Sadot Group Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of the results of operations and financial condition of Muscle Maker, Inc. (“Muscle Maker”), together with its subsidiaries (collectively, the “Company”) as of December 31, 2021 and 2020 and for the years ended December 31, 2021 and 2020 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Annual Report on Form 10-K following Item 16. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us,” “we,” “our,” and similar terms refer to Muscle Maker. “Muscle Maker Grill”, “SuperFit Foods” and “Pokemoto” refers to the names under which our corporate and franchised restaurants do business depending on the concept. This Annual Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Annual Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “forecast,” “model,” “proposal,” “should,” “may,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Reference is made to “Factors That May Affect Future Results and Financial Condition” in this Item 7 for a discussion of some of the uncertainties, risks and assumptions associated with these statements. OVERVIEW The Company operates under the names Muscle Maker Grill, Pokemoto and SuperFit Foods and is a franchisor and owner operator of Muscle Maker Grill and Pokemoto restaurants. As of December 31, 2021, the Company’s restaurant system included twenty-two Company-owned restaurants, including the SuperFit Foods kitchen, and twenty franchise restaurants. In addition to these restaurants, the Company also operates with the following brand names under our ghost kitchen model: Meal Plan AF, Muscle Maker Burger Bar, Bowls Deep, Burger Joe’s, Wrap It Up, Salad Vibes, Mr. T’s House of Boba and Gourmet Sandwich. Our direct mail to consumer meal prep/plan program operates under the musclemakerprep.com and superfitfoods.com websites. As of December 31, 2021, MMI consisted of three operating segments: ● Muscle Maker Grill Restaurant Division ● Pokemoto Hawaiian Poke Restaurants Division ● SuperFit Foods Meal Prep Division 39 Muscle Maker, Inc. is our parent company. We own and operate three unique “healthier for you” restaurant concepts within our portfolio of companies: Muscle Maker Grill restaurants, SuperFit Foods and Pokemoto restaurants. Our Company was founded on the belief of taking every-day menu options and converting them into “healthier for you” menu choices. Consumers are demanding healthier choices, customization, flavor and convenience. We believe our portfolio of companies directly satisfy these consumer needs. We take focus on lean proteins, fresh fruits and vegetables, proprietary sauces, whole grains and various other items like protein shakes, meal plans, specialty drinks and super foods. Each of our three concepts offers different menus that are tailored to specific consumer segments. We operate in the fast-casual and meal prep segments of the restaurant industry. We believe our “healthier for you” inspired concepts deliver a highly differentiated customer experience. On February 26, 2020, the Company entered into a Kitchen Services Agreement with a major delivery-only kitchen concept. The Kitchen Services Agreement provides for ten locations in total with four initial locations starting in the Chicago market, two locations in the Philadelphia market, one location in the Providence market, two locations in the Miami market and one location in the New York market. The Kitchen Services Agreement provide the Company with access to the delivery-only locations for a one-year term with an automatic one-year renewal unless terminated by either party. The delivery-only locations are set up for third party delivery and provide that the Company must pay monthly license fees, processing service fees and storage service fees. The monthly license fees for the locations range from $3,000 to $6,000. The monthly license fees become due 14 days after the Company is granted access to the location. As of December 31, 2021, the Company had opened seven of the ten locations. One Miami location opened in February 2022 and the second Miami location is anticipated to open in April 2022. During the year ended December 31, 2021, the decision was made not to renew the monthly license agreements at the seven delivery-only kitchen locations after their initial one-year term as a cost saving measure due to the locations not performing as anticipated. The existing assets at the locations were transferred to a storage unit and will be installed in future new locations. As part of the non-traditional location growth strategy, the Company entered into an agreement and announced on June 1, 2020, its expansion within the Northern Virginia Community College system to open 4 locations on various campus locations. These locations were built in 2020 with the anticipation of opening in the fall semester of 2020. However, due to covid-19 restrictions, these locations were temporarily closed and were opened during 2021 as roughly 50% of the students