Sadot Group Inc. 10-K

ITEM 1. 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, 2020, Muscle Maker and our subsidiaries and franchisees operated thirty-two Muscle Maker Grill restaurants located in 15 states and Kuwait, sixteen of which are owned and operated by Muscle Maker, and sixteen are franchise restaurants. Our company owned and operated restaurants generated company restaurant revenue of $3,672,944 and $3,466,553 for the years ended December 31, 2020 and 2019, respectively. For the years ended December 31, 2020 and 2019, our total revenues which includes company restaurant sales, royalty, franchise fee, rebate revenue derived from franchisees and other revenues were $4,473,447 and $4,959,005, respectively. As of December 31, 2020, we had an aggregate accumulated deficit of $63,193,707. We anticipate that we will continue to report losses and negative cash flow. As a result of the net loss and cash flow deficit for the year ended December 31, 2020 and other factors, our independent registered public accountants issued an audit opinion with respect to our financial statements for the year ended December 31, 2020 that indicated that there is a substantial doubt about our ability to continue as a going concern. We are the owner of the trade name and service mark Muscle Maker Grill®, Healthy Joe’s, MMG Burger Bar, Meal Plan AF and other trademarks and intellectual property we use in connection with the operation of Muscle Maker Grill® restaurants. We license the right to use the Muscle Maker Grill® and Healthy Joe’s trademarks and intellectual property to our wholly-owned subsidiaries, Muscle Maker Development and Muscle Maker Corp., and to further sublicense them to our franchisees for use in connection with Muscle Maker Grill® and Healthy Joe’s restaurants. Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the fourth quarter due to reduced November and December traffic and higher traffic in the first, second, and third quarters. In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout the United States. In response to the COVID-19 outbreak, “shelter in place” orders and other public health measures were implemented across much of the United States and continue in limited fashion across the country. The COVID-19 global pandemic continues to rapidly evolve. The Company is continually monitoring the outbreak of COVID-19 and the related business and travel restrictions and changes to behavior intended to reduce its spread, and its impact on operations, financial position, cash flows, inventory, supply chains, purchasing trends, customer payments, and the industry in general, in addition to the impact on its employees. The pandemic has resulted in a negative impact on the Company’s operations during the year ended December 31, 2020. As a result of the pandemic the Company has limited its operations through limiting hours of operations, reduced its capacity and utilized a delivery only concept as mandated by each state and has temporarily closed five of our Company owned locations during the second quarter of 2020. In addition, the Company opened two new locations at the end of the third quarter on university campuses that were subsequently temporarily closed due to the impact of COVID-19 on students returning to campus. As of the date of the filing of this report the Company re-opened five of the seven temporarily closed locations and permanently closed two underperforming locations. Commencing in the second quarter of 2020 the Company provided royalty relief to its franchisees by deferring half of their royalties earned by the Company through July 2020. The Company has not attempted to collect the deferred royalties as of the date of the filing of this report as we provide time for the franchise locations to fully recover to pre-pandemic conditions. The executive team deferred a portion of their salaries in 2020 and some members continue to defer salary as of the date of the filing of this report. In addition, various franchisee locations had to take similar actions by temporarily closing their locations and limiting their operations as mandated by each state. As of the date of the filing of this report seven of the franchise locations have permanently closed. Due to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic and its impact on the Company’s operations and liquidity is uncertain as of the date of this report. While there could ultimately be an additional material impact on operations and liquidity of the Company, the full impact could not be determined, as of the date of this report. 4 Our Industry We operate within the Limited-Service Restaurant, or LSR, segment, of the United States restaurant industry, which includes quick service restaurants, or QSR, and fast-casual restaurants. We offer fast-casual quality food combined with quick-service speed, convenience and value across multiple dayparts. We believe our differentiated, high-quality healthy-inspired menu delivers great value all day, every day and positions us to compete against both QSR and fast-casual concepts. We expect that the upward trend towards healthier eating will attract and increase consumer demand for fresh and hand-prepared dishes, which may lead to a positive impact on our sales. Our Strategy While our 2020 business plan and the restaurant industry in general was interrupted and modified due to Covid-19, we re-positioned the Company to better support an anticipated change in the restaurant industry. Our revised strategy continues to focus on serving “healthier for you” meals in non-traditional locations and methods while emphasizing a shift into delivery, ghost kitchens, direct to consumer meal prep and strategic acquisitions. We believe the