     $ 4,247,649  
                 
Liabilities and Stockholders’ Deficit                
Current Liabilities:                
Accounts payable and accrued expenses   $ 2,887,380     $ 2,710,193  
Convertible note payable     100,000       150,000  
Other notes payable     -       20,000  
Convertible notes payable to Former Parent, net of debt discount of $43,178 at December 31,2018     39,280       -  
Deferred revenue     907,948       1,391,860  
Deferred rent, current     14,243       25,620  
Payable to Former Parent, current     -       16,995  
Other current liabilities     607,486       369,123  
Total Current Liabilities     4,556,337       4,683,791  
Convertible notes payable, net of debt discount of $1,313,259 and $0 at December 31, 2018 and 2017, respectively     2,015,007       1,899,340  
Convertible notes payable, related parties, net of debt discount of $233,462 and $0 at December 31, 2018 and 2017, respectively     153,566       300,000  
Other notes payable, non - current     225,000       200,000  
Other notes payable long term, related parties     335,000       335,000  
Deferred rent, non-current     45,315       31,313  
Total Liabilities     7,330,225       7,449,444  
                 
Commitments and Contingencies                
                 
Stockholders’ Deficit:                

Common stock, $0.0001 par value, 100,000,000 shares authorized, 10,427,803 and 7,637,855 shares issued and outstanding as of December 31, 2018 and December 31, 2017, respectively

   

1,043

      763  
Additional paid-in capital     20,989,478       13,919,456  
Accumulated deficit     (23,833,656 )     (17,052,086 )
Total Controlling Interest     (2,843,135 )     (3,131,867 )
Non-controlling interest     -       (69,928 )
Total Stockholders’ Deficit     (2,843,135 )     (3,201,795 )
Total Liabilities and Stockholders’ Deficit   $ 4,487,090     $ 4,247,649  

 

See Notes to the Consolidated Financial Statements

 

F-30
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

    For the Years ended  
    December 31,  
    2018     2017  
Revenues:            
Company restaurant sales, net of discounts   $ 3,869,758     $ 5,215,285  
Franchise royalties and fees     1,908,278       1,988,167  
Other revenues     244,633       725,685  
Total Revenues     6,022,669       7,929,137  
                 
Operating Costs and Expenses:                
Restaurant operating expenses:                
Food and beverage costs     1,432,653       1,946,643  
Labor     1,646,264       2,634,730  
Rent     681,176       927,610  
Other restaurant operating expenses     853,197       1,283,286  
Total restaurant operating expenses     4,613,290       6,792,269  
Costs of other revenues     114,388       330,367  
Depreciation and amortization     200,885       446,369  
Impairment of intangible assets     -       410,225  
Impairment of property and equipment     -       1,375,790  
Impairment of goodwill     -       2,521,468  
Other expenses incurred for closed locations     321,821       -  
General and administrative expenses     4,358,131       7,983,673  
Total Costs and Expenses     9,608,515       19,860,161  
Loss from Operations     (3,585,846 )     (11,931,024 )
                 
Other (Expense) Income:                
Other income     96,221       88,874  
Interest expense, net     (983,499 )     (15,336 )
Loss on sale of CTI     (456,169 )     -  
Amortization of debt discounts     (2,275,247 )     (3,956,792 )
Total Other Expense, Net     (3,618,694 )     (3,883,254 )
                 
Loss Before Income Tax     (7,204,540 )     (15,814,278 )
Income tax provision     -       246,527  
Net Loss     (7,204,540 )     (15,567,751 )
Net loss attributable to the non-controlling interest     (2,071 )     (2,357,303 )
Net Loss Attributable to Controlling Interest   $ (7,202,469 )   $ (13,210,448 )
                 
Net Loss Attributable to Controlling Interest Per Share:                
Basic and Diluted   $ (0.81 )   $ (2.19 )
                 
Weighted Average Number of Common Shares Outstanding:                
Basic and Diluted     8,909,192       6,039,731  

 

See Notes to the Consolidated Financial Statements

 

F-31
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

 

    Common Stock     Additional
Paid-in
    Accumulated     Total
Controlling
    Non-
Controlling
       
    Shares     Amount     Capital     Deficit     Interest     Interest     Total  
Balance - December 31, 2016     4,604,842     $ 460     $ 7,998,893     $ (3,841,638 )   $ 4,157,715     $ 159,717     $ 4,317,432  
Issuance of restricted stock     53,383       5       (5 )     -       -       -       -  
Shares issued for cash     56,250       5       419,995       -       420,000       -       420,000  
Exercise of warrants for purchase of
common stock
    5,356       -       50,000       -       50,000       -       50,000  
Restricted stock issued as compensation
for services
    52,307       5       169,995       -       170,000       -       170,000  
Shares issued in connection with merger     1,550,964       156       (2,127,814 )     -       (2,127,658 )     2,127,658       -  
Options issued to franchisees     -       -       47,583       -       47,583       -       47,583  
Conversion of convertible notes payable to
Former Parent into common stock
    1,314,753       132       5,361,045       -       5,361,177       -       5,361,177  
Beneficial conversion feature -
First, Second and Third 2017 ARH Notes
    -       -       1,085,985       -       1,085,985       -       1,085,985  
Warrants issued in connection with
convertible debt
    -       -       170,958       -       170,958       -       170,958  
Stock-based compensation:
Amortization of restricted common stock
    -       -       742,821       -       742,821       -       742,821  
Net loss     -       -       -       (13,210,448 )     (13,210,448 )     (2,357,303 )     (15,567,751 )
Balance - December 31, 2017     7,637,855     $ 763     $ 13,919,456     $ (17,052,086 )   $ (3,131,867 )   $ (69,928 )   $ (3,201,795 )
Shares issued for cash     180,000       18       179,982       -       180,000       -       180,000  
Issuance of restricted stock     26,286       3       (3 )     -       -       -       -  
Beneficial conversion feature -Convertible Notes     -       -       2,959,506       -       2,959,506       -       2,959,506  
Beneficial conversion feature -Convertible Note to Former Parent     -       -       475,000       -       475,000       -       475,000  
Warrants issued in connection with common stock and convertible debt     -       -       399,554       -       399,554       -       399,554  
Warrants issued and recorded as debt discount in connection with notes payable     -       -       343,818       -       343,818       -       343,818  
Offering on March 29, 2018, net of underwriter’s discount and offering cost of $58,798     44,153       5       85,571       -       85,576       -       85,576  
Restricted stock issued as compensation for services     250,000       25       249,975       -       250,000       -       250,000  
Conversion of convertible note payable to Former Parent into common stock     785,084       79       392,463       -       392,542       -       392,542  
Conversion of convertible notes payable into common stock     1,504,425       150       1,850,190       -       1,850,340       -       1,850,340  
Stock-based compensation:
Amortization of restricted common stock
    -       -       133,966       -       133,966       -       133,966  
Sale of interest in CTI     -       -       -       420,899       420,899       71,999       492,898  
Net loss     -       -       -       (7,202,469 )     (7,202,469 )     (2,071 )     (7,204,540 )
                                                         
Balance - December 31, 2018     10,427,803     $ 1,043     $ 20,989,478     $ (23,833,656 )   $ (2,843,135 )   $ -     $ (2,843,135 )

 

See Notes to the Consolidated Financial Statements

 

F-32
 

 

MUSCLE MAKER, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

 

    For the Years ended  
    December 31,  
    2018     2017  
             
Cash Flows from Operating Activities                
Net loss   $ (7,204,540 )   $ (15,567,751 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     200,885       446,369  
Accretion of interest expense of other notes payable     234,044       -  
Interest expense related to issuances of warrants     305,055       -  
Stock-based compensation     383,966       742,821  
Loss on sale of CTI     456,169       -  
Options issued to franchisees     -       47,583  
Restricted stock issued as compensation for services     -       170,000  
Amortization of debt discounts     2,275,247       3,956,792  
Impairment of intangible asset     -       410,225  
Impairment of property and equipment     -       1,375,790  
Impairment of Goodwill     -       2,521,468  
Write off of security deposits     -       137,160  
Bad debt expense     64,412       128,855  
Deferred rent     2,625       (126,705 )
Deferred income tax provision     -       (246,527 )
Expenses paid by Former Parent     620,464       490,071  
Changes in operating assets and liabilities:                
Accounts receivable     (179,548 )     (8,008 )
Inventory     47,701       (28,648 )
Prepaid expenses and other current assets     6,575       27,029  
Security deposits and other assets     (12,131 )     (9,789 )
Accounts payable and accrued expenses     309,778       1,556,488  
Deferred revenue     (475,802 )     88,893  
Other current liabilities     238,363       210,885  
Total Adjustments     4,477,803       11,890,752  
Net Cash Used in Operating Activities     (2,726,737 )     (3,676,999 )
                 
Cash Flows from Investing Activities                
Purchases of property and equipment     (252,645 )     (968,831 )
Issuance of loans receivable     (9,689 )     (58,753 )
Issuance of loans receivable - related parties     -       (5,533 )
Collections from loans receivable     67,446       167,452  
Collections from loans receivable - related party     6,667       22,496  
Net Cash Used in Investing Activities     (188,221 )     (843,169 )
                 
Cash Flows from Financing Activities                
Proceeds from exercise of warrants     -       50,000  
Proceeds from issuance of restricted stock     180,000       420,000  
Proceeds from offering, net of underwriter’s discount and offering costs     85,576       -  
Repayments to Former Parent, net     (132,459 )     (250,013 )
Repayments of convertible notes payable     (50,000 )     -  
Repayments of other note payable     (50,000 )     -  
Proceeds from convertible notes payable     2,051,000       2,049,340  
Proceeds from convertible notes payable - related parties     650,000       300,000  
Proceeds from other notes payable     460,000       220,000  
Proceeds from other notes payable - related parties     -       335,000  
Proceeds from convertible notes payable to Former Parent     -       1,138,800  
Net Cash Provided by Financing Activities     3,194,117       4,263,127  
                 
Net Increase (Decrease) in Cash     279,159       (257,041 )
Cash - Beginning of Period     78,683       335,724  
Cash - End of Period   $ 357,842     $ 78,683  

 

See Notes to the Consolidated Financial Statements

 

F-33
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

 

    For the Years ended  
    December 31,  
    2018     2017  
             
Supplemental Disclosures of Cash Flow Information:                
Cash paid for interest   $ 40,605     $ 25,116  
                 
Supplemental disclosures of non-cash investing and financing activities                
Beneficial conversion feature   $ 3,434,506     $ 1,085,985  
Warrants issued in connection with common stock and convertible debt   $ 399,554     $ 170,958  
Conversion of convertible notes payable to Former Parent into common stock   $ 392,542     $ 5,361,177  
Conversion of notes payable into common stock   $ 1,850,340     $ -  
Loan receivable advanced by Former Parent   $ -     $ 162,500  
Accounts payable associated with purchases of property and equipment   $ -     $ 187,241  
Other note payable exchanged for convertible note   $ 635,294     $ -  
Warrants issued and recorded as debt discount in connection with notes payable   $ 343,818     $ -  
Convertible note issued to Former Parent in exchange for payable to Former Parent   $ 475,000     $ 517,915  

 

F-34
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

F-35
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

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

 

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

 

MMI and its subsidiaries is the “Company”.

 

The Company operates under the name Muscle Maker Grill and is a franchisor and owner operator of Muscle Maker Grill restaurants. As of December 31, 2018, the Company’s restaurant system included six company-owned restaurants, and thirty-four franchised restaurants. One company-owned restaurant was subsequently opened for operation. Three franchised restaurants were subsequently opened for operations and six franchised restaurants were closed as of the date of the issuance of these consolidated financial statements. In addition, the Company currently has thirty-three United States based and two Kuwait based franchise locations open as of the date of the issuance of these consolidated financial statements. Muscle Maker Grill restaurants offer quality food freshly prepared with the Company’s proprietary recipes created with the guest’s health in mind. The menu is protein based, and features various supplements, health food snacks, along with a nutritious children’s menu.

 

Going Concern and Management’s Plans

 

As of December 31, 2018, the Company had a cash balance, a working capital deficiency and an accumulated deficit of $357,842, $3,918,443, and $23,833,656, respectively. For the year ended December 31, 2018, the Company incurred a pre-tax net loss of $7,204,540. These conditions indicate that there is substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date of the issuance of these consolidated financial statements.

 

The Company’s operations have primarily been funded through proceeds from the issuance of equity and debt. Subsequent to December 31, 2018, the Company received an aggregate of $6,239,000 associated with the issuances of convertible promissory notes payable and warrants and other notes to various lenders (See Note 18 – Subsequent Events -15% Senior Secured Convertible Notes and Note 18 – Subsequent Events – 12% Secured Convertible Notes).

 

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

 

F-36
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

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

 

Going Concern and Management’s Plans, continued

 

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

 

NOTE 2 – REVERSE STOCK SPLITS

 

Effective 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”).

 

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

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and majority-owned subsidiary. Any intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

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

 

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;

 

F-37
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Use of Estimates, continued

 

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, 2018 or 2017.

 

Inventory

 

Inventories, which are stated at the lower of cost or net realizable value, consist primarily of perishable food items and supplies. Cost is determined using the first-in, first out method.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized, and minor replacements, maintenance and repairs are charged to expense as incurred. Depreciation and amortization are calculated on the straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the estimated useful life or the lease term of the related asset. The estimated useful lives are as follows:

 

  Furniture and equipment 5 - 7 years
  Leasehold improvements 1.7 – 10.4 years

 

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.

 

F-38
 

 

MUSCLE MAKER, INC. & 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.

 

Convertible Instruments

 

The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with Topic 815 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The accounting treatment of derivative financial instruments requires that the Company record embedded conversion options and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Embedded conversion options and any related freestanding instruments are recorded as a discount to the host instrument.

 

If the instrument is determined not to be a derivative liability, the Company then evaluates for the existence of a beneficial conversion feature by comparing the market price of the Company’s common stock as of the commitment date to the effective conversion price of the instrument.

 

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

 

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.

 

F-39
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Revenue Recognition, continued

 

Restaurant Sales

 

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

 

The Company sells gift cards which do not have an expiration date, and it does not deduct dormancy fees from outstanding gift card balances. The Company recognize revenues form gift cards as restaurant revenues once the Company performs obligation to provide food and beverage to the customer is satisfies upon redemption of the gift card.

 

Franchise Royalties and Fees

 

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

 

The Company has supply agreements with certain food and beverage vendors. Pursuant to the terms of these agreements, rebates are provided to the Company based upon the dollar volume of purchases for all company-owned and franchised restaurants from these vendors. Rebates earned on purchases by franchise stores are recorded as revenue during the period in which the related food and beverage purchases are made. The Company recorded revenue from rebates of $308,958 and $337,786 during the years ended December 31, 2018 and 2017, respectively, which is included in franchise royalties and fees on the accompanying consolidated statements of operations. Rebates earned on purchases by company owned stores are recorded as a reduction of cost of goods sold during the period in which the related food and beverage purchases are made.

 

Other Revenues

 

Through its subsidiary CTI, which was sold in May 2018, the Company derived revenue from the sale of POS computer systems, cash registers, digital menu boards and camera systems, and from the provision of related consulting and support services, which generally include implementation, installation and training services. The Company recognized revenue when persuasive evidence of an arrangement existed, delivery of the product or service occurred, the fee was fixed or determinable and collectability was reasonably assured. The Company recorded $244,633 and $725,685 of revenues from these technology sales and services during the years ended December 31, 2018 and 2017, respectively.

 

Deferred Revenue

 

Deferred revenue primarily includes initial franchise fees received by the Company, for which the restaurant has not yet opened, as well as unearned vendor rebates and customer deposits received in connection with technology sales and services by CTI (see Note 13 – Deferred Revenue).

 

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

 

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Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Advertising

 

Advertising costs are charged to expense as incurred. Advertising costs were approximately $26,000 and $609,000 for the years ended December 31, 2018 and 2017, respectively, and are included in general and administrative expenses in the consolidated statements of operations. Advertising costs incurred related to our national advertising fund are netted with contributions from our Company-owned stores and our franchisees.

 

Net Loss per Share

 

Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, plus the impact of potential common shares, if dilutive, resulting from the exercise of warrants and stock options from the conversion of convertible debt.

 

The following securities are excluded from the calculation of weighted average diluted common shares at December 31, 2018 and 2017, respectively, because their inclusion would have been anti-dilutive:

 

    December 31,  
    2018     2017  
Warrants     2,184,548       521,045  
Options     33,750       33,750  
Convertible debt     4,327,070       1,445,748  
Total potentially dilutive shares     6,545,368       2,000,543  

 

Concentration of Credit Risk

 

The Company is subject to credit risk through loan’s 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, 2018, one franchisee accounted for 95% of loans receivable and at December 31, 2017, one franchisee accounted for 78% of loans receivable. At December 31, 2018 and 2017, a loan to a consultant, who is also a stockholder of CTI, accounted for 0% and 4%, respectively, of loans receivable.

 

Major Vendor

 

The Company engages various vendors to distribute food products to their Company-owned restaurants. Purchases from the Company’s largest supplier totaled 78% and 82% of the Company’s purchases for the years ended December 31, 2018 and 2017, respectively.

 

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Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Controlling and Non-Controlling Interest

 

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

 

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 the previously reported results of operations or loss per share.

 

Stock-Based Compensation

 

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally recorded on the grant date and re-measured on financial reporting dates and vesting dates until the service period is complete. The fair value amount of the award is then recognized over the period services are required to be provided in exchange for the award, usually the vesting period.

 

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Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its consolidated financial statements and disclosures.

 

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations”, in April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing” and in May 9, 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”). This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue From Contracts with Customers which is not yet effective. These new standards provide for a single, principles-based model for revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date of ASU 2014-09 for private companies and emerging growth public companies until annual periods beginning on or after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. 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 consolidated financial statements.

 

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

 

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

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Recent Accounting Pronouncements, continued

 

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

 

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

 

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

 

In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). These amendments provide clarifications and corrections to certain ASC subtopics including the following: Income Statement - Reporting Comprehensive Income – Overall (Topic 220-10), Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from Equity – Overall (Topic 480-10), Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations - Income Taxes (Topic 805-740), Derivatives and Hedging – Overall (Topic 815-10), and Fair Value Measurement – Overall (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on its consolidated financial statements.

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Recent Accounting Pronouncements, continued

 

In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”). The amendments in ASU 2018-10 provide additional clarification and implementation guidance on certain aspects of the previously issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) and have the same effective and transition requirements as ASU 2016-02. Upon the effective date, ASU 2018-10 will supersede the current lease guidance in ASC Topic 840, Leases. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2018-10 is effective for emerging growth companies for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.

 

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

 

Subsequent Events

 

The Company evaluated events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation and transactions, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed in Note 18 – Subsequent Events and Note 19 – Subsequent Event - Redomicile.

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 4 – SALE OF CTI

 

On May 24, 2018, the Company entered into a stock purchase agreement between John Guild, JohnG Solutions LLC and CTI in which the Company agreed to sell their 70% ownership in CTI for a total purchase price of $1.00. During the year ended December 31, 2018, the Company recorded a loss of $456,169 related to the sale of CTI, as follows:

 

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

 

NOTE 5 - LOANS RECEIVABLE

 

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

 

    December 31,     December 31,  
    2018     2017  
Loans receivable, net   $ 112,911     $ 170,668  
Less: current portion     (37,155 )     (20,146 )
Loans receivable, non-current   $ 75,756     $ 150,522  

 

Loans receivable includes loans to franchisees totaling, in the aggregate, $112,911 and $170,668, net of reserves for uncollectible loans of $55,000 and $55,000 at December 31, 2018 and 2017, respectively. The loans have original terms ranging from 1 year to 5 years, earn interest at rates ranging from 1% to 5%, and are being repaid on a weekly or monthly basis.

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 6 – LOANS RECEIVABLE FROM RELATED PARTIES

 

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

 

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

 

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

 

NOTE 7 – PROPERTY AND EQUIPMENT, NET

 

At December 31, 2018 and 2017, property and equipment consist of the following:

 

    December 31,     December 31,  
    2018     2017  
             
Furniture and equipment   $ 282,896     $ 189,401  
Leasehold improvements     626,368       472,218  
      909,264       661,619  
Less: accumulated depreciation and amortization     (271,977 )     (144,617 )
Property and equipment, net   $ 637,287     $ 517,002  

 

Depreciation expense amounted to $134,712 and $335,825 for the years ended December 31, 2018 and 2017, respectively.

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS, NET

 

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

 

A summary of the intangible assets is presented below:

 

Intangible Assets   Trademark     Franchise Agreements     Non-Compete
Agreement
    Total  
Intangible assets, net at December 31, 2016   $ 2,524,000     $ 1,157,204     $ 21,445     $ 3,702,649  
Amortization expense     -       (104,550 )     (5,994 )     (110,544 )
Impairment of intangible assets     -       (410,225 )     -       (410,225 )
Intangible assets, net at December 31, 2017     2,524,000       642,429       15,451       3,181,880  
Amortization expense     -       (63,808 )     (2,365 )     (66,173 )
Sale of CTI     -       -       (13,086 )     (13,086 )
Intangible assets, net at December 31, 2018   $ 2,524,000     $ 578,621     $ -     $ 3,102,621  
                                 
Weighted average remaining amortization period at December 31, 2018 (in years)             9.1       0.0          

 

Amortization expense related to intangible assets was $66,173 and $110,544 for the years ended December 31, 2018 and 2017, respectively

 

The Company sustained operating and cash flow losses from inception which formed a basis for performing an impairment test of its Intangible Assets. As of December 31, 2018 and 2017, the Company performed a recoverability test on the trademark measuring the discounted projected cash flows of company owned stores and new franchisees, using the relief from royalty method, against the carrying value of the trademark; accordingly, no impairment was required. As of December 31,2018, the Company performed a recoverability test on the franchise agreements that passed the test based on its projected future undiscounted cash flows generated through the asset’s use and eventual disposal and no further action was required. As of December 31, 2017, the Company performed a recoverability test on the franchise agreements that failed the test based on its projected future undiscounted cash flows generated through the asset’s use and eventual disposal. We measured and recorded an impairment charge based on a measurement of fair value of those assets using an income approach. The key assumptions used in the estimates of projected cash flows utilized in both the test and measurement steps of the impairment analysis were projected revenues and royalty payments. These forecasts were based on actual revenues and take into account recent developments as well as the Company’s plans and intentions. Based upon the results of the undiscounted cash flow analysis, the Company recorded an impairment charge on the franchise agreements of $410,225 during the year ended December 31, 2017.

 

The estimated future amortization expense is as follows:

 

For the Year Ended
December 31,
  Franchise
Agreements
 
2019   $ 63,806  
2020     63,981  
2021     63,806  
2022     63,806  
2023     63,806  
Thereafter     259,416  
    $ 578,621  

 

During the fourth quarter of 2017, the Company performed the annual assessment and determined that goodwill was impaired, and recorded impairment of goodwill of $2,521,468. The impairment charges resulted from decrease in the Company’s estimated undiscounted cash flows from the expected future operations of the assets. These estimates considered factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors.

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 9 – ACCOUNTS PAYABLES AND ACCRUED EXPENSES

 

Accounts payables and accrued expenses consist of the following:

 

    December 31,  
    2018     2017  
Accounts payable   $ 841,334     $ 1,425,281  
Accrued payroll     181,452       150,709  
Accrued vacation     -       93,477  
Accrued professional fees     296,518       318,379  
Accrued board members fees     143,108       31,500  
Accrued rent expense     618,120       284,999  
Sales taxes payable (1)     297,160       355,692  
Accrued interest     249,535       24,275  
Accrued interest, Related parties     183,959       -  
Other accrued expenses     76,194       25,881  
    $ 2,887,380     $ 2,710,193  

 

(1) See Note 16 – Commitments and Contingencies –Taxes for detailed related to delinquent sales taxes.

 

NOTE 10 – CONVERTIBLE NOTES PAYABLE TO FORMER PARENT

 

On February 15, 2017, the Company issued a promissory note in the amount of $980,949 (the “First 2017 ARH Note”) and on March 15, 2017, MMI issued a promissory note in the amount of $338,834 (the “Second 2017 ARH Note”), both to the Former Parent. The First 2017 ARH Note and the Second 2017 ARH Note bear no stated interest rate or maturity date and are convertible into 262,753 and 72,606 shares of the Company’s common stock at a conversion price of $3.73 per share and $4.67 per share, respectively, at a time to be determined by the Former Parent.

 

The First 2017 ARH Note and the Second 2017 ARH note include a three-year warrant for the purchase of 91,963 and 15,793 shares, respectively, of the Company’s common stock at an exercise price of $9.33 per share. The warrants issued in connection with the First 2017 ARH Note and the Second 2017 ARH note had a grant date value of $122,820 and $23,120, respectively. The Company allocated the proceeds to the First 2017 ARH Note and the Second 2017 ARH and related warrants based on the relative fair values at the time of issuance, resulting in an effective conversion price of $3.27 and $4.35 per share, respectively. The fair value of the Company’s common stock on the dates the notes were issued was $7.15 per share, creating an intrinsic value of $3.88 and $2.80 per share, respectively.

 

On July 18, 2017, the Company issued a convertible promissory note (the “Third 2017 ARH Note”) to the Former Parent in exchange for cash proceeds of $336,932. The Third 2017 ARH Note has no stated interest rate or maturity date and is convertible into shares of the Company’s common stock at a conversion price of $7.47 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 15,793 shares of the Company’s common stock at an exercise price of $9.33 per share, with an aggregate grant date value of $25,018.

 

The 2015 ARH Note, 2016 ARH Note, First 2017 ARH Note, Second 2017 ARH Note and Third 2017 ARH Note are together, the “ARH Notes”.

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 10 – CONVERTIBLE NOTES PAYABLE TO FORMER PARENT, continued

 

On March 14, 2017, the Former Parent elected to convert aggregate principal of $4,685,411 under the 2015 ARH Note, the 2016 ARH Note and the First 2017 ARH Note into an aggregate 1,197,022 shares of the Company’s common stock.

 

On September 19, 2017, the Former Parent elected to convert aggregate principal of $675,766 under the Second 2017 ARH Note and the Third 2017 Note into an aggregate 117,731 shares of the Company’s common stock.

 

On April 6, 2018, the Company issued a $475,000 convertible promissory note (the “2018 ARH Note”) to the Former Parent for services rendered and expense paid on behalf of the Company. The 2018 ARH Note has no stated interest rate or maturity date and is convertible into shares of the Company’s common stock at a conversion price of $0.50 per share at a time to be determined by the lender.

 

On April 11, 2018, the Former Parent elected to partially convert the 2018 ARH Note for the principal of $392,542 into 785,084 shares of the Company’s common stock.

 

In accordance with ASC 470-20 “Debt with Conversion and other Options”, the intrinsic value related to the convertible notes results in a beneficial conversion feature which is recorded as a debt discount with a corresponding credit to additional paid in capital. The relative fair value of the warrant at the date of grant of is also recorded as a debt discount. For the year ended December 31, 2017 the Company recorded aggregate debt discounts of $170,958 and $1,085,985, related to the warrants and the beneficial conversion feature, respectively, on the ARH notes and for the year ended December 31, 2018 the Company recorded aggregate debt discounts of $0 and $475,000, related to the warrants and the beneficial conversion feature, respectively, on the ARH Notes, which were amortized over the expected terms of the respective notes. The grant date fair value of the warrants issued was valued on the date of issuance using the Black-Scholes option pricing model with the following weighted average assumptions:

 

    For the Years Ended
December 31,
 
    2018     2017  
Risk free interest rate     - %     1.07% - 1.57 %
Contractual term (years)     0.00       3.00  
Expected volatility     0.0 %     43.5 %
Expected dividend     0.00 %     0.00 %

 

F-50
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 11 – OTHER NOTES PAYABLE

 

Convertible Notes

 

During the year ended December 31, 2017, the Company received an aggregate of $1,550,000 associated with the issuances of convertible promissory notes payable and warrants to various parties, of which convertible promissory notes in the aggregate amount of $300,000 were issued to related parties. These notes are convertible into shares of the Company’s common stock upon the occurrence of the initial public offering at a 50% discount to the initial public offering price (the “Conversion Price”). If the convertible notes are not converted within six months, they are to be repaid with 10% interest. The maturity dates of all of the notes were extended subsequent to the year ended December 31, 2017. See Note 18 – Subsequent Events- Convertible Notes Payable for details related to subsequent issuances and extensions. In connection with the issuances of the convertible promissory notes, the Company issued three-year warrants for the purchase of an aggregate of 84,736 shares of the Company’s common stock exercisable at the Conversion Price (see Note 17 - Equity – Warrants).

 

During the year ended December 31, 2017, the Company received an aggregate of $799,340 associated with the issuances of convertible promissory notes payable to various parties. The notes are automatically converted into common stock at the Conversion Price upon the earlier of the closing of the offering or the maturity dates of the notes. See Note 18 – Subsequent Events- Convertible Notes Payable for details related to subsequent issuances or extensions of convertible notes.

 

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

 

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

 

In January 2018, the Company and certain note holders, including related parties, agreed to extend the maturity date of convertible notes payable in the aggregate principal amount of $1,591,800 to be upon the earlier of the closing of the initial public offering, but no later than July 29, 2018. See Note 18 - Subsequent Events – Convertible Notes for details related to further extensions of convertible notes.

 

On February 7, 2018, the Company and a note holder entered into an amendment to a promissory note issued by the Company on May 31, 2017, whereby the parties agreed to (i) extend the term of the note to March 15, 2018, (ii) increase the outstanding balance of the note to $170,000, inclusive of principal and interest and (iii) the Company agreed to payments on the following dates: (a) $70,000 upon entering into the amendment and (b) $100,000 on March 15, 2018. See Note 16 – Litigations, Claims and Assessments for further action taken by the note holder.

 

F-51
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 11 –OTHER NOTES PAYABLE, continued

 

Convertible Notes, continued

 

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

 

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

 

From September 12, 2018 through December 31, 2018, the Company entered into Securities Purchase Agreements (“SPA”) with several accredited investors (the “Investors”) providing for the sale by the Company to the investors of 15% Senior Secured Convertible Promissory Notes (the “15% Notes”) in the aggregate amount of $2,165,000, which included $635,000 in other notes payable converted into 15% Notes. The Notes bear interest at 15% per annum paid quarterly and mature 18 months from issuance.

 

The Investors may elect to convert all or part of the 15% Notes, plus accrued interest, at any time into shares of common stock of the Company at a conversion price of $1.00 (the “Fixed Conversion Price”); provided, however, in the event the per share price of a public offering multiplied by sixty percent (60%) at the time of the listing of the shares of common stock on an exchange (the “Listing Event”) is less than $1.00 (the “Discounted Public Offering Price”) then the conversion price shall be reset to equal the Discounted Public Offering Price. In the event the Investors are required to execute a Lock Up Agreement concurrent with a public offering at the time of the Listing Event, then the Fixed Conversion Price shall be $0.75 and the Discounted Public Offering Price shall be the public offering multiplied by forty five percent (45%) at the time of the Listing Event. Upon the occurrence of a Listing Event or the sale or license of all or substantially all of the Company’s assets (a “Liquidity Event”), the entire unpaid and outstanding principal amount and any accrued interest thereon under this Note shall automatically convert in whole without any further action by the Holder.

 

In addition to the 15% Notes, the Investors also received 1,082,500 warrants to purchase common stock of the Company (the “Warrants”) that entitles the holder to purchase a number of shares equal to 50% of the conversion shares of common stock of the Company. The Warrants are exercisable for five years at an exercise price of $1.20. In the event the conversion price is adjusted as contemplated above, then the exercise price shall adjust to equal 120% of the adjusted conversion price. The Investors may exercise the Warrants on a cashless basis.

 

F-52
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 11 –OTHER NOTES PAYABLE, continued

 

Convertible Notes, continued

 

The Securities Purchase Agreements require that until the Listing Event, Catalytic Capital LLC holds the right to designate one member and one observer to the board of directors of the Company and that the Company shall engage an investor relations firm mutually agreed to by the Company and Catalytic Capital LLC from the time of the Listing Event until six months after the Listing Event. The Company is also required to engage Insight Advisory as a consultant to provide business and financial advice.

 

The Company granted the Investors piggy back registration rights with respect to the shares of common stock underlying the Notes and the Warrants.

 

See Note 18 – Subsequent Events- Other Notes Payable for details related to subsequent issuances or extensions of convertible notes.

 

During the year ended December 31, 2018, convertible notes with an aggregate amount of $1,850,340 were automatically converted into 1,504,425 shares of the Company’s common stock pursuant to the terms of the notes.

 

In accordance with ASC 470-20 “Debt with Conversion and other Options”, the intrinsic value related to the convertible notes results in a beneficial conversion feature which is recorded as a debt discount with a corresponding credit to additional paid in capital. The relative fair value of the warrant at the date of grant of is also recorded as a debt discount. For the year ended December 31, 2018, the Company recorded aggregate debt discounts of $399,554 and $2,959,506, related to the warrants and the beneficial conversion feature, respectively, on the convertible notes, which were amortized over the expected terms of the respective notes.

 

Other Notes Payable

 

During the year ended December 31, 2017, the Company received an aggregate of $555,000 associated with the issuances of promissory notes, as amended and extended (See Note 18 – Subsequent Events – Other Notes Payable), payable to various parties, of which $335,000 were issued to a related party with a stated interest rate of 10% per the original 60-day-term.

 

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

 

F-53
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 12 –NOTES PAYABLE, continued

 

Other Notes Payable, continued

 

On January 24, 2018, the Company entered into a promissory note with an unrelated third party in the principal amount of $511,765 with a maturity date of March 30, 2018. The note is issued with a 15% original issue discount of which the Company received cash proceeds of $435,000. In connection with the promissory note, the Company issued three-year warrants for the purchase of an aggregate of 78,733 shares of the Company’s common stock with an exercise price per share at 50% of initial public offering price. The grant date fair value of the warrants of $155,104 has been amortized over the terms of the note and was recorded as interest. The warrant contains a cashless exercise provision and piggyback registration rights as to the common stock underlying the warrants subsequent to the filing and effectiveness of the Form 8-A with the SEC following the closing of the initial public offering. In the event of default, the principal amount of the note is to be increased by 30% of the original principal amount and another three-year warrant for the purchase of an additional 78,733 shares of the Company’s common stock with an exercise price per share at 50% of initial public offering price, which together with the original warrant would constitute 100% warrant coverage. On March 30, 2018, the Company had defaulted on the loan and as a result the principal interest amount of the note has increase by $153,529 and the Company issued the additional three-year warrants for the purchase of an aggregate of 78,733 shares of the Company’s common stock with an exercise price per share at 50% of initial public offering price. The grant date fair value of the warrants of $149,951 has been recorded as interest expense. The Company has since defaulted on the note and the note was subsequently converted into Secured Convertible Promissory Notes (see Note 18 Subsequent Events - 15% Senior Secured Convertible Notes).

 

NOTE 13 – DEFERRED REVENUE

 

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

 

    December 31,     December 31,  
    2018     2017  
Customer deposits   $ -     $ 18,179  
Franchise fees     801,107       1,223,608  
Unearned vendor rebates     106,841       150,073  
    $ 907,948     $ 1,391,860  

 

During the year ended December 31, 2017, the Company entered into a new agreement with a vendor whereby the vendor advanced the Company approximately $200,000 against future rebates that the Company will earn from the vendor.

 

NOTE 14 – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

    December 31,  
    2018     2017  
Gift card liability   $ 122,221     $ 107,568  
Marketing and co-op advertising fund liability     485,265       261,555  
    $ 607,486     $ 369,123  

 

F-54
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 15 – INCOME TAXES

 

The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2018 and 2017 are presented below:

 

    For the Years Ended  
    December 31,  
    2018     2017  
Deferred tax assets:                
Net operating loss carryforwards   $ 3,328,192     $ 2,058,299  
Receivable allowance     30,800       27,000  
Stock-based compensation     244,157       200,471  
Accruals     44,816       20,250  
Intangible assets     527,235       603,746  
Deferred revenues     166,025       264,330  
Gross deferred tax asset     4,341,225       3,174,096  
                 
Deferred tax liabilities:                
Beneficial conversion feature     (352,111 )     -  
Deferred Rent     (5,798 )     -  
                 
Gross deferred tax liabilities     (357,909 )     -  
                 
Net deferred tax assets     3,983,316       3,174,096  
                 
Valuation allowance     (3,983,316 )     (3,174,096 )
                 
Net deferred tax assets, net of valuation allowance   $ -     $ -  

 

The income tax (provision) benefit for the periods shown consist of the following:

 

    For the Years Ended  
    December 31,  
    2018     2017  
Federal:                
Current   $ -     $ -  
Deferred     606,915       2,050,319  
State and local:                
Current     -       -  
Deferred     202,305       585,806  
      809,220       2,636,125  
Change in valuation allowance     (809,220 )     (2,389,598 )
Income tax (provision) benefit   $ -     $ 246,527  

 

F-55
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 15 – INCOME TAXES, continued

 

A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the periods shown, are as follows:

 

    For the Years Ended  
    December 31,  
    2018     2017  
             
Federal income tax benefit at statutory rate     21.0 %     21.0 %
State income tax benefit, net of federal impact     7.0 %     6.0 %
Permanent differences     (0.6 )%     (0.8 )%
Income passed through to non-controlling interests     (0.0 )%     (4.1 )%
Change in effective rate     (3.0 )%     (9.8 )%
Other     (0.1 )%     (0.9 )%
Change in valuation allowance     (24.3 )%     (13.1 )%
                 
Effective income tax rate     0.0 %     (1.7 )%

 

At December 31, 2018, the Company had approximately $11.9 million each of federal and state net operating losses (“NOLS”) that may be available to offset future taxable income. The net operating loss carry-forwards, if not utilized, will expire from 2030 to 2038 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 completed a Section 382 analysis and determined that none of its net operating losses would be limited.