were allowed back on campus. These locations are based on a variable lease determined on monthly sales thus limiting the ongoing costs associated with these locations. On November 11, 2020, the Company announced an agreement with Happy Meal Prep to offer Muscle Maker meal prep/plans to consumers via direct- to-consumer shipments of over 40 meal prep/plan options. This program allows shipments of up to a 250-mile radius around participating locations increasing the total number of potential consumers who can enjoy Muscle Maker Grill meals. The Company made a greater push in the direct-to-consumer market meal prep/plan strategy in 2021 as an alternate, non-traditional approach to delivering our products to consumers. On March 25, 2021, we acquired the assets of SuperFit Foods, a subscription based fresh-prepared meal prep business located in Jacksonville, Florida. With this acquisition, we are also the owner of the trade name SuperFit Foods that we use in connection with the operations of SuperFit Foods. In 2020 SuperFit Foods produced over 220,000 fresh-prepared meals. SuperFit Foods is differentiated from other meal prep services by allowing customers in the Jacksonville Florida market to order online via the Company’s website and pick up their fully prepared meals from 28 Company-owned coolers located in gyms and wellness centers. On April 7, 2021, the Company entered into a Securities Purchase Agreement with an accredited investor for a private placement pursuant to which the investor purchased from the Company for an aggregate purchase price of approximately $10,000,000 (i) 1,250,000 shares of common stock of the Company (ii) a common stock purchase warrant to purchase up to 4,115,227 shares of Common Stock (the “Common Warrant”) and (iii) a pre-funded common stock purchase warrant to purchase up to 2,865,227 shares of Common Stock (the “Pre-Funded Warrant”). Each share and accompanying Common Warrant was sold together at a combined offering price of $2.43 per share and Common Warrant, and each Pre-Funded Warrant and accompanying Common Warrant was sold together at a combined offering price of $2.42 per Pre-Funded Warrant and accompanying Common Warrant. The Pre-Funded Warrant is immediately exercisable, at a nominal exercise price of $0.01 per share, and may be exercised at any time until the Pre-Funded Warrant is fully exercised. The Common Warrant has an exercise price of $2.43 per share, are immediately exercisable and will expire five and one-half (5.5) years from the date of issuance. The private placement closed on April 9, 2021. 40 On May 14, 2021, MMI acquired the Pokemoto restaurant chain. This consisted of purchasing PKM Stamford, LLC, Poke Co., LLC, LB Holdings LLC, and TNB Holdings, LLC, Poke Co Holdings LLC, GLL Enterprises, LLC, and TNB Holdings II, LLC, each a Connecticut limited liability company (collectively, Pokemoto”). Pokemoto has thirteen locations in four states – Connecticut, Rhode Island, Massachusetts, and Georgia and offers up chef-driven contemporary flavors with fresh delectable and healthy ingredients such as Atlantic salmon, sushi-grade tuna, fresh mango, roasted cashews and black caviar tobiko that appeals to foodies, health enthusiasts, and sushi-lovers everywhere. The colorful dishes and modern chic dining rooms provide an uplifting dining experience for guests of all ages. Customers can dine in-store or order online via third party delivery apps for contactless delivery. On October 25, 2021, Muscle Maker Development International LLC (“MMDI”), a wholly-owned subsidiary of Muscle Maker Inc., entered into a Master Franchise Agreement (the “Master Franchise Agreement”) with Almatrouk Catering Company – OPC (“ACC”) providing ACC with the right to grant franchises for the development of 40 “Muscle Maker Grill” restaurants through December 31, 2030 (the “Term”) in the Kingdom of Saudi Arabia (“KSA”). On November 17, 2021, the Company entered into a Securities Purchase Agreement with accredited investors for a private placement pursuant to which the investors purchased from the Company for an aggregate purchase price of approximately $15,000,000 (i) 6,772,000 shares (the “Shares”) of common stock of the Company, (ii) a common stock purchase warrant to purchase up to 10,830,305 shares of common stock (the “November Common Warrant”) and (iii) a pre-funded common stock purchase warrant to purchase up to 4,058,305 shares of common stock (the “Pre-Funded Warrant”). Each Share and accompanying November Common Warrant was sold together at a combined offering price of $1.385 per Share and November Common Warrant, and each Pre-Funded Warrant and accompanying November Common Warrant was sold together at a combined offering price of $1.3849 per Pre-Funded Warrant and accompanying November Common Warrant. The November Pre-Funded Warrant is immediately exercisable, at a nominal exercise price of $0.0001 per share, and may be exercised at any time until the November Pre-Funded Warrant is fully exercised. The November Common Warrant will have an exercise price of $1.385 per share, are immediately exercisable and will expire five (5) years from the date of issuance. The private placement closed on November 22, 2021. During the year ended December 31, 2021, we entered into various franchise agreements for a total of seventeen potentially new Pokemoto locations with various franchisees. The Franchisees paid the Company an aggregate of $217,500 and this has been recorded in deferred revenue as of December 31, 2021. 