restaurant industry has experienced a change in the way consumers interact with brands. We believe consumers have become more dependent on new technologies, unique locations and new methodologies to access restaurants. We believe we have positioned the company in a unique way for future growth in a post-covid environment where consumers rely on new methods to order and access restaurant meals such as third-party delivery services, ghost kitchens and direct to consumer shipments of meal plans. In implementing our revised business plan, we plan to pursue the following strategies. Expand Our System-Wide Restaurant Base . Our strategy focuses on non-traditional locations. We believe these locations offer somewhat of a buffer against macro-economic forces. These locations tend to be destination locations, captured audiences or inside other larger venues. Our current focus is on military bases, college campuses and ghost kitchens while also increasing our consumer reach through direct to consumer meal plan delivery via UPS or customer pickup. ● Military Bases: As of December 31, 2020, we had 6 open military locations. These locations are mostly in food court settings on military bases. These tend to be captured audiences but also support visitors, base personnel and military member families. ● College Campuses: As of December 31, 2020, we have built 4 college campus locations with the Northern Virginia Community College System. These locations were built in anticipation of students attending classes post-covid and the intent is to re-open these locations in the summer or fall semester of 2021. In addition to these four locations, we also have one university location under agreement at the Texas Tech Medical Center in El Paso Texas. This location is currently in the construction phase. ● Ghost Kitchens: As of December 31, 2020, we had five free standing ghost kitchen locations open in Chicago and Philadelphia. We currently have five additional locations under agreement for New York City, Miami and Providence. The ghost kitchens run multiple brands out of one location which include Muscle Maker Grill, Healthy Joes, Meal Plan AF, Muscle Maker Burger Bar, Bowls Deep, Wrap It Up, Salad Vibes and other concepts. Each location can support 6-8 different concepts all running out of one ghost kitchen. This creates the appearance of 6-8 different restaurants to consumers for ordering various entrees but leverages ingredients and infrastructure across all concepts to reduce the number of ingredients needed for each concept. ● In addition, in 2020, the Company purchased 2 existing franchise locations and is in the process of launching additional ghost kitchens out of these locations in addition to Muscle Maker Grill offerings. ● For year ended 2020, we opened six new company-operated restaurants of which five locations are delivery only ghost kitchen locations. In addition, we purchased two franchise locations that are now company-operated. 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 only alternative proteins, recipes and other healthy-inspired ingredients. Our marketing and operations teams collaborate to ensure that the items developed in our test stores can be executed to our high standards in our restaurants with the speed and value that our customers have come to expect. To provide added variety, from time to time we introduce limited time offerings such as our grass-fed hamburger bar menu, smoothie of the month program, keto your way menu, healthy tacos and other seasonal items. Some of these items have been permanently added to the menu. In November 2019, we opened our first Healthy Joe’s concept. This was formerly a Muscle Maker Grill location located in Tribeca New York that was converted into the Healthy Joe’s concept. Healthy Joe’s focuses on healthier for your recipes and products featuring a different menu than a typical Muscle Maker Grill. The concept is designed to attract a wider audience and features menu items such as wild caught salmon, fresh brewed iced teas, fresh lemonades, locally baked breads, house made avocado smash, fruits, nuts and other new trending menu items. The menu features hot topped bowls, salads and oven toasted sandwiches. All protein, cheese and sauces are run though a 500-degree oven to add a unique approach to serving our products. Due to the temporary Covid related closure of this new concept in 2020, we plan on relaunching the grand opening in 2021 as the Covid related restrictions are relaxed in New York City. The Company is in the process of expanding the menu offerings in most of our non-military company owned and operated locations through ghost kitchen concepts within the existing Muscle Maker Grill locations. This allows company locations to leverage existing facilities and labor to launch unique brands without the added infrastructure costs normally associated with opening a new concept. For example, in our Chelsea Muscle Maker Grill location, we also run several ghost kitchen concepts out of the same facility. These ghost kitchen concepts include Healthy Joe’s and Muscle Maker Burger Bar. ● Attract New Customers Through Expanded Brand Awareness : Our goal is to attract new customers as the Muscle Maker Grill brand becomes more widely known due to new restaurant openings and marketing efforts focused on broadening the reach and appeal of our brand. The goal of our marketing efforts is to have consumers become more familiar with Muscle Maker Grill as we continue to penetrate our markets, which we believe will benefit our existing restaurant base. Our marketing strategy centers on our “Great Food with Your Health in Mind” campaign, which highlights the desirability of healthy-inspired food and in-house made or proprietary recipe quality of our food. We utilize various marketing techniques including email, text, social media, print, influencers, press releases and local store marketing. We believe the restaurant industry has changed over the past year and consumer preferences have shifted towards an emphasis on convenience, speed and mobility in a safe environment. This has led to an increase in home delivery and direct to consumer meal prep/plan offerings. We believe Muscle Maker Grill has the ability to adjust our business strategy to accommodate these consumer trends as we are not locked in to extensive four wall location leases and are able to transform the business to meet consumer needs. In 2020, the company expanded its delivery services through third-party delivery companies such as Uber Eats, GrubHub, DoorDash, Seamless and others. 