 

The Company has filed income tax returns in the U.S. federal jurisdiction and the states of California, New Jersey, Texas and New York. The Company’s tax return filed for 2018, 2017, 2016 and 2015 remains subject to examination.

 

The Company is in the process of filing its amended U.S. Federal and State tax returns for the years ended December 31, 2017, 2016 and 2015. The NOLS for the years will not be available until the returns are filed. Assuming these returns are filed, as of December 31, 2018 the company had approximately $7.6 million of Federal and State NOLS that may be available to offset future taxable income.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%, resulting in a $1,529,547 decrease in net deferred tax assets for the year ended December 31, 2017 and a corresponding $1,529,547 decrease in valuation allowance as of December 31, 2017.

 

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the 2017 Tax Act enactment date for companies to complete the accounting for the income tax effects of certain elements of the 2017 Tax Act. In accordance with SAB 118, we have recognized the provisional tax impacts related to the remeasurement of deferred tax assets and liabilities and included these amounts in our financial statements for the year ended December 31, 2018 and 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the 2017 Tax Act.

 

F-56
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 16 – COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

During the year ended December 31, 2017, the Company became obligated for payments pursuant to four lease agreements for restaurant spaces with lease terms ranging from 5 years to 10 years, exclusive of options to renew. One of the lease agreements has a monthly rent expense based on a percentage fee of eight percent of gross sales for each year of the agreement. Rent expense pursuant to the remaining three lease agreements range from $5,916 to $7,532 per month.

 

The leases are subject to certain annual escalations as defined in the agreements. The Company recognizes rent on a straight-line basis. The cumulative difference between the rent payments and the rent expense since the inception of the leases was $59,558 at December 31, 2018.

 

During the year ended December 31, 2018, the Company became obligated for payments pursuant to two new lease agreements for restaurant spaces with lease terms of 10 years, exclusive of options to renew. These lease agreements have a monthly rent expense based on a percentage fee of eight percent of gross sales for each year of the agreement.

 

The Company has recorded security deposits, totaling, in the aggregate, approximately $33,000 and $21,000 as of December 31, 2018 and 2017, respectively.

 

Future aggregate minimum lease payments for these leases and others as of December 31, 2018 are:

 

Future Minimum Lease Payments
       
2019   $ 217,043  
2020     224,336  
2021     191,237  
2022     188,693  
2023     192,049  
Thereafter     527,455  
    $ 1,540,813  

 

Total rent expense was $980,136 and $980,238 for the years ended December 31, 2018 and 2017, respectively.

 

F-57
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 16 – COMMITMENTS AND CONTINGENCIES, continued

 

Employment Agreements

 

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

 

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

 

In connection with the resignation of Grady Metoyer, on January 25, 2018, the Company’s board of directors appointed Ferdinand Groenewald as its Vice President of Finance, Principal Financial Officer and Principal Accounting Officer. The Company entered into an at-will employment agreement with Ferdinand Groenewald for a one-year term that is to commence as of the date the Company successfully receives at least $5,000,000 in gross proceeds from an SEC qualified offering under Offering Statement under Regulation A+ under the Securities Act of 1933, as amended. The employment agreements did not become effective since the company terminated its Regulation A+ offering on March 29, 2018.

 

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

 

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

 

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

 

On May 1, 2018, the Company appointed Michael J. Roper as Chief Executive Officer (“CEO”) of the Company and entered into an Employment Agreement with Mr. Roper. During the term of the agreement, Mr. Roper will be entitled to a base salary at the annualized rate of $250,000 and will be eligible for a discretionary performance bonus to be paid in cash or equity. Mr. Roper is also entitled to 100,000 shares of common stock of the Company that will be issued upon a Public offering of at least $3,000,000. In addition, Mr. Mohan resigned as Interim President of the Company.

 

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

 

F-58
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 16 – COMMITMENTS AND CONTINGENCIES, continued

 

Employment Agreements, continued

 

On September 26, 2018, Muscle Maker, Inc. (the “Company”) rehired Ferdinand Groenewald as Chief Financial Officer of the Company and entered into an Employment Agreement with Mr. Groenewald. Pursuant to the agreement, Mr. Groenewald will be employed as Chief Financial Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the agreement. During the term of the agreement, Mr. Groenewald will be entitled to a base salary at the annualized rate of $150,000 and will be eligible for a discretionary performance cash bonuses which will include $10,000 upon completion of the audit for the year ended December 31, 2017 and $25,000 and up to 10,000 shares of common stock upon completion of a public offering of not less than $3 million together with listing on a national exchange (the “Public Offering”), which may be increased to 25,000 in the event $5 million is raised. Mr. Groenewald’s salary will increase to $175,000 upon closing of the Public Offering. Mr. Groenewald is also eligible to participate in employee benefits plans as the Company may institute from time to time that are available for full-time employees. In addition, pursuant to board approval, Mr. Groenewald is entitled to 110,000 shares of common stock of the Company that will be issued upon a Public Offering of at least $3,000,000.

 

On September 26, 2018, the Company appointed Kenneth Miller as Chief Operating Officer of the Company and entered into an Employment Agreement with Mr. Miller. Pursuant to the agreement, Mr. Miller will be employed as Chief Operating Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the agreement. During the term of the agreement, Mr. Miller will be entitled to a base salary at the annualized rate of $200,000, which will be increased to $275,000 upon successful closing of the Public Offering. Mr. Miller is also entitled to 100,000 shares of common stock of the Company that will be issued upon a Public offering of at least $3,000,000. Mr. Miller is eligible for a discretionary performance cash and equity bonuses which will include cash of $50,000 and 75,000 shares of common stock upon completion of the Public Offering, which may be increased to 125,000 shares in the event $5 million is raised. Mr. Miller is also eligible to participate in employee benefits plans as the Company may institute from time to time that are available for full-time employees.

 

On October 26, 2018, the Company entered into an Employment Agreement with Michael Roper, which replaced his employment agreement from May 2018. Pursuant to the Employment Agreement, Mr. Roper will continue to be employed as Chief Executive Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon listing the Company on a national exchange and raising $3,000,000 (the “IPO”). During the term of the Employment Agreement, Mr. Roper will be entitled to a base salary at the annualized rate of $250,000, which was increased to $275,000 upon achieving various milestones required by the Investors that participated in the September 2018 Offering and will be increased to $350,000 upon the Company completing the IPO. Mr. Roper will be eligible for a discretionary performance bonus to be paid in cash or equity, provided, however, no cash bonus will be paid until the closing of the IPO. Mr. Roper is entitled to $100,000 bonus upon closing of the IPO. Mr. Roper is also entitled to 100,000 shares of common stock of the Company that will be issued upon a Public offering of at least $3,000,000. In addition, pursuant to board approval on June 29, 2019, Mr. Roper is entitled to 250,000 shares of common stock of the Company that will be issued upon a Public Offering of at least $3,000,000. In the event the Company raises $3 million or $5 million upon completion of a public offering together with listing on a national exchange, then Mr. Roper will receive 150,000 restricted stock units or 250,000 restricted stock units, respectively. In addition, Mr. Roper will receive 100,000 restricted stock units upon the one- and two-year anniversaries of his employment.

 

F-59
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 16 – COMMITMENTS AND CONTINGENCIES, continued

 

Employment Agreements, continued

 

On October 26, 2018, the Company entered into an Employment Agreement with Kevin Mohan. Pursuant to the Employment Agreement, Mr. Mohan will be engaged as Chief Investment Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon the IPO. During the term of the Employment Agreement, Mr. Mohan will be entitled to a base salary at the annualized rate of $156,000, which will be increased to $175,000 upon the IPO. Mr. Mohan will be eligible for a discretionary performance bonus to be paid in cash following the closing of the IPO. Mr. Mohan is entitled to $50,000 bonus upon closing of the IPO. In the event the Company raises $3 million or $5 million, then Mr. Mohan will receive 100,000 restricted stock units or 200,000 restricted stock units, respectively. In addition, pursuant to board approval on June 29, 2019, Mr. Mohan is entitled to 250,000 shares of common stock of the Company that will be issued upon a Public Offering of at least $3,000,000.

 

Consulting Agreement

 

On September 12, 2018, the Company entered into a Consulting Agreement with a professional business and financial expert to provide the Company financial and business advice including, but not limited, to discussing financing, potential business opportunities and potential acquisition. In addition, the consultant will help the Company select an underwriter to conduct an offering and will work with Company to prepare for the offering. Pursuant to the terms of the agreement the Company agreed to pay $140,000 in cash and to issue 250,000 restricted shares of the Company’s common stock on or before September 30, 2018. In addition, the Company agrees to pay the following additional fees (i) $70,000 in cash and 70,000 in restricted shares upon performance of the first milestones per the SPA agreement, (ii) $70,000 in cash and 70,000 in restricted shares upon performance of the Second milestones per the SPA agreement and (iii)$150,000 in cash and 200,000 in restricted shares upon the completion of both the contract and the Company’s offering. See Note 17 – Equity – Restricted Common Stock related to the issuance of the 250,000 restricted common stock.

 

Taxes

 

The Company failed in certain instances in paying sales taxes collected from customers in specific states that impose a tax on sales of the Company’s products. The Company had accrued for approximate $297,160 and $355,692, which includes penalties and interest as of December 31, 2018 and December 31, 2017 related to this matter.

 

Litigations, Claims and Assessments

 

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

 

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

 

F-60
 

 

MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 16 – COMMITMENTS AND CONTINGENCIES, continued

 

Litigations, Claims and Assessments, continued

 

On October 3, 2018, the Company, ARH and Mr. Morgan entered into a settlement agreement with Crownhall and Limestone agreeing to forfeit all security deposits, pay an upfront amount of $25,000 and an additional $175,000 to be paid over 20 months. This agreement settles litigation surrounding two closed locations, which the plaintiffs were seeking a total of $2,391,330 in past damages for rent, interest and other expenses. As of December 31, 2018, the Company has accrued for the liability in accounts payable and accrued expenses.

 

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

 

On March 27, 2018 a convertible note holder filed a complaint in the Iowa District Court for Polk County #CVCV056029 against the Company for failure to pay the remaining balance due on a promissory note in the amount of $100,000, together with interest, attorney fees and other costs of $171,035. On June 6, 2018 a default judgement was entered against the Company for the amount of $171,035. As of December 31, 2018, the Company has accrued for the liability in accounts payable and accrued expenses and convertible note payable.

 

On or about April 5, 2018, the Company and Former Parent entered into a settlement agreement with 918-924 Belmont, LLC for $100,000 regarding past rents owed, other charges and the termination of its lease at Belmont location. The settlement calls for monthly payments of $8,333 thru March 2019. As of December 31, 2018, the Company has accrued for the liability in accounts payable and accrued expenses. As of the date of the issuance of these consolidated financial statements the settlement has been paid in full.

 

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

 

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

 

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

 

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Notes to Consolidated Financial Statements

 

NOTE 16 – COMMITMENTS AND CONTINGENCIES, continued

 

Litigations, Claims and Assessments, continued

 

In May 2018, Resolute Contractors, Inc., Quality Tile, MTL Construction, Genesis Electric, JNB Interiors and Captive Aire filed a Mechanics Lien for labor, service, equipment and materials in the total amount of $98,005. The Company intends to set up various payment plans with these vendors. As of December 31, 2018, the Company has accrued for the liability in accounts payable and accrued expenses.

 

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

 

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

 

On December 12, 2018, the Company was listed as a defendant to a lawsuit filed by a landlord in the Superior Court of the State of California. Fountain Valley is seeking approximately $121,000 in damages for rent, interest and other expenses. On February 15, 2019, the Company entered into a settlement agreement and payment plan in the amount of $85,000. The Company agreed to make the following payments (i) $15,000 on or before March 15, 2019, and (ii) ten monthly installments of $7,000 commencing on April 15, 2019 and continuing monthly on the 15th day of each month though January 15, 2020.

 

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.

 

Employment Agreement

 

The Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements.

 

Termination of Offering

 

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

 

NOTE 17 – EQUITY

 

Authorized Capital

 

As of December 31, 2018, the Company was authorized to issue 100,000,000 shares of no par value common stock. The holders of the Company’s common stock are entitled to one vote per share.

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 17 – EQUITY, continued

 

Common Stock Issuances

 

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

 

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

 

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

 

During the year ended December 31, 2017, the Company issued 1,314,753 shares of its common stock upon conversion of various ARH Notes in the aggregate principal amount of $5,361,177 (See Note 10 – Convertible Notes Payable to Former Parent).

 

On March 29, 2018, the Company decided to terminate its Regulation A+ offering in order to register its common stock with the SEC under the Securities Exchange Act of 1934, as amended, using a Form 8-A12g and become a publicly reporting company. Prior to terminating the Regulation A+ offering, the Company sold 44,153 shares in the offering at $3.25 per share, yielding proceeds of approximately $143,497.

 

During the year ended December 31, 2018, the Company sold 180,000 shares of common stock of the company to various investors at a purchase price of $1.00 per share providing $180,000 of proceeds to the Company.

 

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, the company reserved 1,071,428 shares of common stock, no par value per share, for issuance. As of December 31, 2018, 1,039,292 shares of common stock and options were outstanding under the 2017 Plan.

 

Warrant and Option Valuation

 

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

 

Options Granted

 

On July 27, 2017, the Company issued stand-alone non-qualified stock options, not pursuant to a plan, to purchase an aggregate of 33,750 shares of the Company’s common stock to its franchisees. The options are fully vested on the date of issuance and have an exercise price of $9.33 per share. The options expire three years from the date of issuance. The options have a grant date value of $47,583. The Company has estimated the fair value of the options granted using the Black-Scholes model using the following assumptions: expected volatility of 37%, risk-free rate of 1.52%, expected term of 3 years, expected dividends of 0%, and stock price of $7.47.

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 17 – EQUITY, continued

 

Restricted Common Stock

 

In May 2017, Muscle Maker granted 119,709 shares of its restricted common stock to its employees and consultants, with an aggregate grant date value of $1,117,403 or $9.33 per share. The restricted common stock awards granted to the employees and consultants will vest in five equal installments with the first installment vesting on the date of grant and the remaining installments 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 received such shares, any remaining non-vested shares will be forfeited. These awards were granted under the 2017 Plan.

 

Effective July 20, 2017, the Company entered into a Master Services Agreement (the “MSA”), with a consultant for marketing services to the Company in connection with the Regulation A + offering. Pursuant to the terms of the MSA, the Company issued 52,307 shares of fully vested restricted common stock at a value of $3.25 per share with an aggregate value of $170,000, as well as a cash fee of $145,000.

 

On September 21, 2017, the Company granted an aggregate amount of 32,142 shares of its restricted common stock under the 2017 Plan at a price of $9.33 per share to its directors. The restricted common stock awards granted to the directors are subject to graded vesting in the following installments: (i) 66.67% as of the date of grant and (ii) four installments of 8.333% vesting on the first day of each of the next four calendar months.

 

During September 30, 2018, the Company issued 250,000 restricted common stock of the Company to a consultant at a price of $1.00 per share. The shares are fully vested on the date of grant. See Note 16 – Commitments and Contingencies – Consulting Agreement.

 

At December 31, 2018, the unamortized value of the restricted common stock was $271,795. The unamortized amount will be expensed over a weighted average period of 2.01 years. A summary of the activity related to the restricted common stock for the years ended December 31, 2018 and December 31, 2017 is presented below:

 

          Weighted  
          Average Grant  
    Total     Date Fair Value  
Outstanding at January 1, 2017     -     $ -  
Granted     204,152       7.78  
Forfeited     (1,285 )     9.33  
Vested     (105,690 )     6.32  
Outstanding at December 31, 2017     97,177       6.82  
Granted     250,000       1.00  
Forfeited     (28,449 )     9.33  
Vested     (276,286 )     9.12  
Outstanding at December 31, 2018     42,442     $ 6.34  

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 17 – EQUITY, continued

 

Stock-Based Compensation Expense

 

Stock-based compensation related to restricted stock issued to employees, directors and consultants amounted to $383,965 and $912,821 for the years ended December 31, 2018 and 2017, respectively, of which $380,871 and $729,073, respectively, was recorded in general and administrative expenses, $3,094 and $13,748, respectively, was recorded in labor expense with restaurant operating expenses and $0 and $170,000, respectively, was recorded in consulting expenses.

 

Stock-based compensation related to options issued to franchisees amounted to $0 and $47,583, respectively, for the year ended December 31, 2018 and 2017, of which was offset against franchisee royalties and fees in the statement of operations.

 

Warrants

 

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

 

A summary of warrants activity during the years ended December 31, 2018 and 2017 is presented below:

 

                Weighted  
          Weighted     Average  
          Average     Remaining  
    Number of     Exercise     Life  
    Warrants     Price     In Years  
Outstanding, December 31, 2016     318,116     $ 8.84       2.2  
Issued     208,285       9.33          
Exercised     (5,356 )     9.33          
Outstanding, December 31, 2017     521,045     $ 9.03       1.9  
Issued     1,730,466       1.82          
Exercised     -       -          
Forfeited     (66,963 )     7.00          
Outstanding, December 31, 2018     2,184,548       3.38       3.3  
                         
Exercisable, December 31, 2018     2,184,548     $ 3.38       3.3  

 

The grant date fair value of warrants granted during the years ended December 31, 2018 and 2017 was determined on the date of issuance using the Black-Scholes option pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company calculates the expected volatility using the historical volatility of comparable companies over the most recent period equal to the expected term and evaluates the extent to which available information indicates that future volatility may differ from historical volatility. The expected dividend rate is zero as the Company does not expect to pay or declare any cash dividends on common stock. The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of the grant. The Company has not experienced significant exercise activity on stock options. Due to the lack of historical information, the Company determined the expected term of its stock option awards issued using the simplified method. In applying the Black-Scholes option pricing model, the Company used the following assumptions:

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 17 – EQUITY, continued

 

Warrants, continued

 

    For the Years Ended  
    December 31,  
    2018     2017  
Risk free interest rate     2.27 - 3.05 %     1.07 - 1.59 %
Expected term (years)     3.00 - 5.00       3.00  
Expected volatility     38.57- 55.37 %     43.50 %
Expected dividends     0.00 %     0.00 %

 

NOTE 18 – SUBSEQUENT EVENTS

 

Company-Owned Restaurants

 

Subsequent to December 31, 2018 and through the date of the issuance of these consolidated financial statements, the Company opened one additional company-owned restaurant, two franchised restaurants and closed six franchised restaurants.

 

Convertible Notes

 

On or about January 23, 2019, the Company and certain note holders, including related parties, agreed to extend the maturity date of the convertible notes payable, as amended and extended on or about August 2018, in the aggregate principal amount of $1,550,000 to be upon the earlier of (a) January 24, 2020 or (b) the first day the company’s stock is publicly traded. All interest due and payable on the notes, shall be converted into shares of common stock at a conversion price of $1.00 per share.

 

Other Notes Payable

 

On or about January 23, 2019, the Company and certain note holders, including related parties, agreed to extend the maturity date of the notes payable, as amended and extended on or about August 2018, in the aggregate principal amount of $560,000 to be upon the earlier of (a) January 24, 2020 or (b) the first day the company’s stock is publicly traded. All interest due and payable on the notes, shall be converted into shares of common stock at a conversion price of $1.00 per share.

 

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

 

On May 14, 2019, the Company issued a $91,000 promissory note to a related party. The note has a stated interest rate of 15% over the original term of one year with monthly interest payments. The note becomes due in one year or the first day the Company trades publicly on an exchange.

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 18 – SUBSEQUENT EVENTS, continued

 

15% Senior Secured Convertible Notes

 

Subsequent to December 31, 2018 through the date of the issuance of these consolidated financial statements, the Company entered into SPA with Investors providing for the sale by the Company to the investors of SPA Notes in the aggregate amount of $2,973,000, of which a $100,000 was issued to related parties.

 

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

 

In addition to the SPA Notes, the Investors also received warrants to purchase common stock of 2,164,000 shares of the Company (the “Warrants”). The Investors are entitled to purchase a number of shares equal to 50% of the conversion shares of common stock of the Company. The Warrants are exercisable for five years at an exercise price of $1.20. In the event the conversion price is adjusted as contemplated above, then the exercise price shall adjust to equal 120% of the adjusted conversion price. The Investors may exercise the Warrants on a cashless basis.

 

Employment Agreements

 

On May 5, 2019, the Company entered into an Employment Agreement with Rodney Silva. Pursuant to the Employment Agreement, Mr. Silva will be engaged as Vice President of Brand Development/Franchise Sales of the Company for a period of eighteen months unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon the IPO. During the term of the Employment Agreement, Mr. Silva will be entitled to a base salary at the annualized rate of $150,000. Mr. Silva will be eligible for a discretionary performance bonus to be paid in cash following the closing of the IPO. Mr. Silva is also eligible to participate in employee benefits plans as the Company may institute from time to time that are available for full-time employees.

 

On May 6, 2019, the Company appointed Aimee Infante as Chief Marketing Officer of the Company and entered into an Employment Agreement with Ms. Infante. Pursuant to the Employment Agreement, Ms. Infante will be employed as Chief Marketing Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the Employment Agreement. During the term of the Employment Agreement, Ms. Infante will be entitled to a base salary at the annualized rate of $125,000, which will be increased to $150,000 upon the completion of a public offering of not less than $3 million together with listing on a national exchange (the “Public Offering”). Following the closing of the Public Offering, Ms. Infante will receive a one-time $10,000 cash bonus and will be entitled to an annual cash bonus based on 25% of her base salary subject to satisfying specific written criteria. The Company agreed to issue Ms. Infante 5,000 restricted stock units upon closing of the Public Offering, which may be increased to 10,000 restricted stock units if the Public Offering is in excess of $5 million. Ms. Infante is also eligible to participate in employee benefits plans as the Company may institute from time to time that are available for full-time employees.

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 18 – SUBSEQUENT EVENTS, continued

 

12% Secured Convertible Notes

 

During April 2019 through the date of the issuance of these condensed consolidated financial statements, Muscle USA entered into April 2019 SPA with the April 2019 Investors providing for the sale by the Company to the investors of April 2019 Notes in the aggregate amount of $3,175,000 (the “April 2019 Offering”).

 

The 12% Notes bear interest at 12% per annum, paid quarterly, and mature 18 months from issuance. The April 2019 Investors may elect to convert all or part of the April 2019 Notes, plus accrued interest, at any time into shares of common stock of the Company at a conversion price of $2.00 per share (the “April 2019 Conversion Price”); provided, however, in the event the per share price of a public offering multiplied by fifty percent (50%) at the time of the Company listing on a national exchange (the “Discounted Public Offering Price”) is less than $2.00 then the April 2019 Conversion Price shall be reset to equal the lesser of (i) Discounted Public Offering Price or (ii) a price per share equal to a $20 million valuation.

 

In addition to the April 2019 Notes, the Investors also received 1,587,500 warrants to purchase common stock of the Company (the “Warrants”) that entitles the holder to purchase a number of shares equal to 50% of the conversion shares of common stock of the Company. The Warrants are exercisable for five years at an exercise price of 115% of the conversion price.

 

Upon the occurrence of the listing of the Company’s common stock on a national securities exchange, the sale of all or substantially all of the Company’s stock, the sale or licensing of all or substantially all of the Company’s assets or any combination of the foregoing, the entire unpaid and outstanding principal amount and any accrued interest thereon under the April 2019 Notes shall automatically convert in whole without any further action by the holders.

 

As long as the April 2019 Notes remain outstanding, the Company has agreed that, among other items, it will only use proceeds from the sale of the April 2019 Notes and exercise of the Warrants for specific corporate purposes as set forth in the April 2019 SPA, will not incur or permit indebtedness or liens unless permitted and will not enter into variable priced transactions. The Company, Muscle USA and the April 2019 Investors entered into Security and Pledge Agreements providing that the obligations to the April 2019 Investors are secured by substantially all of Muscle USA’s assets.

 

The Company granted the Investors piggyback registration rights with respect to the shares of common stock underlying the Notes and the Warrants.

 

Operating Leases

 

Subsequent to December 31, 2018, the Company became obligated for payments pursuant to three new lease agreements for restaurant spaces with lease terms of 10 years, exclusive of options to renew. These lease agreements have a monthly rent expense based on a percentage fee of eight percent of gross sales for less than $1,000,000 and ten percent of gross sales greater than $1,000,000 for each year of the agreement.

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 18 – SUBSEQUENT EVENTS, continued

 

Operating Leases, continued

 

On August 1, 2019, we entered a settlement agreement with a landlord in connection with the prior executive office in Houston, Texas as we vacated the property on April 30, 2018. The Company owed the landlord the sum of $58,522. The landlord agreed to accept $32,283 as full payment of the damages. Pursuant to the settlement we will make three equal payments of $10,761 with the first payment to be made on August 2, 2019, the second payment is to be made on September 1, 2019 and the final payment is to be made on October 1, 2019. As of the date of the issuance of these condensed consolidated financial statements the Company made the first payment of $10,761 pursuant to the agreement.

 

Litigations, Claims and Assessments

 

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

 

On or about March 7, 2019, the Company was listed as a defendant to a lawsuit filed by a contractor in the State of Texas. The contractor is claiming a breach of contract and is seeking approximately $32,809 in damages for services claimed to be rendered by the contractor. The Company is working with legal counsel in order to reach a settlement. As of December 31, 2018, the Company accrued for the liability in accounts payable and accrued expenses.

 

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

 

Trademark

 

During July 2019 the Company filed an application to register a trade name and service mark for “Healthy Joe’s” that will be used in connection with the development and operating of potential Healthy Joe’s restaurants. If the trademark is approved, the Company will license the rights to use the Healthy Joe’s trademark and intellectual property to the wholly-owned subsidiaries, Muscle Maker Development and Muscle Maker Corp., and to further sublicense them to our franchisees for use in connection with Healthy Joe’s restaurants.

 

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Notes to Consolidated Financial Statements

 

NOTE 18 – SUBSEQUENT EVENTS, continued

 

Consulting Agreement

 

On May 24, 2019, the Company entered into a Consulting Agreement with a project management group to assist with various financial matters, documentation and presentations as needed. Pursuant to the terms of the agreement, the Company will pay $5,000 per month until the contract is cancelled by either party with written notice.

 

During July 2019, the Company entered into a Consulting Agreement, effective as of July 1, 2019, with an advisory group to provide strategic business services in connection with a future offering. The term of the agreement is for one year. Pursuant to the terms of the agreement, the Company issued 290,000 restricted shares of common stock on or before July 15, 2019 and agree to pay a cash fee of $75,000 upon signing the agreement.

 

During July 2019, the Company entered into a Consulting Agreement with a consultant with a background in menu and recipe development to develop a new menu and recipes for a new healthy restaurant concept called Healthy Joe’s. The Company will issue 11,500 shares of common stock as payment pursuant to the agreement and reimburse the consultant for any out of pocket expenses in connection with the services provided pursuant to the agreement.

 

Underwriters Agreement

 

On July 29, 2019, the Company entered into an Underwriters agreement for a proposed public offering by the Company of up to $7,000,000, plus a 15% overallotment, consisting of the common stock of the Company. The price and terms of the common stock offered shall be determined prior to the effective date of the registrations statement. The term of the contract is 12 months from the effective date of the agreement.

 

Board Compensation

 

On July 16, 2019, the board of directors approved a board compensation plan that would compensate the board members for their deferred compensation for 2019, 2018 and 2017. Each of the existing board members would have to entered into a letter agreement. The board members are eligible for cash compensation of $9,000 per year to be paid on a quarterly basis of $2,250. To be paid as follows: (i) directors serving on the board during 2018 and 2017, will be granted shares is lieu of payment as the letter agreements set forth certain terms pursuant to which the directors will serve as directors of the Company.

 

The letter agreements provide that each director will receive an annual cash fee of $9,000 as consideration for their service as a director. In addition, each director will receive 10,000 shares of common stock per year for service as director, 1,300 shares of common stock per year for service on each committee and 1,000 shares of common stock per year for service as chair for such committee. The shares of common stock for committee service will be limited to two committees.

 

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MUSCLE MAKER, INC. & SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 18 – SUBSEQUENT EVENTS, continued

 

Board Compensation, continued

 

As directors have not received compensation for services to date, the Company agreed to provide equity in lieu of cash compensation and equity compensation for services rendered during 2017, 2018 and 2019. For past director services in lieu of cash unpaid to date: (i) directors that served as directors during the year ended December 31, 2017 will each receive shares of common stock valued at $4,500 to be priced at the price per share of the Company’s public offering in connection with its uplisting (the “Uplisting Offering”), (ii) directors that served as directors during the year ended December 31, 2018 will each receive shares of common stock valued at $9,000, which shall be prorated for a partial year of service, to be priced at the price per share of the Uplisting Offering and (iii) directors that served as directors during the year ended December 31, 2019 through the date of the Uplisting Offering will each receive shares of common stock valued at $9,000, which shall be prorated for a partial year of service, to be priced at the price per share of the Uplisting Offering. Following the public offering, directors will be paid cash for the balance of 2019.

 

As further compensation for past director services, the Company will issue shares of common stock as follows, which shall be prorated for a partial year: (i) directors that served as directors during the year ended December 31, 2017 will each receive 5,000 shares of common stock, (ii) directors that served as directors during the year ended December 31, 2018 will each receive 10,000 shares of common stock and (iii) directors that served as directors during the year ended December 31, 2019 will each receive 5,000 shares of common stock.

 

Note 19 – SUBSEQUENT EVENT – REDOMICILE

 

On August 5, 2019 the Company authorized the issuances of an aggregate of 119,046 shares of common stock to the members of the board of directors

 

In November 2019, MMI formed Muscle Maker Inc., LLC (“MMI NV.”) in the state of Nevada. Pursuant to the Articles of Incorporation filed in the state of Nevada, MMI NV has authorized capital stock consisting of 100,000,000 shares of common stock, with a $0.0001 par value per share.

 

On November 13, 2019, Muscle Maker, Inc., a California corporation, merged with and into its wholly owned subsidiary, Muscle Maker, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Merger between Muscle Maker, Inc., a California corporation, and Muscle Maker, Inc., a Nevada corporation. Muscle Maker, Inc., a Nevada corporation, continued as the surviving entity of the migratory merger. Pursuant to the migratory merger, the Company changed its state of incorporation from California to Nevada and each share of its common stock converted into one share of common stock of the surviving entity in the migratory merger. No dissenters’ rights were exercised by any of the Company’s stockholders in connection with the migratory merger. All share and per share information has been retroactively adjusted to reflect the merger with a $0.0001 par value per share. Accordingly, the reclassification between additional-paid-in-capital and common stock is reflected in the accompanying consolidated financial statements. These reclassifications had no effect on previously reported net loss.

 

F-71
 

 

Through and including             , 2019, (the 25th day after the date of this prospectus), all dealers effecting transactions in the common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

Shares

 

 

Common Stock

 

P R O S P E C T U S

 

 

            , 2019

 

     
     

 

[Alternate Page for Selling Stockholder Prospectus]

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED November 26, 2019

 

Shares

 

 

Common Stock

 

This prospectus relates to the offer for sale of 10,088,250 shares of common stock, par value $0.0001 per share, by the existing holders of the securities named in this prospectus, referred to as selling stockholders throughout this prospectus. We will not receive any of the proceeds from the sale of common shares by the selling stockholders named in this prospectus.

 

The distribution of securities offered hereby may be effected in one or more transactions that may take place on The Nasdaq Capital Market, including ordinary brokers’ transactions, privately negotiated transactions or through sales to one or more dealers for resale of such securities as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the selling stockholders. No sales of the shares covered by this prospectus shall occur until the shares of common stock sold in our initial public offering begin trading on The Nasdaq Capital Market. Currently, there is no public market for our common stock. We intend to apply to list our common stock on The Nasdaq Capital Market under the symbol “                            ”

 

The selling stockholders and intermediaries through whom such securities are sold may be deemed “underwriters” within the meaning of the Securities Act, with respect to the securities offered hereby, and any profits realized or commissions received may be deemed underwriting compensation. We have agreed to indemnify the selling stockholders against certain liabilities, including liabilities under the Securities Act.

 

On            , 2019, a registration statement under the Securities Act, with respect to our public offering underwritten by Alexander Capital, L.P., as the underwriter, of $           of our common stock (or      shares of common stock assuming a $         per share public offering price) was declared effective by the Securities and Exchange Commission. We received approximately $              in net proceeds from the offering (assuming no exercise of the underwriter’s over-allotment option) after payment of underwriting discounts and commissions and estimated expenses of the offering.

 

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

 

We are an “emerging growth company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements.

 

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

 

The date of this prospectus is                   , 2019.

 

     
     

 

[Alternate Page for Selling Stockholder Prospectus]

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY  
   
THE OFFERING  
   
SUMMARY FINANCIAL DATA  
   
RISK FACTORS  
   
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS  
   
EXPLANATORY NOTE REGARDING REDOMESTICATION  
   
USE OF PROCEEDS 3
   
DIVIDEND POLICY  
   
CAPITALIZATION  
   
DILUTION  
   
SELECTED HISTORICAL FINANCIAL DATA  
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  
   
BUSINESS  
   
MANAGEMENT  
   
EXECUTIVE COMPENSATION  
   
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS  
   
PRINCIPAL STOCKHOLDERS  
   
DESCRIPTION OF CAPITAL STOCK  
   
SHARES ELIGIBLE FOR FUTURE SALE  
   
UNDERWRITING  
   
LEGAL MATTERS 9
   
EXPERTS 9
   
WHERE YOU CAN FIND MORE INFORMATION 9
   
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 9
   
INDEX TO FINANCIAL STATEMENTS  

 

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

 

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

 

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

 

 
 

 

[Alternate Page for Selling Stockholder Prospectus]

 

SHARES REGISTERED FOR RESALE

 

Overview

 

15% Senior Secured Convertible Promissory Notes – September 2018

 

From September 12, 2018 through December 31, 2018, the Company entered into Securities Purchase Agreements with several accredited investors (the “September 2018 Investors”) providing for the sale by the Company to the Investors of 15% Senior Secured Convertible Promissory Notes in the aggregate amount of $2,165,000 (the “15% Notes”), which included $635,000 in debt converted into Notes (the “September 2018 Offering”). Further, from January 1, 2019 through May 23, 2019, the Company received an additional $2,973,000, of which $100,000 was to related parties, in funding from the September 2018 Investors. In total the Company received an aggregate amount of $5,138,000 from the September 2018 Investors. In addition to the 15% Notes, the September 2018 Investors also received warrants to purchase common stock of the Company (the “Senior Warrants”) to acquire an aggregate of 2,569,000 shares of common stock of the Company. The Senior Warrants are exercisable for five years at an exercise price of $1.20. The September 2018 Investors may exercise the Senior Warrants on a cashless basis and the number of shares of common stock issuable upon exercise of the Senior Warrants may be adjusted in the event the September 2018 Investors are required to sign a lock up agreement in connection with a public offering.