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. ● 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. We are the owner of the trade name and service mark Muscle Maker Grill®, SuperFit Foods®, Pokemoto®, 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®, Pokemoto®, and SuperFit Foods trademarks and intellectual property to our wholly owned subsidiaries, Muscle Maker Development, Poke Co Holdings LLC and Muscle Maker Corp., and to further sublicense them to our franchisees for use in connection with Muscle Maker Grill® and Pokemoto® restaurants. As of December 31, 2021, the Company had a cash balance, a working capital surplus and an accumulated deficit of $15,766,703, $15,041,334, and $71,369,837, respectively. During the year ended December 31, 2021, the Company incurred a pre-tax net loss of $8,176,130 and net cash used in operations of $6,392,711. The Company believes that our existing cash on hand and future cash flows from our franchise operations, will be sufficient to fund our operations, anticipated capital expenditures and repayment obligations over the next twelve months. 41 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 2% to 6% 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. In addition, we have other revenues which consists of gift card breakage which is recognized when we determine that there is no further legal obligation to remit the unredeemed gift card balance. 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. 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 total 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. Our labor costs in 2021 have been partially offset by employee retention tax credits provided by the Internal Revenue Service due to the impact of Covid-19. 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 in some locations 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. 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, insurance and maintenance. A portion of these costs are associated with third party delivery services such as Uber Eats, Grub Hub, DoorDash 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. We have adjusted our cost structure to reflect different pricing models, portion sizes, menu offerings, and other considerations to potentially partially offset these rising costs of delivery. 42 Impairment of Intangible Assets Impairment of intangible assets consist of an amount by which the carry amount of the intangible assets exceeds its fair value. This is recognized by us when the carry amount of an intangible asset is greater than the projected future undiscounted cash flows, as the asset is not fully recoverable. Impairment of Goodwill Impairment of goodwill consist of an amount by which the carry amount of the goodwill assets exceeds its fair value. This is recognized by us when the carry amount of goodwill is greater than the projected future discounted cash flows, as the asset is not fully recoverable. Depreciation and Amortization Depreciation and amortization primarily consist of the depreciation of property and equipment and amortization of intangible assets. Franchise Advertising Expenses In accordance with Topic 606, the Company recognizes sales-based advertising contributions from franchisees as franchise revenue when the underlying franchisee incurs the corresponding advertising expense. The Company records the related advertising expenses as incurred under general and administrative expenses. 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, investor relations and other corporate costs. We incur incremental general and administrative expenses as a result of being a publicly listed company on the Nasdaq capital market. A certain portion of these expenses are related to the preparation of an initial stock offering and subsequent capital raises and should be considered one-time expenses. Other (Expense) Income Other (expenses) income consists of amortization of debt discounts on the convertible notes, interest expense related to convertible notes payable, change in fair value of accrued compensation and gains on debt extinguishments in connection with the PPP loan forgiveness. Income Taxes Income taxes represent federal, state, and local current and deferred income tax expense. 