5 ● Continue to Grow Dayparts: We currently have multiple dayparts and segments where revenue is generated in our restaurants. These dayparts and segments include: lunch, dinner, catering, smoothies/protein shakes and meal prep/plans in all of our locations, and breakfast in select locations. We expect to drive growth across our dayparts through enhanced menu offerings, innovative merchandising and marketing campaigns. We plan to continue introducing and marketing limited time offers to increase occasions across our dayparts as well as to educate customers on our lunch and dinner offerings. Muscle Maker Grill has the unique opportunity to grow in the pre-packaged, portion-controlled meal prep/plan category. Currently, we offer pre-portioned and packaged meal prep/plans for consumers who want to specifically plan their weekly meals for dietary or nutritional needs. These meal plans can be delivered to a consumer’s home or picked up at each restaurant location. Third party delivery services such as Uber Eats, Grub Hub, DoorDash, Seamless and others offer an expansion beyond the four walls of our restaurants and represents a growing segment of our overall revenue. On November 11, 2020, the Company announced an agreement with Happy Meal Prep to launch an online meal plan/prep direct to consumer mail delivery service. This agreement allows Muscle Maker Grill to mail pre-made, ready to eat meals direct to consumers within a 250-mile radius around specific locations. Consumers can currently select from over 40 meal prep options. The company plans to expand the network of locations offering direct to consumer meal plan shipping throughout 2020 while also emphasizing meal prep in a more significant manner in 2020. The company operates this program under the musclemakerprep.com website. Our Strengths Iconic and Unique Concept: We provide guests healthy-inspired versions of mainstream-favorite dishes that are intended to taste great, in our effort to make it convenient, affordable and enjoyable to eat healthier. Our diverse menu was created for everyone – fitness enthusiasts, those starting their journey to a healthier lifestyle, and people trying to eat better while on-the-go. We are focused on expanding our presence within new and existing markets by continuing to add franchise partners to our system and increasing the number of corporate-owned locations. Our corporate-owned restaurants will focus on an expansion in non-traditional locations such as military bases, universities and ghost kitchens while also offering direct to consumer pre-made meal prep/plan offerings to consumers within a 250 mile radius around certain locations. We believe our concept is a unique fit with the military’s “Operation Live Well” campaign and a focus on healthier eating habits. We believe ghost kitchens offer a unique way to expand the brand into new and existing markets with lower capital costs yet provide the ability to make rapid changes to fit consumer needs. We believe consumers are looking for alternate ways to interact with restaurants and receive meals. Using non-traditional locations, third party delivery, ghost kitchens and direct to consumer meal plans offers consumers multiple choices on how to access Muscle Maker Grill concepts. 6 Innovative, Healthier Menu : Providing “Great Food with Your Health in Mind,” Muscle Maker Grill’s menu features items with grass-fed steak, all-natural chicken, lean turkey and plant-based products as well as options that satisfy all dietary preferences – from the carb-free consumer to guests following gluten-free or vegetarian diets. Muscle Maker Grill does not sacrifice taste to serve healthy-inspired options. We boast superfoods such as avocado, kale, quinoa, broccoli, romaine and spinach, and use only healthy-inspired carbohydrate options such as cauliflower or brown rice and whole wheat pasta. We develop and source proprietary sauces and fat free or zero-carb dressings to enhance our unique flavor profiles. Our open style kitchen allows guests to experience our preparation and cooking methods such as an open flame grill and sauté. In addition to our healthy-inspired and diverse food platform, Muscle Maker Grill offers 100% real fruit smoothies, boosters and proprietary protein shakes as well as retail supplements. Muscle Maker Grill prides itself on making healthy-inspired versions of the guest’s favorite food, giving them easy access to the food they seek at our restaurants. This means catering to an array of healthier eating lifestyles. For over 20 years Muscle Maker Grill has been providing food to gluten-free diners, low-carbohydrate consumers and vegetarians. We offer over 30 versions of salads, wraps, bowls, sandwiches and flatbreads. Cook to Order Preparation: We work to provide our guests their meals prepared in less time than a typical fast casual restaurant. While our service