 

The 15% Notes bear interest at 15% per annum paid quarterly and mature 18 months from issuance. The September 2018 Investors may elect to convert all or part of the 15% Notes, plus accrued interest, at any time into shares of common stock of the Company at a conversion price of $1.00 (the “Fixed Conversion Price”); provided, however, in the event the per share price of a public offering multiplied by sixty percent (60%) at the time of the listing of the shares of common stock on an exchange (the “Listing Event”) is less than $1.00 (the “Discounted Public Offering Price”) then the conversion price shall be reset to equal the Discounted Public Offering Price. In the event the September 2018 Investors are required to execute a Lock Up Agreement concurrent with a public offering at the time of the Listing Event, then the Fixed Conversion Price shall be $0.75 and the Discounted Public Offering Price shall be the public offering multiplied by forty five percent (45%) at the time of the Listing Event. The Company, upon the occurrence and continuation of any event of default, shall pay, as interest, 5% of the outstanding principal amount due under the 15% Notes on each monthly anniversary of the occurrence of the event of default while it is continuing. Further, while an event of default is continuing, 15% of any funds raised from sales of the Company’s securities shall be paid to the September 2018 Investors on a pro rata basis. If a Liquidity Event has not occurred as of the maturity date or the September 2018 Note has not been repaid in full as of the maturity date, then an event of default will occur and the principal amount of the 15% Notes shall be increased by 30%. As long as the 15% Notes remain outstanding, the Company has agreed that, among other items, it will only use proceeds from the sale of the 15% Notes and exercise of the Senior Warrants for specific corporate purposes as set forth in the Securities Purchase Agreement, will not incur or permit indebtedness or liens unless permitted, will not enter into variable priced transactions and will not increase the compensation of officers and directors until the Listing Event. The Company and the September 2018 Investors entered into Security and Pledge Agreements providing that the Company’s obligations to the September 2018 Investors are secured by substantially all of the Company’s assets.

 

On April 11, 2019, the Company and the September 2018 Investors entered into an amendment pursuant to which the conversion price of the 15% Notes was amended to equal 25.0% of the per share offering price paid by investors in the public offering in conjunction with an uplisting to a national exchange. However, in the event the holder is required to sign a Lock-Up Agreement as part of the public offering in conjunction with an uplisting to a national exchange, then the conversion price shall be 17.5% of the per share offering price paid by investors in the public offering in conjunction with an uplisting to a national exchange. The Securities Purchase Agreements require that until the Listing Event, Catalytic Capital LLC holds the right to designate one member and one observer to the board of directors of the Company and that the Company shall engage an investor relations firm mutually agreed to by the Company and Catalytic Capital LLC from the time of the Listing Event until six months after the Listing Event. The Company is also required to engage Insight Advisory as a consultant to provide business and financial advice. The Company granted the September 2018 Investors piggyback registration rights with respect to the shares of common stock underlying the 15% Notes and the Senior Warrants.

 

1
 

 

12% Secured Convertible Promissory Notes – April 2019

 

On April 16, 2019 through September 20, 2019, the Company and its newly formed wholly owned subsidiary, Muscle Maker USA, Inc., a Texas corporation (“Muscle USA”), entered into Securities Purchase Agreements with several accredited investors (the “April 2019 Investors”) providing for the sale by the Company to the April 2019 Investors of 12% Secured Convertible Promissory Notes in the aggregate amount of $3,500,000 (the “12% Notes”). In addition to the 12% Notes, the April 2019 Investors also received Warrants to Purchase an aggregate of 793,750 share of common stock of the Company (the “April 2019 Warrants”) which equals 50% of the shares of common stock issuable upon conversion of the 12% Notes. The April 2019 Warrants are exercisable for five years at an exercise price equal to 115% of the April 2019 Conversion Price (as defined below).

 

The 12% Notes bear interest at 12% per annum paid quarterly and mature 18 months from issuance. The April 2019 Investors may elect to convert all or part of the 12% Notes, plus accrued interest, at any time into shares of common stock of the Company at a conversion price of $          per share (the “April 2019 Conversion Price”); provided, however, in the event the per share price of a public offering multiplied by fifty percent (50%) at the time of the Company listing on a national exchange (the “Discounted Public Offering Price”) is less than $          then the April 2019 Conversion Price shall be reset to equal the lesser of (i) Discounted Public Offering Price or (ii) a price per share equal to a $20 million valuation. As long as the 12% Notes remain outstanding, the Company has agreed that, among other items, it will only use proceeds from the sale of the 12% Notes and exercise of the April 2019 Warrants for specific corporate purposes as set forth in the Securities Purchase Agreement, will not incur or permit indebtedness or liens unless permitted and will not enter into variable priced transactions. The Company, Muscle USA and the April 2019 Investors entered into Security and Pledge Agreements providing that the obligations to the April 2019 Investors are secured by substantially all of Muscle USA’s assets. The Company granted the April 2019 Investors piggyback registration rights with respect to the shares of common stock underlying the 12% Notes and the April 2019 Warrants.

 

As part of this prospectus, we are registering 10,088,250 for resale which includes (i) 5,138,000 shares of common stock issuable upon conversion of the 15% Notes, (ii) 2,569,000 shares of common stock issuable upon exercise of the Senior Warrants, (iii) 1,587,500 shares of common stock issuable upon conversion of the 12% Notes and (iv) 793,750 shares of common stock issuable upon exercise of the April 2019 Warrants. The shares issuable upon conversion of convertible notes and exercise of the common stock purchase warrants are being registered to permit public sales of such shares, and the selling stockholders may offer the conversion shares for resale from time to time pursuant to this prospectus. The selling stockholders may also sell, transfer or otherwise dispose of all or a portion of their conversion shares in transactions exempt from the registration requirements of the Securities Act, or pursuant to another effective registration statement covering the conversion shares.

 

2
 

 

[Alternate Page for Selling Stockholder Prospectus]

 

USE OF PROCEEDS

 

We will not receive any of the proceeds from the sale of the conversion shares by the selling stockholders named in this prospectus. All proceeds from the sale of the conversion shares will be paid directly to the selling stockholders.

 

3
 

 

[Alternate Page for Selling Stockholder Prospectus]

 

SELLING STOCKHOLDERS

 

An aggregate of up to 10,088,250 for resale which includes (i) 5,138,000 shares of common stock issuable upon conversion of the 15% Notes, (ii) 2,569,000 shares of common stock issuable upon exercise of the Senior Warrants, (iii) 1,587,500 shares of common stock issuable upon conversion of the 12% Notes and (iv) 793,750 shares of common stock issuable upon exercise of the April 2019 Warrants.

 

The following table sets forth certain information with respect to each selling stockholder for whom we are registering conversion shares for resale to the public. The selling stockholders have not had a material relationship with us within the past three years other than as described in the footnotes to the table below or as a result of their acquisition of our shares or other securities. To our knowledge, subject to community property laws where applicable, each person named in the table has sole voting and investment power with respect to the shares of common stock set forth opposite such person’s name. None of the selling stockholders are broker-dealers or affiliates of broker-dealers, unless otherwise noted.

 

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. The percentage of shares beneficially owned after the offering is based on                            shares of common stock to be outstanding after this offering, including                           shares of common stock sold in our initial public offering and                       shares issuable upon conversion of the 15% Notes and the 12% Notes and exercise of the Senior Warrants and the April 2019 Warrants. Applicable percentage ownership is based on 11,836,425 shares of common stock outstanding as of November 25, 2019. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of are deemed to be beneficially owned by the person holding such securities for computing the percentage of ownership of such person but are not treated as outstanding for computing the percentage ownership of any other person.

 

                Common Stock Beneficially
Owned
After Offering
 
Selling Stockholder   Number of
Shares of
Common Stock
    Shares
Being
Offered
    Number of
Shares
Outstanding
    Percent of
Shares
 
Secured and Collateralized Lending, LLC (1)     525,000       525,000               0        
Brian Fitzpatrick (2)     600,000       600,000                  
Thomas Swaintek (3)     262,500       262,500       0        
Mark Bukata(4)     150,000      

150,000

      0        
James Karalis (5)     150,000       150,000       0        
Nicholas Karalis (6)     150,000       150,000       0        
Bruce Summers (7)     135,000       135,000       0        
Jeff Holley (8)     37,500       37,500       0        
Saadh 401K Trust FBO Saritha Akarapu (9)     30,000       30,000       0        
Paul Menchik (10)     75,000       75,000       0        
IRA Resources Inc. FBO F. Armstrong III (11)     22,500       22,500       0        
Biju Mathew (12)     30,000       30,000       0        
Alfred B. Southall, III Trust (13)     75,000       75,000       0        
Brad Kovin (14)     120,000       120,000       0        
Favikumar Bajjuri (15)     15,000       15,000       0        
John R Bertsch Trust (16)     75,000       75,000       0        
R2K Properties, LLC (17)     150,000       150,000       0        
The Fourys CO LTD (18)     75,000       75,000       0        
Catalytic Holdings 1, LLC (19)     5,104,500       5,104,500       0        
Thoroughbred Diagnostics, LLC (20)     2,250,000       2,250,000       0        
Leonard Stefano (21)     56,250       56,250       0        

 

* Less than 1%

 

No selling stockholder is a broker dealer or an affiliate of a broker-dealer.

 

4
 

 

(1) Includes 700,000 shares of common stock issuable upon conversion of the 15% Notes, 350,000 shares of common stock issuable upon exercise of the Senior Warrants, 50,000 shares of common stock issuable upon conversion of the 12% Notes and 25,000 shares of common stock issuable upon exercise of the April 2019 Warrants.

 

(2) Includes 400,000 shares of common stock issuable upon conversion of the 15% Notes, 200,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(3) Includes 175,000 shares of common stock issuable upon conversion of the 15% Notes and 87,500 shares of common stock issuable upon exercise of the Senior Warrants.

 

(4) Includes 100,000 shares of common stock issuable upon conversion of the 15% Notes and 50,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(5) Includes 100,000 shares of common stock issuable upon conversion of the 15% Notes and 50,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(6) Includes 100,000 shares of common stock issuable upon conversion of the 15% Notes and 50,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(7) Includes 90,000 shares of common stock issuable upon conversion of the 15% Notes and 45,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(8) Includes 25,000 shares of common stock issuable upon conversion of the 15% Notes and 12,500 shares of common stock issuable upon exercise of the Senior Warrants.

 

(9) Includes 20,000 shares of common stock issuable upon conversion of the 15% Notes and 10,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(10) Includes 50,000 shares of common stock issuable upon conversion of the 15% Notes and 25,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(11) Includes 15,000 shares of common stock issuable upon conversion of the 15% Notes and 7,500 shares of common stock issuable upon exercise of the Senior Warrants.

 

(12) Includes 20,000 shares of common stock issuable upon conversion of the 15% Notes and 10,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(13) Includes 50,000 shares of common stock issuable upon conversion of the 15% Notes and 25,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

5
 

 

(14) Includes 80,000 shares of common stock issuable upon conversion of the 15% Notes and 40,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(15) Includes 10,000 shares of common stock issuable upon conversion of the 15% Notes and 5,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(16) Includes 50,000 shares of common stock issuable upon conversion of the 15% Notes and 25,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(17) Includes 100,000 shares of common stock issuable upon conversion of the 15% Notes and 50,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(18) Includes 50,000 shares of common stock issuable upon conversion of the 15% Notes and 25,000 shares of common stock issuable upon exercise of the Senior Warrants.

 

(19) Includes 3,403,000 shares of common stock issuable upon conversion of the 15% Notes and 1,701,500 shares of common stock issuable upon exercise of the Senior Warrants.

 

(20) Includes 1,500,000 shares of common stock issuable upon conversion of the 12% Notes and 750,000 shares of common stock issuable upon exercise of the April 2019 Warrants.

 

(21) Includes 37,500 shares of common stock issuable upon conversion of the 12% Notes and 18,750 shares of common stock issuable upon exercise of the April 2019 Warrants.

 

6
 

 

[Alternate Page for Selling Stockholder Prospectus]

 

PLAN OF DISTRIBUTION

 

Each selling stockholder of the securities and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their securities covered hereby on The Nasdaq Capital Market or any other stock exchange, market or trading facility on which the securities are traded or in private transactions. These sales may be at fixed or negotiated prices. A selling stockholder may use any one or more of the following methods when selling securities:

 

  ordinary brokerage transactions and transactions in which the broker dealer solicits purchasers;
     
  block trades in which the broker dealer will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction;
     
  purchases by a broker-dealer as principal and resale by the broker dealer for its account;
     
  an exchange distribution in accordance with the rules of the applicable exchange;
     
  privately negotiated transactions;
     
  settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;
     
  in transactions through broker dealers that agree with the selling stockholders to sell a specified number of such securities at a stipulated price per security;
     
  through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
     
  a combination of any such methods of sale; or
     
  any other method permitted pursuant to applicable law.

 

The selling stockholders may also sell securities under Rule 144 under the Securities Act, if available, rather than under this prospectus.

 

Broker dealers engaged by the selling stockholders may arrange for other broker dealers to participate in sales. Broker dealers may receive commissions or discounts from the selling stockholders (or, if any broker dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.

 

In connection with the sale of the securities or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the securities in the course of hedging the positions they assume. The selling stockholders may also sell securities short and deliver these securities to close out their short positions, or loan or pledge the securities to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of securities offered by this prospectus, which securities such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

7
 

 

The selling stockholders and any broker-dealers or agents that are involved in selling the securities may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the securities purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each selling stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the securities. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).

 

We are required to pay certain fees and expenses incurred by us incident to the registration of the securities. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

Because selling stockholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. The selling stockholders have advised us that there is no underwriter or coordinating broker acting in connection with the proposed sale of the resale securities by the selling stockholders.

 

We agreed to keep this prospectus effective until the earliest of (i) one (1) year from the date the Registration Statement is declared effective by the Commission, (ii) the date on which the securities may be resold by the selling stockholders without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for us to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar effect or (iii) the date on which all of the securities have been sold pursuant to this prospectus or Rule 144 under the Securities Act, or any other rule of similar effect. The resale securities will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale securities covered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

 

Under applicable rules and regulations under the Securities Exchange Act of 1934, as amended, any person engaged in the distribution of the resale securities may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of securities of the common stock by the selling stockholders or any other person. We will make copies of this prospectus available to the selling stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

 

8
 

 

[Alternate Page for Selling Stockholder Prospectus]

 

LEGAL MATTERS

 

The validity of the shares offered by this prospectus will be passed upon for us by Fleming PLLC, New York, New York.

 

EXPERTS

 

Marcum LLP, our independent registered public accounting firm, has audited our balance sheets as of December 31, 2018 and 2017, and the related statements of operations, changes in shareholders’ deficit and cash flows for each of the two years in the period ended December 31, 2018, as set forth in their report, which report expresses an unqualified opinion and includes an explanatory paragraph relating to our ability to continue as a going concern. We have included our financial statements in this prospectus and in this registration statement in reliance on the report of Marcum LLP given on their authority as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the Securities and Exchange Commission a registration statement on Form S-1 (including the exhibits, schedules and amendments thereto) under the Securities Act, with respect to the shares of our common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to us and the common stock offered hereby, reference is made to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus as to the contents of any contract, agreement or other documents are summaries of the material terms of that contract, agreement or other document. With respect to each of these contracts, agreements or other documents filed as an exhibit to the registration statement, reference is made to the exhibits for a more complete description of the matter involved. A copy of the registration statement, and the exhibits and schedules thereto, may be accessed at the Securities and Exchange Commission’s website at www.sec.gov. The Securities and Exchange Commission maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the Securities and Exchange Commission’s website is http://www.sec.gov.

 

We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. We make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission available, free of charge, through our website at www.musclemakergrill.com/investor-relations, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the Securities and Exchange Commission. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus. You may read and copy any reports, statements or other information on file at the public reference rooms. You can also request copies of these documents, for a copying fee, by writing to the Securities and Exchange Commission, or you can review these documents on the Securities and Exchange Commission’s website, as described above. In addition, we will provide electronic or paper copies of our filings free of charge upon request.

 

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

 

The Securities and Exchange Commission allows us to “incorporate by reference” certain information we have filed with the Securities and Exchange Commission into this prospectus, which means we are disclosing important information to you by referring you to other information we have filed with the Securities and Exchange Commission. The information we incorporate by reference is considered part of this prospectus. All reports and definitive proxy or information statements subsequently filed by us pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, on or after the date of this prospectus and prior to the sale of all securities registered hereunder or termination of the registration statement of which this prospectus forms a part (excluding any disclosures that are furnished and not filed with the Securities and Exchange Commission) shall be deemed to be incorporated by reference into this prospectus and to be part hereof from the date of filing of such reports and other documents.

 

9
 

 

Notwithstanding the foregoing, we are not incorporating by reference any documents, portions of documents, exhibits or other information that is deemed to have been furnished to, rather than filed with, the Securities and Exchange Commission.

 

Any statement contained in a document incorporated by reference into this prospectus shall be deemed to be modified or superseded for the purposes of this prospectus or any prospectus supplement to the extent that a statement contained herein or any prospectus supplement or in any subsequently filed document that is also incorporated by reference in this prospectus or any prospectus supplement modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus or any prospectus supplement.

 

You may request a copy of the filings incorporated herein by reference, including exhibits to such documents that are specifically incorporated by reference, at no cost, by writing or calling us at the following address or telephone number:

 

Muscle Maker, Inc.

308 East Renfro Street, Suite 101

Burleson, Texas 76028

(682) 708-8250832

 

Statements contained in this prospectus as to the contents of any contract or other documents are not necessarily complete, and in each instance, investors are referred to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference and the exhibits and schedules thereto.

 

10
 

 

[Alternate Page for Selling Stockholder Prospectus]

 

Through and including ,              2019, (the 25th day after the date of this prospectus), all dealers effecting transactions in the common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

Shares

 

 

Common Stock

 

P R O S P E C T U S

 

                 , 2019

 

     
     

 

Part II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

ITEM 13. Other Expenses of Issuance and Distribution

 

The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable in connection with the sale and distribution of the securities being registered. All amounts are estimated except the Securities and Exchange Commission registration fee, the FINRA filing fee and the Nasdaq listing fee.

 

Securities and exchange Commission Registration Fee*   $  
FINRA Filing Fee*        
Nasdaq listing fee*        
Accountants’ fees and expenses*        
Legal fees and expenses*        
Printing and engraving expenses*        
Transfer agent and registrar fees*        
Miscellaneous*        
Total*   $  

 

* To be provided by amendment

 

ITEM 14. Indemnification of Directors and Officers

 

ITEM 15. Recent Sales of Unregistered Securities

 

In the three years preceding the filing of this registration statement, we have issued and sold the following securities that were not registered under the Securities Act of 1933, as amended:

 

On December 15, 2016, the Company granted a three-year warrant for the purchase of 245,797 shares of the Company common stock at an exercise price of $9.33 to American Restaurant Holdings Inc. (“ARH”), the Company’s former parent, in connection with the issuance of the $2,621,842 Convertible Note dated December 15, 2016 issued to ARH (the “ARH Note”) as a result of advances exchanged for the convertible note.

 

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

 

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

 

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

 

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

 

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

 

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

 

II-1
 

 

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

 

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

 

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

 

During the year ended December 31, 2017, the Company issued three-year warrants for the purchase of an aggregate of 208,285 shares of the Company’s common stock exercisable at $9.33.

 

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

 

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

 

On April 11, 2018, ARH elected to partially convert the 2018 ARH Note for the principal of $392,542 into 785,084 shares of the Company’s common stock.

 

During the year ended December 31, 2018, the Company issued 1,504,425 shares of its common stock upon automatic conversion of various convertible notes in the aggregate principal amount of $1,850,340, 180,000 shares of common stock of the company to various investors at a purchase price of $1.00 per share providing $180,000 of proceeds to the Company and 250,000 restricted shares of common stock issued for services.

 

From September 12, 2018 through October 26, 2018, the Company entered into Securities Purchase Agreements with several accredited investors (the “Investors”) providing for the sale by the Company to the Investors of 15% Senior Secured Convertible Promissory Notes in the aggregate amount of $1,915,000 (the “Notes”), which included $635,000 in debt converted into Notes (the “September 2018 Offering”). Following the initial closing, there were two additional closings in the amount of $1,000,000 each. Further, from May 21, 2019 through May 23, 2019, the Company received an additional $688,000 in funding from the September 2018 Investors. In addition to the September 2018 Notes, the September 2018 Investors also received warrants to purchase common stock of the Company (the “Senior Warrants”) to acquire an aggregate of 2,549,000 shares of common stock of the Company. The Senior Warrants are exercisable for five years at an exercise price of $1.20. The September 2018 Investors may exercise the Senior Warrants on a cashless basis and the number of shares of common stock issuable upon exercise of the Senior Warrants may be adjusted in the event the September 2018 Investors are required to sign a lock up agreement in connection with a public offering.

 

The Notes bear interest at 15% per annum paid quarterly and mature 18 months from issuance. The Investors may elect to convert all or part of the Notes, plus accrued interest, at any time into shares of common stock of the Company at a conversion price of $1.00 (the “Fixed Conversion Price”); provided, however, in the event the per share price of a public offering multiplied by sixty percent (60%) at the time of the listing of the shares of common stock on an exchange (the “Listing Event”) is less than $1.00 (the “Discounted Public Offering Price”) then the conversion price shall be reset to equal the Discounted Public Offering Price. In the event the Investors are required to execute a Lock Up Agreement concurrent with a public offering at the time of the Listing Event, then the Fixed Conversion Price shall be $0.75 and the Discounted Public Offering Price shall be the public offering multiplied by forty five percent (45%) at the time of the Listing Event. The Company, upon the occurrence and continuation of any event of default, shall pay, as interest, 5% of the outstanding principal amount due under the Notes on each monthly anniversary of the occurrence of the event of default while it is continuing. Further, while an event of default is continuing, 15% of any funds raised from sales of the Company’s securities shall be paid to the Investors on a pro rata basis. If a Liquidity Event has not occurred as of the maturity date or the Note has not been repaid in full as of the maturity date, then an event of default will occur and the principal amount of the Notes shall be increased by 30%. As long as the Notes remain outstanding, the Company has agreed that, among other items, it will only use proceeds from the sale of the Notes and exercise of the Warrants for specific corporate purposes as set forth in the Securities Purchase Agreement, will not incur or permit indebtedness or liens unless permitted, will not enter into variable priced transactions and will not increase the compensation of officers and directors until the Listing Event. The Company and the Investors entered into Security and Pledge Agreements providing that the Company’s obligations to the Investors are secured by substantially all of the Company’s assets.

 

II-2
 

 

On April 11, 2019, the Company and the September 2018 Investors entered into an amendment pursuant to which the conversion price of the 15% Notes was amended to equal 25.0% of the per share offering price paid by investors in the public offering in conjunction with an uplisting to a national exchange. However, in the event the holder is required to sign a Lock-Up Agreement as part of the public offering in conjunction with an uplisting to a national exchange, then the conversion price shall be 17.5% of the per share offering price paid by investors in the public offering in conjunction with an uplisting to a national exchange. The Securities Purchase Agreements require that until the Listing Event, Catalytic Capital LLC holds the right to designate one member and one observer to the board of directors of the Company and that the Company shall engage an investor relations firm mutually agreed to by the Company and Catalytic Capital LLC from the time of the Listing Event until six months after the Listing Event. The Company is also required to engage Insight Advisory as a consultant to provide business and financial advice. The Company granted the Investors piggy back registration rights with respect to the shares of common stock underlying the Notes and the Senior Warrants.

 

On April 16, 2019 through September 20, 2019, the Company and its newly formed wholly owned subsidiary, Muscle Maker USA, Inc., a Texas corporation (“Muscle USA”), entered into Securities Purchase Agreements with several accredited investors (the “April 2019 Investors”) providing for the sale by the Company to the April 2019 Investors of 12% Secured Convertible Promissory 12% Notes in the aggregate amount of $3,500,000 (the “12% Notes”). In addition to the 12% Notes, the April 2019 Investors also received Warrants to Purchase Common Stock of the Company (the “Warrants”) to acquire an amount of shares of common stock of the Company equal to 50% of the shares of common stock issuable upon conversion of the 12% Notes. The Warrants are exercisable for five years at an exercise price equal to 115% of the April 2019 Conversion Price (as defined below).

 

The 12% Notes bear interest at 12% per annum paid quarterly and mature 18 months from issuance. The April 2019 Investors may elect to convert all or part of the 12% Notes, plus accrued interest, at any time into shares of common stock of the Company at a conversion price of $             per share (the “April 2019 Conversion Price”); provided, however, in the event the per share price of a public offering multiplied by fifty percent (50%) at the time of the Company listing on a national exchange (the “Discounted Public Offering Price”) is less than $           then the April 2019 Conversion Price shall be reset to equal the lesser of (i) Discounted Public Offering Price or (ii) a price per share equal to a $20 million valuation. As long as the 12% Notes remain outstanding, the Company has agreed that, among other items, it will only use proceeds from the sale of the 12% Notes and exercise of the Warrants for specific corporate purposes as set forth in the Securities Purchase Agreement, will not incur or permit indebtedness or liens unless permitted and will not enter into variable priced transactions. The Company, Muscle USA and the April 2019 Investors entered into Security and Pledge Agreements providing that the obligations to the April 2019 Investors are secured by substantially all of Muscle USA’s assets. The Company granted the April 2019 Investors piggy back registration rights with respect to the shares of common stock underlying the 12% Notes and the Warrants.

 

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

 

II-3
 

 

ITEM 16. Exhibits and Financial Statement Schedules

 

(a) Exhibits

 

See the Exhibit Index immediately following the signature page included in this registration statement, which is incorporated herein by reference.

 

(b) Financial Statement Schedules.

 

See “Index to Financial Statements” which is located on page 98 of this prospectus.

 

ITEM 17. Undertakings

 

(A) The undersigned registrant hereby undertakes:

 

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

 

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increases or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

 

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

 

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:

 

(i) If the registrant is relying on Rule 430B:

 

(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and

 

II-4
 

 

(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or

 

(ii) If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

 

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

(6) To provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

 

(B) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

(C) The undersigned registrant hereby undertakes that:

 

(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

II-5
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Burleson, State of Texas, on November 26, 2019.

 

  Muscle Maker, Inc.
     
  By:

/s/ Michael J. Roper

    Name: Michael J. Roper
    Title: Chief Executive Officer

 

POWER OF ATTORNEY

 

Each person whose signature appears below constitutes and appoints Michael J. Roper and Ferdinand Groenewald with full power to act alone and without the others, his true and lawful attorney-in-fact, with full power of substitution, and with the authority to execute in the name of each such person, any and all amendments (including without limitation, post-effective amendments) to this registration statement, to sign any and all additional registration statements relating to the same offering of securities as this registration statement that are filed pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and to file such registration statements with the Securities and Exchange Commission, together with any exhibits thereto and other documents therewith, necessary or advisable to enable the registrant to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, which amendments may make such other changes in the registration statement as the aforesaid attorney-in-fact executing the same deems appropriate.

 

Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature   Title   Date
         

/s/ Michael J. Roper

  Chief Executive Officer, Secretary  

November 26, 2019

Michael J. Roper   (principal executive officer)    
         

/s/ Ferdinand Groenewald

  Chief Financial Officer  

November 26, 2019

Ferdinand Groenewald   (principal financial and accounting officer)    
       

/s/ Kevin Mohan

  Chief Investment Officer and Chairman of the Board  

November 26, 2019

Kevin Mohan      
         

/s/ Paul L. Menchik

  Director  

November 26, 2019

Paul L. Menchik      
         

/s/ John Marques

  Director  

November 26, 2019

John Marques      
         

/s/ Peter S. Petrosian

  Director  

November 26, 2019

Peter S. Petrosian      
         

/s/ Omprakash Vajinapalli

  Director  

November 26, 2019

Omprakash Vajinapalli      
         

/s/ Jeff Carli

  Director  

November 26, 2019

Jeff Carl      
         

/s/ Noel DeWinter

  Director  

November 26, 2019

Noel DeWinter      
         

/s/ A.B. Southhall III

  Director  

November 26, 2019

A.B. Southall III      

 

II-6
 

 

EXHIBIT INDEX

 

Exhibit
No.
  Exhibit Description
     
1.1   Form of Underwriting Agreement
     
3.1  

Articles of Incorporation of Muscle Maker, Inc., a Nevada corporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 14, 2019)

     
3.2  

Bylaws of Muscle Maker, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 14, 2019)

     
4.1   Form of Selling Agent Warrant (incorporated by reference to Exhibit 3.1 to Amendment No 1 to the Offering Statement Report on Form 1-A/A filed on September 21, 2017)
     
4.2   Form of Warrant (incorporated by reference to Exhibit 3.2 to Amendment No 1 to the Offering Statement Report on Form 1-A/A filed on September 21, 2017)
     
4.3   Form of Convertible Promissory Note (incorporated by reference to Exhibit 3.3 to Amendment No 1 to the Offering Statement Report on Form 1-A/A filed on September 21, 2017)
     
4.4   Form of Subscription Agreement for BANQ subscribers (incorporated by reference to Exhibit 4.1 to Amendment No 1 to the Offering Statement Report on Form 1-A/A filed on September 21, 2017)
     
4.5   Form of Subscription Agreement (incorporated by reference to Exhibit 4.2 to Amendment No 1 to the Offering Statement Report on Form 1-A/A filed on September 21, 2017)
     
4.6   Form of Warrants to Purchase Common Stock – September 2018 Offering (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on November 6, 2018)
     
4.7   Form of 15% Senior Secured Convertible Promissory Notes – September 2018 Offering (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on November 6, 2018)
     
4.8  

Form of Securities Purchase Agreement by and between Muscle Maker, Inc. and the Investors – September 2018 Offering (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 6, 2018).

     
4.9  

Form of Security and Pledge Agreement by and between Muscle Maker, Inc. and the Investors – September 2018 Offering (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 6, 2018).

     
4.10   Form of 12% senior Secured Convertible Promissory Notes - April 2019 Offering (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on April 17, 2019)
     
4.11   Form of Warrants to Purchase Common Stock - April 2019 Offering (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on April 17, 2019)

 

II-7
 

 

4.12   Form of Securities Purchase Agreement by and between Muscle Maker, Inc., Muscle Maker USA, Inc. and the April 2019 Investors (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 17, 2019)
     
4.13  

Form of Security Agreement by and between Muscle Maker, Inc., Muscle Maker USA, Inc. and the April 2019 Investors (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 17, 2019)

     
4.14   Form of Subscription Agreement by and between Muscle Maker, Inc., Muscle Maker USA, Inc. and the April 2019 Investors (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 17, 2019)
     
4.15   First Amendment to 15% Senior Secured Convertible Promissory Note dated April 10, 2019 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on April 17, 2019)
     
4.16   Form of Representative’s Warrant.
     
5.1*   Opinion of Fleming PLLC
     
10.1†   Muscle Maker 2017 Stock Option and Stock Issuance Plan and form of award agreements (incorporated by reference to Exhibit 6.1 to Amendment No 1 to the Offering Statement Report on Form 1-A/A filed on September 21, 2017)
     
10.2†   Form of Restricted Stock Agreement under Muscle Maker 2017 Stock Option and Stock Issuance Plan
     
10.3   Assignment and Assumption Agreement, dated August 25, 2017, between Muscle Maker Brands Conversion, Inc. and Muscle Maker Development, LLC
     
10.4   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
     
10.5†   Employment Agreement, between Muscle Maker and Ferdinand Groenewald (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 22, 2018)
     
10.6†   Employment Agreement, between Muscle Maker and Ken Miller (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on October 22, 2018)
     
10.7†   Employment Agreement between Michael Roper and Muscle Maker, Inc. dated October 26, 2018 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on November 6, 2018)
     
10.8†   Employment Agreement between Kevin Mohan and Muscle Maker, Inc. dated October 26, 2018 (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on November 6, 2018)
     
10.9†   Employment Agreement between Aimee Infante and Muscle Maker, Inc. dated May 6, 2019 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 10, 2019)
     
10.10†   Form of Director Agreement dated July 16, 2019 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 10, 2019)
     
10.11  

Master Distribution Agreement between Muscle Maker Franchising LLC and Sysco Corporation dated June 1, 2011

     
10.12  

Amendment to Master Distribution Agreement between Muscle Maker Franchising LLC and Sysco Corporation dated October 17, 2017

     
21.1   List of Subsidiaries
     
23.1   Consent of Marcum LLP
     
23.2*   Consent of Fleming PLLC (contained in Exhibit 5.1)
     
24.1   Power of Attorney (contained on signature page hereto)

 

* To be filed by amendment

 

† Management contract.

 

♯ Certain confidential portions of this exhibit were omitted by means of marking such portions with asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.

 

II-8
 

 

 

UNDERWRITING AGREEMENT

 

among

 

MUSCLE MAKER, INC.

 

and

 

ALEXANDER CAPITAL, L.P.,

 

as Representative of the Several Underwriters

 

     
 

 

MUSCLE MAKER, INC.

 

UNDERWRITING AGREEMENT

 

New York, New York
[●], 2019

 

Alexander Capital, L.P.

As Representative of the several Underwriters named on Schedule 1 attached hereto

 

c/o Alexander Capital, L.P.

17 State Street, 5th Floor

New York, NY 10004

 

Ladies and Gentlemen:

 

The undersigned, Muscle Maker, Inc., a corporation formed under the laws of the State of Nevada (collectively with its subsidiaries and affiliates, including, without limitation, all entities disclosed or described in the Registration Statement (as hereinafter defined) and set forth on Schedule 4 attached hereto, as being subsidiaries or affiliates of Muscle Maker, Inc., the “Company”), hereby confirms its agreement (this “Agreement”) with the Underwriters named in Schedule 1 hereto (the “Representative” and such other underwriters being collectively called the “Underwriters” or, individually, an “Underwriter”) as follows:

 

1. Purchase and Sale of Shares.

 

1.1 Firm Shares.

 

1.1.1 Nature and Purchase of Firm Shares.

 

(i) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the several Underwriters, an aggregate of [●] shares (the “Firm Shares”) of the Company’s common stock, par value $0.0001 per share (the “Common Stock”).

 

(ii) The Underwriters, severally and not jointly, agree to purchase from (A) the Company the number of Firm Shares set forth opposite their respective names on Schedule 1 attached hereto and made a part hereof at a purchase price of $[●] per share (91% of the per Firm Share offering price). The Firm Shares are to be offered initially to the public at the offering price set forth on the cover page of the Prospectus (as defined in Section 2.1.1 hereof).

 

1.1.2 Shares Payment and Delivery.

 

(i) Delivery and payment for the Firm Shares shall be made at 10:00 a.m., Eastern time, on the third (3rd) Business Day following the effective date (the “Effective Date”) of the Registration Statement (as defined in Section 2.1.1 below) (or the fourth (4th) Business Day following the Effective Date if the Registration Statement is declared effective after 4:01 p.m., Eastern time) or at such earlier time as shall be agreed upon by the Representative and the Company, at the offices of Cozen O’Connor, 33 South 6th Street, Suite 3800, Minneapolis, Minnesota 55402 (“Representative Counsel”), or at such other place (or remotely by other electronic transmission) as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Shares is called the “Closing Date.”

 

     
 

 

(ii) Payment for the Firm Shares shall be made on the Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company, upon delivery of the certificates (in form and substance satisfactory to the Underwriters) representing the Firm Shares (or through the facilities of the Depository Trust Company (“DTC”)) for the account of the Underwriters. The Firm Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two (2) full Business Days prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares except upon tender of payment by the Representative for all of the Firm Shares. The term “Business Day” means any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions are authorized or obligated by law to close in New York, New York.

 

1.2 Over-allotment Option.

 

1.2.1 Option Shares. For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Shares, the Company hereby grants to the Underwriters an option to purchase up to [●] additional shares of Common Stock, representing fifteen percent (15%) of the Firm Shares sold in the offering, from the Company (the “Over-allotment Option”). Such [●] additional shares of Common Stock, the net proceeds of which will be deposited with the Company’s account, are hereinafter referred to as “Option Shares.” The purchase price to be paid per Option Share shall be equal to the price per Firm Share set forth in Section 1.1.1 hereof. The Firm Shares and the Option Shares are hereinafter referred to together as the “Public Securities.” The offering and sale of the Public Securities is hereinafter referred to as the “Offering.”

 

1.2.2 Exercise of Option. The Over-allotment Option granted pursuant to Section 1.2.1 hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) of the Option Shares within 45 days after the Effective Date. The Underwriters shall not be under any obligation to purchase any Option Shares prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Representative, which must be confirmed in writing by overnight mail or electronic transmission setting forth the number of Option Shares to be purchased and the date and time for delivery of and payment for the Option Shares (the “Option Closing Date”), which shall not be later than five (5) full Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of Representative Counsel or at such other place (including remotely other electronic transmission) as shall be agreed upon by the Company and the Representative. If such delivery and payment for the Option Shares does not occur on the Closing Date, the Option Closing Date will be as set forth in the notice. Upon exercise of the Over-allotment Option with respect to all or any portion of the Option Shares, subject to the terms and conditions set forth herein, (i) the Company shall become obligated to sell to the Underwriters the number of Option Shares specified in such notice and (ii) each of the Underwriters, acting severally and not jointly, shall purchase that portion of the total number of Option Shares then being purchased as set forth in Schedule 1 opposite the name of such Underwriter.