43 Consolidated Results of Operations The following table represents selected items in our consolidated statements of operations for the years ended December 31, 2021 and 2020, respectively: For the Years Ended December 31, 2021 2020 Revenues: Company restaurant sales, net of discounts $ 9,320,920 $ 3,672,944 Franchise royalties and fees 778,181 739,450 Franchise advertising fund contributions 188,539 61,053 Other revenue 61,996 - Total Revenues 10,349,636 4,473,447 Operating Costs and Expenses: Restaurant operating expenses: Food and beverage costs 3,532,907 1,467,799 Labor 1,917,979 1,908,476 Rent 1,261,096 691,986 Other restaurant operating expenses 2,362,687 1,146,443 Total restaurant operating expenses 9,074,669 5,214,704 Impairment of intangible asset 1,139,908 100,000 Impairment of goodwill 86,348 - Depreciation and amortization 1,206,505 422,546 Franchise advertising fund expenses 188,539 61,053 Preopening expenses 31,829 56,362 General and administrative expenses 8,094,509 8,576,231 Total Costs and Expenses 19,822,307 14,430,896 Loss from Operations (9,472,671 ) (9,957,449 ) Other Expenses (Income): Other income (9,097 ) 27,143 Interest income, net (50,170 ) (115,881 ) Change in fair value of accrued compensation 127,500 (14,000 ) Gain on debt extinguishment 1,228,308 - Amortization of debt discounts - (38,918 ) Total Other Expenses, Net 1,296,541 (141,656 ) Loss Before Income Tax (8,176,130 ) (10,099,105 ) Income tax provision - - Net Loss $ (8,176,130 ) $ (10,099,105 ) 44 Year Ended December 31, 2021Compared with Year Ended December 31, 2020 Revenues Our revenues totaled $10,349,636 for the year ended December 31, 2021 compared to $4,473,447 for the year ended December 31, 2020. The $5,876,189 increase is primarily attributed to an increase in restaurant sales as a direct result of the acquisition of Pokemoto and SuperFit Foods. We generated Company restaurant sales, net of discounts, of $9,320,920 for the year ended December 31, 2021 compared to $3,672,944 for the year ended December 31, 2020. This represented an increase of $5,647,976, or 153.8%, which is mainly attributable to the Pokemoto restaurants sales and SupferFit Foods sales generated during the current year since their dates of acquisition. Franchise royalties and fees for the year ended December 31, 2021 and 2020 totaled $778,181 compared to $739,450, respectively. This represents an increase of $38,731, or 5.24%. As the Company executes against its franchising strategy and expands its efforts to sell franchise locations, management is anticipating that this number will likely increase over the coming years. Franchise advertising fund contributions for the years ended December 31, 2021 and 2020 totaled $188,539 compared to $61,053, respectively. In accordance with Topic 606, the Company recognizes these sales-based advertising contributions from franchisees as franchise revenue when the underlying franchisee Company incurs the corresponding advertising expense. Thus the increase has been a direct result of us increasing our expenses incurred related to our national advertising services to benefit our franchisees and the brands as a whole. Other revenues for the year ended December 31, 2021 totaled $61,996. Other revenues consisted of gift card breakage recognized. Operating Costs and Expenses Operating costs and expenses primarily consist of restaurant food and beverage costs, restaurant labor expense, restaurant rent expense, other restaurant operating expenses, depreciation and amortization expenses and general and administrative expenses. Restaurant food and beverage costs for the year ended December 31, 2021 and 2020 totaled $3,532,907 or 37.90% as a percentage of Company restaurant net sales, and $1,467,799 or 39.96%, as a percentage of Company restaurant net sales, respectively. The $2,065,108 increase resulted from higher store counts during the current year as compared to the prior year resulting in higher sales with an overall decrease (improvement) of (2.06%) in restaurant and food beverage cost as a percentage of sales. Restaurant labor for the year ended December 31, 2021 and 2020 totaled $1,917,979, or 20.58%, as a percentage of Company restaurant net sales, and $1,908,476, or 51.96%, as a percentage of Company restaurant net sales, respectively. The $9,503 increase resulted due a higher store count during the current year as compared to the prior year as the Company opened and acquired more stores as compared to the prior period, offset by the reduction in labor expense as a result of approximately $1,920,000 in employee retention credits that were made available to us due to the effects of Covid-19. Without the employee retention credit restaurant labor for the year ended December 31, 2021 totaled $3,837,979 or 41.17% as a percentage of Company restaurant net sales. Notwithstanding the positive effect of the tax credits on our labor costs we were able to reduce (improve) our overall labor as a percentage of sales by (10.79%) due to increased sales and also due to improvements in operations. Restaurant rent expense for the year ended December 31, 2021 and December 31, 2020 totaled $1,261,096, or 13.53% as a percentage of restaurant sales, and $691,986, or 18.84%, as a percentage of restaurant sales, respectively. The increase of $569,110 is directly attributed to the new Company-owned locations acquired during the current period as compared to the prior period thus increasing the store count from sixteen stores to twenty-two stores. The percent of total sales reduced (improved) by (5.31%) as sales increased overall and we are able to leverage fixed rent against these higher sales levels. 