UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~September~~June 30, ~~2019~~2020

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: ~~000-55918~~001-39223

MUSCLE MAKER, INC.

(Exact name of registrant as specified in its charter)

~~California~~Nevada

47-2555533

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

308 East Renfro Street, Suite 101, Burleson, Texas		76028
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (682)-708-8250

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, $0.0001 par value per share		GRIL		The NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted ~~electronically and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to ~~submit and post such files)~~submit). Yes [X] No [ ]

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes [ ] No [X]

AsThe number of ~~November 19, 2019, there were 11,836,425~~ shares ofif the Registrant’s common stock, ~~outstanding.~~$0.0001 par value per share, outstanding as of August 19, 2020, was 7,473,861.

MUSCLE MAKER, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER~~JUNE 30, ~~2019~~2020

TABLE OF CONTENTS

		Page

PART 1 – FINANCIAL INFORMATION

ITEM 1. Financial Statements.

	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019	1

	Unaudited Condensed Consolidated Statements of Operations for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	2

	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019	3

	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ ~~Deficit~~Equity for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	5

	Notes to Unaudited Condensed Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	2923

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.	4337

ITEM 4.	Controls and Procedures.	4337

PART II - OTHER INFORMATION

ITEM 1.	Legal Proceedings.	4538

ITEM 1A.	Risk Factors.	4639

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	4739

ITEM 3.	Defaults Upon Senior Securities.	4840

ITEM 4.	Mine Safety Disclosures.	4840

ITEM 5.	Other Information.	4840

ITEM 6.	Exhibits.	4941

SIGNATURES		5042

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
	(unaudited)						(unaudited)
Assets
Current Assets:
Cash	$	1,983,306		$	357,842		$	3,161,195		$	478,854
Accounts receivable, net of allowance for doubtful accounts of $75,000 and $45,000 as of September 30, 2019 and December 31, 2018, respectively		157,826			180,768
Accounts receivable, net of allowance for doubtful accounts of $75,000 as of June 30, 2020 and December 31, 2019, respectively								169,557			136,477
Inventory		78,701			45,067			56,460			78,422
Current portion of loans receivable, net of allowance of $55,000 at September 30, 2019 and December 31, 2018, respectively		19,092			37,155
Current portion of loan receivable from related party		-			650
Current portion of loans receivable, net of allowance of $55,000 at June 30, 2020 and December 31, 2019, respectively								40,364			38,712
Prepaid expenses and other current assets		48,664			16,412			24,041			48,064
Total Current Assets		2,287,589			637,894			3,451,617			780,529
Property and equipment, net		1,393,940			637,287			1,642,580			1,646,879
Goodwill		86,348			-			656,348			656,348
Intangible assets, net		3,054,898			3,102,621			3,006,999			3,038,815
Loans receivable, non-current		127,324			75,756			88,223			98,677
Security deposits and other assets		35,007			33,532			74,062			39,462
Total Assets	$	6,985,106		$	4,487,090		$	8,919,829		$	6,260,710

Liabilities and Stockholders’ Deficit
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses	$	2,720,598		$	2,887,380		$	1,869,559		$	2,630,948
Convertible notes payable		100,000			100,000
Convertible notes payable to Former Parent, net of debt discount of $10,883 and $43,178 at September 30, 2019 and December 31, 2018, respectively		71,574			39,280
Convertible notes payable, net of debt discount of $760,723 at September 30, 2019		3,638,328			-
Convertible notes payable, related parties, net of debt discount of $70,806 at September 30, 2019		329,194			-
Convertible notes payable to Former Parent								82,458			82,458
Convertible notes payable, net of debt discount of $0 and $38,918 at June 30, 2020 and December 31, 2019								100,000			536,082
Other notes payable								435,733			351,512
Other notes payable, related party		91,000			-			-			91,000
Deferred revenue, current		131,631			907,948			97,288			122,697
Deferred rent, current		10,143			14,243			6,263			20,730
Other current liabilities		679,243			607,486			645,673			652,643
Total Current Liabilities		7,771,711			4,556,337			3,236,974			4,488,070
Convertible notes payable, net of debt discount of $498,178 and $1,313,259 at September 30, 2019 and December 31, 2018, respectively		4,740,772			2,015,007
Convertible notes payable, related parties, net of debt discount of $0 and $233,462 at September 30, 2019 and December 31, 2018, respectively		-			153,566
Convertible notes payable								-			75,000
Other notes payable		-			225,000			697,131			240,295
Other notes payable, related parties		-			335,000
Deferred revenue, non-current		902,778			-			1,068,646			1,152,975
Deferred rent, non-current		55,738			45,315			90,904			58,608
Total Liabilities		13,470,999			7,330,225			5,093,655			6,014,948