time may be slightly higher than the QSR fast casual segment, it fits well within the range of the fast-casual segment. Daypart Mix and Revenue Streams: Standard operating hours for a Muscle Maker Grill are from 10:30 AM to 8:30 PM, Monday through Friday, 11:00 AM to 6:00 PM, Saturday and Sunday. However, many of our locations are closed on Sunday. Our daypart mix is typical to the QSR fast casual segment which is 5% pre-lunch, 45% lunch, 35% dinner and 15% late evening. We have multiple revenue streams including: dine-in, take-out, delivery, catering, meal plans and retail. Attractive Price Point and Perceived Value: Muscle Maker Grill offers meals with free ‘power sides’ beginning at $8.99 per meal, using only high quality ingredients such as grass-fed beef, all-natural chicken, whole wheat pastas, brown rice and a power blend of kale, romaine and spinach. Our cook to order method, speed of service, hospitality and the experience of our exhibition style kitchen creates a great value perception for our customers. Meal Plan meals begin at $6.99 per meal, which we believe make them not only convenient but affordable too. Delivery: A significant differentiator is that Muscle Maker Grill offers delivery at many locations nation-wide. Delivery is an option through our online ordering platform making it easy and convenient for our guests. Delivery percentages range from 10% up to 75% of sales in our corporate locations. We strongly believe the delivery segment will continue to grow as our core demographic has demonstrated the need for online ordering and delivery versus dine-in and take-out. We and our franchise owners leverage employees for local delivery but also uses third party services such as Uber Eats, GrubHub, DoorDash, Seamless and others to fulfill delivery orders. Stand alone ghost kitchen locations are 100% delivery. Catering: Our diverse menu items are also offered through our catering program making it easy and affordable to feed a large group. Our boxed lunch program, which includes a wrap, salad, or entrée, a side and a drink for a set price is available within schools and other organizations. Meal Prep/Plans: To make healthy-inspired eating even easier, Muscle Maker Grill’s healthy-inspired nutritionally focused menu items are available through our Meal Prep/Plan program, allowing pre-orders of meals via phone, online or in-store, available for pick up or delivered right to their door. Available as five, 10, 15 or 20 meals, guests can choose from over 40 Muscle Maker Grill menu items for each meal. With the partnership with Happy Meal Prep, Muscle Maker Grill is now able to ship meals direct to consumers within a 250-mile radius of participating locations. Retail: All Muscle Maker Grill locations participate in our retail merchandising and supplement program. This is a unique revenue stream specific to the Muscle Maker Grill brand and is atypical in the QSR fast casual segment. Guests can purchase our propriety protein in bulk, supplements, boosters, protein and meal replacement bars and cookies. This program gives our guests the opportunity to manage their healthy lifestyle beyond meals they consume at our locations. 7 Our Properties Rent Structure: Our restaurants are typically in-line or food court locations. A typical restaurant generally ranges from 1,200 to 2,500 square feet with seating for approximately 40 people. Our leases for company-operated locations generally have terms of 10 years, with one or two renewal terms of five years. Restaurant leases provide for a specified annual rent, and some leases call for additional or contingent rent based on revenue above specified levels. Generally, our leases are “net leases” that require us to pay a pro rata share of taxes, insurance and maintenance costs. New leases for our non-traditional locations usually have rent calculated as a percentage of net sales and have terms of 10 years. We do not guarantee performance or have any liability regarding franchise location leases. Stand-alone ghost kitchen locations have short term leases usually in 1 year duration with several renewal options. System-Wide Restaurant Counts: As of December 31, 2020, our restaurant system consisted of 32 restaurants comprised of sixteen company-operated restaurants and sixteen franchised restaurants located in California, Georgia, Illinois, Maryland, New Jersey, New York, North Carolina, Oklahoma, Pennsylvania, Texas, Virginia, Washington, Rhode Island and Kuwait. In addition, the Company built four new location on university campuses but due to Covid-19 restrictions have not yet open these locations but incurred expenses during the twelve months ended December 31, 2021 Site Selection Process: We consider the location of a restaurant to be a critical variable in its long-term success, and as such, we devote significant effort to the investigation and evaluation of potential restaurant locations. Our in-house management team has extensive experience developing hundreds of locations for various brands. We use a combination of our in-house team and outside real estate consultants to locate, evaluate and negotiate new sites using various criteria including demographic characteristics, daytime population thresholds and traffic patterns, along with the potential visibility of, and accessibility to, the restaurant. The process for selecting locations incorporates management’s and franchisee’s experience and expertise and includes data collection and analysis. Additionally, we use information and intelligence gathered from managers and other restaurant personnel that live in or near the neighborhoods we are considering. A typical Muscle Maker Grill may be free standing or located in malls, airports, gyms, strip