45 Other restaurant operating expenses for the year ended December 31, 2021 and December 31, 2020 totaled $2,362,687, or 25.35% as a percentage of restaurant sales, and $1,146,443, or 31.21% as a percentage of restaurant sales, respectively. The $1,216,244 increase is due to higher third-party merchant fees resulting from an increase in delivery orders and a higher store count during the year as compared to the prior year. The increased store count also resulted in an increase in utility fees and insurance expenses. The other restaurant operating expenses as a percent of total sales reduced (improved) by (5.86%). Depreciation and amortization expense for the year ended December 31, 2021 and December 31, 2020 totaled $1,206,505 and $422,546, respectively. The $783,959 increase is mainly attributed to amortization expense attributed to the additions of definite life intangible assets of approximately $4,150,000 acquired through the various acquisitions during the current year as compared to the prior year. The remaining of the variance is attributable to depreciation expense related to additional property and equipment of approximately $435,000 acquired through acquisitions and additional property and equipment purchased of approximately $262,000 for new store build outs and the remodeling of an existing and acquired Company-owned restaurant compared to the prior year. Impairment of intangible assets for the year ended December 31, 2021 and 2020 totaled $1,139,908 and $100,000. We performed a recoverability test on the Muscle Maker Grill trademark and franchise agreements based on its projected future undiscounted cash flows. The forecast was based on actual revenues and we also considered recent developments as well as our strategic plans and intentions. Based on the forecasts we recorded an aggregate impairment charge. The increase in our impairment charge is directly attributed to the closure of our Muscle Maker Grill Company-owned restaurants and our franchise locations as compared to the prior period. Preopening expense for the years ended December 31, 2021 and 2020, totaled $31,829 and $56,362 resulted from expense incurred prior to the opening of our new Company-owned store that opened during the year ended December 31, 2021 and 2020, respectively. General and administrative expenses for the year ended December 31, 2021 and 2020 totaled $8,094,509, or 78.21% of total revenue, and $8,576,231, or 191.70 % of total revenue, respectively. The $481,722 decrease was mainly attributed to a reduction in consulting expenses of approximately $1,433,000 which is mainly due to stock-based compensation expense for stock issued to various consultants for various services rendered in the prior year as compared to the current year, a decrease in bad debt expenses of approximately $106,000, a decrease in professional fees of approximately $42,300 which resulted from changing our auditing firm during the current year. The decrease was offset with increase in salaries and wages of approximately $1,189,415 which resulted from additional staff members due to our acquisitions, in addition, included in the increase is stock-based compensation for shares issued to employees of approximately $637,000 as part of their employment agreements. The remainder of the variance was attributed to various other expenses including recruiting, marketing, computer expenses etc. Loss from Operations Our loss from operations for the year ended December 31, 2021 and 2020 totaled $9,472,671, or 91.53% of total revenues and $9,957,449, or 222.59% of total revenue, respectively. The decrease of $484,778 in loss from operations is primarily attributable to the increase of total revenues of $5,876,189, partially offset by the increase in total cost and expenses of $5,391,411 as discussed above. Other Income (Expense) Other income (expense) for the year ended December 31, 2021 and 2020 totaled $1,296,541 and ($141,656), respectively. The $1,438,197 increase in other income (expense) was primarily attributable to a gain on extinguishment of debt of $1,228,308 due mainly to the forgiveness of our PPP loans, an increase of $141,500 in the change in fair value of accrued compensation issued during the current year as compared to the prior year due to administrative delays by the Company as the shares were earned by the consultant but not issued in the correct period. Attributing to the increase in other income (expense) is a decrease in interest expense of $65,711 due to the reduction of interest-bearing instrument in the current year as compared to the prior year and a decrease in amortization of debt discounts of $38,918. 