Commitments and Contingencies

Stockholders’ Deficit:
Common stock, $0.0001 par value, 100,000,000 shares authorized, 11,585,226 and 10,427,803 shares issued and outstanding as of September 30, 2019, and December 31, 2018, respectively		1,159			1,043
Stockholders’ Equity:
Common stock, $0.0001 par value, 14,285,714 shares authorized, 7,958,534 and 5,714,464 shares issued and outstanding as of June 30, 2020, and December 31, 2019, respectively								796			571
Additional paid-in capital		23,290,058			20,989,478			63,913,668			53,339,793
Accumulated deficit		(29,777,110	)		(23,833,656	)		(60,088,290	)		(53,094,602	)
Total Stockholders’ Deficit		(6,485,893	)		(2,843,135	)
Total Liabilities and Stockholders’ Deficit	$	6,985,106		$	4,487,090
Total Stockholders’ Equity								3,826,174			245,762
Total Liabilities and Stockholders’ Equity							$	8,919,829		$	6,260,710

See Notes to the Condensed Consolidated Financial Statements

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	For the Three Months Ended						For the Nine Months Ended						For the Three Months Ended						For the Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2019			2018			2019			2018			2020			2019			2020			2019

Revenues:
Company restaurant sales, net of discounts	$	821,684		$	721,300		$	2,438,284		$	3,246,041		$	659,939		$	815,837		$	1,897,366		$	1,616,600
Franchise royalties and fees		252,744			324,080			1,126,541			1,129,972			142,293			529,085			318,324			873,797
Franchise advertising fund contributions		39,030			-			116,423			-			32,454			38,494			54,050			77,393
Other revenues		-			-			-			244,633
Total Revenues		1,113,458			1,045,380			3,681,248			4,620,646			834,686			1,383,416			2,269,740			2,567,790

Operating Costs and Expenses:
Restaurant operating expenses:
Food and beverage costs		339,454			266,678			915,063			1,193,908			255,329			286,264			721,023			575,609
Labor		347,786			266,817			966,020			1,383,941			342,823			339,221			929,443			618,234
Rent		96,832			66,599			283,667			537,588			139,604			88,645			284,281			186,835
Other restaurant operating expenses		113,292			60,084			367,611			621,312			100,552			138,634			432,912			254,319
Total restaurant operating expenses		897,364			660,178			2,532,361			3,736,749			838,308			852,764			2,367,659			1,634,997
Costs of other revenues		-			-			-			114,388
Preopening expenses														46,764			-			46,764			-
Depreciation and amortization		59,033			47,663			190,637			145,615			97,245			62,912			208,502			131,604
Other expenses incurred for closed locations		-			269,659			27,519			473,378			-			23,809			-			27,519
Franchise advertising fund expenses		39,030			-			116,423			-			32,454			38,494			54,050			77,393
General and administrative expenses		1,514,123			916,268			3,584,698			3,713,743			1,213,851			966,539			6,343,254			2,070,575
Total Costs and Expenses		2,509,550			1,893,768			6,451,638			8,183,873			2,228,622			1,944,518			9,020,229			3,942,088
Loss from Operations		(1,396,092	)		(848,388	)		(2,770,390	)		(3,563,227	)		(1,393,936	)		(561,102	)		(6,750,489	)		(1,374,298	)

Other Income (Expense):
Other income, net		112,673			65,933			3,680			60,314
Other (Expense) Income:
Other (expense) income, net														(10,360	)		2,757			(13,548	)		(108,993	)
Interest expense, net		(614,100	)		(94,655	)		(1,262,521	)		(826,155	)		(1,129	)		(465,956	)		(94,733	)		(648,421	)
Loss on sale of CTI		-			-			-			(456,169	)
Change in fair value of accrued compensation														(96,000	)		-			(96,000	)		-
Amortization of debt discounts		(451,310	)		(267,358	)		(1,345,683	)		(1,914,038	)		-			(518,305	)		(38,918	)		(894,373	)
Total Other Expense, Net		(952,737	)		(296,080	)		(2,604,524	)		(3,136,048	)		(107,489	)		(981,504	)		(243,199	)		(1,651,787	)