 

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1.2.3 Payment and Delivery. Payment for the Option Shares shall be made on the Option Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery to you of certificates (in form and substance satisfactory to the Underwriters) representing the Option Shares (or through the facilities of DTC) for the account of the Underwriters. The Option Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two (2) full Business Days prior to the Option Closing Date. The Company shall not be obligated to sell or deliver the Option Shares except upon tender of payment by the Representative for applicable Option Shares. The Option Closing Date may be simultaneous with, but not earlier than, the Closing Date; and in the event that such time and date are simultaneous with the Closing Date, the term “Closing Date” shall refer to the time and date of delivery of the Firm Shares and Option Shares.

 

1.3 Representative’s Warrants.

 

1.3.1 Purchase Warrants. The Company hereby agrees to issue and sell to the Representative (and/or its designee) on the Closing Date a warrant (“Representative’s Warrants”) for the purchase of an aggregate of [●] shares of Common Stock, representing 8% of the Firm Shares (excluding the Option Shares), for an aggregate purchase price of $100.00. The Representative’s Warrant agreement, in the form attached hereto as Exhibit A (the “Representative’s Warrant Agreement”), shall be exercisable, in whole or in part, commencing on a date which is one (1) year after the Effective Date and expiring on the five-year anniversary of the Effective Date at an initial exercise price per share of Common Stock of $[●], which is equal to 120% of the initial public offering price of the Firm Shares. The Representative’s Warrant Agreement and the shares of Common Stock issuable upon exercise thereof are hereinafter referred to together as the “Representative’s Securities.” The Representative understands and agrees that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Representative’s Warrant Agreement and the underlying shares of Common Stock during the one hundred eighty (180) days after the Effective Date and by its acceptance thereof shall agree that it will not sell, transfer, assign, pledge or hypothecate the Representative’s Warrant Agreement, 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 Effective Date to anyone other than (i) an Underwriter or a selected dealer in connection with the Offering, or (ii) a bona fide officer or partner of the Representative or of any such Underwriter or selected dealer; and only if any such transferee agrees to the foregoing lock-up restrictions.

 

1.3.2 Delivery. Delivery of the Representative’s Warrant Agreement shall be made on the Closing Date and shall be issued in the name or names and in such authorized denominations as the Representative may request in writing.

 

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2. Representations and Warranties of the Company. The Company represents and warrants to the Underwriters as of the Applicable Time (as defined below), as of the Closing Date and as of the Option Closing Date, if any, as follows:

 

2.1 Filing of Registration Statement.

 

2.1.1 Pursuant to the Securities Act. The Company has filed with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement, and an amendment or amendments thereto, on Form S-1 (File No. 333-______), including any related prospectus or prospectuses, for the registration of the Public Securities and the Representative’s Securities under the Securities Act of 1933, as amended (the “Securities Act”), which registration statement and amendment or amendments have been prepared by the Company in all material respects in conformity with the requirements of the Securities Act and the rules and regulations of the Commission under the Securities Act (the “Securities Act Regulations”) and will contain all material statements that are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement became effective (including the Preliminary Prospectus included in the registration statement, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein and all information deemed to be a part thereof as of the Effective Date pursuant to paragraph (b) of Rule 430A of the Securities Act Regulations (the “Rule 430A Information”)), is referred to herein as the “Registration Statement.” If the Company files any registration statement pursuant to Rule 462(b) of the Securities Act Regulations, then after such filing, the term “Registration Statement” shall include such registration statement filed pursuant to Rule 462(b). The Registration Statement has been declared effective by the Commission on the date hereof.

 

Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a “Preliminary Prospectus.” The Preliminary Prospectus, subject to completion, dated [●], that was included in the Registration Statement immediately prior to the Applicable Time is hereinafter called the “Pricing Prospectus.” The final prospectus in the form first furnished to the Underwriters for use in the Offering is hereinafter called the “Prospectus.” Any reference to the “most recent Preliminary Prospectus” shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement.

 

Applicable Time” means [●]., Eastern time, on the date of this Agreement.

 

Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the Securities Act Regulations (“Rule 433”), including without limitation any “free writing prospectus” (as defined in Rule 405 of the Securities Act Regulations) relating to the Public Securities that is (i) required to be filed with the Commission by the Company, (ii) a “road show that is a written communication” within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission pursuant to Rule 433(d)(5)(i) because it contains a description of the Public Securities or of the Offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g).

 

Issuer General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a “bona fide electronic road show,” as defined in Rule 433 (the “Bona Fide Electronic Road Show”)), as evidenced by its being specified in Schedule 2-B hereto.

 

4
 

 

Issuer Limited Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.

 

Pricing Disclosure Package” means any Issuer General Use Free Writing Prospectus issued at or prior to the Applicable Time, the Pricing Prospectus and the information included on Schedule 2-A hereto, all considered together.

 

2.1.2 Pursuant to the Exchange Act. The Company has filed with the Commission a Form 8-A (File Number 001-_____) providing for the registration pursuant to Section 12(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the shares of Common Stock. The registration of the shares of Common Stock under the Exchange Act has been declared effective by the Commission on or prior to the date hereof. The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the shares of Common Stock under the Exchange Act, nor has the Company received any notification that the Commission is contemplating terminating such registration.

 

2.2 Stock Exchange Listing. The shares of Common Stock have been approved for listing on the NASDAQ Capital Market (the “Exchange”) subject only to official notice of issuance, and the Company has taken no action designed to, or likely to have the effect of, delisting the shares of Common Stock from the Exchange, nor has the Company received any notification that the Exchange is contemplating terminating such listing except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

2.3 No Stop Orders, etc. Neither the Commission nor, to the Company’s knowledge, any state regulatory authority has issued any order preventing or suspending the use of the Registration Statement, any Preliminary Prospectus or the Prospectus or has instituted or, to the Company’s knowledge, threatened to institute, any proceedings with respect to such an order. The Company has complied with each request (if any) from the Commission for additional information.

 

2.4 Disclosures in Registration Statement.

 

2.4.1 Compliance with Securities Act and 10b-5 Representation.

 

(i) Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus, including the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto, and the Prospectus, at the time each was filed with the Commission, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus delivered to the Underwriters for use in connection with this Offering and the Prospectus was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

 

5
 

 

(ii) Neither the Registration Statement nor any amendment thereto, at its effective time, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), contained, contains or will contain an untrue statement of a material fact or omitted, omits or will 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.

 

(iii) The Pricing Disclosure Package, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), did not, does not and will not include an 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; and each Issuer Limited Use Free Writing Prospectus does not conflict in any material respect with the information contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, and each such Issuer Limited Use Free Writing Prospectus, as supplemented by and taken together with the Pricing Prospectus as of the Applicable Time, did not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by the Representative expressly for use in the Registration Statement, the Pricing Prospectus or the Prospectus or any amendment thereof or supplement thereto. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of the disclosure contained in the “Underwriting” section of the Prospectus (the “Underwriters’ Information”).

 

(iv) Neither the Prospectus nor any amendment or supplement thereto (including any prospectus wrapper), as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Date or at any Option Closing Date, included, includes or will include an untrue statement of a material fact or omitted, omits or will 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; provided, however, that this representation and warranty shall not apply to the Underwriters’ Information.

 

2.4.2 Disclosure of Agreements. The agreements and documents described in the Registration Statement, the Pricing Disclosure Package and the Prospectus conform in all material respects to the descriptions thereof contained therein and there are no agreements or other documents required by the Securities Act and the Securities Act Regulations to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company is a party or by which it is or may be bound or affected and (i) that is referred to in the Registration Statement, the Pricing Disclosure Package and the Prospectus, or (ii) is material to the Company’s business, has been duly authorized and validly executed by the Company, is in full force and effect in all material respects and is enforceable against the Company and, to the Company’s knowledge, the other parties thereto, in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, none of such agreements or instruments has been assigned by the Company, and neither the Company nor, to the Company’s knowledge, any other party is in default thereunder and, to the Company’s knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a default thereunder except for such defaults that would not reasonably be expected to result in a Material Adverse Change (as defined in Section 2.5.1 below). To the best of the Company’s knowledge, performance by the Company of the material provisions of such agreements or instruments will not result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its assets or businesses (each, a “Governmental Entity”), including, without limitation, those relating to environmental laws and regulations, except for such violations that would not reasonably be expected to result in a Material Adverse Change.

 

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2.4.3 Prior Securities Transactions. No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by or under common control with the Company, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Preliminary Prospectus.

 

2.4.4 Regulations. The disclosures in the Registration Statement, the Pricing Disclosure Package and the Prospectus concerning the effects of federal, state, local and all foreign regulation on the Offering and the Company’s business as currently contemplated are correct in all material respects and no other such regulations are required to be disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus which are not so disclosed.

 

2.5 Changes After Dates in Registration Statement.

 

2.5.1 No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except as otherwise specifically stated therein: (i) there has been no material adverse change in the financial position or results of operations of the Company, nor to the Company’s knowledge, any change or development that, singularly or in the aggregate, would involve a material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company (a “Material Adverse Change”); and (ii) there have been no material transactions entered into by the Company not in the ordinary course of business, other than as contemplated pursuant to this Agreement.

 

2.5.2 Recent Securities Transactions, etc. Subsequent to the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and except as may otherwise be indicated or contemplated herein or disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not: (i) issued any securities other than securities issued pursuant to the Company’s existing equity incentive plans or shares issuable upon the exercise of then outstanding options, warrants and convertible securities, which in each case were disclosed in the Prospectus, Pricing Disclosure Package or the Registration Statement, or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock.

 

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2.6 Independent Accountants. To the knowledge of the Company, Marcum LLP (the “Auditor”), whose report is filed with the Commission as part of the Registration Statement, the Pricing Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Auditor has not, during the periods covered by the financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.

 

2.7 Financial Statements, etc. The financial statements, including the notes thereto and supporting schedules, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, fairly in all material respects present the financial position and the results of operations of the Company at the dates and for the periods to which they apply; and such financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), consistently applied throughout the periods involved (provided that unaudited interim financial statements are subject to year-end audit adjustments that are not expected to be material in the aggregate and do not contain all footnotes required by GAAP); and any supporting schedules included in the Registration Statement present fairly in all material respects the information required to be stated therein. Except as included therein, no historical or pro forma financial statements are required to be included in the Registration Statement, the Pricing Disclosure Package or the Prospectus under the Securities Act or the Securities Act Regulations. The pro forma and pro forma as adjusted financial information and the related notes, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus have been properly compiled and prepared in accordance with the applicable requirements of the Securities Act and the Securities Act Regulations and present fairly in all material respects the information shown therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. All disclosures contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus regarding “non-GAAP financial measures” (as such term is defined by the rules and regulations of the Commission), if any, comply with Regulation G of the Exchange Act and Item 10 of Regulation S-K of the Securities Act, to the extent applicable. Each of the Registration Statement, the Pricing Disclosure Package and the Prospectus discloses all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons 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, capital resources, or significant components of revenues or expenses. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (a) neither the Company nor any of its direct and indirect subsidiaries, including each entity disclosed or described in the Registration Statement, the Pricing Disclosure Package and the Prospectus as being a subsidiary of the Company (each, a “Subsidiary” and, collectively, the “Subsidiaries”), has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business, (b) the Company has not declared or paid any dividends or made any distribution of any kind with respect to its capital stock, (c) there has not been any change in the capital stock of the Company or any of its Subsidiaries, or, other than in the course of business, any grants under any stock compensation plan, and (d) there has not been any Material Adverse Change in the Company’s long-term or short-term debt.

 

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2.8 Authorized Capital; Options, etc. The Company had, at the date or dates indicated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the duly authorized, issued and outstanding capitalization as set forth therein. Based on the assumptions stated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set forth therein. Except as set forth in, or contemplated by, the Registration Statement, the Pricing Disclosure Package and the Prospectus, on the Effective Date, as of the Applicable Time and on the Closing Date and any Option Closing Date, there will be no stock options, warrants, or other rights to purchase or otherwise acquire any authorized, but unissued shares of Common Stock of the Company or any security convertible or exercisable into shares of Common Stock of the Company, or any contracts or commitments to issue or sell shares of Common Stock or any such options, warrants, rights or convertible securities.

 

2.9 Valid Issuance of Securities, etc.

 

2.9.1 Outstanding Securities. All issued and outstanding securities of the Company issued prior to the transactions contemplated by this Agreement have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The authorized shares of Common Stock conform in all material respects to all statements relating thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. The offers and sales of the outstanding shares of Common Stock were at all relevant times either registered under the Securities Act and the applicable state securities or “blue sky” laws or, based in part on the representations and warranties of the purchasers of such Shares, exempt from such registration requirements.

 

2.9.2 Securities Sold Pursuant to this Agreement. The Public Securities and Representative’s Securities have been duly authorized for issuance and sale and, when issued and paid for, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Public Securities and Representative’s Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Public Securities and Representative’s Securities has been duly and validly taken. The Public Securities and Representative’s Securities conform in all material respects to all statements with respect thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. All corporate action required to be taken for the authorization, issuance and sale of the Representative’s Warrant Agreement has been duly and validly taken; the shares of Common Stock issuable upon exercise of the Representative’s Warrant have been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and when paid for and issued in accordance with the Representative’s Warrant and the Representative’s Warrant Agreement, such shares of Common Stock will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; and such shares of Common Stock are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company.

 

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2.10 Registration Rights of Third Parties. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, no holders of any securities of the Company or any rights exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Securities Act or to include any such securities in a registration statement to be filed by the Company.

 

2.11 Validity and Binding Effect of Agreements. This Agreement and the Representative’s Warrant Agreement have been duly and validly authorized by the Company, and, when executed and delivered, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.

 

2.12 No Conflicts, etc. The execution, delivery and performance by the Company of this Agreement, the Representative’s Warrant Agreement and all ancillary documents, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both: (i) result in a material breach of, or conflict in any material respect with any of the terms and provisions of, or constitute a material default under, or result in the creation, modification, termination or imposition of any material lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any agreement or instrument to which the Company is a party; (ii) result in any violation of the provisions of the Company’s Certificate of Incorporation (as the same may be amended or restated from time to time, the “Charter”) or the by-laws of the Company; or (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any Governmental Entity as of the date hereof; except in the cases of clause (iii) above, for such breaches, conflicts or defaults that would not reasonably be expected to result in a Material Adverse Change.

 

2.13 No Defaults; Violations. No material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not in violation of any term or provision of its Charter or by-laws. The Company is not in violation of any franchise, license, permit, applicable law, rule, regulation, judgment or decree of any Governmental Entity, except for such violations that would not reasonably be expected to result in a Material Adverse Change.

 

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2.14 Corporate Power; Licenses; Consents.

 

2.14.1 Conduct of Business. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has all requisite corporate power and authority, and has all necessary authorizations, approvals, orders, licenses, certificates and permits (“Permits”) of and from any Governmental Entity that it needs as of the date hereof to conduct its business purpose as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except for such Permits, the absence of which would not reasonably be expected to have a Material Adverse Change.

 

2.14.2 Transactions Contemplated Herein. The Company has all corporate power and authority to enter into this Agreement and to carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency or other body is required for the valid issuance, sale and delivery of the Public Securities and the consummation of the transactions and agreements contemplated by this Agreement and the Representative’s Warrant Agreement and as contemplated by the Registration Statement, the Pricing Disclosure Package and the Prospectus, except with respect to applicable federal and state securities laws and the rules and regulations of the Financial Industry Regulatory Authority, Inc. (“FINRA”).

 

2.15 D&O Questionnaires. To the Company’s knowledge, all information contained in the questionnaires (the “Questionnaires”) completed by each of the Company’s directors and officers immediately prior to the Offering (the “Insiders”) as supplemented by all information concerning the Company’s directors, officers and principal shareholders as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, as well as in the Lock-Up Agreement (as defined in Section 2.24 below), provided to the Underwriters, is true and correct in all material respects and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires to become materially inaccurate or incorrect in any material respect.

 

2.16 Litigation; Governmental Proceedings. There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company’s knowledge, threatened against, or involving the Company or, to the Company’s knowledge, any executive officer or director which has not been disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus or in connection with the Company’s listing application for the listing of the Public Securities on the Exchange, which individually or in the aggregate, if determined adversely to the Company would reasonably be expected to have a Material Adverse Change.

 

2.17 Good Standing. The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of the State of Nevada as of the date hereof, and is duly qualified to do business and is in good standing in each other jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify, singularly or in the aggregate, would not have or reasonably be expected to result in a Material Adverse Change.

 

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2.18 Insurance. The Company carries or is entitled to the benefits of insurance, with reputable insurers, in such amounts and covering such risks which the Company believes are adequate, and all such insurance is in full force and effect. The Company has no reason to believe that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not reasonably be expected to result in a Material Adverse Change.

 

2.19 Transactions Affecting Disclosure to FINRA.

 

2.19.1 Finder’s Fees. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder’s, consulting or origination fee by the Company or any Insider with respect to the sale of the Public Securities hereunder or any other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, any of its shareholders that may affect the Underwriters’ compensation, as determined by FINRA.

 

2.19.2 Payments Within Twelve (12) Months. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not made any direct or indirect payments (in cash, securities or otherwise) in connection with the Offering to: (i) any person, as a finder’s fee, consulting fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital to the Company; (ii) any FINRA member; or (iii) any person or entity that has any direct or indirect affiliation or association with any FINRA member, within the twelve (12) months prior to the Effective Date, other than the payment to the Underwriters as provided hereunder.

 

2.19.3 Use of Proceeds. None of the net proceeds of the Offering will be paid by the Company to any participating FINRA member or its affiliates, except as specifically authorized herein.

 

2.19.4 FINRA Affiliation. There is no (i) officer or director of the Company, (ii) beneficial owner of 5% or more of any class of the Company’s securities or (iii) beneficial owner of the Company’s unregistered equity securities which were acquired during the 180-day period immediately preceding the filing of the Registration Statement that is an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).

 

2.19.5 Information. All information provided by the Company in its FINRA questionnaire to Representative Counsel specifically for use by Representative Counsel in connection with its Public Offering System filings (and related disclosure) with FINRA is true, correct and complete in all material respects.

 

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2.20 Foreign Corrupt Practices Act. None of the Company and its Subsidiaries or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company and its Subsidiaries or any other person acting on behalf of the Company and its Subsidiaries, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any Governmental Entity or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have caused a Material Adverse Change or (iii) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The Company has taken reasonable steps to ensure that its accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended.

 

2.21 Compliance with OFAC. None of the Company and its Subsidiaries or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company and its Subsidiaries or any other person acting on behalf of the Company and its Subsidiaries, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”), and the Company will not knowingly, directly or indirectly, use the proceeds of the Offering 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 U.S. sanctions administered by OFAC.

 

2.22 Money Laundering Laws. 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 Entity (collectively, the “Money Laundering Laws”); and no action, suit or proceeding by or before any Governmental Entity involving the Company with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

 

2.23 Officers’ Certificate. Any certificate signed by any duly authorized officer of the Company and delivered to you or to Representative Counsel shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby.

 

2.24 Lock-Up Agreements. Schedule 3 hereto contains a complete and accurate list of the Company’s officers, directors and each owner of at least 5% of the Company’s outstanding shares of Common Stock (or securities convertible or exercisable into shares of Common Stock) (collectively, the “Lock-Up Parties”). The Company has caused each of the Lock-Up Parties to deliver to the Representative an executed Lock-Up Agreement, in the form attached hereto as Exhibit B (the “Lock-Up Agreement”), prior to the execution of this Agreement.

 

2.25 Subsidiaries. All direct and indirect Subsidiaries of the Company are duly organized and in good standing under the laws of the place of organization or incorporation, and each Subsidiary is in good standing in each jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify would not have a Material Adverse Change. The Company’s ownership and control of each Subsidiary is as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

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2.26 Related Party Transactions. There are no business relationships or related party transactions involving the Company or any other person required to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus that have not been described as required.

 

2.27 Board of Directors. The Board of Directors of the Company is comprised of the persons set forth under the heading of the Pricing Prospectus and the Prospectus captioned “Management.” The qualifications of the persons serving as board members and the overall composition of the board comply with the Exchange Act, the Exchange Act Regulations, the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder (the “Sarbanes-Oxley Act”) applicable to the Company and the listing rules of the Exchange. At least one member of the Audit Committee of the Board of Directors of the Company qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules of the Exchange. In addition, at least a majority of the persons serving on the Board of Directors qualify as “independent,” as defined under the listing rules of the Exchange.

 

2.28 Sarbanes-Oxley Compliance.

 

2.28.1 Disclosure Controls. The Company has developed and currently maintains disclosure controls and procedures that comply in all material respects with Rule 13a-15 or 15d-15 under the Exchange Act Regulations, and such controls and procedures are effective to ensure that all material information concerning the Company will be made known on a timely basis to the individuals responsible for the preparation of the Company’s Exchange Act filings and other public disclosure documents.

 

2.28.2 Compliance. The Company is, or at the Applicable Time and on the Closing Date will be, in material compliance with the provisions of the Sarbanes-Oxley Act applicable to it, and has implemented or will implement such programs and taken reasonable steps to ensure the Company’s future compliance (not later than the relevant statutory and regulatory deadlines therefor) with all of the material provisions of the Sarbanes-Oxley Act.

 

2.29 Accounting Controls. The Company and its Subsidiaries maintain systems of “internal control over financial reporting” (as defined under Rules 13a-15 and 15d-15 under the Exchange Act Regulations) that comply in all material respects with the requirements of the Exchange Act and have been designed by, or under the supervision of, their respective principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including, but not limited to, internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company is not aware of any material weaknesses in its internal controls. The Company’s auditors and the Audit Committee of the Board of Directors of the Company have been advised of: (i) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are known to the Company’s management and that have adversely affected or are reasonably likely to adversely affect the Company’ ability to record, process, summarize and report financial information; and (ii) any fraud known to the Company’s management, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.

 

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2.30 No Investment Company Status. The Company is not and, after giving effect to the Offering and the application of the proceeds thereof as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, will not be, required to register as an “investment company,” as defined in the Investment Company Act of 1940, as amended.

 

2.31 No Labor Disputes. No labor dispute with the employees of the Company or any of its Subsidiaries exists or, to the knowledge of the Company, is imminent.

 

2.32 Intellectual Property Rights. The Company and each of its Subsidiaries owns or possesses or has valid rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and similar rights (“Intellectual Property Rights”) necessary for the conduct of the business of the Company and its Subsidiaries as currently carried on and as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus. To the knowledge of the Company, no action or use by the Company or any of its Subsidiaries necessary for the conduct of its business as currently carried on and as described in the Registration Statement and the Prospectus will involve or give rise to any infringement of, or license or similar fees for, any Intellectual Property Rights of others (other than license or similar fees described or contemplated in the Registration Statement, the Pricing Disclosure Package and the Prospectus). Neither the Company nor any of its Subsidiaries has received any notice alleging any such infringement, fee or conflict with asserted Intellectual Property Rights of others. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus and except as would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change (A) to the knowledge of the Company, there is no infringement, misappropriation or violation by third parties of any of the Intellectual Property Rights owned by the Company; (B) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the rights of the Company in or to any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim, that would, individually or in the aggregate, together with any other claims referred to in this Section 2.32, reasonably be expected to result in a Material Adverse Change; (C) the Intellectual Property Rights owned by the Company and, to the knowledge of the Company, the Intellectual Property Rights licensed to the Company have not been adjudged by a court of competent jurisdiction invalid or unenforceable, in whole or in part, and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims referred to in this Section 2.32, reasonably be expected to result in a Material Adverse Change; (D) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company infringes, misappropriates or otherwise violates any Intellectual Property Rights or other proprietary rights of others, the Company has not received any written notice of such claim and the Company is unaware of any other facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims referred to in this Section 2.32, reasonably be expected to result in a Material Adverse Change; and (E) to the Company’s knowledge, no employee of the Company is in or has ever been in violation in any material respect of any term of any employment contract, patent disclosure agreement, invention assignment agreement, non-competition agreement, non-solicitation agreement, nondisclosure agreement or any restrictive covenant to or with a former employer where the basis of such violation relates to such employee’s employment with the Company, or actions undertaken by the employee while employed with the Company and could reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change. To the Company’s knowledge, all material technical information developed by and belonging to the Company which has not been patented has been kept confidential. The Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of any other person or entity that are required to be set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus and are not described therein. The Registration Statement, the Pricing Disclosure Package and the Prospectus contain in all material respects the same description of the matters set forth in the preceding sentence. None of the technology employed by the Company has been obtained or is knowingly being used by the Company in material violation of any contractual obligation binding on the Company or, to the Company’s knowledge, any of its officers, directors or employees, or otherwise in material violation of the rights of any persons.

 

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2.33 Taxes. Each of the Company and its Subsidiaries has filed all material returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof. Each of the Company and its Subsidiaries has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all taxes imposed on or assessed against the Company or such respective Subsidiary. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Underwriters, (i) no material issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company or its Subsidiaries, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company or its Subsidiaries. The term “taxes” means all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto. The term “returns” means all returns, declarations, reports, statements and other documents required to be filed in respect to taxes.

 

2.34 ERISA Compliance. The Company and any “employee benefit plan” (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, “ERISA”)) established or maintained by the Company or its “ERISA Affiliates” (as defined below) are in compliance in all material respects with ERISA. “ERISA Affiliate” means, with respect to the Company, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the “Code”) of which the Company is a member. No “reportable event” (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates. No “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates, if such “employee benefit plan” were terminated, would have any “amount of unfunded benefit liabilities” (as defined under ERISA). Neither the Company nor any of its ERISA Affiliates has incurred or reasonably expects to incur any material liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “employee benefit plan” or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and, to the knowledge of the Company, nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification.

 

2.35 Compliance with Laws. Each of the Company and its Subsidiaries: (A) is and at all times has been in compliance with all statutes, rules, or regulations applicable to the ownership, testing, development, manufacture, packaging, processing, use, distribution, marketing, labeling, promotion, sale, offer for sale, storage, import, export or disposal of any product manufactured or distributed by the Company (“Applicable Laws”), except as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Change; (B) has not received any warning letter, untitled letter or other correspondence or notice from any other Governmental Entity alleging or asserting noncompliance with any Applicable Laws or any licenses, certificates, approvals, clearances, authorizations, permits and supplements or amendments thereto required by any such Applicable Laws (“Authorizations”); (C) possesses all material Authorizations and such material Authorizations are valid and in full force and effect and are not in material violation of any term of any such Authorizations; (D) has not received notice of any claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any Governmental Entity or third party alleging that any product operation or activity is in violation of any Applicable Laws or Authorizations and has no knowledge that any such Governmental Entity or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding that if brought would result in a Material Adverse Change; (E) has not received notice that any Governmental Entity has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations and has no knowledge that any such Governmental Entity is considering such action; (F) has filed, obtained, maintained or submitted all material reports, documents, forms, notices, applications and records, as required by any Applicable Laws or Authorizations and that all such reports, documents, forms, notices, applications, and records, were complete and correct in all material respects on the date filed (or were corrected or supplemented by a subsequent submission); and (G) has not, either voluntarily or involuntarily, initiated, conducted, or issued or caused to be initiated, conducted or issued, any recall, market withdrawal or replacement, safety alert, post-sale warning, or other notice or action relating to the alleged lack of safety or any alleged product defect or violation and, to the Company’s knowledge, no third party has initiated, conducted or intends to initiate any such notice or action.

 

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2.36 Environmental Matters.

 

2.36.1 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 to the knowledge of the Company, 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 Change; 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).

 

2.36.2 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 Change. “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.

 

2.37 Ineligible Issuer. At the time of filing the Registration Statement and any post-effective amendment thereto, at the time of effectiveness of the Registration Statement and any amendment thereto, at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the Securities Act Regulations) of the Public Securities and at the date hereof, the Company was not and is not an “ineligible issuer,” as defined in Rule 405, without taking account of any determination by the Commission pursuant to Rule 405 that it is not necessary that the Company be considered an ineligible issuer.

 

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2.38 Real and Personal Property. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company and its Subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real or personal property which are material to the business of the Company and its Subsidiaries taken as a whole, in each case free and clear of all liens, encumbrances, security interests, claims and defects that do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or its Subsidiaries; and all of the leases and subleases material to the business of the Company and its Subsidiaries, considered as one enterprise, and under which the Company or any of its Subsidiaries holds properties described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, are in full force and effect, and neither the Company nor any Subsidiary has received any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease.

 

2.39 Contracts Affecting Capital. There are no transactions, arrangements or other relationships between and/or among the Company, any of its affiliates (as such term is defined in Rule 405 of the Securities Act Regulations) and any unconsolidated entity, including, but not limited to, any structured finance, special purpose or limited purpose entity that could reasonably be expected to materially affect the Company’s or its Subsidiaries’ liquidity or the availability of or requirements for their capital resources required to be described or incorporated by reference in the Registration Statement, the Pricing Disclosure Package and the Prospectus which have not been described or incorporated by reference as required.

 

2.40 Loans to Directors or Officers. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees or indebtedness by the Company or its Subsidiaries to or for the benefit of any of the officers or directors of the Company, its Subsidiaries or any of their respective family members, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

2.41 Smaller Reporting Company. As of the time of filing of the Registration Statement, the Company was a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act Regulations.

 

2.42 Industry Data. The statistical and market-related data included in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus are based on or derived from sources that the Company reasonably and in good faith believes are reliable and accurate or represent the Company’s good faith estimates that are made on the basis of data derived from such sources.

 

2.43 Emerging Growth Company. From the time of the initial confidential submission of the Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged directly in or through any Person authorized to act on its behalf in any Testing-the Waters Communication) through the date hereof, the Company has been and is an “emerging growth company,” as defined in Section 2(a) of the Securities Act (an “Emerging Growth Company”). “Testing-the-Waters Communication” means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Securities Act.

 

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2.44 Testing-the-Waters Communications. The Company has not (i) alone engaged in any Testing-the-Waters Communications, other than Testing-the-Waters Communications with the written consent of the Representative and with entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act and (ii) authorized anyone other than the Representative to engage in Testing-the-Waters Communications. The Company confirms that the Representative has been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Company has not distributed any Written Testing-the-Waters Communications other than those listed on Schedule 2-C hereto. “Written Testing-the-Waters Communication” means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Securities Act.

 

3. Covenants of the Company. The Company covenants and agrees as follows:

 

3.1 Amendments to Registration Statement. Until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof, the Company shall deliver to the Representative, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Representative shall reasonably object in writing.

 

3.2 Federal Securities Laws.

 

3.2.1 Compliance. Until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof, the Company, subject to Section 3.2.2, shall comply in all material respects with the requirements of Rule 430A of the Securities Act Regulations, and will notify the Representative promptly, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed; (ii) of the receipt of any comments from the Commission; (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information; (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or of the suspension of the qualification of the Public Securities and Representative’s Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the Securities Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the Offering of the Public Securities and Representative’s Securities. The Company shall effect all filings required under Rule 424(b) of the Securities Act Regulations, in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and shall take such steps as it deems reasonably necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company shall use its commercially reasonable efforts to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment.

 

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3.2.2 Continued Compliance. Until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof, the Company shall comply in all material respects with the Securities Act, the Securities Act Regulations, the Exchange Act and the Exchange Act Regulations so as to permit the completion of the distribution of the Public Securities as contemplated in this Agreement and in the Registration Statement, the Pricing Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations (“Rule 172”), would be) required by the Securities Act to be delivered in connection with sales of the Public Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to (i) amend the Registration Statement in order that the Registration Statement will not include 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; (ii) amend or supplement the Pricing Disclosure Package or the Prospectus in order that the Pricing Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser; or (iii) amend the Registration Statement or amend or supplement the Pricing Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the Securities Act or the Securities Act Regulations, the Company will promptly (A) give the Representative notice of such event; (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the Pricing Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Representative with copies of any such amendment or supplement and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representative or Representative Counsel shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. The Company has given the Representative notice of any filings made pursuant to the Exchange Act or the Exchange Act Regulations within 48 hours prior to the Applicable Time. The Company shall give the Representative notice of its intention to make any such filing from the Applicable Time until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof and will furnish the Representative with copies of the related document(s) a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Representative or counsel for the Underwriters shall reasonably object.

 

3.2.3 Exchange Act Registration. For a period of three (3) years after the date of this Agreement, the Company shall use its commercially reasonable efforts to maintain the registration of the shares of Common Stock under the Exchange Act. The Company shall not deregister the shares of Common Stock under the Exchange Act without the prior written consent of the Representative.

 

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3.2.4 Free Writing Prospectuses. The Company agrees that, unless it obtains the prior written consent of the Representative, it shall not make any offer relating to the Public Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus,” or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433; provided that the Representative shall be deemed to have consented to each Issuer General Use Free Writing Prospectus hereto and any “road show that is a written communication” within the meaning of Rule 433(d)(8)(i) that has been reviewed by the Representative. The Company represents that it has treated or agrees that it will treat each such free writing prospectus consented to, or deemed consented to, by the Underwriters as an “issuer free writing prospectus,” as defined in Rule 433, and that it has complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission where required, legending and record keeping. If at any time following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement or 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 will promptly notify the Underwriters and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.

 

3.2.5 Testing-the-Waters Communications. 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 shall promptly notify the Representative and shall promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.

 

3.3 Delivery to the Underwriters of Registration Statements. The Company has delivered or made available or shall deliver or make available to the Representative and Representative Counsel, without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the Underwriters, upon request and without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

 

3.4 Delivery to the Underwriters of Prospectuses. The Company has delivered or made available or will deliver or make available to each Underwriter, without charge, as many copies of each Preliminary Prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the Securities Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

 

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3.5 Events Requiring Notice to the Representative. The Company shall notify the Representative promptly and confirm the notice in writing: (i) of the issuance by any state securities commission of any proceedings for the suspension of the qualification of the Public Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose; (ii) of the mailing and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus; (iii) of the receipt of any comments or request for any additional information from the Commission; and (iv) of the happening of any event during the period described in this Section 3.5 that, in the judgment of the Company, makes any statement of a material fact made in the Registration Statement, the Pricing Disclosure Package or the Prospectus untrue or that requires the making of any changes in (a) the Registration Statement in order to make the statements therein not misleading, or (b) in the Pricing Disclosure Package or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

 

3.6 Review of Financial Statements. For a period of three (3) years after the date of this Agreement, the Company, at its expense, shall cause its regularly engaged independent registered public accounting firm to review (but not audit) the Company’s financial statements for each of the three fiscal quarters immediately preceding the announcement of any quarterly financial information.

 

3.7 Listing. The Company shall use its commercially reasonable efforts to maintain the listing of the shares of Common Stock (including the Public Securities) on the Exchange for at least three (3) years from the date of this Agreement.

 

3.8 Reports to the Representative.

 

3.8.1 Periodic Reports, etc. For a period of three (3) years after the date of this Agreement, the Company shall furnish or make available to the Representative copies of such financial statements and other periodic and special reports as the Company from time to time furnishes generally to holders of any class of its securities and also promptly furnish to the Representative: (i) a copy of each periodic report the Company shall be required to file with the Commission under the Exchange Act and the Exchange Act Regulations; (ii) a copy of every press release and every news item and article with respect to the Company or its affairs which was released by the Company; (iii) a copy of each Form 8-K filed by the Company; (iv) five copies of each registration statement filed by the Company under the Securities Act; and (v) such additional documents and information with respect to the Company and the affairs of any future subsidiaries of the Company as the Representative may from time to time reasonably request; provided the Representative shall sign, if requested by the Company, a Regulation FD compliant confidentiality agreement which is reasonably acceptable to the Representative and Representative Counsel in connection with the Representative’s receipt of such information. Documents filed with the Commission pursuant to its EDGAR system shall be deemed to have been delivered to the Representative pursuant to this Section 3.8.1.

 

3.8.2 Transfer Agent; Transfer Sheets. For a period of one (1) year after the date of this Agreement, the Company shall retain a transfer agent and registrar acceptable to the Representative (the “Transfer Agent”) and shall furnish to the Representative at the Company’s sole cost and expense such transfer sheets of the Company’s securities as the Representative may reasonably request, including the daily and monthly consolidated transfer sheets of the Transfer Agent and DTC. Computershare Trust Company, N.A. is acceptable to the Representative to act as Transfer Agent for the shares of Common Stock.