shopping centers, health clubs, military bases, non-traditional or highly concentrated business and residential demographic areas. Customers order their food at the counter and food servers deliver the food to the appropriate table. Based on our experience and results, we are currently focused on developing inline sites for franchising and non-traditional locations such as military bases for company-operated locations. Stand-alone ghost kitchen locations offer a unique opportunity to expand the brand into new markets with lower build-out costs than a typical Muscle Maker Grill location. These locations are usually located away from high rent areas where a typical consumer traffic pattern is present. These locations rely on a delivery radius and consumer orders are placed using third party delivery apps. As long as the delivery radius covers densely populated areas for both business and residential areas, we consider the location to be in an attractive location where we can reach consumers with delivery. Direct to consumer meal prep/plan locations can either be through existing Muscle Maker Grill locations or can be set up like a commissary where meals are prepared in a kitchen space not open to consumer traffic. These locations can be in any area as long as pick up service via UPS or Fedex is available. This allows the company to build out locations in favorable rent situations while being able to mail meal prep/plans direct to consumers within a 250 mile radius. Our Restaurant Design After identifying a lease site, we commence our restaurant buildout. Our typical restaurant is an inline retail space or food court that ranges in size from 1,200 to 2,500 square feet. Our restaurants are characterized by a unique exterior and interior design, color schemes, and layout, including specially designed decor and furnishings. Restaurant interiors incorporate modern designs and rich colors in an effort to provide a clean and inviting environment and fun, family-friendly atmosphere. Each restaurant is designed in accordance with plans we develop; and constructed with a similar design motif and trade dress. Restaurants are generally located near other business establishments that will attract customers who desire healthier food at fair prices served in a casual, fun environment. Our new restaurants are typically inline or food court buildouts. We estimate that each inline or food court buildout of a restaurant will require an average total cash investment of approximately $200,000 to $350,000 net of tenant allowances but these costs can vary depending upon the location and requirements of specific municipalities or landlords. On average, it takes us approximately four to six months from identification of the specific site to opening the restaurant. In order to maintain consistency of food and customer service, as well as our colorful, bright and contemporary restaurant environment, we have set processes and timelines to follow for all restaurant openings. 8 Our restaurants are built-out in approximately 10 weeks and the development and construction of our new sites is the responsibility of our Development Department. Real estate managers are responsible for locating and leasing potential restaurant sites. Construction managers are then responsible for building the restaurants, and several staff members manage purchasing, budgeting, scheduling and other related administrative functions. We leverage in-house personnel as well as consultants and independent contractors in the real estate, design and construction process. Stand-alone ghost kitchens range in size from 200 to 300 square feet. These locations are not open to the public and rely solely on third party delivery to access consumers. The total cash investment for a stand-alone ghost kitchen ranges from $50,000 to $100,000 depending on what equipment is required. There is limited leasehold improvements and the equipment is modular in general. This allows the company to reduce its risk in the event a particular location isn’t working as we can simply move the equipment to a new location and not have leasehold improvements left behind. Ghost kitchens have no consumer dining areas, no bathrooms, no furniture, etc which keeps the cost of buildout to a minimum. Our Restaurant Management and Operations Service: We are extremely focused on customer service. We aim to provide fast, friendly service on a solid foundation of dedicated, driven team members and managers. Our cashiers are trained on the menu items we offer and provide customers thoughtful suggestions to enhance the ordering process. Our team members and managers are responsible for our dining room environment, personally visiting tables to ensure every customer’s satisfaction. In our non-food court locations, meals are brought to the customers table using actual dishes and customers are free to leave their dishes when finished as team members clear and clean tables as guests leave the restaurant. Operations: We intend to measure the execution of our system standards within each restaurant through an audit program for quality, service and cleanliness. The goal is to conduct these audits quarterly and may be more or less frequent based upon restaurant performance. Additionally, we have food safety and quality assurance programs designed to maintain the highest standards for food and food preparation procedures used by both company-operated and franchised restaurants. Managers and Team Members: Each of our restaurants typically has a general manager, and shift leaders. At each location there are between six and 10 total team members who prepare our food fresh daily and provide customer service. We are selective in our hiring processes, aiming