Loss Before Income Tax		(2,348,829	)		(1,144,468	)		(5,374,914	)		(6,699,275	)		(1,501,425	)		(1,542,606	)		(6,993,688	)		(3,026,085	)
Income tax provision		-			-			-			-			-			-			-			-
Net Loss		(2,348,829	)		(1,144,468	)		(5,374,914	)		(6,699,275	)	$	(1,501,425	)	$	(1,542,606	)	$	(6,993,688	)	$	(3,026,085	)
Net loss attributable to the non-controlling interest		-			-			-			(2,071	)
Net Loss Attributable to Controlling Interest	$	(2,348,829	)	$	(1,144,468	)	$	(5,374,914	)	$	(6,697,204	)

Net Loss Attributable to Controlling Interest Per Share:
Net Loss Per Share:
Basic and Diluted	$	(0.22	)	$	(0.14	)	$	(0.50	)	$	(0.81	)	$	(0.21	)	$	(1.03	)	$	(1.01	)	$	(2.02	)

Weighted Average Number of Common Shares Outstanding:
Basic and Diluted		10,913,984			8,342,481			10,750,468			8,229,176			7,092,879			1,503,438			6,916,218			1,499,019

See Notes to the Condensed Consolidated Financial Statements

MUSCLE MAKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Unaudited)

Common Stock Additional Paid-in Accumulated Total Controlling Non- Controlling
Shares Amount Capital Deficit Interest Interest Total
Balance - December 31, 2017 7,637,855 $ 764 $ 13,919,455 $ (17,052,086 ) $ (3,131,867 ) $ (69,928 ) $ (3,201,795 )
Beneficial conversion feature - Convertible Notes - - 2,537,008 - 2,537,008 - 2,537,008
Warrants issued in connection with convertible debt - - 12,332 - 12,332 - 12,332
Warrants issued and recorded as debt discount in connection with notes payable - - 305,055 - 305,055 - 305,055
Offering on March 29, 2018, net of underwriter’s discount and offering cost of $58,798 44,153 4 85,572 - 85,576 - 85,576
Conversion of convertible notes payable into common stock 553,425 53 899,287 - 899,340 - 899,340
Stock-based compensation: Amortization of restricted common stock - - 39,091 - 39,091 - 39,091
Net loss - - - (3,183,726 ) (3,183,726 ) (7,257 ) (3,190,983 )

Balance - March 31, 2018 8,235,433 $ 821 $ 17,797,800 $ (20,235,812 ) $ (2,437,191 ) $ (77,185 ) $ (2,514,376 )
Issuance of restricted stock 26,286 3 (3 ) - - - -
Shares issued for common stock 180,000 18 179,982 - 180,000 - 180,000
Beneficial conversion feature - Convertible Notes - - 39,072 - 39,072 - 39,072
Beneficial conversion feature - Convertible Note to Former Parent - - 475,000 - 475,000 - 475,000
Warrants issued in connection with common stock and convertible debt - - 3,750 - 3,750 - 3,750
Warrants issued and recorded as debt discount in connection with notes payable - - 38,763 - 38,763 - 38,763
Conversion of convertible note payable to Former Parent into common stock 785,084 78 392,464 - 392,542 - 392,542
Stock-based compensation: Amortization of restricted common stock - - 27,133 - 27,133 - 27,133
Sale of interest in CTI - - - 420,899 420,899 71,999 492,898
Net loss - - - (2,368,921 ) (2,368,921 ) 5,186 (2,363,735 )

Balance – June 30, 2018 9,226,803 $ 920 $ 18,953,961 $ (22,183,834 ) $ (3,228,953 ) $ - $ (3,228,953 )

Restricted stock issued as compensation for services 250,000 25 249,975 - 250,000 250,000
Beneficial conversion feature - Convertible Notes - - 143,591 - 143,591 - 143,591
Warrants issued in connection with common stock and convertible debt - - 143,699 - 143,699 - 143,699
Stock-based compensation Amortization of restricted common stock - - 33,876 - 33,876 - 33,876
Net loss - - - (1,144,557 ) (1,144,557 ) - (1,144,557 )