 

3.9 Payment of Expenses

 

3.9.1 General Expenses Related to the Offering. The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date, if any, to the extent not paid at the Closing Date, all expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a) all filing fees and communication expenses relating to the registration of the shares of Common Stock to be sold in the Offering (including the Over-allotment Shares) with the Commission; (b) all Public Filing System filing fees associated with the review of the Offering by FINRA; (c) all fees and expenses relating to the listing of such Public Securities on the Exchange and such other stock exchanges as the Company and the Representative together determine; (d) all fees, expenses and disbursements relating to background checks of the Company’s officers and directors; (e) all fees, expenses and disbursements, if any, relating to the registration or qualification of the Public Securities under the “blue sky” securities laws of such states and other jurisdictions as the Representative may reasonably designate if the Offering is commenced on the Over-the-Counter Bulletin Board; (f) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Public Securities under the securities laws of such foreign jurisdictions as the Representative may reasonably designate; (g) the costs of all mailing and printing of the underwriting documents (including, without limitation, the Underwriting Agreement, any Blue Sky Surveys and, if appropriate, any Agreement Among Underwriters, Selected Dealers’ Agreement, Underwriters’ Questionnaire and Power of Attorney), Registration Statements, Prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final Prospectuses as the Representative may reasonably deem necessary; (h) the costs of preparing, printing and delivering certificates representing the Public Securities; (i) fees and expenses of the transfer agent for the shares of Common Stock; (j) stock transfer and/or stamp taxes, if any, payable upon the transfer of securities from the Company to the Underwriters; (k) the cost associated with the Underwriter’s use of book-building and compliance software for the Offering (l) the costs associated with one set of bound volumes of the public offering materials as well as commemorative lucite mementos, each of which the Company or its designee shall provide within a reasonable time after the Closing Date in such quantities as the Representative may reasonably request up to $2,500; (m) the fees and expenses of the Company’s accountants; (n) the fees and expenses of the Company’s legal counsel and other agents and representatives; (o) the fees and expenses of the Representative Counsel not to exceed $75,000; and (p) the Underwriter’s actual accountable “road show” expenses for the Offering; provided, that the maximum amount that the Company shall pay for items (d), (k), (l), (o) and (p) and shall be $175,000. The Representative may deduct from the net proceeds of the Offering payable to the Company on the Closing Date, or the Option Closing Date, if any, the expenses set forth herein to be paid by the Company to the Underwriters, other than amounts already advanced to the Representative as of the date of this Underwriting Agreement.

 

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3.9.2 Non-accountable Expenses. The Company further agrees that, in addition to the expenses payable pursuant to Section 3.9.1, on the Closing Date it shall pay to the Representative, by deduction from the net proceeds of the Offering contemplated herein, a non-accountable expense allowance equal to one percent (1%) of the gross proceeds received by the Company from the sale of the Firm Shares (excluding the Option Shares), less the Advance (as such term is defined in Section 8.3 hereof), provided, however, that in the event that the Offering is terminated, the Company agrees to reimburse the Underwriters pursuant to Section 8.3 hereof.

 

3.10 Application of Net Proceeds. The Company shall apply the net proceeds from the Offering received by it in a manner consistent with the application thereof described under the caption “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

3.11 Delivery of Earnings Statements to Security Holders. The Company shall make generally available to its security holders as soon as practicable, but not later than the first day of the fifteenth (15th) full calendar month following the date of this Agreement, an earnings statement (which need not be certified by independent registered public accounting firm unless required by the Securities Act or the Securities Act Regulations, but which shall satisfy the provisions of Rule 158(a) under Section 11(a) of the Securities Act) covering a period of at least twelve (12) consecutive months beginning after the date of this Agreement.

 

3.12 Stabilization. Neither the Company nor, to its knowledge, any of its employees, directors or shareholders (without the consent of the Representative) has taken or shall take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Public Securities.

 

3.13 Internal Controls. The Company shall use its best efforts to maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

 

3.14 Accountants. As of the date of this Agreement, the Company has retained an independent registered public accounting firm reasonably acceptable to the Representative, and the Company shall continue to retain a nationally recognized independent registered public accounting firm for a period of at least three (3) years after the date of this Agreement. The Representative acknowledges that the Auditor is acceptable to the Representative.

 

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3.15 FINRA. The Company shall advise the Representative (who shall make an appropriate filing with FINRA) if it is or becomes aware that (i) any officer or director of the Company, (ii) any beneficial owner of 5% or more of any class of the Company’s securities or (iii) any beneficial owner of the Company’s unregistered equity securities which were acquired during the 180 days immediately preceding the filing of the Registration Statement is or becomes an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).

 

3.16 No Fiduciary Duties. The Company acknowledges and agrees that the Underwriters’ responsibility to the Company is solely contractual in nature and that none of the Underwriters or their affiliates or any selling agent shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement.

 

3.17 Company Lock-Up Agreements.

 

3.17.1 Restriction on Sales of Capital Stock. The Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of one-year after the date of this Agreement (the “Lock-Up Period”), (i) 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 to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be filed any registration statement with the Commission relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company other than a registration statement on Form S-8; or (iii) complete any offering of debt securities of the Company (other than debt securities convertible into shares of Common Stock of the Company); or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company, whether any such transaction described in clause (i), (ii) or (iii) above is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise.

 

The restrictions contained in this Section 3.17.1 shall not apply to (i) the shares of Common Stock to be sold hereunder, (ii) the issuance by the Company of shares of Common Stock upon the exercise of a stock option or warrant or the conversion of a security outstanding on the date hereof, of which the Representative has been advised in writing or (iii) the issuance by the Company of stock options or shares of capital stock of the Company under any equity compensation plan of the Company.

 

Notwithstanding the foregoing, if (i) during the last 17 days of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs, or (ii) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results or becomes aware that material news or a material event will occur during the 16-day period beginning on the last day of the Lock-Up Period, the restrictions imposed by this Section 3.17.1 shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of such material news or material event, as applicable, unless the Representative waives, in writing, such extension; provided, however, that this extension of the Lock-Up Period shall not apply to the extent that FINRA has amended or repealed NASD Rule 2711(f)(4), or has otherwise provided written interpretive guidance regarding such rule, in each case, so as to eliminate the prohibition of any broker, dealer, or member of a national securities association from publishing or distributing any research report, with respect to the securities of an Emerging Growth Company prior to or after the expiration of any agreement between the broker, dealer, or member of a national securities association and the Emerging Growth Company or its shareholders that restricts or prohibits the sale of securities held by the Emerging Growth Company or its shareholders after the initial public offering date.

 

3.17.2 Restriction on Continuous Offerings. Except as set forth in the Registration Statement, notwithstanding the restrictions contained in Section 3.17.1, the Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of 12 months after the date of this Agreement, directly or indirectly in any “at-the-market” or continuous equity transaction, offer to sell, sell, contract to sell, grant any option to sell or otherwise dispose of shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company.

 

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3.18 Release of D&O Lock-up Period. If the Representative, in its sole discretion, agrees to release or waive the restrictions set forth in the Lock-Up Agreements described in Section 2.24 hereof for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three (3) Business Days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit C hereto through a major news service at least two (2) Business Days before the effective date of the release or waiver.

 

3.19 Blue Sky Qualifications. The Company shall use its commercially reasonable efforts, in cooperation with the Underwriters, if necessary, to qualify the Public Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative may designate and to maintain such qualifications in effect so long as required to complete the distribution of the Public Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.

 

3.20 Reporting Requirements. The Company, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, will use its commercially reasonable efforts to file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and Exchange Act Regulations. Additionally, the Company shall report the use of proceeds from the issuance of the Public Securities as may be required under Rule 463 under the Securities Act Regulations.

 

3.21 Emerging Growth Company Status. The Company shall promptly notify the Representative if the Company ceases to be an Emerging Growth Company at any time prior to the later of (i) completion of the distribution of the Public Securities within the meaning of the Securities Act and (ii) fifteen (15) days following the completion of the Lock-Up Period.

 

3.22 Right of First Refusal. Upon the closing of the Offering and for a period of nine (9) months thereafter, the Representative shall have the right to act as sole investment banker, sole book-runner and/or sole underwriter, at the Representative’s sole discretion, for each and every future public and/or private financing, for the Company, or any successor to or any Subsidiary of the Company.

 

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4. Conditions of Underwriters’ Obligations. The obligations of the Underwriters to purchase and pay for the Public Securities, as provided herein, shall be subject to (i) the continuing accuracy of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and the Option Closing Date, if any; (ii) the accuracy of the statements of officers of the Company made pursuant to the provisions hereof; (iii) the performance by the Company of its obligations hereunder; and (iv) the following conditions:

 

4.1 Regulatory Matters.

 

4.1.1 Effectiveness of Registration Statement; Rule 430A Information. The Registration Statement has become effective not later than 5:00 p.m., Eastern time, on the date of this Agreement or such later date and time as shall be consented to in writing by you, and, at each of the Closing Date and any Option Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the Securities Act, no order preventing or suspending the use of any Preliminary Prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the Company’s knowledge, contemplated by the Commission. The Company has complied with each request (if any) from the Commission for additional information. The Prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) (without reliance on Rule 424(b)(8)) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A.

 

4.1.2 FINRA Clearance. On or before the date of this Agreement, the Representative shall have received clearance from FINRA as to the amount of compensation allowable or payable to the Underwriters as described in the Registration Statement.

 

4.1.3 Exchange Stock Market Clearance. On the Closing Date, the Company’s shares of Common Stock, including the Firm Shares, shall have been approved for listing on the Exchange, subject only to official notice of issuance. On the first Option Closing Date (if any), the Company’s shares of Common Stock, including the Option Shares, shall have been approved for listing on the Exchange, subject only to official notice of issuance.

 

4.2 Company Counsel Matters.

 

4.2.1 Closing Date Opinion of Counsel. On the Closing Date, the Representative shall have received the favorable opinion of Fleming PLLC, counsel to the Company, dated the Closing Date and addressed to the Representative, substantially in the form of Exhibit D attached hereto.

 

4.2.2 Option Closing Date Opinions of Counsel. On the Option Closing Date, if any, the Representative shall have received the favorable opinions of each counsel listed in Section 4.2.1, dated the Option Closing Date, addressed to the Representative and in form and substance reasonably satisfactory to the Representative, confirming as of the Option Closing Date, the statements made by such counsels in their respective opinions delivered on the Closing Date.

 

4.2.3 Reliance. In rendering such opinions, such counsel may rely: (i) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to the Representative) of other counsel reasonably acceptable to the Representative, familiar with the applicable laws; and (ii) as to matters of fact, to the extent they deem proper, on certificates or other written statements of officers of the Company and officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Representative Counsel if requested. The opinion of Fleming PLLC and any opinion relied upon by Fleming PLLC shall include a statement to the effect that it may be relied upon by Representative Counsel in its opinion delivered to the Underwriters.

 

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4.3 Comfort Letters.

 

4.3.1 Cold Comfort Letter. At the time this Agreement is executed you shall have received a cold comfort letter containing statements and information of the type customarily included in accountants’ comfort letters with respect to the financial statements and certain financial information contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus, addressed to the Representative and in form and substance satisfactory in all respects to you and to the Auditor, dated as of the date of this Agreement.

 

4.3.2 Bring-down Comfort Letter. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received from the Auditor a letter, dated as of the Closing Date or the Option Closing Date, as applicable, to the effect that the Auditor reaffirms the statements made in the letter furnished pursuant to Section 4.3.1, except that the specified date referred to shall be a date not more than three (3) business days prior to the Closing Date or the Option Closing Date, as applicable.

 

4.4 Officers’ Certificates.

 

4.4.1 Officers’ Certificate. The Company shall have furnished to the Representative a certificate, dated the Closing Date and any Option Closing Date (if such date is other than the Closing Date), of its Chief Executive Officer, its President and its Chief Financial Officer stating that (i) such officers have carefully examined the Registration Statement, the Pricing Disclosure Package, any Issuer Free Writing Prospectus and the Prospectus and, in their opinion, the Registration Statement and each amendment thereto, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date) did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Pricing Disclosure Package, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), any Issuer Free Writing Prospectus as of its date and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the Prospectus and each amendment or supplement thereto, as of the respective date thereof and as of the Closing Date, did not include any untrue statement of a material fact and did not omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading, (ii) since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus, (iii) to the best of their knowledge, after reasonable inquiry, as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the representations and warranties of the Company in this Agreement are true and correct and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date (or any Option Closing Date if such date is other than the Closing Date), and (iv) there has not been, subsequent to the date of the most recent audited financial statements included or incorporated by reference in the Pricing Disclosure Package, any material adverse change in the financial position or results of operations of the Company, or any change or development that, singularly or in the aggregate, would involve a material adverse change or a prospective material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company, except as set forth in the Prospectus.

 

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4.4.2 Secretary’s Certificate. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date or the Option Date, as the case may be, respectively, certifying: (i) that each of the Charter and Bylaws is true and complete, has not been modified and is in full force and effect; (ii) that the resolutions of the Company’s Board of Directors relating to the Offering are in full force and effect and have not been modified; (iii) as to the accuracy and completeness of all correspondence between the Company or its counsel and the Commission; and (iv) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.

 

4.5 No Material Changes. Prior to and on each of the Closing Date and each Option Closing Date, if any: (i) there shall have been no material adverse change or development involving a prospective material adverse change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (ii) no action, suit or proceeding, at law or in equity, shall have been pending or threatened against the Company or any Insider before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may materially adversely affect the business, operations, prospects or financial condition or income of the Company, except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (iii) no stop order shall have been issued under the Securities Act and no proceedings therefor shall have been initiated or threatened by the Commission; and (iv) the Registration Statement, the Pricing Disclosure Package and the Prospectus and any amendments or supplements thereto shall contain all material statements which are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations and shall conform in all material respects to the requirements of the Securities Act and the Securities Act Regulations, and neither the Registration Statement, the Pricing Disclosure Package nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any 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.

 

4.6 Delivery of Agreements.

 

4.6.1 Lock-Up Agreements. On or before the date of this Agreement, the Company shall have delivered to the Representative executed copies of the Lock-Up Agreements from each of the persons listed in Schedule 3 hereto.

 

4.6.2 Representative’s Warrant Agreement. On the Closing Date, the Company shall have delivered to the Representative executed copies of the Representative’s Warrant Agreement.

 

4.7 Additional Documents. At the Closing Date and at each Option Closing Date (if any) Representative Counsel shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling Representative Counsel to deliver an opinion to the Underwriters, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Public Securities and the Representative’s Securities as herein contemplated shall be satisfactory in form and substance to the Representative and Representative Counsel.

 

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5. Indemnification.

 

5.1 Indemnification of the Underwriters.

 

5.1.1 General. Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each Underwriter, its affiliates and each of its and their respective directors, officers, members, employees, representatives and agents and each person, if any, who controls any such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively the “Underwriter Indemnified Parties,” and each an “Underwriter Indemnified Party”), against any and all loss, liability, claim, damage and expense whatsoever (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or otherwise) to which they or any of them may become subject under the Securities Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in (i) the Registration Statement, the Pricing Disclosure Package, the Preliminary Prospectus, the Prospectus, or in any Issuer Free Writing Prospectus or in any Written Testing-the-Waters Communication (as from time to time each may be amended and supplemented); (ii) any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the Offering, including any “road show” or investor presentations made to investors by the Company (whether in person or electronically); or (iii) any application or other document or written communication (in this Section 5, collectively called “application”) executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Public Securities and Representative’s Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, the Exchange or any other national securities exchange; or the omission or alleged omission therefrom of 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, unless such statement or omission was made in reliance upon, and in conformity with, the Underwriters’ Information. With respect to any untrue statement or omission or alleged untrue statement or omission made in the Pricing Disclosure Package, the indemnity agreement contained in this Section 5.1.1 shall not inure to the benefit of any Underwriter Indemnified Party to the extent that any loss, liability, claim, damage or expense of such Underwriter Indemnified Party results from the fact that a copy of the Prospectus was not given or sent to the person asserting any such loss, liability, claim or damage at or prior to the written confirmation of sale of the Public Securities to such person as required by the Securities Act and the Securities Act Regulations, and if the untrue statement or omission has been corrected in the Prospectus, unless such failure to deliver the Prospectus was a result of non-compliance by the Company with its obligations under Section 3.3 hereof.

 

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5.1.2 Procedure. If any action is brought against an Underwriter Indemnified Party in respect of which indemnity may be sought against the Company pursuant to Section 5.1.1, such Underwriter Indemnified Party shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment and fees of counsel (subject to the reasonable approval of such Underwriter Indemnified Party) and payment of actual expenses. Such Underwriter Indemnified Party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter Indemnified Party unless (i) the employment of such counsel at the expense of the Company shall have been authorized in writing by the Company in connection with the defense of such action, or (ii) the Company shall not have employed counsel to have charge of the defense of such action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the Company (in which case the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the reasonable fees and expenses of not more than one additional firm of attorneys selected by the Underwriter Indemnified Party (in addition to local counsel) shall be borne by the Company. Notwithstanding anything to the contrary contained herein, if any Underwriter Indemnified Party shall assume the defense of such action as provided above, the Company shall have the right to approve the terms of any settlement of such action, which approval shall not be unreasonably withheld.

 

5.2 Indemnification of the Company. Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the several Underwriters, as incurred, but only with respect to untrue statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or in any application, in reliance upon, and in strict conformity with, the Underwriters’ Information. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against any Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the several Underwriters by the provisions of Section 5.1.2. The Company agrees to promptly notify the Representative of the commencement of any litigation or proceedings against the Company or any of its officers, directors or any person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, in connection with the issuance and sale of the Public Securities or in connection with the Registration Statement, the Pricing Disclosure Package, the Prospectus, or any Issuer Free Writing Prospectus or any Written Testing-the-Waters Communication.

 

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5.3 Contribution.

 

5.3.1 Contribution Rights. If the indemnification provided for in this Section 5 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 5.1 or 5.2 in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and the Underwriters, on the other, from the Offering of the Public Securities, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, with respect to such Offering shall be deemed to be in the same proportion as the total net proceeds from the Offering of the Public Securities purchased under this Agreement (before deducting expenses) received by the Company, as set forth in the table on the cover page of the Prospectus, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the shares of the Common Stock purchased under this Agreement, as set forth in the table on the cover page of the Prospectus, on the other hand. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 5.3.1 were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 5.3.1 shall be deemed to include, for purposes of this Section 5.3.1, 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 Section 5.3.1 in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the Offering of the Public Securities exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

 

5.3.2 Contribution Procedure. Within fifteen (15) days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party (“contributing party”), notify the contributing party of the commencement thereof, but the failure to so notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or its representative of the commencement thereof within the aforesaid 15 days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution without the written consent of such contributing party. The contribution provisions contained in this Section 5.3.2 are intended to supersede, to the extent permitted by law, any right to contribution under the Securities Act, the Exchange Act or otherwise available. Each Underwriter’s obligations to contribute pursuant to this Section 5.3 are several and not joint.

 

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6. Defaults.

 

6.1 Default by an Underwriter.

 

6.1.1 Default Not Exceeding 10% of Firm Shares or Option Shares. If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Shares or the Option Shares, if the Over-allotment Option is exercised hereunder, and if the number of the Firm Shares or Option Shares with respect to which such default relates does not exceed in the aggregate 10% of the number of Firm Shares or Option Shares that all Underwriters have agreed to purchase hereunder, then such Firm Shares or Option Shares to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder.

 

6.1.2 Default Exceeding 10% of Firm Shares or Option Shares. In the event that the default addressed in Section 6.1 relates to more than 10% of the Firm Shares or Option Shares, the Representative may in its discretion arrange for themselves or for another party or parties to purchase such Firm Shares or Option Shares to which such default relates on the terms contained herein. If, within one (1) Business Day after such default relating to more than 10% of the Firm Shares or Option Shares, the Representative does not arrange for the purchase of such Firm Shares or Option Shares, then the Company shall be entitled to a further period of one (1) Business Day within which to procure another party or parties reasonably satisfactory to the Representative to purchase said Firm Shares or Option Shares on such terms. In the event that neither the Representative nor the Company arrange for the purchase of the Firm Shares or Option Shares to which a default relates as provided in this Section 6, this Agreement will automatically be terminated by the Representative or the Company without liability on the part of the Company (except as provided in Sections 3.8 and 5 hereof) or the several Underwriters (except as provided in Section 5 hereof); provided, however, that if such default occurs with respect to the Option Shares, this Agreement will not terminate as to the Firm Shares; and provided, further, that nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other Underwriters and to the Company for damages occasioned by its default hereunder.

 

6.1.3 Postponement of Closing Date. In the event that the Firm Shares or Option Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representative or the Company shall have the right to postpone the Closing Date or Option Closing Date for a reasonable period, but not in any event exceeding five (5) Business Days, in order to effect whatever changes may thereby be made necessary in the Registration Statement, the Pricing Disclosure Package or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus that in the opinion of counsel for the Underwriter may thereby be made necessary. The term “Underwriter” as used in this Agreement shall include any party substituted under this Section 6 with like effect as if it had originally been a party to this Agreement with respect to such shares of Common Stock.

 

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7. Additional Covenants.

 

7.1 Board Composition and Board Designations. The Company shall ensure that: (i) the qualifications of the persons serving as members of the Board of Directors and the overall composition of the Board comply with the Sarbanes-Oxley Act, with the Exchange Act and with the listing rules of the Exchange or any other national securities exchange, as the case may be, in the event the Company seeks to have its Public Securities listed on another exchange or quoted on an automated quotation system, and (ii) if applicable, at least one member of the Audit Committee of the Board of Directors qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules of the Exchange.

 

7.2 Prohibition on Press Releases and Public Announcements. The Company shall not issue press releases or engage in any other publicity, without the Representative’s prior written consent (which consent shall not be unreasonably withheld), for a period ending at 5:00 p.m., Eastern time, on the first (1st) Business Day following the forty-fifth (45th) day after the Closing Date, other than normal and customary releases issued in the ordinary course of the Company’s business.

 

8. Effective Date of this Agreement and Termination Thereof.

 

8.1 Effective Date. This Agreement shall become effective when both the Company, and the Representative have executed the same and delivered counterparts of such signatures to the other party.

 

8.2 Termination. The Representative shall have the right to terminate this Agreement at any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in your reasonable opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange or the Nasdaq Stock Market LLC shall have been suspended or materially limited, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required by FINRA or by order of the Commission or any other government authority having jurisdiction; or (iii) if the United States shall have become involved in a new war or an increase in major hostilities; or (iv) if a banking moratorium has been declared by a New York State or federal authority; or (v) if a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities markets; or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in your reasonable opinion, make it inadvisable to proceed with the delivery of the Firm Shares or Option Shares; or (vii) if the Company is in material breach of any of its representations, warranties or covenants hereunder; or (viii) if the Representative shall have become aware after the date hereof of such a material adverse change in the conditions or prospects of the Company, or such adverse material change in general market conditions as in the Representative’s reasonable judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Public Securities or to enforce contracts made by the Underwriters for the sale of the Public Securities.

 

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8.3 Expenses. Notwithstanding anything to the contrary in this Agreement, except in the case of a default by the Underwriters, pursuant to Section 6.1.2 above, in the event that this Agreement shall not be carried out for any reason whatsoever, within the time specified herein or any extensions thereof pursuant to the terms herein, the Company shall be obligated to pay to the Underwriters their actual and accountable out-of-pocket expenses related to the transactions contemplated herein then due and payable (including the fees and disbursements of Representative Counsel) up to $175,000, inclusive of any advance for accountable expenses previously paid by the Company to the Representative (the “Advance”) and upon demand the Company shall pay the full amount thereof to the Representative on behalf of the Underwriters; provided, however, that such expense cap in no way limits or impairs the indemnification and contribution provisions of this Agreement. Notwithstanding the foregoing, any advance received by the Representative will be reimbursed to the Company to the extent not actually incurred in compliance with FINRA Rule 5110(f)(2)(C).

 

8.4 Indemnification. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall remain in full force and effect and shall not be in any way affected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof.

 

8.5 Representations, Warranties, Agreements to Survive. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors or any person controlling the Company or (ii) delivery of and payment for the Public Securities.

 

9. Miscellaneous.

 

9.1 Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed (registered or certified mail, return receipt requested), personally delivered or sent by facsimile transmission or email with confirmation and shall be deemed given when so delivered or faxed or emailed with confirmation or if mailed, two (2) days after such mailing.

 

If to the Representative:

 

Alexander Capital, L.P.

17 State Street, 5th Floor

New York, NY 10004

 

with a copy (which shall not constitute notice) to:

 

Cozen O’Connor

33 South 6th Street, Suite 3800

Minneapolis, Minnesota 55402

Attn: Christopher J. Bellini, Esq.

Email: cbellini@cozen.com

 

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If to the Company:

 

Muscle Maker, Inc.

308 East Renfro Street, Suite 101

Burleson, Texas 76028

Attention: Michael J. Roper, Chief Executive Officer

Email: Michael.Roper@musclemakergrill.com

 

with a copy (which shall not constitute notice) to:

 

Fleming PLLC

30 Wall Street, 8th Floor

New York, New York 10005

Attention: Stephen M. Fleming, Esq.

Email: smf@flemingpllc.com

 

9.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.

 

9.3 Amendment. This Agreement may only be amended by a written instrument executed by each of the parties hereto.

 

9.4 Entire Agreement. This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and thereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. Notwithstanding anything to the contrary set forth herein, it is understood and agreed by the parties hereto that all other terms and conditions of that certain engagement letter between the Company and the Representative, dated June 3, 2019 shall remain in full force and effect.

 

9.5 Binding Effect. This Agreement shall inure solely to the benefit of and shall be binding upon the Representative, the Underwriters, the Company, the controlling persons, directors and officers referred to in Section 5 hereof, and their respective successors, legal representatives, heirs and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of securities from any of the Underwriters.

 

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9.6 Governing Law; Consent to Jurisdiction; Trial by Jury. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Agreement shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 9.1 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company agrees that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

 

9.7 Execution in Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Delivery of a signed counterpart of this Agreement by facsimile or email/pdf transmission shall constitute valid and sufficient delivery thereof.

 

9.8 Waiver, etc. The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

 

[Signature Page Follows]

 

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If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.

 

  Very truly yours,
     
  MUSCLE MAKER, INC.
     
  By:  
    Michael J. Roper
    Chief Executive Officer

 

Confirmed as of the date first written above mentioned,

on behalf of itself and as Representative of the several

Underwriters named on Schedule 1 hereto:

 

ALEXANDER CAPITAL, L.P.  
     
By:              
[Name]    
[Title]    

 

[SIGNATURE PAGE]

 

[Muscle Maker, Inc. – Underwriting Agreement Signature Page]

 

     
     

 

SCHEDULE 1

 

Underwriter   Total
Number of
Firm Shares to
be Purchased
    Number of
Additional
Shares to be
Purchased if
the Over-
Allotment Option
is Fully Exercised
 
                           
Alexander Capital, L.P.            
             
TOTAL            

 

     
     

 

SCHEDULE 2-A

 

Pricing Information

 

Number of Firm Shares: [●]

 

Number of Option Shares: [●]

 

Public Offering Price per Share: $[●]

 

Underwriting Discount per Share: $[●]

 

Underwriting Non-accountable expense allowance per Share: $[●]

 

Proceeds to Company per Share (before expenses): $[●]

 

SCHEDULE 2-B

 

Issuer General Use Free Writing Prospectuses

 

[None.]

 

SCHEDULE 2-C

 

Written Testing-the-Waters Communications

 

[None.]

 

     
     

 

SCHEDULE 3

 

List of Lock-Up Parties

 

Directors & Officers:
Kevin Mohan
Michael J. Roper
Kenneth Miller
Ferdinand Groenewald
Aimee Infantee
Noel DeWinter
A.B. Southall III
Paul L. Menchik
John Marques
Peter S. Petrosian
Omprakash Vajinapalli
Stockholders:
P. John, LLC
John Marques

 

     
     

 

SCHEDULE 4

 

Subsidiaries and Affiliates

 

     
     

 

EXHIBIT A

 

Form of Representative’s Warrant Agreement

 

THE REGISTERED HOLDER OF THIS PURCHASE WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS PURCHASE WARRANT OR CAUSE IT TO BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT, OR CALL TRANSACTION THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF THE PURCHASE WARRANT BY ANY PERSON FOR A PERIOD OF ONE HUNDRED EIGHTY (180) DAYS FOLLOWING THE EFFECTIVE DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) [__________] OR AN UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A BONA FIDE OFFICER OR PARTNER OF [__________] OR OF ANY SUCH UNDERWRITER OR SELECTED DEALER AND IN ACCORDANCE WITH FINRA RULE 5110(G)(2).

 

THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [  ] [DATE THAT IS ONE (1) YEAR FROM THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT]. VOID AFTER 5:00 P.M., EASTERN TIME, [  ] [DATE THAT IS FIVE (5) YEARS FROM THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT].

 

COMMON STOCK PURCHASE WARRANT

 

For the Purchase of [              ] Shares of Common Stock

of

MUSCLE MAKER, INC.

 

1. Purchase Warrant. THIS CERTIFIES THAT, in consideration of funds duly paid by or on behalf of [__________] (“Holder”), as registered owner of this Purchase Warrant, to Muscle Maker, Inc., a Nevada corporation (the “Company”), Holder is entitled, at any time or from time to time from [ ] [DATE THAT IS ONE (1) YEAR FROM THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT] (the “Commencement Date”), and at or before 5:00 p.m., Eastern time, [ ] [DATE THAT IS FIVE (5) YEARS FROM THE EFFECTIVE DATE OF THE OFFERING] (the “Expiration Date”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [ ] shares of common stock of the Company, par value $0.0001 per share (the “Shares”), subject to adjustment as provided in Section 5 hereof. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant. This Purchase Warrant is initially exercisable at $[ ] per Share [120% of the price of the Shares sold in the Offering]; provided, however, that upon the occurrence of any of the events specified in Section 5 hereof, the rights granted by this Purchase Warrant, including the exercise price per Share and the number of Shares to be received upon such exercise, shall be adjusted as therein specified. This Warrant is being issued pursuant to the certain Underwriting Agreement (the “Underwriting Agreement”), dated ______, 2019, by and among the Company, the Holder and other underwriters named therein, providing for the public offering (the “Offering”) of shares of common stock, par value $0.0001 per share, of the Company. The term “Effective Date” shall mean the effective date of the Registration Statement on Form S-1 (File No. 333-___________). The term “Exercise Price” shall mean the initial exercise price or the adjusted exercise price, depending on the context.

 

  A-1  
     

 

1. Exercise.

 

1.1 Exercise Form. In order to exercise this Purchase Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and payment of the Exercise Price for the Shares being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Purchase Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.

 

1.2 Cashless Exercise. If at any time after the Commencement Date there is no effective registration statement registering, or no current prospectus available for, the resale of the Shares by the Holder, then in lieu of exercising this Purchase Warrant by payment of cash or check payable to the order of the Company pursuant to Section 1.1 above, Holder may elect to receive the number of Shares equal to the value of this Purchase Warrant (or the portion thereof being exercised), by surrender of this Purchase Warrant to the Company, together with the exercise form attached hereto, in which event the Company shall issue to Holder, Shares in accordance with the following formula:

 

X = Y(A-B)
A

 

Where,

 

X = The number of Shares to be issued to Holder;

Y = The number of Shares for which the Purchase Warrant is being exercised;

A = The fair market value of one Share; and

B = The Exercise Price.

 

For purposes of this Section 1.2, the fair market value of a Share is defined as follows:

 

(i) if the Company’s common stock is traded on a securities exchange, the fair market value shall be deemed to be the closing price on such exchange on the trading day immediately prior to the date the exercise form is submitted to the Company in connection with the exercise of the Purchase Warrant; or

 

(ii) if the Company’s common stock is actively traded over-the-counter, the fair market value shall be deemed to be the closing bid price on the trading day immediately prior to the date the exercise form is submitted to the Company in connection with the exercise of the Purchase Warrant; or

 

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(iii) if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Company’s Board of Directors.

 

1.3 Legend. Each certificate for the securities purchased under this Purchase Warrant shall bear a legend as follows unless such securities have been registered under the Securities Act of 1933, as amended (the “Act”):

 

“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Act”), or applicable state law. Neither the securities nor any interest therein may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Securities Act, or pursuant to an exemption from registration under the Securities Act and applicable state law which, in the opinion of counsel to the Company, is available.”

 

1.4 No Obligation to Net Cash Settle. Notwithstanding anything to the contrary contained in this Purchase Warrant, in no event will the Company be required to net cash settle the exercise of the Purchase Warrant. The holder of the Purchase Warrant will not be entitled to exercise the Purchase Option unless it exercises such Purchase Warrant pursuant to the cashless exercise right or a registration statement is effective, or an exemption from the registration requirements is available at such time and, if the Holder is not able to exercise the Purchase Warrant, the Purchase Warrant will expire worthless.

 

2. Transfer.

 

2.1 General Restrictions. The registered Holder of this Purchase Warrant agrees by his, her or its acceptance hereof, that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant for a period of one hundred eighty (180) days following the Effective Date to anyone other than: (i) [__________] (“[Underwriter]”) or another underwriter or a selected dealer participating in the Offering, or (ii) a bona fide officer or partner of [Underwriter] or of any such underwriter or selected dealer, in each case in accordance with FINRA Conduct Rule 5110(g)(1), or (b) cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(g)(2). On and after one (1) year after the Effective Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall within five (5) Business Days transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new Purchase Warrant or Purchase Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Shares purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.

 

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2.2 Restrictions Imposed by the Securities Act. The securities evidenced by this Purchase Warrant shall not be transferred unless and until: (i) the Company has received the opinion of counsel for the Holder that the securities may be transferred pursuant to an exemption from registration under the Securities Act and applicable state securities laws, the availability of which is established to the reasonable satisfaction of the Company (the Company hereby agreeing that the opinion of Cozen O’Connor shall be deemed satisfactory evidence of the availability of an exemption), or (ii) a registration statement or a post-effective amendment to the Registration Statement relating to the offer and sale of such securities has been filed by the Company and declared effective by the U.S. Securities and Exchange Commission (the “Commission”) and compliance with applicable state securities law has been established.

 

3. Registration Rights.

 

3.1 “Piggy-Back” Registration.

 

3.1.1 Grant of Right. The Holder shall have the right, for a period of no more than seven (7) years from the Effective Date in accordance with FINRA Rule 5110(f)(2)(G)(v), to include any portion of the Shares underlying the Purchase Warrants (collectively, the “Registrable Securities”) as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-8 or any equivalent form); provided, however, that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of shares of common stock which may be included in the Registration Statement because, in such underwriter(s)’ judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which the Holder requested inclusion hereunder as the underwriter shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holders seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Holders; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities.

 

3.1.2 Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 3.1.1 hereof, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than thirty (30) days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been sold by the Holder. The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice within ten (10) days of the receipt of the Company’s notice of its intention to file a registration statement. Except as otherwise provided in this Purchase Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 3.1.2; provided, however, that such registration rights shall terminate upon on the sixth anniversary of the Commencement Date.

 

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3.2 General Terms.

 

3.2.1 Indemnification. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters contained in Section 5.1 of the Underwriting Agreement between the Underwriters and the Company, dated as of [  ], 2019. The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company and its affiliates, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 5.2 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company.

 

3.2.2 Exercise of Purchase Warrants. Nothing contained in this Purchase Warrant shall be construed as requiring the Holder(s) to exercise their Purchase Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.

 

3.2.3 Documents Delivered to Holders. The Company shall furnish to each Holder participating in any underwritten offerings and to each underwriter of any such offering, a signed counterpart, addressed to such Holder and underwriter, of: (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and an opinion dated the date of the closing under any underwriting agreement related thereto), and (ii) a “cold comfort” letter dated the effective date of such registration statement (and a letter dated the date of the closing under the underwriting agreement) signed by the independent registered public accounting firm which has issued a report on the Company’s financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten public offerings of securities. The Company shall also deliver promptly to each Holder participating in the underwritten offering requesting the correspondence and memoranda described below and to the managing underwriter copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request.

 

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3.2.4 Underwriting Agreement. In the event the Company shall enter into an underwriting agreement with any managing underwriter(s), if any, selected by the Company with respect to the Registrable Securities that are being registered pursuant to this Section 3, which managing underwriter shall be reasonably satisfactory to the Majority Holders. Such agreement shall be reasonably satisfactory in form and substance to the Company and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Shares and their intended methods of distribution.

 

3.2.5 Documents to be Delivered by Holder(s). Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders.

 

3.2.6 Damages. Should the registration or the effectiveness thereof required by Section 3.1 hereof be delayed by the Company or the Company otherwise fails to comply with such provisions, the Holder(s) shall, in addition to any other legal or other relief available to the Holder(s), be entitled to seek specific performance or other equitable (including injunctive) relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving actual damages and without the necessity of posting bond or other security.

 

4. New Purchase Warrants to be Issued.

 

4.1 Partial Exercise or Transfer. Subject to the restrictions in Section 2 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 1.1 hereto, the Company shall cause to be delivered to the Holder without charge a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Shares purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.

 

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4.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.