46 Net Loss Our net loss for the year ended December 31, 2021 was $8,176,130 which was an improvement of $1,922,975 as compared to a net loss of $10,099,105 for the year ended December 31, 2020, resulting from an increase in our total revenue of $5,876,189 and an increase in our other income (expense) of $1,438,197, partially offset by an increase of our total cost and expenses of $5,391,411. The following table represents selected items in our consolidated statements of operations for the years ended December 31, 2021, respectively by our operating segments: Muscle Maker Pokemoto SuperFit Foods Consolidated Grill Division Division (d) Division (e) Unallocated Revenues: Company restaurant sales, net of discounts $ 9,320,920 $ 5,159,134 $ 2,694,335 $ 1,467,451 $ - Franchise royalties and fees 778,181 627,734 150,447 - - Franchise advertising fund contributions 188,539 188,539 - - - Other Revenue 61,996 61,996 - - - Total Revenues 10,349,636 6,037,403 2,844,782 1,467,451 - Operating Costs and Expenses: Restaurant operating expenses: Food and beverage costs 3,532,907 2,038,636 999,586 494,685 - Labor 1,917,979 1,227,187 416,847 273,944 - Rent 1,261,096 977,202 209,242 74,652 - Other restaurant operating expenses 2,362,687 1,437,418 624,437 300,832 - Total restaurant operating expenses 9,074,669 5,680,443 2,250,112 1,144,113 - Impairment of intangible assets 1,139,908 - - - 1,139,908 (b) Impairment of goodwill 86,348 - - - 86,348 (b) Depreciation and amortization 1,206,505 461,922 80,752 23,200 640,631 (b) Franchise advertising fund expenses 188,539 188,539 - - - Preopening expenses 31,829 9,937 21,892 - - General and administrative expenses 8,094,509 - - - 8,094,509 (a) Total Costs and Expenses 19,822,307 6,340,841 2,352,756 1,167,313 9,961,396 (Loss) Income from Operations (9,472,671 ) (303,438 ) 492,026 300,138 (9,961,396 ) Other Income: Other income (9,097 ) - - - (9,097 )(c) Interest expense, net (50,170 ) - - - (50,170 ) Change in fair value of accrued compensation 127,500 - - - 127,500 (c) Gain on debt extinguishment 1,228,308 - - - 1,228,308 Amortization of debt discounts - - - - - Total Other Income, Net 1,296,541 - - - 1,321,541 Loss Before Income Tax (8,176,130 ) (303,438 ) 492,026 300,138 (8,639,855 ) Income tax provision - - - - - Net (Loss) Income $ (8,176,130 ) $ (303,438 ) $ 492,026 $ 300,138 $ (8,639,855 ) (a) Includes charges related to corporate expense that the Company does not allocate to the respective divisions. The largest portion of this expense relates to payroll, benefits and other compensation expense of $3,320,061, professional fees of $1,818,998, and consulting fees of $1,611,045. (b) Includes charges of $1,135,448 and $86,348 related to the impairment of intangible assets and goodwill, respectively, related to Muscle Maker Grill restaurants intangible assets and good will. This also includes amortization of intangible assets. See Note 7. (c) Includes changes in the fair value of accrued compensation of $127,500. (d) Pokemoto Division – Statement of operations for the period from May 14, 2021 (acquisition date) through December 31, 2021. (e) SuperFit Foods Division - Statement of operations for the period from March 25, 2021 (acquisition date) through December 31, 2021. Liquidity and Capital Resources Liquidity We measure our liquidity in a number of ways, including the following: December 31, December 31, 2021 2020 Cash $ 15,766,703 $ 4,195,932 Working Capital Surplus $ 15,041,334 $ 1,383,568 Convertible notes payable, including related parties and Former Parent, net $ 182,458 $ 182,458 Other notes payable, including related parties $ 1,170,079 $ 1,276,692 Availability of Additional Funds Although we have a working capital surplus of $15,041,334, we presently have an accumulated deficit of $71,369,837, as of December 31, 2021, and we utilized $6,392,711 of cash in operating activities during the year ended December 31, 2021. We believe that our existing cash on hand and future cash flows from our franchise operations, will be sufficient to fund our operations, anticipated capital expenditures and repayment obligations over the next twelve months. In the event we are required 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. If we need 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 could dilute the ownership and control of your shares and could be at prices substantially below prices at which our shares currently trade. 