Balance –September 30, 2018 9,476,803 $ 945 $ 19,525,102 $ (23,328,391 ) $ (3,802,344 ) $ - $ (3,802,344 )
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
Balance - December 31, 2018 1,489,686 $ 148 $ 20,990,373 $ (23,833,656 ) $ (2,843,135 )
Cumulative effect of change in accounting principle - - - (875,902 ) (875,902 )
Issuance of restricted stock 1,988 1 (1 ) - -
Restricted stock issued as compensation for services 20,000 2 139,998 - 140,000
Beneficial conversion feature - Convertible Notes - - 217,800 - 217,800
Warrants issued and recorded as debt discount in connection with convertible notes payable - - 217,641 - 217,641
Stock-based compensation: Amortization of restricted common stock - - 165,133 - 165,133
Net loss - - - (1,483,479 ) (1,483,479 )

Balance - March 31, 2019 1,511,674 $ 151 $ 21,730,944 $ (26,193,037 ) $ (4,461,942 )
Common stock issued in exchange for interest earned on other notes payable 68,475 7 479,316 - 479,323
Common stock issued in exchange for interest earned on convertible notes payable 15,952 2 111,664 - 111,666
Beneficial conversion feature - Convertible Notes - - 330,220 - 330,220
Warrants issued and recorded as debt discount in connection with convertible notes payable - - 330,713 - 330,713
Stock-based compensation: Amortization of restricted common stock - - (123,431 ) - (123,431 )
Net loss - - - (1,542,606 ) (1,542,606 )

Balance - June 30, 2019 1,596,101 $ 160 $ 22,859,426 $ (27,735,643 ) $ (4,876,057 )

See Notes to the Condensed Consolidated Financial Statements
MUSCLE MAKER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF CHANGES IN STOCKHOLDERS’ ~~DEFICIT~~EQUITY

Common Stock Additional
Paid-in Accumulated
Shares Amount Capital Deficit Total
Balance - December 31, 2018 10,427,803 $ 1,043 $ 20,989,478 $ (23,833,656 ) $ (2,843,135 )
Cumulative effect of change in accounting principle - - - (568,540 ) (568,540 )
Issuance of restricted stock 13,918 1 (1 ) - -
Restricted stock issued as compensation
for services 140,000 14 139,986 - 140,000
Beneficial conversion feature - Convertible Notes - - 217,800 - 217,800
Warrants issued and recorded as debt discount in connection with convertible notes payable - - 217,641 - 217,641
Stock-based compensation: Amortization of restricted common stock - 16 165,117 - 165,133
Net loss - - - (1,483,479 ) (1,483,479 )

Balance - March 31, 2019 10,581,721 $ 1,074 $ 21,730,021 $ (25,885,675 ) $ (4,154,580 )
Common stock issued in exchange for interest earned on other notes payable 111,666 11 111,655 - 111,666
Common stock issued in exchange for interest earned on convertible notes payable 479,323 48 479,275 - 479,323
Beneficial conversion feature - Convertible Notes - - 330,220 - 330,220
Warrants issued and recorded as debt discount in connection with convertible notes payable - - 330,713 - 330,713
Stock-based compensation: Amortization of restricted common stock - - (123,431 ) - (123,431 )
Net loss - - - (1,542,606 ) (1,542,606 )

Balance - June 30, 2019 11,172,710 $ 1,133 $ 22,858,453 $ (27,428,281 ) $ (4,568,695 )
Common stock issued as compensation to board of directors 119,046 12 119,034 - 119,046
Restricted stock issued as compensation
for services 290,000 29 289,971 - 290,000

Common stock issued as compensation
for services 3,500 - 3,500 - 3,500
Stock-based compensation: Amortization of restricted common stock - - 19,085 - 19,085
Net loss - - - (2,348,829 ) (2,348,829 )