to staff our restaurants with team members that are friendly, customer-focused, and driven to provide high-quality products. Our team members are cross-trained in several disciplines to maximize depth of competency and efficiency in critical restaurant functions. Stand alone ghost kitchen locations typically staff 1-2 employees at any time and are managed by personnel who also oversee multiple locations. Training: The majority of our company-operated restaurant management staff is comprised of former team members who have advanced along the Muscle Maker Grill career path. Skilled team members who display leadership qualities are encouraged to enter the team leader training program. Successive steps along the management path add increasing levels of duties and responsibilities. Our Franchisee training generally consists of 10 to 14 days in a certified training location, and an additional seven to 10 days post opening training. Our operational team members provide consistent, ongoing training through follow up restaurant visits, inspections, or email or phone correspondences. Our Franchise Program Overview: We use a franchising strategy to increase new restaurant growth in certain United States and international markets, leveraging the ownership of entrepreneurs with specific local market expertise and requiring a relatively minimal capital commitment by us. We believe the franchise revenue generated from our franchise base has historically served as an important source of stable and recurring cash flows to us and, as such, we plan to expand our base of franchised restaurants. In existing markets, we encourage growth from current franchisees. In our expansion markets, we seek highly qualified and experienced new franchisees for multi-unit development opportunities. We seek franchisees of successful, non-competitive brands operating in our expansion markets. Through strategic networking and participation in select franchise conferences, we aim to identify highly-qualified prospects. Additionally, we market our franchise opportunities with the support of a franchising section on our website and printed brochures. Franchise Owner Support: We believe creating a foundation of initial and on-going support is important to future success for both our franchisees and our brand. 9 We have a mandatory training program that was designed to ensure that our franchise owners and their managers are equipped with the knowledge and skills necessary to position themselves for success. The program consists of hands-on training in the operation and management of the restaurant. Training is conducted by a general training manager who has been certified by us for training. Instructional materials for the initial training program include our operations manual, crew training system, wall charts, job aids, recipe books, product build cards, management training materials, food safety book, videos and other materials we may create from time to time. Training must be successfully completed before a trainee can be assigned to a restaurant as a manager. We also provide numerous opportunities for communication and shared feedback between us and franchise owners. Currently, we communicate on a frequent basis through email and system wide conference calls allowing for questions and answers with all franchisees. In addition, our operations and marketing teams conduct phone calls and/or on-site visits on a frequent basis with franchisees on current operational changes, new products, revenue generating ideas, cost savings, and local store marketing. Franchise Arrangements: At December 31, 2020, Muscle Maker Development franchises the operation of a total of 16 Muscle Maker Grill restaurants. The franchise agreements currently: ● Have terms for 15 years, with termination dates ranging from 2023 until 2034. These agreements are generally renewable for terms ranging from 5 to 10 years. ● 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. During 2019 and continuing through 2020, we have undertaken an extensive review of the terms and conditions of our franchise relationships and have recently finalized the terms of our revised standard franchise agreement and multi-unit development agreement which we intend to govern the relationship between Muscle Maker Development and its new franchisees. Under this franchise agreement: ● 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 Make 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. 10 ● 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. ● We have historically required our franchisees to pay a software license fee of $3,500. However as of July 2019, Muscle Maker has discontinued this arrangement. ● 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. Area Representative Agreements: Pursuant to our area representative agreements, the area representatives will identify and refer prospective franchisee candidates to us, provide franchisees with our site selection criteria and assist franchisees to complete a site review package, and will advise franchisees concerning our standards and specifications and make on-site visits, but we retain control of all decision-making authority relative to the franchisees, including franchisee approval, site location approval and determination whether franchisees are in compliance with their franchise agreements. Area representative agreements are generally for a term of 15 years, in consideration for which we generally compensate area representatives with 1% of net sales of the franchises that are under the area representative for the 15-year term. 11 Our Marketing and Advertising We promote our restaurants and products through multiple advertising campaigns. The campaigns aim to deliver