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. On April 7, 2021, the Company entered into a Securities Purchase Agreement with an accredited investor for a private placement pursuant to which the investor purchased from the Company for an aggregate purchase price of approximately $10,000,000 (i) 1,250,000 shares of common stock of the Company (ii) a common stock purchase warrant to purchase up to 4,115,227 shares of Common Stock (the “Common Warrant”) and (iii) a pre-funded common stock purchase warrant to purchase up to 2,865,227 shares of Common Stock (the “Pre-Funded Warrant”). Each share and accompanying Common Warrant was sold together at a combined offering price of $2.43 per share and Common Warrant, and each Pre-Funded Warrant and accompanying Common Warrant was sold together at a combined offering price of $2.42 per Pre-Funded Warrant and accompanying Common Warrant. The Pre-Funded Warrant is immediately exercisable, at a nominal exercise price of $0.01 per share, and may be exercised at any time until the Pre-Funded Warrant is fully exercised. The Common Warrant has an exercise price of $2.43 per share, are immediately exercisable and will expire five and one-half (5.5) years from the date of issuance. The private placement closed on April 9, 2021. 47 On November 17, 2021, the Company entered into a Securities Purchase Agreement with accredited investors for a private placement pursuant to which the investors purchased from the Company for an aggregate purchase price of approximately $15,000,000 (i) 6,772,000 shares (the “Shares”) of common stock of the Company, (ii) a common stock purchase warrant to purchase up to 10,830,305 shares of common stock (the “November Common Warrant”) and (iii) a pre-funded common stock purchase warrant to purchase up to 4,058,305 shares of common stock (the “Pre-Funded Warrant”). Each Share and accompanying November Common Warrant was sold together at a combined offering price of $1.385 per Share and November Common Warrant, and each Pre-Funded Warrant and accompanying November Common Warrant was sold together at a combined offering price of $1.3849 per Pre-Funded Warrant and accompanying November Common Warrant. The November Pre-Funded Warrant is immediately exercisable, at a nominal exercise price of $0.0001 per share, and may be exercised at any time until the November Pre-Funded Warrant is fully exercised. The November Common Warrant will have an exercise price of $1.385 per share, are immediately exercisable and will expire five (5) years from the date of issuance. The private placement closed on November 22, 2021. Sources and Uses of Cash for the Years Ended December 31, 2021 and December 31, 2020 For the year ended December 31, 2021 and 2020, we used cash of $6,392,711 and $7,785,873, respectively, in operations. Our cash used for the year ended December 31, 2021 was primarily attributable to our net loss of $8,176,130, adjusted for net non-cash income in the aggregate amount of $3,484,067, partially offset by $1,700,648 of net cash provided by changes in the levels of operating assets and liabilities. Our cash used for the year ended December 31, 2020 was primarily attributable to our net loss of $10,099,105, adjusted for net non-cash income in the aggregate amount of $3,535,995, partially offset by $1,222,763 of net cash provided by changes in the levels of operating assets and liabilities. During the year ended December 31, 2021, cash used in investing activities was $3,575,809, of which $262,019 was used to purchase property and equipment, $3,315,390 used in connection with the acquisition of SuperFit Foods and Pokemoto and $1,600 was collected from loans to franchisees loan issuances. During the year ended December 31, 2020, cash used in investing activities was $850,334, of which $781,041 was used to purchase property and equipment, $75,000 used in connection with the acquisition of new Company stores from former franchisees and $5,707 was collected from loans to franchisees and related parties net of loan issuances. Net cash provided by financing activities for the year ended December 31, 2021 was $21,539,291, consisting of $22,890,950 proceeds from Private Placement offerings, net of underwriter’s discount and offering costs, and proceeds from the exercising of the pre-funded warrants of $28,773, partially offset by repayments of various other notes payable of $1,280,43, which consisted mainly of SBA loans that was acquired through the Pokemoto acquisition and $100,000 cash paid to a former investor in connection with the cancellation of their shares. Net cash provided by financing activities for the year ended December 31, 2020 was $12,353,285, consisting of $11,720,001 in proceeds from the offerings, net of underwriter’s discount and offering costs, $764,399 proceeds from the over-allotment, net of underwriter’s discount and offering costs, $150,000 proceeds from other note payable, $866,300 proceeds from the PPP loan, partially offset by repayments of various convertible notes of $550,000 and $597,415 of repayments of other notes payables, including a related party. 