Balance - September 30, 2019 11,585,256 $ 1,174 $ 23,290,043 $ (29,777,110 ) $ (6,485,893 )
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
Balance - December 31, 2019 5,714,464 $ 571 $ 53,339,793 $ (53,094,602 ) $ 245,762
Issuance of restricted stock 1,226 - - - -
Common stock issued upon offering on February 12, 2020, net of underwriter’s discount and offering costs of $920,000 1,540,000 154 6,779,846 - 6,780,000
Restricted common stock issued as compensation to executive team upon completion of the initial public offering 216,783 22 1,083,893 - 1,083,915
Common stock issued as compensation to board of directors 25,616 3 128,077 - 128,080
Common stock issued as compensation for services 385,000 39 1,924,961 - 1,925,000
Stock-based compensation:
Restricted common stock - - 20,148 - 20,148
Warrant - - 191,000 - 191,000
Net loss - - - (5,492,263 ) (5,492,263 )

Balance - March 31, 2020 7,883,089 $ 789 $ 63,467,718 $ (58,586,865 ) $ 4,881,642
Common stock issued as compensation for services 20,000 2 56,198 - 56,200
Common stock issued in exchange for accrued interest 51,105 5 357,730 - 357,735
Common stock issued as compensation to board of directors 4,340 - 11,874 - 11,874
Stock-based compensation:
Restricted common stock - - 20,148 - 20,148
Net loss - - - (1,501,425 ) (1,501,425 )

Balance – June 30, 2020 7,958,534 $ 796 $ 63,913,668 $ (60,088,290 ) $ 3,826,174

See Notes to the Condensed Consolidated Financial Statements
MUSCLE MAKER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

For the Nine Months Ended For the Six Months Ended
September 30, June 30,
2019 2018 2020 2019

Cash Flows from Operating Activities
Net loss $ (5,374,914 ) $ (6,699,275 ) $ (6,993,688 ) $ (3,026,085 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 190,637 145,615 208,502 131,604
Accretion of interest expense - 234,044
Interest expense related to issuances of warrants - 305,055
Stock-based compensation 613,333 350,100 3,625,220 181,702
Loss on sale of CTI - 456,169
Amortization of debt discounts 1,345,683 1,914,038 38,918 894,373
Loss on change in fair value of accrued compensation 96,000 -
Bad debt expense 147,922 52,170 - 75
Deferred rent 6,323 (2,969 ) 17,829 4,455
Expenses paid by Former Parent - 620,464

Changes in operating assets and liabilities:
Accounts receivable (125,274 ) (149,510 ) (33,080 ) (57,879 )
Inventory (33,634 ) 51,786 21,962 (17,487 )
Prepaid expenses and other current assets (32,252 ) (1,257 ) 24,023 (3,399 )
Security deposits and other assets (1,475 ) (12,131 ) (34,600 ) 1,000
Accounts payable and accrued expenses 337,859 698,984 (688,509 ) 252,123
Deferred revenue (442,079 ) 53,312 (109,738 ) (417,488 )
Other current liabilities 71,757 230,527 (6,970 ) 43,608
Total Adjustments 2,078,800 4,946,397 3,159,557 1,012,687
Net Cash Used in Operating Activities (3,296,114 ) (1,752,878 ) (3,834,131 ) (2,013,398 )

Cash Flows from Investing Activities
Purchases of property and equipment (864,451 ) (78,754 ) (172,387 ) (305,511 )
Issuance of loans receivable (60,186 ) (9,689 )
Cash paid in connection with the acquisition of Midtown franchise store (35,116 ) -
Collections from loans receivable 26,681 48,655 8,802 18,582
Collections from loans receivable - related party 650 6,667 - 650
Net Cash Used in Investing Activities (932,422 ) (33,121 ) (163,585 ) (286,279 )

Cash Flows from Financing Activities
Proceeds from issuance of restricted stock - 180,000
Proceeds from offering, net of underwriter’s discount and offering costs - 85,576
Repayments to Former Parent, net - (132,459 )
Repayments of convertible note payable (50,000 ) (50,000 )
Proceeds from other notes payable - related party 91,000 (50,000 )
Proceeds from offering, net of underwriter’s discount and
offering costs of $920,000 6,780,000 -
Proceeds from PPP loan 866,300 -
Proceeds from convertible notes payable 6,373,000 1,331,000 - 5,873,000
Proceeds from convertible notes payable - related parties 100,000 650,000 - 100,000
Repayments of convertible notes payable - related party (100,000 ) -
Repayments of other notes payable - related parties (335,000 ) -
Repayments of convertible note payable (550,000 ) (50,000 )
Repayments of convertible note payable – related parties - (100,000 )
Repayments of other notes payable - related party (91,000 ) (335,000 )
Repayments of other notes payables (225,000 ) - (475,243 ) (225,000 )
Proceeds from other notes payable - 460,000
Proceeds from other notes payable – related party - 91,000
Proceeds from other note payable
150,000
-
Net Cash Provided by Financing Activities 5,854,000 2,474,117 6,680,057 5,354,000