 

5. Adjustments.

 

5.1 Adjustments to Exercise Price and Number of Securities. The Exercise Price and the number of Shares underlying the Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:

 

5.1.1 Share Dividends; Split Ups. If, after the date hereof, and subject to the provisions of Section 5.3 below, the number of outstanding Shares is increased by a stock dividend payable in Shares or by a split up of Shares or other similar event, then, on the effective day thereof, the number of Shares purchasable hereunder shall be increased in proportion to such increase in outstanding Shares, and the Exercise Price shall be proportionately decreased.

 

5.1.2 Aggregation of Shares. If, after the date hereof, and subject to the provisions of Section 5.3 below, the number of outstanding Shares is decreased by a consolidation, combination or reclassification of Shares or other similar event, then, on the effective date thereof, the number of Shares purchasable hereunder shall be decreased in proportion to such decrease in outstanding Shares, and the Exercise Price shall be proportionately increased.

 

5.1.3 Replacement of Securities upon Reorganization, etc. In case of any reclassification or reorganization of the outstanding Shares other than a change covered by Section 5.1.1 or 5.1.2 hereof or that solely affects the par value of such Shares, or in the case of any share reconstruction or amalgamation or consolidation of the Company with or into another corporation or other entity (other than a consolidation or share reconstruction or amalgamation in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding Shares), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Warrant shall have the right thereafter (until the expiration of the right of exercise of this Purchase Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, share reconstruction or amalgamation, or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of Shares of the Company obtainable upon exercise of this Purchase Warrant immediately prior to such event; and if any reclassification also results in a change in Shares covered by Section 5.1.1 or 5.1.2, then such adjustment shall be made pursuant to Sections 5.1.1, 5.1.2 and this Section 5.1.3. The provisions of this Section 5.1.3 shall similarly apply to successive reclassifications, reorganizations, share reconstructions or amalgamations, or consolidations, sales or other transfers.

 

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5.1.4 Changes in Form of Purchase Warrant. This form of Purchase Warrant need not be changed because of any change pursuant to this Section 5.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of Shares as are stated in [the Purchase Warrants initially issued pursuant to this Agreement]. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date or the computation thereof.

 

5.2 Substitute Purchase Warrant. In case of any consolidation of the Company with, or share reconstruction or amalgamation of the Company with or into, another corporation or other entity (other than a consolidation or share reconstruction or amalgamation which does not result in any reclassification or change of the outstanding Shares), the corporation or other entity formed by such consolidation or share reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or share reconstruction or amalgamation, by a holder of the number of Shares of the Company for which such Purchase Warrant might have been exercised immediately prior to such consolidation, share reconstruction or amalgamation, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 5. The above provision of this Section shall similarly apply to successive consolidations or share reconstructions or amalgamations.

 

5.3 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of the Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of Shares or other securities, properties or rights.

 

6. Reservation and Listing. The Company shall at all times reserve and keep available out of its authorized Shares, solely for the purpose of issuance upon exercise of the Purchase Warrants, such number of Shares or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Purchase Warrants and payment of the Exercise Price therefor, in accordance with the terms hereby, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any shareholder. The Company further covenants and agrees that upon exercise of the Purchase Warrants and payment of the exercise price therefor, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any shareholder. As long as the Purchase Warrants shall be outstanding, the Company shall use its commercially reasonable efforts to cause all Shares issuable upon exercise of the Purchase Warrants to be listed (subject to official notice of issuance) on all national securities exchanges (or, if applicable, on the OTC Bulletin Board or any successor trading market) on which the Shares issued to the public in the Offering may then be listed and/or quoted.

 

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7. Certain Notice Requirements.

 

7.1 Holder’s Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a shareholder for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Purchase Warrants and their exercise, any of the events described in Section 7.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given to the other shareholders of the Company at the same time and in the same manner that such notice is given to the shareholders.

 

7.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 7 upon one or more of the following events: (i) if the Company shall take a record of the holders of its Shares for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, (ii) the Company shall offer to all the holders of its Shares any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or share reconstruction or amalgamation) or a sale of all or substantially all of its property, assets and business shall be proposed.

 

7.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 5 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company’s Chief Financial Officer.

 

7.4 Transmittal of Notices. All notices, requests, consents and other communications under this Purchase Warrant shall be in writing and shall be deemed to have been duly made when hand delivered, or mailed by express mail or private courier service: (i) if to the registered Holder of the Purchase Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to following address or to such other address as the Company may designate by notice to the Holders:

 

If to the Holder:

 

____________

____________

____________

Attn: [●]

 

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with a copy (which shall not constitute notice) to:

 

Cozen O’Connor

33 South 6th Street, Suite 3800

Minneapolis, Minnesota 55402

Attn: Christopher J. Bellini, Esq.

Email: cbellini@cozen.com

 

If to the Company:

 

Muscle Maker, Inc.

909 New Brunswick Avenue

Phillipsburg, New Jersey 08865

Attention: Michael J. Roper, Chief Executive Officer

Email: cferguson@edisonnation.com

 

with a copy (which shall not constitute notice) to:

 

Fleming PLLC

30 Wall Street, 8th Floor

New York, New York 10005

Attention: Stephen M. Fleming, Esq.

Email: smf@flemingpllc.com

 

8. Miscellaneous.

 

8.1 Amendments. The Company and [Underwriter] may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and [Underwriter] may deem necessary or desirable and that the Company and [Underwriter] deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.

 

8.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.

 

8.3 Entire Agreement. This Purchase Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.

 

8.4 Binding Effect. This Purchase Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.

 

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8.5 Governing Law; Submission to Jurisdiction; Trial by Jury. This Purchase Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 7 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Holder hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

 

8.6 Waiver, etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

 

8.7 Execution in Counterparts. This Purchase Warrant may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Such counterparts may be delivered by facsimile transmission or other electronic transmission.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the ______ day of ________________, 2019.

 

  MUSCLE MAKER, INC.
     
  By:      
  Name:  
  Title:  

 

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[Form to be used to exercise Purchase Warrant]

 

Date: _______________, 20___

 

The undersigned hereby elects irrevocably to exercise the Purchase Warrant for shares of common stock, par value $0.0001 per share (the “Shares”), of Muscle Maker, Inc., a Nevada corporation (the “Company”), and hereby makes payment of $ (at the rate of $ per Share) in payment of the Exercise Price pursuant thereto. Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been exercised.

 

or

 

The undersigned hereby elects irrevocably to convert its right to purchase ___ Shares of the Company under the Purchase Warrant for ______ Shares, as determined in accordance with the following formula:

 

X = Y(A-B)
A

 

Where,

 

X = The number of Shares to be issued to Holder;

Y = The number of Shares for which the Purchase Warrant is being exercised;

A = The fair market value of one Share which is equal to $_____; and

B = The Exercise Price which is equal to $______ per share

 

The undersigned agrees and acknowledges that the calculation set forth above is subject to confirmation by the Company and any disagreement with respect to the calculation shall be resolved by the Company in its sole discretion.

 

Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been converted.

 

Signature

 

Signature Guaranteed_____________________________

 

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INSTRUCTIONS FOR REGISTRATION OF SECURITIES

 

Name:    
     
  (Print in Block Letters)  
     
Address:    
     
     
     
     

 

NOTICE: The signature to this form must correspond with the name as written upon the face of the Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.

 

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[Form to be used to assign Purchase Warrant]

 

ASSIGNMENT

 

(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):

 

FOR VALUE RECEIVED, __________________ does hereby sell, assign and transfer unto the right to purchase shares of common stock, par value $0.0001 per share, of Muscle Maker, Inc., a Nevada corporation (the “Company”), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right on the books of the Company.

 

Dated: __________, 20__

 

Signature

 

Signature Guaranteed______________________________

 

NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.

 

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EXHIBIT B

 

Form of Lock-Up Agreement

 

[●], 2019

 

Alexander Capital, L.P.

As Representative of the several Underwriters named on Schedule 1 attached hereto

 

c/o Alexander Capital, L.P.

17 State Street, 5th Floor

New York, NY 10004

 

Ladies and Gentlemen:

 

The undersigned understands that you, as representative (the “Representative”), propose to enter into an Underwriting Agreement (the “Underwriting Agreement”) with Muscle Maker, Inc., a Nevada corporation (the “Company”), providing for the public offering (the “Public Offering”) of shares of common stock, par value $0.0001 per share, of the Company (the “Shares”).

 

To induce the Representative to continue its efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of the Representative, the undersigned will not, during the period commencing on the date hereof and ending one-year after the date of the final prospectus (the “Prospectus”) relating to the Public Offering (the “Lock-Up Period”), (1) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any Shares or any securities convertible into or exercisable or exchangeable for Shares, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition (collectively, the “Lock-Up Securities”); (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-Up Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Lock-Up Securities, in cash or otherwise; (3) make any demand for or exercise any right with respect to the registration of any Lock-Up Securities; or (4) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any Lock-Up Securities. Notwithstanding the foregoing, and subject to the conditions below, the undersigned may transfer Lock-Up Securities without the prior written consent of the Representative in connection with (a) transactions relating to Lock-Up Securities acquired in open market transactions after the completion of the Public Offering; provided that no filing under Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), shall be required or shall be voluntarily made in connection with subsequent sales of Lock-Up Securities acquired in such open market transactions; (b) transfers of Lock-Up Securities as a bona fide gift, by will or intestacy or to a family member or trust for the benefit of a family member (for purposes of this lock-up agreement, “family member” means any relationship by blood, marriage or adoption, not more remote than first cousin); (c) transfers of Lock-Up Securities to a charity or educational institution; (d) if the undersigned, directly or indirectly, controls a corporation, partnership, limited liability company or other business entity, any transfers of Lock-Up Securities to any shareholder, partner or member of, or owner of similar equity interests in, the undersigned, as the case may be, (e) if required by the terms of a qualified domestic relations order or (f) in transactions relating to shares of Common Stock that the undersigned may purchase (A) from the Underwriters in the Public Offering or (B) in open market transactions after the Public Offering Date; provided that in the case of any transfer pursuant to the foregoing clauses (b), (c) or (d), (i) any such transfer shall not involve a disposition for value, (ii) each transferee shall sign and deliver to the Representative a lock-up agreement substantially in the form of this lock-up agreement and (iii) no filing under Section 16(a) of the Exchange Act shall be required or shall be voluntarily made. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of the undersigned’s Lock-Up Securities except in compliance with this lock-up agreement.

 

  B-1  
     

 

If (i) during the last 17 days of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs, or (ii) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results or becomes aware that material news or a material event will occur during the 16-day period beginning on the last day of the Lock-Up Period, the restrictions imposed by this lock-up agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of such material news or material event, as applicable, unless the Representative waives, in writing, such extension; provided, however, that this extension of the Lock-Up Period shall not apply to the extent that FINRA has amended or repealed NASD Rule 2711(f)(4), or has otherwise provided written interpretive guidance regarding such rule, in each case, so as to eliminate the prohibition of any broker, dealer, or member of a national securities association from publishing or distributing any research report, with respect to the securities of an Emerging Growth Company prior to or after the expiration of any agreement between the broker, dealer, or member of a national securities association and the Emerging Growth Company or its shareholders that restricts or prohibits the sale of securities held by the Emerging Growth Company or its shareholders after the initial public offering date.

 

The Representative agrees that, at least three (3) business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Lock-Up Securities, the Representative will notify the Company of the impending release or waiver; and the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two (2) business days before the effective date of the release or waiver. Any release or waiver granted by the Representative hereunder to any such officer or director shall only be effective two (2) business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer of Lock-Up Securities not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this lock-up agreement to the extent and for the duration that such terms remain in effect at the time of such transfer.

 

No provision in this agreement shall be deemed to restrict or prohibit the exercise, exchange or conversion by the undersigned of any securities exercisable or exchangeable for or convertible into Shares, as applicable; provided that the undersigned does not transfer the Shares acquired on such exercise, exchange or conversion during the Lock-Up Period, unless otherwise permitted pursuant to the terms of this lock-up agreement. In addition, no provision herein shall be deemed to restrict or prohibit the entry into or modification of a so-called “10b5-1” plan at any time (other than the entry into or modification of such a plan in such a manner as to cause the sale of any Lock-Up Securities within the Lock-Up Period).

 

The undersigned understands that the Company and the Representative are relying upon this lock-up agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that this lock-up agreement is irrevocable and shall be binding upon the undersigned’s heirs, legal representatives, successors and assigns.

 

A-2
 

 

Notwithstanding anything to the contrary contained herein, this Agreement will automatically terminate and the undersigned shall be released from all obligations under this Agreement upon the earliest to occur, if any, of (i) the Underwriting Agreement is executed but is terminated (other than the provisions thereof which survive termination) by the Representative prior to payment for and delivery of the Common Stock to be sold thereunder, or (ii) __________, 2019, if the Underwriting Agreement does not become effective by such date; provided, however, that the Representative may, by written notice to the undersigned prior to such date, extend such date for a period of up to three additional months.

 

Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Representative.

 

  Very truly yours,
   
   
  (Name - Please Print)
   
   
  (Signature)
   
   
  (Name of Signatory, in the case of entities - Please Print)
   
   
  (Title of Signatory, in the case of entities - Please Print)
   
  Address:    
   
   

 

A-3
 

 

EXHIBIT C

 

Form of Press Release

 

Muscle Maker, Inc.

 

[Date]

 

Muscle Maker, Inc. (the “Company”) announced today that Alexander Capital, L.P., acting as representative for the underwriters in the Company’s recent public offering of _______ shares of the Company’s common stock, is [waiving] [releasing] a lock-up restriction with respect to _________ shares of the Company’s common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver] [release] will take effect on _________, 20___, and the shares may be sold on or after such date.

 

This press release is not an offer or sale of the securities in the United States or in any other jurisdiction where such offer or sale is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act of 1933, as amended.

 

 
 

 

EXHIBIT D

 

Form of Opinion of Counsel to the Company

 

A-2
 

 

 

Form of Representative’s Warrant Agreement

 

THE REGISTERED HOLDER OF THIS PURCHASE WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS PURCHASE WARRANT OR CAUSE IT TO BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT, OR CALL TRANSACTION THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF THE PURCHASE WARRANT BY ANY PERSON FOR A PERIOD OF ONE HUNDRED EIGHTY (180) DAYS FOLLOWING THE EFFECTIVE DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) [__________] OR AN UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A BONA FIDE OFFICER OR PARTNER OF [__________] OR OF ANY SUCH UNDERWRITER OR SELECTED DEALER AND IN ACCORDANCE WITH FINRA RULE 5110(G)(2).

 

THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [                         ] [DATE THAT IS ONE (1) YEAR FROM THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT]. VOID AFTER 5:00 P.M., EASTERN TIME, [                         ] [DATE THAT IS FIVE (5) YEARS FROM THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT].

 

COMMON STOCK PURCHASE WARRANT

 

For the Purchase of [                ] Shares of Common Stock

of

MUSCLE MAKER, INC.

 

1. Purchase Warrant. THIS CERTIFIES THAT, in consideration of funds duly paid by or on behalf of [__________] (“Holder”), as registered owner of this Purchase Warrant, to Muscle Maker, Inc., a Nevada corporation (the “Company”), Holder is entitled, at any time or from time to time from [                                                      ] [DATE THAT IS ONE (1) YEAR FROM THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT] (the “Commencement Date”), and at or before 5:00 p.m., Eastern time, [                                ] [DATE THAT IS FIVE (5) YEARS FROM THE EFFECTIVE DATE OF THE OFFERING] (the “Expiration Date”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [                         ] shares of common stock of the Company, par value $0.0001 per share (the “Shares”), subject to adjustment as provided in Section 5 hereof. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant. This Purchase Warrant is initially exercisable at $[                            ] per Share [120% of the price of the Shares sold in the Offering]; provided, however, that upon the occurrence of any of the events specified in Section 5 hereof, the rights granted by this Purchase Warrant, including the exercise price per Share and the number of Shares to be received upon such exercise, shall be adjusted as therein specified. This Warrant is being issued pursuant to the certain Underwriting Agreement (the “Underwriting Agreement”), dated ______, 2019, by and among the Company, the Holder and other underwriters named therein, providing for the public offering (the “Offering”) of shares of common stock, par value $0.0001 per share, of the Company. The term “Effective Date” shall mean the effective date of the Registration Statement on Form S-1 (File No. 333-___________). The term “Exercise Price” shall mean the initial exercise price or the adjusted exercise price, depending on the context.

 

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1. Exercise.

 

1.1 Exercise Form. In order to exercise this Purchase Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and payment of the Exercise Price for the Shares being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Purchase Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.

 

1.2 Cashless Exercise. If at any time after the Commencement Date there is no effective registration statement registering, or no current prospectus available for, the resale of the Shares by the Holder, then in lieu of exercising this Purchase Warrant by payment of cash or check payable to the order of the Company pursuant to Section 1.1 above, Holder may elect to receive the number of Shares equal to the value of this Purchase Warrant (or the portion thereof being exercised), by surrender of this Purchase Warrant to the Company, together with the exercise form attached hereto, in which event the Company shall issue to Holder, Shares in accordance with the following formula:

 

X = Y(A-B)
A

Where,

 

X = The number of Shares to be issued to Holder;

Y = The number of Shares for which the Purchase Warrant is being exercised;

A = The fair market value of one Share; and

B = The Exercise Price.

 

For purposes of this Section 1.2, the fair market value of a Share is defined as follows:

 

(i) if the Company’s common stock is traded on a securities exchange, the fair market value shall be deemed to be the closing price on such exchange on the trading day immediately prior to the date the exercise form is submitted to the Company in connection with the exercise of the Purchase Warrant; or

 

(ii) if the Company’s common stock is actively traded over-the-counter, the fair market value shall be deemed to be the closing bid price on the trading day immediately prior to the date the exercise form is submitted to the Company in connection with the exercise of the Purchase Warrant; or

 

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(iii) if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Company’s Board of Directors.

 

1.3 Legend. Each certificate for the securities purchased under this Purchase Warrant shall bear a legend as follows unless such securities have been registered under the Securities Act of 1933, as amended (the “Act”):

 

“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Act”), or applicable state law. Neither the securities nor any interest therein may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Securities Act, or pursuant to an exemption from registration under the Securities Act and applicable state law which, in the opinion of counsel to the Company, is available.”

 

1.4 No Obligation to Net Cash Settle. Notwithstanding anything to the contrary contained in this Purchase Warrant, in no event will the Company be required to net cash settle the exercise of the Purchase Warrant. The holder of the Purchase Warrant will not be entitled to exercise the Purchase Option unless it exercises such Purchase Warrant pursuant to the cashless exercise right or a registration statement is effective, or an exemption from the registration requirements is available at such time and, if the Holder is not able to exercise the Purchase Warrant, the Purchase Warrant will expire worthless.

 

2. Transfer.

 

2.1 General Restrictions. The registered Holder of this Purchase Warrant agrees by his, her or its acceptance hereof, that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant for a period of one hundred eighty (180) days following the Effective Date to anyone other than: (i) [__________] (“[Underwriter]”) or another underwriter or a selected dealer participating in the Offering, or (ii) a bona fide officer or partner of [Underwriter] or of any such underwriter or selected dealer, in each case in accordance with FINRA Conduct Rule 5110(g)(1), or (b) cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(g)(2). On and after one (1) year after the Effective Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall within five (5) Business Days transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new Purchase Warrant or Purchase Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Shares purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.

 

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2.2 Restrictions Imposed by the Securities Act. The securities evidenced by this Purchase Warrant shall not be transferred unless and until: (i) the Company has received the opinion of counsel for the Holder that the securities may be transferred pursuant to an exemption from registration under the Securities Act and applicable state securities laws, the availability of which is established to the reasonable satisfaction of the Company (the Company hereby agreeing that the opinion of Cozen O’Connor shall be deemed satisfactory evidence of the availability of an exemption), or (ii) a registration statement or a post-effective amendment to the Registration Statement relating to the offer and sale of such securities has been filed by the Company and declared effective by the U.S. Securities and Exchange Commission (the “Commission”) and compliance with applicable state securities law has been established.

 

3. Registration Rights.

 

3.1 Piggy-Back” Registration.

 

3.1.1 Grant of Right. The Holder shall have the right, for a period of no more than seven (7) years from the Effective Date in accordance with FINRA Rule 5110(f)(2)(G)(v), to include any portion of the Shares underlying the Purchase Warrants (collectively, the “Registrable Securities”) as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-8 or any equivalent form); provided, however, that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of shares of common stock which may be included in the Registration Statement because, in such underwriter(s)’ judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which the Holder requested inclusion hereunder as the underwriter shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holders seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Holders; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities.

 

3.1.2 Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 3.1.1 hereof, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than thirty (30) days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been sold by the Holder. The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice within ten (10) days of the receipt of the Company’s notice of its intention to file a registration statement. Except as otherwise provided in this Purchase Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 3.1.2; provided, however, that such registration rights shall terminate upon on the sixth anniversary of the Commencement Date.

 

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3.2 General Terms.

 

3.2.1 Indemnification. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters contained in Section 5.1 of the Underwriting Agreement between the Underwriters and the Company, dated as of [                              ], 2019. The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company and its affiliates, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 5.2 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company.

 

3.2.2 Exercise of Purchase Warrants. Nothing contained in this Purchase Warrant shall be construed as requiring the Holder(s) to exercise their Purchase Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.

 

3.2.3 Documents Delivered to Holders. The Company shall furnish to each Holder participating in any underwritten offerings and to each underwriter of any such offering, a signed counterpart, addressed to such Holder and underwriter, of: (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and an opinion dated the date of the closing under any underwriting agreement related thereto), and (ii) a “cold comfort” letter dated the effective date of such registration statement (and a letter dated the date of the closing under the underwriting agreement) signed by the independent registered public accounting firm which has issued a report on the Company’s financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten public offerings of securities. The Company shall also deliver promptly to each Holder participating in the underwritten offering requesting the correspondence and memoranda described below and to the managing underwriter copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request.

 

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3.2.4 Underwriting Agreement. In the event the Company shall enter into an underwriting agreement with any managing underwriter(s), if any, selected by the Company with respect to the Registrable Securities that are being registered pursuant to this Section 3, which managing underwriter shall be reasonably satisfactory to the Majority Holders. Such agreement shall be reasonably satisfactory in form and substance to the Company and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Shares and their intended methods of distribution.

 

3.2.5 Documents to be Delivered by Holder(s). Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders.

 

3.2.6 Damages. Should the registration or the effectiveness thereof required by Section 3.1 hereof be delayed by the Company or the Company otherwise fails to comply with such provisions, the Holder(s) shall, in addition to any other legal or other relief available to the Holder(s), be entitled to seek specific performance or other equitable (including injunctive) relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving actual damages and without the necessity of posting bond or other security.

 

4. New Purchase Warrants to be Issued.

 

4.1 Partial Exercise or Transfer. Subject to the restrictions in Section 2 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 1.1 hereto, the Company shall cause to be delivered to the Holder without charge a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Shares purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.

 

4.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.

 

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5. Adjustments.

 

5.1 Adjustments to Exercise Price and Number of Securities. The Exercise Price and the number of Shares underlying the Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:

 

5.1.1 Share Dividends; Split Ups. If, after the date hereof, and subject to the provisions of Section 5.3 below, the number of outstanding Shares is increased by a stock dividend payable in Shares or by a split up of Shares or other similar event, then, on the effective day thereof, the number of Shares purchasable hereunder shall be increased in proportion to such increase in outstanding Shares, and the Exercise Price shall be proportionately decreased.

 

5.1.2 Aggregation of Shares. If, after the date hereof, and subject to the provisions of Section 5.3 below, the number of outstanding Shares is decreased by a consolidation, combination or reclassification of Shares or other similar event, then, on the effective date thereof, the number of Shares purchasable hereunder shall be decreased in proportion to such decrease in outstanding Shares, and the Exercise Price shall be proportionately increased.

 

5.1.3 Replacement of Securities upon Reorganization, etc. In case of any reclassification or reorganization of the outstanding Shares other than a change covered by Section 5.1.1 or 5.1.2 hereof or that solely affects the par value of such Shares, or in the case of any share reconstruction or amalgamation or consolidation of the Company with or into another corporation or other entity (other than a consolidation or share reconstruction or amalgamation in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding Shares), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Warrant shall have the right thereafter (until the expiration of the right of exercise of this Purchase Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, share reconstruction or amalgamation, or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of Shares of the Company obtainable upon exercise of this Purchase Warrant immediately prior to such event; and if any reclassification also results in a change in Shares covered by Section 5.1.1 or 5.1.2, then such adjustment shall be made pursuant to Sections 5.1.1, 5.1.2 and this Section 5.1.3. The provisions of this Section 5.1.3 shall similarly apply to successive reclassifications, reorganizations, share reconstructions or amalgamations, or consolidations, sales or other transfers.

 

5.1.4 Changes in Form of Purchase Warrant. This form of Purchase Warrant need not be changed because of any change pursuant to this Section 5.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of Shares as are stated in [the Purchase Warrants initially issued pursuant to this Agreement]. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date or the computation thereof.

 

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5.2 Substitute Purchase Warrant. In case of any consolidation of the Company with, or share reconstruction or amalgamation of the Company with or into, another corporation or other entity (other than a consolidation or share reconstruction or amalgamation which does not result in any reclassification or change of the outstanding Shares), the corporation or other entity formed by such consolidation or share reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or share reconstruction or amalgamation, by a holder of the number of Shares of the Company for which such Purchase Warrant might have been exercised immediately prior to such consolidation, share reconstruction or amalgamation, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 5. The above provision of this Section shall similarly apply to successive consolidations or share reconstructions or amalgamations.

 

5.3 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of the Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of Shares or other securities, properties or rights.

 

6. Reservation and Listing. The Company shall at all times reserve and keep available out of its authorized Shares, solely for the purpose of issuance upon exercise of the Purchase Warrants, such number of Shares or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Purchase Warrants and payment of the Exercise Price therefor, in accordance with the terms hereby, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any shareholder. The Company further covenants and agrees that upon exercise of the Purchase Warrants and payment of the exercise price therefor, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any shareholder. As long as the Purchase Warrants shall be outstanding, the Company shall use its commercially reasonable efforts to cause all Shares issuable upon exercise of the Purchase Warrants to be listed (subject to official notice of issuance) on all national securities exchanges (or, if applicable, on the OTC Bulletin Board or any successor trading market) on which the Shares issued to the public in the Offering may then be listed and/or quoted.

 

7. Certain Notice Requirements.

 

7.1 Holder’s Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a shareholder for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Purchase Warrants and their exercise, any of the events described in Section 7.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given to the other shareholders of the Company at the same time and in the same manner that such notice is given to the shareholders.

 

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7.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 7 upon one or more of the following events: (i) if the Company shall take a record of the holders of its Shares for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, (ii) the Company shall offer to all the holders of its Shares any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or share reconstruction or amalgamation) or a sale of all or substantially all of its property, assets and business shall be proposed.

 

7.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 5 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company’s Chief Financial Officer.

 

7.4 Transmittal of Notices. All notices, requests, consents and other communications under this Purchase Warrant shall be in writing and shall be deemed to have been duly made when hand delivered, or mailed by express mail or private courier service: (i) if to the registered Holder of the Purchase Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to following address or to such other address as the Company may designate by notice to the Holders:

 

If to the Holder:

 

____________

____________

____________

Attn: [●]

 

with a copy (which shall not constitute notice) to:

 

Cozen O’Connor

33 South 6th Street, Suite 3800

Minneapolis, Minnesota 55402

Attn: Christopher J. Bellini, Esq.

Email: cbellini@cozen.com

 

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If to the Company:

 

Muscle Maker, Inc.

909 New Brunswick Avenue

Phillipsburg, New Jersey 08865

Attention: Michael J. Roper, Chief Executive Officer

Email: cferguson@edisonnation.com

 

with a copy (which shall not constitute notice) to:

 

Fleming PLLC

30 Wall Street, 8th Floor

New York, New York 10005

Attention: Stephen M. Fleming, Esq.

Email: smf@flemingpllc.com

 

8. Miscellaneous.

 

8.1 Amendments. The Company and [Underwriter] may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and [Underwriter] may deem necessary or desirable and that the Company and [Underwriter] deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.

 

8.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.

 

8.3 Entire Agreement. This Purchase Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.

 

8.4 Binding Effect. This Purchase Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.

 

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8.5 Governing Law; Submission to Jurisdiction; Trial by Jury. This Purchase Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 7 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Holder hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

 

8.6 Waiver, etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

 

8.7 Execution in Counterparts. This Purchase Warrant may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Such counterparts may be delivered by facsimile transmission or other electronic transmission.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the ______ day of ________________, 2019.

 

  MUSCLE MAKER, INC.
     
  By:     
  Name:  
  Title:  

 

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[Form to be used to exercise Purchase Warrant]

 

Date: _______________, 20___

 

The undersigned hereby elects irrevocably to exercise the Purchase Warrant for shares of common stock, par value $0.0001 per share (the “Shares”), of Muscle Maker, Inc., a Nevada corporation (the “Company”), and hereby makes payment of $                             (at the rate of $                                    per Share) in payment of the Exercise Price pursuant thereto. Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been exercised.

 

or

 

The undersigned hereby elects irrevocably to convert its right to purchase ___ Shares of the Company under the Purchase Warrant for ______ Shares, as determined in accordance with the following formula:

 

X = Y(A-B)
A

Where,

 

X = The number of Shares to be issued to Holder;

Y = The number of Shares for which the Purchase Warrant is being exercised;

A = The fair market value of one Share which is equal to $_____; and

B = The Exercise Price which is equal to $______ per share

 

The undersigned agrees and acknowledges that the calculation set forth above is subject to confirmation by the Company and any disagreement with respect to the calculation shall be resolved by the Company in its sole discretion.

 

Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been converted.

 

Signature

 

Signature Guaranteed                                                             

 

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INSTRUCTIONS FOR REGISTRATION OF SECURITIES

 

Name:

 

(Print in Block Letters)

 

Address:                                                                

 

                                                                

 

                                                                

 

NOTICE: The signature to this form must correspond with the name as written upon the face of the Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.

 

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[Form to be used to assign Purchase Warrant]

 

ASSIGNMENT

 

(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):

 

FOR VALUE RECEIVED, __________________ does hereby sell, assign and transfer unto the right to purchase shares of common stock, par value $0.0001 per share, of Muscle Maker, Inc., a Nevada corporation (the “Company”), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right on the books of the Company.

 

Dated: __________, 20__

 

Signature

 

Signature Guaranteed                                                                   

 

NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.

 

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Confidential Material Omitted – To be filed separately with the Securities and Exchange Commission upon request. Double asterisks denote omissions.

 

MASTER DISTRIBUTION AGREEMENT

“Customer Service Agreement”

 

Master Distribution Agreement (this “Agreement”), dated as of June 1, 2011, (the “Effective Date”) between Sysco Corporation, for itself and on behalf of its Operating Companies, as defined below (collectively, “Sysco”) and [Muscle Maker Franchising, LLC, a New Jersey limited liability company] (“Primary Customer”) on behalf of itself and each Related Customer, as defined below. Primary Customer and Related Customers are sometimes referred to collectively as “Customer.”

 

Background

“Who are the parties?”

 

A. Sysco performs purchasing, marketing, warehousing, transportation, distribution and other services for foodservice customers directly and through its operating subsidiaries, divisions, and affiliated entities that are full-line foodservice distributors including those listed on Schedule 1, as the same may be amended by Sysco from time to time upon written notice to Primary Customer (collectively, “Operating Companies” and individually, an “Operating Company”).
   
B. Primary Customer owns and operates or manages under contract, the establishments listed in Schedule I as amended from time to time pursuant to the terms of this Agreement, and identified as such (“Primary Customer Locations”). Primary Customer also is a franchiser of, and/or acts as a group purchasing organization (‘‘GPO”) for, the establishments listed in Schedule 1 and identified as such (the “Related Customer Locations”) under arrangement with the person or entity owning, or having the exclusive right by contract or law to manage, the Related Customer Locations (collectively, “Related Customers” and individually, a “Related Customer”). Primary Customer Locations and Related Customer Locations are sometimes collectively referred to herein as “Customer Locations” and individually as a “Customer Location.”
   
C. Primary Customer and Sysco desire to enter into this Agreement regarding distribution services to Primary Customer Locations and to make available the benefits and obligations of this Agreement to all Related Customer Locations choosing to purchase under the Agreement.
   
  In consideration of the mutual obligations set forth below, the parties agree as follows:

 

1. Scope “What does my program cover?”

 

This Agreement governs Sysco’s distribution services for Primary Customer, Related Customers and their respective Customer Locations that are located within the service areas of the Operating Companies listed in Schedule 1 (collectively, the “Service Area”). The margin schedule set forth in Schedule 2 is applicable to deliveries to Customer Locations located within the Service Areas.

 

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Sysco’s distribution services for any Related Customer Locations within the Service Area will be governed by this Agreement upon the execution of a Participation Agreement substantially in the form attached as Schedule 1.1 (“Participation Agreement”), by the delivering Operating Company and by the Related Customer owning or having the exclusive right to manage the Related Customer Location(s) in question. The Participation Agreement may provide for location specific terms involving delivery frequencies and payment or credit terms, as permitted under this Agreement. Sysco has no obligation to serve under this Agreement any foodservice outlet operated by any person or entity unless such outlet is located within the subject Operating Company’s Service Area, and that person or entity operating such outlet satisfies that Operating Company’s credit criteria, and, in the case of Related Customers, has executed a Participation Agreement, and is (i) a franchisee of Primary Customer or (ii) a member of Primary Customer’s GPO that is conducting the same type of business as the other members of Primary Customer’s GPO and, in any case, is located within the Service Area and satisfies Sysco’s credit criteria.

 

Subsidiaries or other affiliated entities of Sysco that are controlled directly or indirectly by Sysco (“Affiliates”) that do not operate a full-line foodservice distribution business but rather concentrate on specific, specialized product lines are referred to herein as “Specialty Companies.” This Agreement does not apply to Customer’s purchases of goods and services directly from Specialty Companies. Such direct purchases shall be on such terms as may be agreed upon from time to time by Customer and the servicing Specialty Company. Sales of Products sold by Operating Companies but sourced from Specialty Companies are covered by this Agreement.

 

2. Appointment of Distributor “Who is my distributor?”

 

Primary Customer appoints Sysco to serve as its primary distributor to Primary Customer Locations of foodservice products within the product categories described in Schedule 2 (“Products”). Primary Customer agrees that each participating Primary Customer Location will purchase from Sysco not less than [**]% of the dollar volume of such Customer Location’s purchase requirements for Products in each Product category stated in the margin schedule set forth in Schedule 2.

 

Primary Customer also appoints Sysco to serve as the primary distributor to the Related Customers Locations within the Service Area. It is the intention of Sysco and Primary Customer that each Related Customer Location will purchase from Sysco not less than 80% of the dollar volume of such Related Customer Location’s purchase requirements for Products in each Product category stated in the margin schedule set forth in Schedule 2. Primary Customer shall be entitled to amend or supplement the list of Customer Locations, from time to time, provided that each Customer Location (i) is located within the Service Area, (ii) falls within the limitations on scope set forth in Section 11 and (iii) the Customer Representations set forth in Schedule 4 remain true after such amendment. Sysco shall be entitled to designate the Operating Company that shall provide distribution services to each Customer Location and shall be further entitled to, from time to time, upon reasonable written notice to Primary Customer and the affected Related Customers, amend such designation.

 

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3. Customer Service Provided by Sysco “What account services does Sysco provide for me?”

 

Sysco will provide the account services described in the MDA General Policies and Procedures (the “MDA Policies”), as they may be amended by Sysco from time to time. The MDA Policies as of the Effective Date are attached as Schedule 3.

 

4. Operational Services Provided by Sysco “When do I receive my delivery? How do I handle my returns?”

 

4.1 Delivery Service.

 

4.1.1 In order to maintain scheduled delivery days and times, minimize off-day deliveries and maintain reasonable expense control, each Customer Location will receive _ deliveries per week on its appointed delivery days (“Scheduled Delivery Days”), as such Scheduled Delivery Days may be changed from time to time. The delivering Operating Company will assign Scheduled Delivery Days and the delivery times on such days for each Customer Location within its Service Area, taking into consideration the needs and preferences of the Customer Location, and will use reasonable, good faith efforts to make on-time deliveries.

 

4.1.2 If any single delivery to a Customer Location, including, without limitation, an Off Day Delivery (as defined hereinafter), does not meet the minimum order size set forth in Schedule 4 (“Minimum Order”), the Operating Company shall not be obligated to make such delivery. In addition, certain small delivery sizes are subject to a delivery fee as provided in Schedule 4 (the “Small Order Surcharge”), which will be added to the invoice covering such delivery.