our message of fresh and healthy-inspired product offerings. The campaign emphasizes our points of differentiation, from our fresh ingredients and in-house preparation, to the preparation of our healthy inspired meals. We use multiple marketing channels, including social media such as Facebook, Instagram and Twitter, email, text marketing, local store marketing, public relations/press releases and other methods to broadly drive brand awareness and purchases of our featured products. We complement this periodically with direct mail. Our Purchasing and Distribution Maintaining a high degree of quality in our restaurants depends in part on our ability to acquire fresh ingredients and other necessary supplies that meet our specifications from reliable suppliers. We contract with Sysco, a major foodservice distributor, for substantially all of our food and supplies. Food and supplies are delivered to most of our restaurants one to two times per week. Our distributor relationship with Sysco has been in place since 2007. Our franchisees are required to use our primary distributor, or an approved regional distributor and franchisees must purchase food and supplies from approved suppliers. In our normal course of business, we evaluate bids from multiple suppliers for various products. Fluctuations in supply and prices can significantly impact our restaurant service and profit performance. Our Intellectual Property We have registered Muscle Maker Grill ®, Healthy Joe’s, Muscle Maker AF, MMG Burger Bar and certain other names used by our restaurants as trademarks or service marks with the United States Patent and Trademark Office and Muscle Maker Grill ® in approximately one foreign countries. Our brand campaign, Great Food with Your Health in Mind™, has also been approved for registration with the United States Patent and Trademark Office. In addition, the Muscle Maker Grill and Healthy Joe’s logo, website name and address and Facebook, Instagram and Twitter accounts are our intellectual property. Our policy is to pursue and maintain registration of service marks and trademarks in those countries where business strategy requires us to do so and to oppose vigorously any infringement or dilution of the service marks or trademarks in such countries. We maintain the recipe for our healthy inspired recipes, as well as certain proprietary standards, specifications and operating procedures, as trade secrets or confidential proprietary information. Our Competition We operate in the restaurant industry, which is highly competitive and fragmented. The number, size and strength of competitors vary by region. Our competition includes a variety of locally owned restaurants and national and regional chains that offer dine-in, carry-out and delivery services. Our competition in the broadest perspective includes restaurants, pizza parlors, convenience food stores, delicatessens, supermarkets, third party delivery services and club stores. However, we indirectly compete with fast casual restaurants, including Chipotle and Panera Bread, among others, and with healthy inspired fast casual restaurants, such as the Protein Bar, Freshii and Veggie Grill, among others. We believe competition within the fast-casual restaurant segment is based primarily on ambience, price, taste, quality and the freshness of the menu items. We also believe that QSR competition is based primarily on quality, taste, speed of service, value, brand recognition, restaurant location and customer service. We believe the restaurant industry has changed due to the Covid-19 pandemic and an emphasis on delivery, ghost kitchens, direct mail and other non-traditional locations and methods are becoming critical to the restaurant industry and how consumers interact with brands. This changing environment will require flexibility and the ability to rapidly make adjustments. As consumer preferences continue to evolve into healthier eating options, most restaurants are developing healthier menu options. As more restaurants offer healthier options, the competition for our product offerings becomes more intense and could pose a significant threat to future revenues. However, we believe our experience, size and flexibility allows Muscle Maker to adapt faster than many other restaurant chains. 12 Our Management Information Systems All of our company-operated and franchised restaurants use computerized point-of-sale and back office systems, which we believe are scalable to support our long-term growth plans. The point-of-sale system provides a touch screen interface and a stand-alone high-speed credit card and gift card processing terminal. The point-of-sale system is used to collect daily transaction data, which generates information about daily sales and product mix that we actively analyze. Our in-restaurant back office computer system is designed to assist in the management of our restaurants. The system also provides corporate headquarters and restaurant operations management quick access to detailed business data and reduces the time spent by our restaurant managers on administrative needs. The system also provides sales, bank deposit and variance data to our accounting department. Ghost kitchens and meal prep/plan sales are ordered using online software with reports generated through various software packages. Our Corporate Structure Overview: Muscle Maker, Inc. serves as a holding company of the following subsidiaries: ● 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. ● Muscle Maker Development International. LLC, a directly wholly owned subsidiary, which was formed in Nevada on November 13, 2020 to franchise the Muscle Maker Grill name and business system to qualified franchisees internationally.