Net Increase in Cash 1,625,464 688,118 2,682,341 3,054,323
Cash - Beginning of Period 357,842 78,683 478,854 357,842
Cash - End of Period $ 1,983,306 $ 766,801 $ 3,161,195 $ 3,412,165

See Notes to the Condensed Consolidated Financial Statements
MUSCLE MAKER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended For the Six Months Ended
September 30, June 30,
2019 2018 2020 2019

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 471,774 $ 39,129 $ 297,455 $ 177,690

Supplemental disclosures of non-cash investing and financing activities
Beneficial conversion feature $ 548,020 $ 3,194,671 $ - $ 548,020
Warrants issued in connection with convertible debt $ 548,354 $ 159,781
Conversion of convertible notes payable to Former Parent into common stock $ - $ 392,542
Conversion of notes payable into common stock $ - $ 899,340
Warrants issued and recorded as debt discount in connection with notes payable $ - $ 343,818
Convertible Note issued to Former Parent in exchange for payable to Former Parent $ - $ 475,000
Warrants issued and recorded as debt discount in connection with convertible notes payable $ - $ 548,354
Common stock issued in exchange for interest earned on convertible notes payable $ - $ 111,666
Common stock issued in exchange for interest earned on other notes payable $ 111,666 $ - $ - $ 479,323
Common stock issued in exchange for interest earned on convertible notes payable $ 479,323 $ -
Common stock issued in exchange for accrued interest $
357,735
$ -

See Notes to the Condensed Consolidated Financial Statements
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

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

Muscle Maker, Inc. (“MMI”), a ~~former subsidiary of American Restaurant Holdings (“ARH” or “Former Parent”)~~Nevada corporation was incorporated in Nevada on October 25, 2019. MMI was a wholly owned subsidiary of Muscle Maker, Inc (“MMI-Cal”), a California corporation incorporated on December 8, 2014, ~~and was a majority owner of Muscle Maker Brands, LLC, (“MMB”). MMB’s subsidiaries included Company owned restaurants~~but the two merged on November 13, 2019 with MMI as ~~well as Custom Technology, Inc., (“CTI”) a technology and point of sale (“POS”) systems dealer and technology consultant. MMB was formed on December 22, 2014 in~~ the State of California for the purpose of acquiring and operating company owned restaurants, as well as franchising its name and business system to qualified franchisees. Muscle Maker Franchising, LLC (“MMF”) was founded in 1995 in order to develop a brand of healthy-option fast food restaurants.
~~On January 23, 2015 (the “Closing Date”),~~surviving entity. MMI MMB and MMF entered into an agreement whereby MMB purchased substantially all of the assets and liabilities of MMF, MMI acquired 74% of the membership units of MMB, and certain members of MMF acquired 26% of the membership units of MMB.
~~On March 23, 2017, ARH authorized and facilitated the distribution of 5,536,308 shares of Common Stock of MMI held by American Restaurants, LLC, the~~ wholly ~~owned subsidiary of ARH, to the shareholders of the Former Parent (the “Spin-Off”). As a result of the Spin-Off on March 23, 2017, ARH is no longer a majority owner of MMI.~~
~~On June 8, 2017, MMB converted from a limited liability company into a California corporation named Muscle Maker Brands Conversion, Inc. (“MMBC”).~~
~~On July 18, 2017, MMI formed~~owns Muscle Maker Development, LLC (“MMD”), Muscle Maker ~~Development”~~Corp, LLC (“MMC”) and Muscle Maker USA, Inc (“Muscle USA”). MMD was formed on July 18, 2017, in the State of Nevada for the purpose of running our existing franchise operations and continuing to franchise the Muscle Maker Grill name and business system to qualified franchisees. Muscle Maker Development issued 1,000 membership units to its sole member and manager, MMI. MMB assigned all the existing franchise agreements to Muscle Maker Development (“Assignment and Assumption Agreement”) pursuant to the terms of that certain Assignment and Assumption Agreement, dated August 25, 2017, among MMI, MMB and Muscle Maker Development.
OnMMC was formed on July 18, 2017, ~~MMI formed Muscle Maker Corp., LLC (“Muscle Maker Corp.”)~~ in the State of Nevada for the purpose of developing new corporate stores and operating new and existing corporate stores of MMI. Muscle ~~Maker Corp. issued 1,000 membership units to its sole member and manager, MMI and MMI assigned all~~USA was formed on March 14, 2019 in the ~~existing~~State of Texas for the purpose of opening additional new corporate ~~stores to Muscle Maker Corp.~~stores.