 

4.1.3 Should Customer request a delivery on a day other than the Scheduled Delivery Days (the “Off Day Delivery”), the delivering Operating Company, in its sole discretion, may determine to provide the Off Day Delivery. The delivering Operating Company, may condition the Off Day Delivery upon payment of an additional charge determined in its sole discretion and in such event, it will not make the Off Day Delivery unless Customer agrees in writing to such additional charge. If the delivering Operating Company does not provide the Off Day Delivery, orders placed by Customer for an Off Day Delivery will be delivered on the next Scheduled Delivery Day.

 

4.2 Product Return Policy. Returns of Products and credits therefor shall be governed by Sysco’s Product Credit and Return Policy, the current terms and conditions of which are set forth in the MDA Policies.

 

4.3 Restocking Fee. Subject to Section 4.2, Sysco reserves the right to collect a restocking fee of $2.50 per case for all Product returned to, and accepted by, the Operating Company, except if the Products are returned or rejected as a result of: (i) Product defects, (ii) Products damaged in distribution, (iii) Product mis-ships by the Operating Company, or

 

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(iv) Product recalls ordered by the Supplier (as defined hereinafter) (subject to Section 9.2.9) or in response to governmental recall or withdrawal action.

 

5. Information Services Provided Bv Sysco “What data do I receive?”

 

Sysco will provide the reporting and order entry services described in the MDA Policies.

 

6. Pricing “How is my pricing calculated and how often?”

 

6.1 Definition of Cost. The price to Customer for all Products sold under this Agreement (the “Sell Price”) will be calculated on the basis of Cost, except as provided in Section 7.2. Except where Customer has agreed with a supplier to purchase certain Products as described in Section 7.1, “Cost” is defined as the cost of the Product as shown on the invoice to the delivering Operating Company or, if there is an open purchase order issued by the delivering Operating Company for customary quantities of such Product and such Product is due to be received by such Operating Company prior to the first day of the pricing period for which the Cost and resulting Sell Price is being determined (“Eligible Open Purchase Order”), the price of the Product as set forth in such Eligible Open Purchase Order, plus, if the price on such invoice or Eligible Purchase Order, as the case may be, is not a delivered price, Applicable Freight. The invoice used to determine Cost will be the invoice issued to the delivering Operating Company from the supplier, including, without limitation, Sysco’s merchandising services Affiliate, currently the Baugh Supply Chain Cooperative, Inc. and its regional member cooperatives (collectively, “BSCC”), as well as any other Affiliate. Cost is not reduced by cash discounts for prompt payment available to Sysco, BSCC or the Operating Companies.

 

“Applicable Freight” means a freight charge for delivering products to the delivering Operating Company. Applicable Freight charges may include: (i) common or contract carrier charges by any Supplier or a third party; (ii) common or contract carrier charges billed by Sysco’s freight management service (“FMS”), sometimes known as Alfmark, for third party carriage arranged by FMS; (iii) charges billed by FMS for shipments back hauled on trucks owned or leased by Sysco or its Affiliates; or (iv) charges such as fuel surcharges, cross-dock charges, unloading and restacking charges, container charges, air freight charges and other similar charges not included any Supplier’s invoice cost that are required to bring Product into the delivering Operating Company’s warehouse. Applicable Freight for any Product will not exceed the rate charged by nationally recognized carriers operating in the same market for the same type of freight service and for the same quantity of Product.

 

6.2 Merchandising Services. Sysco Corporation and its Affiliates, including BSCC, perform value-added services for suppliers of SYSCO® Brand and other Products over and above procurement activities typically provided by other distribution companies in the foodservice industry. These services include, but are not limited to, (i) supply chain services such as consolidation of Operating Company purchases from suppliers, management of supplier ordering processes, consolidation of payments by Operating Companies to suppliers, processing claims by Operating Companies for Product loss and shortages, advanced inventory management, freight consolidation and management and other services associated with management of the total supply chain, (ii) quality assurance and (iii) regional and national marketing and performance-based product marketing. To bring these supply chain efficiencies to its customers requires Sysco and its Affiliates, including BSCC, to accept responsibility for management of certain business functions and expenses once borne by the supplier. There are also instances where Sysco and its Affiliates, including BSCC, incur additional costs in order to generate savings when considering the entirety of the supply chain which is the case with activities such as redistribution, forward contracting, freight consolidation, and cross docking. Therefore, Sysco and its Affiliates, including BSCC, may recover the costs of providing these services, may be compensated for these services and may retain any savings they may receive throughout the supply chain by utilizing their expertise, resources and capital, much of which is used to offset expenses already incurred. Sysco considers such cost recovery, compensation and retained savings to be earned income. Receipt of such cost recovery and earned income does not reduce Cost and does not diminish the commitment of Sysco and its Affiliates, including BSCC, to provide competitive prices to their customers.

 

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6.3 Sell Price.

 

6.3.1 Calculation of Sell Price

 

6.3.1.1 Margin on Sell - For Products subject to margin on sell pricing as indicated in Schedule 2, the Sell Price will equal (i) the Cost of the Product divided by (ii) the difference between [**]% and the percentage margin on sell applicable to the Product category of such Product as set forth in Schedule 2, less (iii) Supplier Allowances (as defined in Section 7.1)

 

For example, a case of Product with a Cost of $[**] per case, a margin on sell of [**]% and an applicable Supplier Allowance of $[**] per case will have a Sell Price calculated as follows:

 

[**]

6.3.1.2 Fee per Unit For Products subject to fee per pound pricing as indicated in Schedule 2, the Sell Price will equal: (i) the Cost of the Product per pound, plus the fee per pound specified in Schedule 2, less (ii) any Supplier Allowance per pound, multiplied by

(iii) the number of pounds of such Product

 

For example, a Product weighing [**] pounds with a fee per pound of $[**], a Cost per pound of $[**], and a Supplier Allowance of $[**] per pound, will be calculated as follows:

 

[**]

 

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For items subject to a fee per case, the Sell Price will equal the Cost (per case), plus the fee per case, less the Supplier Allowance.

 

6.3.1.3 Sell Price - Market Pricing - For Products subject to market pricing as indicated in Schedule 2, the Sell Price shall be the prevailing market price, as determined by the delivering Operating Company for its respective market area, in its sole discretion.

 

6.3.2 Frequency of Sell Price Calculation Sell Prices for all Products will remain in effect for the pricing period set forth in Schedule 2 for the applicable Product category. The day of the week that weekly or monthly Sell Prices change may vary among delivering Operating Companies. Alternative pricing periods are further described below.

 

  (1) Time of sale pricing - pricing in effect for current purchase only;
     
 

(2)

Daily pricing - pricing in effect for a 24-hour period;
     
  (3) Weekly pricing - pricing in effect for seven consecutive calendar days; and
     
  (4) Monthly pricing - pricing in effect for a calendar month or a defined Customer accounting period.

 

Starting and ending dates of Supplier Agreements, as defined in Section 7.1 hereof, may affect the effective dates of the above pricing periods.

 

Sysco reserves the right, on prior notice to Primary Customer, to adjust monthly or weekly pricing in the event of major changes in Cost of any Product defined as a change of more than five percent (5%) of then-current Cost.

 

6.3.3 Sales, Use or Other Taxes and Assessments If, pursuant to local or state law, Sysco is obligated to pay to applicable taxing or regulatory authorities with respect to Sysco’s sales of Products to Customer Locations, any (i) sales or use taxes, (ii) business opportunity taxes, levies or assessments or (iii) taxes, fees or assessments relating to recyclable beverage containers (collectively “Pass-Through Assessments”), Sysco may recoup from Customer, to the extent legally permissible, the amount of such Pass-Through Assessments, either through an increase in the margin on sell (or, if applicable, fee per case) or through a line item surcharge.

 

6.3.4 Sale by, and Payment to, Operating Companies - The delivering Operating Company will invoice all sales of Product under this Agreement. Customer shall pay to the delivering Operating Company all invoices for Product sales under this Agreement issued by such Operating Company in accordance with the credit terms established under Section 10 hereof.

 

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6.3.5 Use of the Term “Margin” Unless the context clearly indicates otherwise, the term “margin” used alone means the amount added to Cost to determine the Sell Price, whether such amount is determined as a margin on sell, mark-up or fee per unit.

 

6.4 Substitutions. Should a substitution be necessary, the delivering Operating Company will ship a comparable product at a Sell Price calculated using the same methodology and margin as on the original Product ordered. Adjustments will be made to account for any pack/size variance and will be calculated based on the same unit price.

 

6.5 Temporary Adjustment in Pricing for Unanticipated Problems. If the operating costs of Sysco or any particular Operating Company are affected as a result of significant regional or national economic fluctuations, including but not limited to power and fuel cost changes and power supply fluctuations, Sysco may, with advance written notice to Customer, add a surcharge to Customer’s invoice or adjust the margins to compensate for such cost variances which surcharge or margin adjustments shall be removed or adjusted back to the pre adjustment levels if the condition prompting such surcharge or adjustment no longer exists.

 

6.6 Adjustments When Customer Representations Are Not Achieved. Customer agrees that the pricing provided under this Agreement is premised upon certain forecasts, representations or assumptions provided by Customer to Sysco about the distribution services to be provided by Sysco that are set forth in Schedule 4 attached hereto (the “Customer Representations”). If at any time following ninety (90) days from the Effective Date, Sysco determines that the Customer Representations are not or are no longer satisfied, in the aggregate, with respect to all Customer Locations, Sysco may provide written notice to Primary Customer of such failure to achieve or maintain the Customer Representations, which may contain a proposed adjustment in the margins to compensate for such failure. Primary Customer will negotiate in good faith with Sysco for an equitable adjustment to the margins so as to compensate Sysco for the failure to achieve or maintain the Customer Representations. If, within thirty (30) days following such notification, Primary Customer and Sysco fail to agree to the proposed or other mutually acceptable adjustment or other form of compensation, Sysco shall be entitled to terminate this Agreement, as provided in Section 11.2.1(d).

 

6.7 Fuel Cost Surcharge. The parties acknowledge and agree that the pricing terms set forth in this Agreement are premised upon fuel prices being within a certain range, the “Base Range,” as further described in Schedule 6.7. In the case of fuel cost fluctuations outside of the Base Range, a fuel surcharge will be added, which will be subject to periodic adjustment, as provided in Schedule 6.7. This surcharge will be added as a line item on the invoice covering each delivery.

 

6.8 Customer Incentives/Allowances. Sysco will pay the incentives/allowances described in Schedule 6.8 pursuant to the procedures contained in Schedule 6.8. Primary Customer represents that the existence of all incentives/allowances provided to Primary Customer under this Agreement has been and will continue to be disclosed to Related Customers and Primary Customer’s own clients or customers (collectively “Operators”) other than retail dining establishment patrons. Primary Customer further represents that (i) the imposition and collection of all incentives/allowances provided under this Agreement is permitted under each Operator’s agreement with Primary Customer and each Related Customer’s agreement with Primary Customer and (ii) payment of such allowances does not violate any law or contract to which Primary Customer is bound. Primary Customer will defend, indemnify and hold harmless Sysco from all loss, damage or liability arising out of any breach of this representation, including reasonable attorneys’ fees and expenses. Primary Customer will further repay to Sysco any allowances paid to Primary Customer with respect to the sa]e of Product to any customer, including without limitation, a Related Customer if Sysco does not ultimately receive payment for such Product. The indemnity set forth herein shall survive the expiration or termination of this Agreement.

 

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7. Customer Agreements with Suppliers “What if I have agreements with product suppliers?”

 

7.1 Supplier Agreements; Customer Contract Pricing. Subject to the limitations set forth in Section 7.3 below, Primary Customer may provide Sysco with written evidence of the existence of agreements it has with any supplier, manufacturer, grower, packer, or other procurement source of Products to be distributed under this Agreement (each, a “Supplier”) for the purchase of such Products (such agreements being referred to herein as “Supplier Agreements”), utilizing the Sysco form provided separately by Sysco (the “Supplier Detail Form”). Supplier Agreements include agreements for which the Supplier and Primary Customer have agreed on (i) allowances for Customer (“Supplier Allowances”) or (ii) the guaranteed cost supplier will charge Sysco for Product to be resold to Customer (“Supplier Guaranteed Distributor Cost”), both FOB Supplier plant or delivered to the delivering Operating Company. Products subject to Supplier Agreements are referred to herein as “Contracted Products”. Subject to Section 7.3, Sysco will use the Supplier Guaranteed Distributor Cost (of which it has been notified appropriately), plus Applicable Freight when such cost is not a delivered cost, as the Cost of Contracted Product (except as provided in Section 7.2 with respect to Controlled Price Products) when ca1culating its Sell Price under Section 6.3, notwithstanding that the Cost to Sysco of such Contracted Product otherwise varies. Sysco will provide for a Supplier Allowance for a Contracted Product by deducting such allowance value after performing the calculation of the Sell Price that would otherwise apply to such Product under Section 6.3. Supplier Agreements put into effect on the Effective Date are referred to as “Initial Supplier Agreements.”

 

7.2 Controlled Price Products. There are a limited number of Products (“Controlled Price Products”) that are governed by agreements with suppliers binding upon Sysco or the Operating Company which establish the ultimate price at which the delivering Operating Company must sell the Product to the Customer Location (“Controlled Price Agreements”). Controlled Price Agreements are limited to bag-in-box products from Coca Cola North America and Pepsi Cola Company, products from Ecolab, Inc. and other products expressly agreed to in writing by Sysco and Customer. Notwithstanding Section 6.3, the Sell Price for Controlled Price Products shall be the amount prescribed (or ca1culated in accordance with) the applicable Controlled Price Agreement.

 

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7.3 Limitations Relating to Supplier Agreements. For any Supplier Agreements which are either (i) not Initial Supplier Agreements or (ii) the terms of which change from what is listed in the Supplier Detail Form which was previously provided, Sysco must be notified in writing and provided with complete information concerning such agreements no later than (A) the tenth (10th) day of a calendar month for new pricing or allowance programs or modifications to existing Supplier Agreements which are to be effective as of the first day of the following calendar month or (B) twenty (20) days prior to the beginning of the next Customer accounting period for new pricing or allowance programs or modifications to existing Supplier Agreements which are to be effective as of the first day of the following Customer accounting period. Customer agrees that Sysco is not responsible for inaccuracies, errors or omissions made by supplier, or untimely submissions of all information required, in connection with the pricing and allowances under Supplier Agreements, and that Customer’s sole and exclusive remedy for any such inaccuracies, errors or omissions or untimely submissions of information related to Supplier Agreements shall be directly with supplier.

 

Sysco shall be obligated to determine the Sell Price for Contracted Products or Controlled Price Products under Sections 7.1 or 7.2 only if the Supplier Agreement and all information described above is included in a Supplier Detail Form or any other required information is timely provided to Sysco as provided above. Furthermore, if the Supplier Guaranteed Distributor Cost or the Supplier Allowances are premised upon specified payment or credit terms or specified purchase volumes of Products, such payment and credit terms must be consistent with industry standards for such supplier and the specified purchase volumes of the related Contracted Products must be consistent with the Customer Locations’ historical or reasonably forecasted usage of such Products. If information concerning Supplier Agreements is not timely provided or the payment or credit terms or specified purchase volumes are not as described above, the Sell Price of such Contracted Products shall be determined in accordance with Section 6.3 and without regard to the Supplier Guaranteed Cost or the Supplier Allowance.

 

8. Price Verification “How do I know if my pricing is correct?”

 

Primary Customer will be allowed one (1) annual price verification at each delivering Operating Company for purchases made under this Agreement. If Sysco is establishing its Cost for Contracted Products at the corporate office for participating Operating Companies, then the price verification shall occur at one Operating Location selected by Primary Customer. The price verification will consist of reviewing computer reports generated by Sysco documenting Sysco’s calculation of Customer’s invoice price and the participating Operating Company’s delivered Cost. If requested, applicable Supplier invoices and accompanying freight invoices will also be made available. Supplier invoices consist of invoices from third party suppliers or from Sysco Affiliates, BSCC or a Specialty Company, as applicable. Price verification adjustments, if applicable, will be made utilizing the net of undercharges and overcharges to the Customer. Any net overcharge adjustments paid to Primary Customer that result from overcharges to Related Customers, shall be forwarded by the Primary Customer to the applicable Related Customers unless Primary Customer is otherwise legally entitled to retain such adjustments. The price verification process is subject to the following:

 

  (a) Primary Customer must request a price verification in writing at least twenty (20) business days prior to the suggested date of the price verification and must identify not more than fifteen (15) items to be price verified and the period covered;

 

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  (b) The date and time of price verification must be to the mutual agreement of Primary Customer and the delivering Operating Company;
     
  (c) The price verification will be made at the delivering Operating Company’s location;
     
  (d) Support for the price verification may not be removed from the delivering Operating Company location where the price verification is conducted;
     
  (e) The period for which pricing is to be verified will not begin more than three (3) months prior to the date of the price verification, and will cover only one pricing period; and
     
  (f) In no event will pricing be corrected for more than six (6) months prior to the date of the price verification.

 

Due to the extensive time and complexity associated with price verification, Sysco will not accept computer generated price matching or electronic audits by or on behalf of Customers or any Third Party Provider (as defined in the MDA Policies) and any price verification adjustments will only be made following the above price verification procedures. Notwithstanding the foregoing, if any Customer becomes aware of pricing discrepancies for Contracted Products, Sysco will investigate the purported discrepancy and make appropriate pricing adjustments, as warranted, but such procedure will not involve additional on-site visits and/or access to supplier invoices.

 

9. Proprietary and Special Order Products “How will Sysco handle products with my logo and products ordered specially for me?”

 

9.1 Definitions.

 

9.1.1 Special Order Products Special Order Products are Products not inventoried by the delivering Operating Company that Customer requests, on behalf of one or more Customer Locations, and such Operating Company purchases for immediate or near immediate distribution to such Customer Locations.

 

9.1.2 Proprietary Products Proprietary Products are (i) Products bearing Customer’s name or logo, (ii) Products with a unique formulation that are restricted for sale to Customer, or (iii) supplier branded products that would otherwise not be inventoried, or quantities of such supplier branded Products that exceed the amounts that the delivering Operating Company would inventory, except for specific Customer’s requirements. Products under the SYSCO® Brand will be considered Proprietary Products when Customer requires that such Product must be procured from a specific supplier. Contracted Products may also be considered to be Proprietary Products if they are within the scope of Products described in clauses (i), (ii), or (iii) of this Section 9.1.2. Fresh produce may not be designated a Proprietary Product due to its highly perishable nature. Proprietary Products described in clause (iii) of this Section 9.1.2 shall be determined separately by each delivering Operating Company.

 

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9.2 Requirements/Limitations Applicable to Proprietary Product, Special Order Product and Contracted Product. Sysco’s obligation to procure and distribute Proprietary Products, Special Order Products, or Contracted Products, is subject to the following conditions, as applicable:

 

9.2.1 Hold Harmless/Insurance - Suppliers of Proprietary Products, Contracted Products and Special Order Products must provide Sysco with an indemnity agreement and insurance coverage satisfactory to Sysco and must not be in breach of such indemnity agreement. If a supplier of such Products does not provide the required indemnity and insurance or is in breach of its requirements to do so and Customer still wishes to purchase Products purchased by Sysco from such supplier, such Products shall be defined as “Customer Directed Products” and Section 9.2.2 shall apply to same.

 

9.2.2 Customer Directed Products - In connection with all Proprietary Products, Contracted Products or Special Order Products, which are not SYSCO® Brand Products (“Customer Directed Products”), Primary Customer and each Related Customer acknowledges that Sysco does not manufacture or produce any Products other than certain further processed Products sourced from Specialty Companies. With regard to Customer Directed Products, Primary Customer and such Related Customers agree that they have selected the Customer Directed Products based upon their own knowledge and judgment. Other than warranty of title, SYSCO MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANT ABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE WITH REGARD TO CUSTOMER DIRECTED PRODUCTS. Furthermore, both Primary Customer and each Related Customer that purchases or uses Customer Directed Products, jointly and severally, will defend, indemnify and hold harmless Sysco and its employees, officers and directors from all actions, claims and proceedings, and any judgments, damages and expenses resulting therefrom, brought by any person or entity for injury, illness and/or death or for damage to property in either case arising out of the manufacture, production, delivery, sale, resale, use or consumption of any Customer Directed Product, except to the extent such claims are caused by the negligence or intentional misconduct of Sysco, its agents or employees. Furthermore, Primary Customer and each Related Customer that purchases or uses such Products does hereby release, discharge and acquit Sysco and its employees, officers and directors from any and all claims, actions, causes of action, demands, liabilities, damages, costs and expenses whatsoever which Customer now has or may hereafter have arising out of the manufacture, production, delivery, sale, resale, use or consumption of any Customer Directed Product except to the extent such claims are caused by the negligence or intentional misconduct of Sysco, its agents or employees. If, as of the date of the occurrence of the events giving rise to the otherwise indemnified claim, Sysco has an established supplier relationship with the supplier of the Customer Directed Product arising from its procurement of Products from such supplier for other customers of Sysco, Sysco shall seek indemnity from such supplier first before pursuing the indemnification obligations of Customer under this paragraph. The indemnity, waiver and release provided in this paragraph shall survive the expiration or termination of this Agreement.

 

9.2.3 GTIN and Bar Code Proprietary Products, Contracted Products and Special Order Products must have a valid Global Trade Identification Number (“GTIN”) assigned and a scannable GTIN bar code on each sellable unit.

 

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9.2.4 Minimum Movement No delivering Operating Company will have an obligation to carry a Proprietary Product if all Customer Locations purchasing from such Operating Company purchase less than ten (10) cases per week of that Product and/or the sales volume of such Proprietary Product in such Operating Company results in less than twelve (12) turns of the inventory of such Product in any twelve (12) month period.

 

9.2.5 Forward Warehouse Consignment Sysco utilizes several third party public warehouses throughout the nation for the purpose of efficiently redistributing products (“Forward Warehouses”). Any Proprietary Products or Contracted Products placed into the Forward Warehouses at Primary Customer’s request must be inventoried on a consigned basis by either the Supplier of such Products or Primary Customer. Forward Warehouses do not include existing redistribution centers established by Sysco Affiliates or redistribution centers that may be established by Sysco Affiliates in the future.

 

9.2.6 Customer Obligations for Special Order Products - Customer Locations shall purchase all shipments of Special Order Products within the timeframes specified in the special order request, as approved by Sysco. No Special Order Products may be returned other than due to Product defects, mis-ships or any such Products or returns for which the Supplier has agreed to credit the delivering Operating Company. Any additional distribution costs incurred by the delivering Operating Company for Special Order Products outside of normal distribution costs, e.g., overnight freight or UPS charges, will be paid by the ordering Customer unless Supplier honors a bill-back to permit Sysco to recover such costs.

 

9.2.7 Stocking of Proprietary Products Customer agrees that each delivering Operating Company shall be required to stock no more than twenty five (25) Proprietary Products. If any delivering Operating Company agrees to inventory any Proprietary Product for Customer in excess of the stated amount, Sysco may increase the margin by five (5) percentage points for each Proprietary Product over the stated limit. Primary Customer shall give reasonable prior notice, of not less than thirty (30) days, to each delivering Operating Company of the Proprietary Products that it wishes such Operating Company to stock.

 

9.2.8 Inventory Disposition - If (i) there is no movement of a Proprietary Product within a thirty (30) day period of time at either any Operating Company or at any Forward Warehouse (such Proprietary Product being referred to herein as an “Obsolete Product”) or (ii) this Agreement terminates for any reason or expires, Customer will purchase, or cause a third party to purchase, all remaining Obsolete Products and, in the case of termination or expiration of this Agreement, all Proprietary Products and Special Order Products (whether in Sysco’s inventory, in transit or at Sysco’s docks) at Sysco’s Cost plus a reasonable transfer and warehouse handling charge. In either event, Customer will purchase or cause to be purchased all perishable Obsolete Products or, in the case of termination or expiration of this Agreement, all perishable Proprietary Products and Special Order Products, within seven (7) days of written notification of non-movement or the termination or expiration of this Agreement, as the case may be, and all frozen and dry Obsolete Products, or, in the case of termination or expiration of this Agreement, all remaining Proprietary Products and Special Order Products, within fourteen (14) days of written notification of non-movement or the termination or expiration of this Agreement, as the case may be. Customer guarantees payment for such Product purchased by a third party designated by Customer which obligation shall survive the expiration or termination of this Agreement. Payment terms for Product purchased under this Section 9.2.8 will be the same as established in or pursuant to Section I 0.1 or if the purchase is triggered by the expiration or termination of this Agreement, within the fourteen (14) days of termination of this Agreement or the established payment terms, whichever is earlier. For purposes of this Agreement, “Sysco’s Cost” is the Cost of the Product, as determined in accordance with Section 6.3, without regard to any Supplier Guaranteed Distributor Cost or Supplier Allowance.

 

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9.2.9 Product Recalls of Proprietary and Special Order Products Sysco has a stated recall policy to charge each Supplier for expenses Sysco incurs as a result of recalls and withdrawals of Products purchased from such Supplier. If Sysco purchases Proprietary Products or Special Order Products exclusively for Customer, and if the Supplier does not pay such expenses, Customer will pay or reimburse Sysco for all such expenses.

 

10. Credit; Customer Financial Responsibility “What are my payment terms?”

 

10.1 Payment Terms.

 

Standard payment terms will be assigned following submission of the information specified in Section l 0.4 to Sysco and its review thereof. This Agreement is not binding upon Sysco, with respect to any Customer, until such time as such information is provided to Sysco and Sysco establishes payment terms in Sysco’s sole discretion, as evidenced by its written approval of the new account application submitted by such Customer, its written designation of payment terms for such Customer, and, in the case of a Related Customer, its acceptance and execution of the required Participation Agreement with such Related Customer.

 

Sysco reserves the right to modify payment terms for any Customer if, in Sysco’s sole judgment, such Customer’s financial condition materially deteriorates or Sysco becomes aware of circumstances that may materially and adversely impact such Customer’s ability to meet its financial obligations when due.

 

Each Customer will be offered credit terms commensurate with its credit worthiness as determined by the respective delivering Operating Companies in their sole discretion.

 

10.2 Set Off Sysco may set off any amounts it may owe to any Customer under this Agreement against all amounts that Customer is obligated to pay Sysco under this Agreement.

 

10.3 Service Charge; Collection Fees. If invoices are not paid when due, a service charge will be assessed to the applicable Customer, up to the maximum amount permitted by law. Unpaid invoice balances and service charges due to Sysco will be deducted from any credits due to such Customer. Customer shall pay all costs and expenses (including reasonable attorney’s fees) Sysco incurs in enforcing its rights under this Agreement including, without limitation, its right to payment for Products sold to Customer.

 

10.4 Applications and Other Documents and Information. Primary Customer and each Related Customer will complete and execute a new account application on forms provided by Sysco and such account applications must be approved by Sysco as a condition to this Agreement binding Sysco with respect to Primary Customer and each Related Customer. In addition, this Agreement shall not be binding upon Sysco with respect to distribution services to any Related Customer until and unless such Related Customer has signed a Participation Agreement approved and accepted by Sysco, as provided in Section 1, above. If required by the delivering Operating Company in its judgment, Related Customers shall also execute and deliver guarantees, security agreements or other related agreements as a further condition to this Agreement being binding upon Sysco with respect to such Related Customer.

 

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In order to enable Sysco to establish each Customer’s credit terms and to monitor each Customer’s financial condition, Primary Customer and, if requested by Sysco, any Related Customer, will provide Sysco with quarterly and annual financial statements (audited, if available) consisting of an income statement, balance sheet, statement of cash flow and, if available, auditor’s opinion and supporting discussion notes. Sysco may request such further financial information from Primary Customer and from any Related Customer, as applicable, and such Customer shall provide such further information from time to time, sufficient, in Sysco’s judgment, to enable Sysco to accurately assess such Customer’s financial condition.

 

10.5 Delivery Stoppage. If Primary Customer or any Related Customer fails to make payment when due, Sysco or any participating Operating Company to which such payment is due may immediately, upon notice to the applicable Customer, condition future deliveries upon more stringent credit and/or payment terms, including, without limitation, cash in advance, cash on delivery, and/or the delivery of acceptable letters of credit, third party guarantees, additional collateral, and/or, following five (5) days written notice to the applicable Customer, cease shipment of any Products to the Customer failing to make such payment until the outstanding receivable balance is fully within terms.

 

10.6 Indemnification Against Franchisee/GPO Member Exclusion. If Primary Customer is a franchisor and/or GPO and permits distribution under this Agreement to Related Customers that are franchisees and/or GPO members, and if for any reason Primary Customer (i) directs Sysco to cease distribution or sales of Proprietary Product bearing trademarks or trade dress owned by Primary Customer to one or more Related Customers, or (ii) prohibits any Related Customers from participating in the purchasing program detailed hereunder, Primary Customer will defend, indemnify and hold Sysco harmless from and against any and all losses, damages or claims by the affected Related Customers which may arise from Sysco ceasing further sales and/or the availability of the purchasing program hereunder to such Related Customers under this Agreement. The indemnity set forth herein shall survive the expiration or

termination of this Agreement.

 

11. Term and Termination “How long will the MDA remain in effect and how does it terminate?

 

11.1 Term. The term of this Agreement (the “Initial Term”) will begin on June 1, 2011 and will end on May 31, 2013. The initial term shall automatically extend until either party provides the other party with ninety (90) days’ prior written notice (the term of extension together with the Initial Term shall be referred to as the “Term”).

 

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11.2 Termination. This Agreement may be terminated prior to the end of the Term as to Primary Customer and any Related Customer as follows:

 

11.2. l By Sysco:

 

  (a) By Sysco for failure of Primary Customer to comply with any material provision of this Agreement within one hundred twenty (120) days of Primary Customer’s receipt of written notice describing said failure unless, with respect to not more than one such failure, such failure is cured within such one hundred twenty (120) day period;
     
  (b) By Sysco immediately upon written notice to Primary Customer if Primary Customer’s financial position deteriorates materially, determined by Sysco in its sole judgment, or if Sysco becomes aware of any circumstances that, in Sysco’s sole judgment, materially impact Primary Customer’s ability to meet its financial obligations when due;
     
  (c) By Sysco, but only with respect to any Related Customer (and not with respect to Primary Customer or any other Related Customer), immediately upon written notice to such Related Customer if its financial position deteriorates materially, as determined by Sysco in its sole judgment, or if Sysco becomes aware of any circumstances that, in Sysco’s sole judgment, materially and adversely impact such Related Customer’s ability to meet its financial obligations when due;
     
  (d) By Sysco, upon not less than sixty (60) days written notice to Primary Customer if the Customer Representations are not achieved or no longer achieved and Primary Customer and Sysco have failed to agree upon adjustments to the margin or other mutually satisfactory form of compensation, as further described in Section 6.6;
     
  (e) By Sysco, but only with respect to distribution services to a designated Related Customer for failure of such Related Customer to comply with any material provision of this Agreement or the Participation Agreement within sixty (60) days of such Related Customer’s receipt of written notice describing such failure, unless, with respect to not more than one such failure, such failure is cured within such sixty (60) day period;

 

11.2.2 By Primary Customer:

 

By Primary Customer for failure of Sysco to comply with any material provision of this Agreement within sixty (60) days of Sysco’s receipt of written notice describing said failure unless with respect to not more than one such failure, such failure is cured within such sixty (60) day period; and

 

11.2.3 By Related Customer:

 

By Related Customer as to its obligations only for failure of Sysco to comply with any material provision of this Agreement within sixty (60) days of Sysco’s receipt of written notice describing said failure unless with respect to not more than one such failure, such failure is cured within such sixty (60) day period (termination by a Related Customer under this Section 11.2.3 shall not constitute termination of this Agreement as it applies to Primary Customer or any other Related Customer).

 

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11.3 Obligations Upon Termination. Upon termination, Primary Customer and all Related Customers agree to fully comply with all of their obligations under this Agreement, including, without limitation the obligation to pay all invoices at the earlier of (i) the time they are due or (ii) two (2) weeks from the date of termination.

 

11.4 Survival of Terms. The sections of this Agreement that by their nature are intended to survive, including but not limited to indemnification, waiver of jury trial, payment, limitations on damages and warranties, and confidentiality found in Sections 9.2.2, 10.3, 10.6, 11.3, 12, 16 and its subsections, and 17, shall survive the expiration or termination of this Agreement. Neither expiration nor termination of this Agreement for any reason shall release a party from liabilities or obligations set forth herein which the parties have expressly agreed will survive such expiration or termination.

 

12. Waiver of Right to Jury Trial “What if we disagree?”

 

Each party affirmatively waives its right to jury trial with respect to any disputes, claims or controversies of any kind whatsoever under this Agreement.

 

13. Perishable Agricultural Commodities “Do any products receive special treatment if certain sellers aren’t paid for them?”

 

This Agreement may cover sales of “perishable agricultural commodities” as those terms are defined by federal law. Generally, all fresh and frozen fruits and vegetables which have not been processed beyond cutting, combining and/or steam blanching are considered perishable agricultural commodities as are oil blanched french fried potato products. All perishable agricultural commodities sold under this Agreement are sold subject to the statutory trust authorized by Section 5(c) of the Perishable Agricultural Commodities Act, 1930 C’PACA”) (7 U.S.C. 499e(c)). The seller of these commodities retains a trust claim over these commodities and all inventories of food or other products derived from these commodities until full payment is received.

 

14. Food Safety and Ground Beef “How do you handle ground beef and veal products?”

 

Sysco has developed a set of stringent standards for the production and packaging of ground beef and ground veal (the “Sysco Ground Beef and Veal Safety Standards”). Sysco will not be obligated to utilize any supplier of ground beef or ground veal that does not meet the Sysco Ground Beef and Veal Safety Standards, whether or not the ground beef or ground veal supplied by such supplier has been designated by Customer as a Proprietary Product, Contracted Product or Special Order Product.

 

15. Customer Initiated Recalls and Product Withdrawals “Under what circumstance will there be any charge to me for a recall?”

 

As noted in Section 9.2.9, Sysco has a stated recall policy to charge each Supplier for expenses Sysco incurs as a result of recalls and withdrawals of Products purchased from such Supplier. If in the absence of a formal recall or withdrawal of Product initiated by the Supplier of such Product or a government agency with authority to do so, Customer directs Sysco to withdraw all such Product from Customer Locations, Sysco reserves the right to assess Customer its then current charge to cover handling charges, currently $7.00 per case.

 

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16. Representations and Warranties; Limitations; Indemnity “What warranties do I receive on Product? Are there any limitations?”

 

16.1 Product Warranties.

 

16.l.l Sysco represents and warrants that all Products other than Customer Directed Products, as of the time of delivery to Customer (i) will meet the specifications for such Product contained within the order guide and other written specifications for such Product provided by Sysco (ii) subject to Section 13, will be free and clear of any adverse lien or security interest, and (iii) to the extent the Product is subject to the Federal Food, Drug and Cosmetic Act, as amended from time to time (the ‘‘FDC Act”), will not be adulterated or misbranded within the meaning of the FDC Act.

 

16.1.2 Sysco represents and warrants that, subject to Section 13, all Customer Directed Products will be free and clear of any adverse lien or security interest.

 

16.1.3 NO PERSON IS AUTHORIZED TO MAKE ANY WARRANTY OR REPRESENTATION IN ADDITION TO OR IN CONFLICT WITH THE WARRANTIES SET FORTH IN THIS SECTION.

 

16.2 Exclusion of Implied Warranties. Except as expressly provided herein, SYSCO MAKES NO EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, INCLUDING WITHOUT LIMITATION, IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WARRANTIES THAT ARISE FROM TRADE USAGE OR CUSTOM.

 

16.3 Exclusion of Certain Damages. In no event shall either Sysco or Customer be liable FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY SORT (INCLUDING WITHOUT LIMITATION, LOST PROFITS AND LOST ENTERPRIZE VALUE) WHETHER IN AN ACT[ON IN CONTRACT, TORT OR OTHERWlSE, ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE PERFORMANCE OR BREACH THEREOF, EVEN IF IT IS ADVISED OF OR COULD HAVE FORESEEN THE POSSIBILITY OF SUCH DAMAGES, except for Losses (as defined in Section 16.4) arising from third party claims that are subject to the indemnification obligations described in Section 16.4 or Losses suffered by a party as a result of the breach by the other party and/or its affiliates, employees, officers, or directors, of the confidentiality provisions set forth in Section 17.