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 assessment of recoverability of long-lived assets, including property and equipment, goodwill and intangible assets; ● the estimated useful lives of intangible and depreciable assets; 48 ● estimates and assumptions used to value warrants issued in connection with notes payable; ● 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 a trademark with an indefinite useful life. The other intangible assets estimated original useful lives are as follows: Franchisee agreements 13 years Franchise license 10 years Trademark – SuperFit, Trademark – Pokemoto Domain name, customer list and Proprietary recipes 5 – 7 years Non-compete agreement 2 – 3 years Impairment of Long-Lived Assets When circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, we perform an analysis to review the recoverability of the asset’s carrying value, which includes estimating the undiscounted cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors. If the analysis indicates that the carrying value is not recoverable from future cash flows, an impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value. Any impairment losses are recorded as operating expenses, which reduce net income. Deferred Revenue Deferred revenue 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 Revenue Recognition The Company’s revenues consist of restaurant sales, franchise royalties and fees, franchise advertising fund contributions, and other revenues. The Company recognized revenues according to Topic 606 “Revenue from Contracts with Customers”. Under the 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 made significant judgments in identifying the promised goods or services in our contracts with franchisees that are distinct, and which represent separate performance obligations. 49 Restaurant Sales Retail store revenue at Company-operated restaurants is recognized when payment is tendered at the point of sale, net of sales tax, discounts and other sales related taxes. The Company recorded retail store revenues of $9,320,920 and $3,672,944 during the years ended December 31, 2021 and 2020, 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 recognizes revenues from gift cards as restaurant revenues once the Company performs its obligation to provide food and beverage to the customer simultaneously with the redemption of the gift card or through gift card breakage, as discussed in Other Revenues below. 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 $434,849 and $331,694 during the years ended December 31, 2021 and 2020, respectively, which is included in franchise royalties and fees on the accompanying consolidated statements of operations. 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, these fees are then recognized as 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 $263,215 and $277,255 during the years ended December 31, 2021 and 2020, respectively, which is included in franchise royalties and fees on the accompanying 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 $80,117 and $130,501 during the years ended December 31, 2021 and 2020, 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 food and beverage costs during the period in which the related food and beverage purchases are made. 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 Company incurs the corresponding advertising expense. 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 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 $188,539 and $61,053, respectively, during the years ended December 31, 2021 and 2020, which are included in franchise advertising fund contributions on the accompanying consolidated statements of operations. 50 Other Revenues Gift card breakage is recognized when the likelihood of a gift card being redeemed by the customer is remote and the Company determines there is not a legal obligation to remit the unredeemed gift card balance to the relevant jurisdiction. The determination of the gift card breakage rate is based upon the Company’s specific historical redemption patterns. Gift card liability is recorded in other current liabilities on the consolidated balance sheet. The Company recorded $61,996 gift card breakage for the year ended December 31, 2021. For the year ended December 31, 2020, the Company did not record any gift card breakage. 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. Deferred revenue is recognized in income over the life of the franchise agreements and vendor rebates are recognized in income as performance obligations are satisfied. Income Taxes We account for income taxes under Accounting Standards Codification (“ASC”) 740 Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Tax benefits claimed or expected to be claimed on a tax return are recorded in our financial statements. A tax benefit from an uncertain tax position is only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Our policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the consolidated statements of operations. Recently Issued Accounting Pronouncements See Note 2 to our consolidated financial statements for the year ended December 31, 2021. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 51