 

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16.4 Indemnity. Each party (in context, the “lndemnitor”) will be responsible for and will defend and indemnify the other party (in context, the “lndemnitee”) for losses, damages, claims and costs (including reasonable attorney’s fees) (collectively, “Losses”) of the Indemnitee for property damage or personal injury that are caused by or arise out of the negligence or intentional misconduct of the Indemnitor other than as limited in Section 16.3. The obligations of the Indemnitor in the preceding sentence will be reduced to the extent such Losses are caused by the negligence or intentional misconduct of the Indemnitee. The Indemnitee will promptly notify the Indemnitor of any Losses and cooperate with the Indemnitor in defending such Losses. The Indemnitor is entitled to defend the Losses at its expense with counsel of its choosing. The Indemnitee may participate in the defense of the Losses at its expense with counsel of its own choosing. This indemnity is in addition to, not in lieu of, any other indemnity set forth in this Agreement.

 

17. Confidentiality “Do we consider information we exchange to be confidential?”

 

Each of Sysco and Primary Customer (in context “Recipient”) agrees to keep all terms of this Agreement and related financial information (“Protected Information”) confidential, will use Protected Information solely to enable it to perform its obligations hereunder, and will not disclose any information concerning this Agreement to any person or entity without the prior express written consent of the disclosing party (“Discloser”); provided, however, that Protected Information may be provided (i) by Recipient to those of its employees who need such information to enable Recipient to perform its obligations hereunder, (ii) by Recipient to its auditors, consultants and advisors who agree to keep such information confidential or are otherwise bound to restrictions on disclosure, (iii) by Primary Customer to Related Customers who have agreed to keep such information confidential, (iv) by Sysco to Related Customers who have agreed to keep such terms confidential, (v) by Primary Customer as to any prospective purchasers of all or part of its business, provided that such prospective purchasers shall have executed and delivered a confidentiality agreement in form and substance approved by Sysco, which approval shall not unreasonably be withheld or delayed, (vi) by Sysco to any Affiliate, or (vii) by Sysco in enforcing Customer’s payment obligations under this Agreement. Protected Information shall not include information which (x) is now or hereafter becomes part of the public domain (y) was received by Recipient from a third party under no obligation of confidentiality to Discloser or (z) is disclosed by Discloser to a third party without restriction (other than disclosure of the terms of this Agreement). In the event that such disclosure is required by applicable law, regulation or court order, Recipient agrees if reasonably practicable, to refrain from such disclosure until such time as Discloser has received written notice with regard to any required disclosure (provided that notice of the required disclosure is not prohibited by law), and Discloser has had a reasonable opportunity to contest the basis for disclosure and review the content of any disclosure proposed to be made to any person or entity.

 

18. Miscellaneous “What else is covered by our agreement?”

 

18.1 Assignment/Change in Control. Neither Primary Customer nor any Related Customer may assign this Agreement, by contract or operation of law, in whole, in part or for collateral purposes, without the prior written consent of Sysco. Any such attempted assignment of this Agreement by Primary Customer or any Related Customer without obtaining the prior written consent of Sysco shall be null and void. A Change in Control will be deemed to be an assignment of this Agreement by Primary Customer or Related Customer. For purposes of this Section, a “Change in Control” means: the transfer of all or substantially all of the assets of the entity in question, or a transfer of the ownership interests in such entity such that a “person” or “group” (as such terms are used in Section 13 (d) and 14 (d) of the Exchange Act of 1934, as amended) has become the beneficial owner, directly or indirectly of fifty percent (50%) or more of the then outstanding voting shares of such entity, provided that such “person” or “group” was not, directly or indirectly, a beneficial owner of at least such amount of such voting shares as of the Effective Date of this Agreement. Subject to these limitations, this Agreement shall be binding upon and inure to the benefit of the successors and assigns of each of the parties.

 

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18.2 Entire Agreement. The parties expressly acknowledge that (i) this Agreement (and the referenced Schedules), (ii) any separate confidentiality agreement between the parties,

(iii) the credit applications and related agreements and guarantees referred to in Section I 0.4 hereof and (iv) the Participation Agreements referred to in Section I contain the entire agreement of the parties with respect to the relationship specified in this Agreement and supersede any prior arrangements or understandings between the parties with respect to such relationship.

 

18.3 Amendments. This Agreement may only be amended by a written document signed by each of the parties.

 

18.4 Notices. Any written notice called for in this Agreement may be given by personal delivery, first class mail, overnight delivery service or confirmed facsimile transmission. Notices given by personal delivery will be effective on delivery; by overnight service on the next business day; by first class mail five (5) business days after mailing; and by facsimile when an answer back confirming receipt by the recipient’s facsimile machine is received. The address of each party is set forth below.

 

18.5 Donations. Due to the competitiveness of the pricing in this Agreement, Sysco will be unable to offer donations in any form, including, without limits, free goods, cash, or use of Sysco owned equipment unless otherwise provided in Schedule 4.

 

18.6 Force Majeure and Disaster Recovery. Sysco and each delivering Operating Company shall be excused for delays in performance or failure to perform any of its obligations hereunder if such delay or failure is caused by reason of labor disputes, strikes, fire, flood, accident, weather, civil disturbances, war, terrorism (including bio-terrorism), acts of God, failure of sources of supply, and like causes (each, a “Force Majeure Event”). In the event of such occurrences with respect to any delivering Operating Company, Sysco may provide distribution services to Customer Locations from its other distribution centers or Operating Companies. In the event that Sysco is unable to provide such services from its other distribution centers or Operating Companies, Primary Customer and Related Customers may purchase Product requirements for their respective Customer Locations from other sources for such periods of time as Sysco is unable to perform. Sysco shall use commercially reasonable efforts to remove or avoid any such events and shall continue performance hereunder as soon as reasonably practicable whenever such causes are eliminated.

 

If a Force Majeure Event occurs with respect to any delivering Operating Company, or any Customer Locations or the geographic territory in which the same are located, Sysco and the affected Customer shall promptly communicate with each other as to alternative and critical distribution requirements. Prioritization of distribution services by Sysco during any Force Majeure Event will favor healthcare Customers and, as among such customers, healthcare Customers that have previously entered into disaster recovery arrangements with Sysco.

 

  20  
 

 

18.7 Governing Law. This Agreement and the rights and obligations of the parties hereunder, shall be construed in accordance with the laws of the State of Texas, without giving effect to any choice or conflict of law provision or rule.

 

18.8 No Agency Relationship. This Agreement shall not be construed as establishing a general agency, employment relationship, partnership, or joint venture, and neither party may obligate the other except as expressly provided herein.

 

18.9 Authority. Each of the undersigned agrees to the terms and conditions of this Agreement on behalf of his or her organization or business. The undersigned represents that he or she is fully authorized to sign this Agreement on behalf of the organization or business represented, and that the business entity represented is bound by this Agreement.

 

  21  
 

 

Executed as of the date set forth at the beginning of this Agreement.

 

1390 Enclave Parkway

Houston, Texas 77077-2099

Attention: Vice President,

Multi-Unit Sales

Telephone: (281) 584-1390

Facsimile: (281) 584-2524

 

Copy to:

 

Sysco Corporation 1390

Enclave Parkway

Houston, Texas 77077-2099  

Attention: Operations Review  

Telephone: (281) 584-1390  

Facsimile: (281) 584-1744  

 

  MUSCLE MAKER FRANCHSING, LLC
   

123 Green Street

Woodbridge, NJ 07095

Attention: __________________

Telephone:__________________

Facsimile: ___________________

 

 

  22  
 

 

MASTER DISTRIBUTION AGREEMENT

 

    Schedule Index
     
Schedule l   Operating Companies, Primary Customer Locations and Related Customer Locations as of Effective Date
     
Schedule 1.1   Form of Participation Agreement
     
Schedule 2   Customer Margin Schedule/Product Categories MDA
     
Schedule 3   General Policies and Procedures
     
Schedule 4   Customer Representations; Minimum Orders; Delivery Fee for Certain Deliveries
     
Schedule 6.7   Fuel Cost Surcharge Customer
     
Schedule 6.8   Incentive Programs

 

Schedule Index

 

     

 

 

SCHEDULE 1 TO

MASTER DISTRIBUTION AGREEMENT

 

Operating Companies; Primary Customer Locations; and Related Customer Locations

 

Operating Companies

 

South Florida San

Francisco

Philadelphia Metro

NY

 

Customer Locations

 

[**]

 

Schedule 1.1

 

     

 

 

SCHEDULE 1.1 TO

MASTER DISTRIBUTION AGREEMENT

 

Form of Participation Agreement

PARTICIPATION AGREEMENT

 

Participation Agreement, dated _____, __(this “Agreement”), by and between the undersigned person or owner (“Customer”) which owns or has the right, by contract or law, to purchase goods and services for the establishments described on the attached Exhibit A (the “Customer Locations”) and Sysco ______(“Sysco”) on behalf of Sysco Corporation and certain of its operating subsidiaries and affiliated companies (individually, an “Operating Company” and collectively, “Operating Companies”), which together with Sysco Corporation, are referred to collectively as “Sysco”.

 

Recitals

 

A. Customer is a franchisee or licensee or a member of the group purchasing organization (“GPO”) known as or offered or managed by __________ (the “Master Organization”).

 

B. Sysco and the Master Organization have entered into a Master Distribution Agreement (the “MDA”).

 

C. The MDA contemplates that Sysco provide distribution services to the Master Organization and its GPO members or franchisees or licenses, including Customer, at Customer Locations it operates under pricing established by the Master Organization under the MDA and the terms and conditions provided herein, including specific delivery terms and other circumstances relating to requirements of Customer specific to the Customer Locations as may be agreed by Customer and Sysco (the “Location Specific Terms”).

 

D. Sysco, as a condition to providing distribution services to the Customer Locations, requires that Customer execute this Agreement, evidencing Customer’s agreement to the terms and conditions set forth in this Agreement, including any Location Specific Terms.

 

E. Customer and the Master Organization have entered into an agreement (the “Customer Agreement”) governing the terms under which Customer may purchase products through the Master Organization (“Products”) consisting of manufacturer and distributor label Product as well as Product bearing the logo, trademarks or trade dress of Master Organization or which are otherwise exclusively available through the Master Organization (“Proprietary Products”).

 

Therefore, in consideration of the recitals above and the mutual covenants in this Agreement, the sufficiency of which is acknowledged, Customer and Sysco agree as follows:

 

1. Binding Nature of Agreement. By his/her/its signature below, Customer specifically acknowledges and agrees: (A) that the distribution services Sysco provides to the

 

Schedule 1.1

 

     

 

 

Customer Locations are provided subject to the terms of the MDA, as the same may be modified pursuant to its terms upon agreement from time to time by and between Sysco and the Master Organization, and further subject to the Location Specific Terms; (B) that Sysco’s ability to sell Customer Proprietary Products is subject to Master Organization’s rights to direct Sysco to cease further distribution of Proprietary Products to Customer; (C) that Customer’s ability to participate in the purchasing program negotiated by Master Organization, which may involve certain contracted pricing with suppliers, as set forth in the MDA, is subject to Master Organization’s right to direct Sysco to cease further distribution to Customer under the terms of the MDA; (D) if Customer is a franchisee of Master Organization, that Customer’s ability to operate an establishment utilizing Master Organization’s trademarked concept is subject to Customer’s compliance with the Customer Agreement with the Master Organization.

 

2. Definition of Cost; Pricing and Earned Income. Customer agrees that, unless otherwise specified in the Location Specific Terms, the cost that shall be utilized in determining the sell price of Products distributed to the Subject Locations shall be as follows unless modified by agreement of the Master Organization and Sysco:

 

“The price to Customer for all Products sold under this Agreement (the “Sell Price”) will be calculated on the basis of Cost. Except for contract pricing extended to Sysco by a supplier for purchases by Customer, “Cost” is defined as the cost of the Product as shown on the invoice to the delivering Operating Company or, if there is an open purchase order issued by the delivering Operating Company for customary quantities of such Product and such Product is due to be received by such Operating Company prior to the first day of the pricing period for which the Cost and resulting Sell Price is being determined (“Eligible Open Purchase Order”), the price of the Product as set forth in such Eligible Open Purchase Order, plus, if the price on such invoice or Eligible Purchase Order, as the case may be, is not a delivered price, Applicable Freight. The invoice used to determine Cost will be the invoice issued to the delivering Operating Company from the supplier, including, without limitation, Sysco’s merchandising services affiliate, the Baugh Supply Chain Cooperative, Inc. and its regional member cooperatives (collectively, “BSCC”), as well as any other affiliate. Cost is not reduced by cash discounts for prompt payment available to Sysco, BSCC or the Operating Companies. Notwithstanding this definition, the price to Customer for certain products such as soft drink and cleaning chemical products (as specified by Sysco) shall be determined by the supplier of such products. In addition, the Master Organization, from time to time, may negotiate prices with suppliers of Products that, subject to the terms of the MDA, Operating Company shall utilize in lieu of “Cost” and some categories of Products may be subject to market pricing, as identified in the MDA.”

 

“‘Applicable Freight’ means a freight charge for delivering products to the delivering Operating Company. Applicable Freight charges may include: (i) common or contract carrier charges by any Supplier or a third party; (ii) common or carrier charges billed by Sysco’s freight management service(“FMS”), for third party carriage arranged by FMS; (iii) charges billed by FMS for shipments back hauled on trucks owned or leased by Sysco or its affiliates; and (iv) charges such as fuel surcharges, cross-dock charges, unloading and restacking charges, container charges, airfreight charges and other similar charges not included in any Supplier’s invoice cost that are required to bring Product into the delivering Operating Company’s warehouse. Applicable Freight for any Product will not exceed the rate charged by nationally recognized carriers operating in the same market for the same type of freight service and for the same quantity of Product.”

 

Schedule 1.1

 

     

 

 

Customer recognizes and agrees that Sysco shall be entitled to compensation for performance of merchandising or other services to or for the benefit of Suppliers as more specifically set forth below and that such compensation is not deducted from or otherwise offset against the Cost utilized in determining the Sell Price of Products:

 

“Sysco Corporation and its affiliates, including BSCC, perform value-added services beyond those typically provided by other distribution companies in the foodservice industry. These services include, but are not limited to, (i) supply chain services such as consolidation of Operating Company purchases from suppliers, management of supplier ordering processes, consolidation of payments by Operating Companies to suppliers, processing claims by Operating Companies for Product loss and shortages, advanced inventory management, freight consolidation and management and other services associated with management of the total supply chain, (ii) quality assurance and (iii) regional and national marketing and performance-based product marketing. To bring these supply chain efficiencies to our customers requires Sysco and its affiliates, including BSCC, to accept responsibility for management of certain business functions and expenses once borne by the supplier. There are also instances where Sysco and its affiliates, including BSCC, incur additional costs in order to generate savings when considering the entirety of the supply chain which is the case with activities such as redistribution, forward contracting, freight consolidation, and cross docking. Therefore, Sysco and its affiliates, including BSCC, may recover the costs of providing these services, may be compensated for these services and may retain any savings they may receive throughout the supply chain by utilizing their expertise, resources and capital, much of which is used to offset expenses already incurred. Sysco considers such cost recovery, compensation and retained savings to be earned income. Receipt of such cost recovery and earned income does not reduce Cost and does not diminish the commitment of Sysco and its affiliates, including BSCC, to provide competitive prices to their customers.”

 

3. Pricing, Delivery and Credit Terms. Unless otherwise set forth in the Location Specific Terms, the pricing of Products to be provided under this Agreement for the Customer Locations shall be established by the MDA (which generally applies an agreed margin or markup over the Cost of such Products as described in Section 2), as amended from time pursuant to its terms or as otherwise agreed between Sysco and Master Organization. In addition, delivery frequencies, credit terms and other supplemental and/or modified terms applicable to the Subject Locations are set forth in the credit application executed by Customer and provided to the delivering Operating Company (the “Credit Application”) or in the Location Specific Terms. Customer recognizes and agrees that the MDA permits Sysco to modify pricing terms in the event of material changes in economic conditions or if certain purchasing criteria, as referenced in the MDA, are not achieved, and agrees to be bound by any adjustments in the pricing terms permitted under the MDA and/or negotiated and agreed to by the Master Organization.

 

Schedule 1.1

 

     

 

 

4. Financial Reports. The continuing creditworthiness of Customer is of central importance to Sysco. In order to enable Sysco to monitor Customer’s financial condition, Customer will, if requested by Sysco, provide quarterly, annual or other financial statements (audited, if available) to Sysco consisting of an income statement, balance sheet, statement of cash flow and, if available, auditor’s opinion and supporting discussion notes. Sysco may request and Customer shall provide such further financial information from time to time, sufficient, in Sysco’s judgment, to enable Sysco to accurately assess Customer’s financial condition.

 

5. Termination.

 

(a) This Agreement shall remain in full force and effect until the expiration of the MDA unless this Agreement and Sysco’s obligation to provide distribution services hereunder to the Subject Locations is terminated:

 

(i) By Sysco upon the termination of the MDA by Sysco or by reason of circumstances permitting termination of the MDA, although not exercised by Sysco;

 

(ii) By Sysco upon the direction of the Master Organization;

 

(iii) By either party upon the termination of the Customer Agreement;

 

(iv) By either party upon (60) sixty days written notice to the other party for failure of the other party to comply with any material provision of this Agreement and the breaching party fails to cure such breach within such sixty (60) day cure period, unless, with respect to not more than one such failure, such failure is cured within such sixty (60) day period;

 

(v) By Sysco immediately upon written notice to Customer if Customer’s financial position deteriorates materially, as determined by Sysco in its sole judgment, or Sysco becomes aware of any circumstances that, in Sysco’s sole judgment, materially impacts Customer’s ability to meet its financial obligations under this Agreement; or

 

(b) If Customer fails to pay for any Products delivered to any Subject Locations within the approved payment terms established pursuant to the Credit Application or this Agreement, Sysco may or if any of the events described in clause (v) above occur with respect to Customer, Sysco shall be entitled to, immediately upon notice to Customer, condition future deliveries of Products to the Subject Locations upon more stringent credit and/or payment terms, such as, without limitation, shortened payment periods, cash on delivery, cash in advance, the receipt of satisfactory letters of credit and/or third party guaranties that guarantee payment to Sysco for such Products, and/or the pledging of collateral to secure such payment and, further, following five (5) days written notice to Customer, may withhold any future deliveries of Products to the Subject Locations until Sysco receives payment in full of the Sell Price with respect to such Products and any finance or late charges permitted under the Credit Application or this Agreement.

 

Schedule 1.1

 

     

 

 

6. Release. Customer agrees that Sysco’s ability to perform distribution services for Customer under this Agreement, is expressly contingent upon the Master Organization’s approval for Sysco to do so. Accordingly, Customer hereby releases Sysco, it affiliates, and each of their respective officers, employees, and directors from any and all losses, damages, or claims (“Claims”) that Customer may have or suffer as a result of (i) Sysco’s discontinuance of services to Customer as a result of express instructions from the Master Organization to cease such services or the termination of the MDA and (ii) Sysco’s sharing of information with the Master Organization concerning purchases by Operator, including, without limitation, Customer’s payment histories, and other similar matters relating to Customer’s membership in, or status as a franchisee or licensee of, the Master Organization. Customer further releases Sysco from any Claims arising from Sysco’s payment of allowances or other compensation to Master Organization or its designee, based, in whole or in part, upon sales of Product to Customer.

 

7. Confidentiality. Customer agrees to keep all terms of this Agreement, the MDA and related financial information (’‘Protected Information”) confidential, will use Protected Information solely to enable it to perform its obligations hereunder, and will not disclose any Protected Information concerning this Agreement to any person or entity without the prior express written consent of Sysco; provided, however, that Protected Information may be provided (i) by Customer to those of its employees who need such information to enable Customer to perform its obligations hereunder, (ii) by Customer to its auditors, consultants and advisors who agree to keep such information confidential or are otherwise bound to restrictions on disclosure, (iii) by Customer to Master Organization, and (iv) by Customer to any prospective purchasers of all or part of its business, provided that such prospective purchasers have executed and delivered a confidentiality agreement in form and substance approved by Sysco, which approval shall not unreasonably be withheld or delayed. Protected Information shall not include information which (x) is now or hereafter becomes part of the public domain or (y) was received by Customer from a third party under no obligation of confidentiality to Sysco. In the event that such disclosure is required by applicable law, regulation or court order, Customer agrees if reasonably practicable, to refrain from such disclosure until such time as Sysco has received written notice with regard to any required disclosure and Sysco has had a reasonable opportunity to contest the basis for disclosure and review the content of any disclosure proposed to be made to any person or entity.

 

8. Waiver of Jury Trial. Customer affirmatively waives its right to jury trial with respect to any disputes, claims or controversies of any kind whatsoever under this Agreement or the MDA.

 

9. Miscellaneous. This Agreement comprises the entire understanding of the parties as to the matters expressed herein, and this Agreement may be amended only in writing signed by each party. The waiver by either party of any instance of the other party’s noncompliance with any covenant, term, condition, obligation or responsibility herein shall not be deemed a waiver of subsequent instances. This Agreement shall be governed by the laws of the State of Texas, excluding any choice of law provisions. If any provision of this Agreement is held unenforceable, the unenforceability thereof shall not affect the remainder of this Agreement which shall remain in full force and effect and enforceable in accordance with its term.

 

Schedule I.I

 

     

 

 

Effective as of the date first above written.

 

Customer

 

   
   
By:    
Name:    
Title:    
     
Sysco  
     
By:    
Name:    
Title:    

 

Schedule 1.1

 

     

 

 

[Exhibits for Participation Agreement]

 

EXHIBIT A

 

Subject Locations

 

EXHIBIT B

 

Location Specific Terms (including Credit Terms)

 

Exhibits

 

     

 

 

SCHEDULE2 TO

MASTER DISTRIBUTION AGREEMENT

 

PRODUCT CATEGORIES AND CUSTOMER MARGINS

 

[**]

 

 

The Sell Price of fluid dairy Products delivered to Customer Locations where applicable state law prescribes the manner of determining the sales price for such Products shall, notwithstanding anything to the contrary elsewhere in this Agreement, be determined in accordance with such applicable law.

 

Schedule 2

 

     

 

 

Margin for Specialty Meats

 

[**]

 

Certain Dispensed Beverage Products

 

When a supplier of beverage Products (which may include BSCC) separates the charges for equipment and service (“E&S Charges”) from the cost of the Product and Customer chooses to utilize equipment and service, Sysco will add E&S Charges to the Cost of the Product prior to calculating the Sell Price. If an Operating Company provides equipment and/or service, a reasonable E&S Charge will be added to the Cost of the Product sold by that Operating Company. If a third party provides equipment and/or service, a ratable portion of the third party’s E&S Charge to Sysco will be added to the Cost of such beverage Products.

 

Schedule 2

 

     

 

 

SCHEDULE 3 TO

MASTER DISTRIBUTION AGREEMENT

 

MDA GENERAL POLICIES AND PROCEDURES

 

1. Customer Service Provided by Sysco

 

1.1 Corporate Service. The corporate Multi-Unit Account Department of Sysco Corporation (“Sysco Corporate”) will assign a Regional Vice President of Multi-unit Sales to be the primary contact for the Customer. In addition and if requested by Primary Customer, Sysco Corporate will assign appropriate members of its customer development team and its multi-unit systems team to assist Customer with Product information, sourcing, and pricing as well as e commerce and customer reporting.

 

1.2 Operating Company Service. The Operating Company servicing each Customer Location will assign an account executive or a customer service representative to service each Customer Location. The account executive or customer service representative will maintain contact with Customer Locations, on a mutually agreed basis, to review service requirements.

 

2. Information Services Provided by Sysco

 

2.1 Reports. Sysco provides Customer access to “Onelink”, a web based reporting tool that can be accessed using a PC browser and the Internet. Customer can build reports or use pre-defined reports to track purchases by category, by the delivering Operating Company, by Customer Location or by supplier. Customer can print reports or download data to use in spreadsheet and database applications.

If Primary Customer desires automated bulk data transfer, Sysco can provide Primary Customer purchase data in electronic format from Sysco’s standard flat file options. Standard data is made available via CD-ROM or FTP. The electronic formats include EDI ANSI X.12 or flat file in fixed width or delimited format.

 

If Primary Customer requests customized reports instead of or in addition to the standard Sysco reports, Sysco will use reasonable efforts to provide such reports. Primary Customer agrees to pay for any additional costs incurred by Sysco for the development of any customized reports or system enhancements.

 

It is Sysco’s practice to provide a Customer with one (1) National Identification Reference (“National I.D.”), to which servicing Operating Companies will tie the Customer Locations that they deliver for aggregate Customer reporting purposes. If Customer is a group purchasing organization (“GPO”) or franchisor, Sysco may be asked to tie Customer Locations to more than one National I.D. and thereby be asked to release data for a Customer Location to more than one entity if that Customer Location is a member of another GPO. In such event, Sysco will not support submission of purchase data to suppliers for the purpose of claiming rebates, allowances or total purchase volume of any Products if a Customer Location has already reported purchases of those same Products to such supplier under a purchasing program established by another GPO of which that Customer Location is a member.

 

Schedule 3

 

     

 

 

2.2 Electronic Order Entry. Sysco will provide either a personal computer software application such as the Sysco Account Manager (sometimes referred to as “SAM”) an internet ordering system or an internet order entry application utilizing a browser. Either option will enable the Customer Locations to directly place orders electronically with the servicing Operating Company. Any participating Customer Locations must provide, at their own cost, compatible hardware, Internet and network connections in order to utilize the software or browser application provided by Sysco.

 

2.3 Reporting to Third Parties. Upon Primary Customer’s written request, Sysco will provide purchasing information that is normally made available to Primary Customer to an agent representing Primary Customer for the purpose of information analysis, order placement or processing or supplier rebate application (a “Third Party Provider”). Sysco’s release of information to a Third Party Provider is subject to the following conditions:

 

(i) Sysco will only supply reporting information to one entity. If Primary Customer uses a Third Party Provider, such reporting information will be provided to such party and not to Primary Customer;

 

(ii) The information will only be made available in one of Sysco’s standard electronic formats or utilizing EDI ANSI X.12 standards;

 

(iii) All information sent or made available by Sysco to an authorized Third Party Provider is for the sole use of Customer. Selling, utilizing, or disclosing such information to anyone other than Customer is prohibited;

 

(iv) Prior to providing any such information to any such Third Party Provider, Sysco will require (A) Primary Customer to authorize such disclosure or access in writing and (B) the Third Party Provider to execute a confidentiality agreement restricting the disclosure of such information;

 

(v) If Sysco incurs additional costs as a result of Third Party Provider requirements, Primary Customer shall reimburse or shall cause the Third Party Provider to reimburse such costs; and

 

(vi) When Primary Customer designates a Third Party Provider to be a recipient of Customer’s data, Customer will look only to the Third Party Provider for all reporting and analysis of Customer’s purchases and Sysco will have no obligation to provide additional reporting under Section 2.1.

 

2.4 Reporting to Suppliers. Sysco will provide reporting to Primary Customer or the Third Party Provider in the manner set forth in this Agreement. Due to the added expense of multiple reporting and to concerns over maintaining confidentiality of Customer’s information, Sysco will not provide any Customer information or reporting directly to suppliers.

 

Schedule 3

 

     

 

 

3. Product Credit and Return Policy

 

One of the most significant issues in foodservice is food safety. Sysco goes to significant lengths to assure all Product is wholesome and complies with requirements established by the U.S. Department of Agriculture (“USDA”) or the U.S. Food and Drug Administration (’‘FDA”), including without limitation, applicable requirements under Hazard Analysis/Critical Control Point programs promulgated by USDA or FDA.

 

To assure that Customer receives high quality product, maintained at optimum conditions, the following guidelines will be enforced for Product that Customer requests to return to the delivering Operating Company after being delivered to a Customer Location. This does not limit any rights Customer may have to reject Product at time of receiving.

 

Time frame: Except for returns of the specific products noted below, all returns and credit requests must be made within these timelines:

 

Fresh meat, poultry, and perishable items   at time of delivery
Frozen Items   14 Days
All other items   14 days

 

Temperature Requirements: All perishable items must be maintained at the following temperatures:

 

Frozen   0 to 20 degrees
Refrigerated   30 to 35 degrees

 

Packaging: Products must be returned in their original packaging free of markings, damage, or signs of temperature excursions or other duress.

 

Specific Product Return Guidelines:

 

Fresh Seafood - returnable only at time of delivery
Produce - returnable only at time of delivery
Dairy - returnable only at time of delivery
Fresh Meat and Poultry - returnable at time of delivery
- must be in original sealed container with no signs of temperature abuse
Cleaning Chemicals - must be in original, sealed container and return must be authorized by Sysco representative.
Special order items Direct - returnable only at time of delivery due to quality problems or damage. Authorization by Sysco representative required.
Drop Shipments Customer must contact Sysco representative within 24 hours of receipt.

 

Schedule 3

 

     

 

 

SCHEDULE4 TO

MASTER DISTRIBUTION AGREEMENT

 

Customer Representations; Minimum Orders; Delivery Fee for Certain Deliveries

 

Customer Representations

 

This Agreement was prepared and based on the following representations which relate to all Customer Locations and are either aggregate totals or averages, as indicated.

 

1. Customer representations as to certain operational assumptions:

 

[**]

 

2. Each Customer will purchase not less than eighty percent (80%) by dollar volume of each of its Customer Locations’ purchase requirements for each category of Products from Sysco under this Agreement.

 

3. Neither Primary Customer nor any Related Customer will require Sysco to provide donations in any form, including, without limitation, free goods, cash or use of Sysco owned equipment, for any event or cause, including without limitation, trade show events, meetings or conferences.

 

Sysco reserves the right to modify the Agreement as provided in the Agreement if above assumptions are not achieved.

 

Schedule 4

 

     
 

 

Minimum Order; Small Order Delivery Fee Surcharges.

 

Minimum Order $[**]*

 

This is the smallest delivery Sysco is obligated make to a Customer Location. The delivering Operating Company may, at its sole discretion, elect to make deliveries in amounts less than the Minimum Order. In such event, the delivery shall be subject to a delivery surcharge mutually agreed upon between the Operating Company and the affected Customer Location.

 

For delivery of orders less than $[**]*, the delivering Operating Company will determine a delivery fee from the following table and add it to the invoice covering such delivery:

 

Order Size* Small Order Surcharge
[**] [**]

 

* Commencing with the first anniversary of the Effective Date and each anniversary thereafter, the indicated range or amount will be increased by an amount equal to [**] percent ([**]%) from the most recent range or amount then in effect.

 

Schedule 4

 

     
 

 

SCHEDULE 6.7 TO

MASTER DISTRIBUTION AGREEMENT

 

FUEL COST SURCHARGE

 

Due to the cost volatility of diesel fuel, a fuel surcharge will be added to each delivery invoice if the Average WSJ Index Value (defined below) exceeds the Base Range. The surcharge will be determined using the matrix below and will be based upon the diesel fuel price published in the Wall Street Journal for diesel fuel [**] S. NY Harbor low sulphur price (the “WSJ Index Value”), which does not include any state or local taxes.

 

[**]

 

The average of the WSJ Index Values published during the first two (2) months of each calendar quarter (each, an “Adjustment Determination Period”) will be calculated (the “Average WSJ Index Value”). The Average WSJ Index Value thus computed will be referenced to the table to determine the applicable surcharge. The surcharge will be increased or decreased as necessary, to take effect as of the commencement of the following calendar quarter but shall never be reduced to less than zero dollars ($0.00). Although the chart above stops at a specified level of Average WSJ Index Value, the fuel cost adjustment continues indefinitely with the surcharge increasing by $1.00 for every increase of $.10 in the Average WSJ Index Value.

 

 

 

Schedule 6.7

 

     
 

 

SCHEDULE 6.8 TO

MASTER DISTRIBUTION AGREEMENT

A. Administrative Allowance

 

Sysco agrees to pay to Primary Customer an allowance of [**]of the total Sell Prices for all Products delivered to Customer Locations during each quarter, which shall be paid to Primary Customer’s corporate office by the 30th of the month following the close of the period for which the allowance is payable (the “Allowance”). The Allowance will not be paid on any sales of Controlled Price Products, Products priced on a fee per unit over Cost or other Products on which the Allowance is not payable under any other provisions of this Agreement.

B. Weekly Purchase Incentive per OPCO

 

The Operating Companies will offer an average weekly purchase incentive allowance to Primary Customer (“Average Delivery Incentive”) as provided in the schedule below. Each Customer Location will be qualified for the bracket allowance based on the average weekly purchases by Sysco Operating Company, calculated on the basis of all deliveries to that Customer Location over a period of three (3) months. Sales of Controlled Price Products will count toward determining the average weekly purchases, but no allowances will be paid on such sales or on sale of any Products priced on a fee per unit over Cost. The dollar amount of the Average Weekly Purchases by Sysco OPCO is equal to the applicable percentage, multiplied by the Sell Price of all Products delivered during such period (other than Controlled Price Products and any Products priced on a fee per unit over Cost).

 

Average Delivery Incentives will only be paid on invoices that have been paid in accordance with the payment terms specified in or determined in accordance with Section I 0.

 

[**]

 

Customer represents and warrants that payment of the Average Delivery Incentives is not prohibited by law or by any contract to which Customer is bound. Customer shall defend, indemnify and hold harmless Sysco from any loss, liability or expense (including reasonable attorney’s fees) resulting from a breach of this representation and warranty.

 

C. Annual Conference Fund MMG received [**] for 2010. 2011 will be paid by Metro as the old agreement states. 2012 will be paid out by Sysco Corporate and fair shared to the participating Sysco houses.

 

Sysco will offer an annual conference fund (“The Annual Conference Fund”) to Primary Customer in an amount of an amount of $[**] or every Customer Location that, at the time of calculation of the Annual Conference Fund: (i) is in operation for a full year, (ii) is in compliance with all its credit terms with Sysco or any operating Company, (iii) current on all its payment obligations and (iv) has not breached any agreement it has with Sysco or any Operating Company. The Annual Conference Fund will be paid to Primary Customer’s corporate office within sixty (60) days after each anniversary of this Agreement.

 

 

     
 

 

Confidential Material Omitted – To be filed separately with the Securities and Exchange Commission upon request. Double asterisks denote omissions.

 

AMENDMENT TO MASTER DISTRIBUTION AGREEMENT

 

This Amendment to Master Distribution Agreement (this “Amendment”), dated the latter of the two dates under the signatures below (the “Amendment Effective Date”), is entered into between Muscle Maker Franchising, LLC (“Primary Customer”) and Sysco Corporation (“Syl·co”) and amends that certain Master Distribution Agreement, dated JU11e I, 2011, as amended to date (the “Agreement”), between the parties. All capitalized terms not otherwise defined herein have the same meanings ascribed to them in the Agreement.

 

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

I. Section 9.2.4 is hereby amended and restated in its entirety to read as set forth below:

 

9.2.4. Minimum Movement - No delivering Operating Company will have an obligation to ca.ny a Proprietary Product if all Customer Locations purchasing from such Operating Company purchase less than [**] cases per week of that Product and/or the sales volume of such Proprietary Product in such Operating Company results in less than [**] turns of the inventory of such Product in any [**] month period; provided however, up to [**] specified Proprietary Products, as mutually detennined by Primary Customer and the applicable delivering Operating Company, will be subject to a minimum weekly case movement requirementof [**] cases per week; and provided further, that with respect to the Sysco Metro New York and Sysco Philadelphia delivering Operating Companies, the specified Proprietary Products set forth in the table below will not be subject to the minimum weekly case movement requirements set forth in this Section 9.2.4:

 

[**]

; and provided further, that with respect to all other delivering Operating Companies, the specified Proprietary Products set forth in the table below will not be subject to the minimum weekly case movement requirements set forth in this Section 9.2.4:

 

[**]

 

     
 

 

IN WITNESS WHEREOF, the parties hereto havecaused this Amendment to be executed as of the Amendment Effective Date.

 

SYSCO CORPORATION   MUSCLE MAKER FRANCHISING, LLC
         
By: /s/ Kim Doherty   By: /s/ Robert Morgan
Title: Vice President, Sales :   Title CEO
Date: Oct 17/17   Date: 10-17-2017

 

2
 

 

 

Exhibit 21.1 List of Subsidiaries

 

Muscle Maker Development, LLC- State of Nevada  
   
Muscle Maker Corp., LLC – State of Nevada  
   
Muscle Maker USA, Inc. – State of Texas  

 

     
     

 

 

Independent Registered Public Accounting Firm’s Consent

 

We consent to the inclusion in this Registration Statement of Muscle Maker, Inc. and Subsidiaries on Form S-1, of our report, which includes an explanatory paragraph as to the Company’s ability to continue as a going concern, dated August 20, 2019, except for Note 19, as to which the date is November 26, 2019, with respect to our audits of the consolidated financial statements of Muscle Maker, Inc. and Subsidiaries as of December 31, 2018 and 2017 and for each of the two years in the period ended December 31, 2018, which report appears in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our Firm under the heading “Experts” in such Prospectus.

 

/s/ Marcum llp  
   
Marcum llp  
Melville, NY  
November 26, 2019