~~On September 15, 2017 (“Effective Merger Date”)~~MMI 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, our restaurants feature freshly prepared entrée salads and an appealing selection of sides, protein shakes and fruit smoothies. MMI operates in the fast-casual restaurant segment.
MMI is the owner of the trade name and service mark Muscle Maker Grill®, ~~pursuant~~Healthy Joe’s and other trademarks and intellectual property we use in connection with the operation of Muscle Maker Grill® restaurants. We license the right to ~~an Agreement of Merger, MMBC was merged (“Merger”) into~~ use the Muscle Maker Grill® and Healthy Joe’s trademarks and intellectual property to our wholly-owned subsidiaries, MMD, MMC and Muscle USA, and to further sublicense them to our franchisees for use in connection with Muscle Maker Grill® and Healthy Joe’s restaurants.
MMI ~~with MMI~~and its subsidiaries are hereinafter referred to as the ~~surviving corporation,~~“Company”.
The Company operates under the name Muscle Maker Grill and is a franchisor and owner operator of Muscle Maker Grill and Healthy Joe’s restaurants. As of June 30, 2020, the Company’s restaurant system included eleven company-owned restaurants, and twenty franchise restaurants. A Muscle Maker Grill restaurant offers quality food freshly prepared with the Company’s proprietary recipes created with the guest’s health in mind. The menu is protein based, and features various supplements, health food snacks, along with a nutritious children’s menu.
COVID-19
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 have been implemented across much of the United States.
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 ~~tax-free reorganization. Pursuant~~negative impact on the Company’s operations during the quarter ended June 30, 2020. However, due to the ~~Merger, each share~~rapid development and fluidity of ~~common stock~~this situation, the magnitude and duration of ~~MMBC (the “MMBC Common Stock”) owned by~~ the ~~members~~pandemic and its impact on the Company’s operations and liquidity is uncertain as of ~~MMF was converted into 796 shares~~the date of ~~common stock~~this report. While there could ultimately be an additional material impact on operations and liquidity of ~~MMI, resulting in aggregate consideration~~the Company, the full impact could not be determined, as of ~~1,550,964 shares~~the date of ~~common stock of MMI to the members of MMF.~~this report. As a result of the ~~Merger, MMI directly~~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 ~~70%~~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 and the executive team has deferred a portion of their salaries which is still in effect as of date of the ~~shares~~filing of ~~CTI.~~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 the Company re-opened one of the five temporarily closed locations.

On May 24, 2018, the Company entered into a stock purchase agreement among John Guild, JohnG Solutions LLC and CTI in which the Company agreed to sell its 70% ownership in CTI for a total purchase price of $1.00.
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

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

~~On March 14, 2019, MMI formed a wholly owned subsidiary, Muscle Maker USA, Inc. (“Muscle USA.”), in the State of Texas.~~
In November 2019, MMI formed Muscle Maker Inc., LLC (“MMI NV.”) in the state of Nevada. Pursuant to the Articles of Incorporation filed in the state of Nevada, MMI NV has authorized capital stock consisting of 100,000,000 shares of common stock, with a $0.0001 par value per share.
On November 13, 2019, Muscle Maker, Inc., a California corporation, merged with and into its wholly owned subsidiary, Muscle Maker, Inc., a Nevada corporation, pursuant to an Agreement and Plan of Merger between Muscle Maker, Inc., a California corporation, and Muscle Maker, Inc., a Nevada corporation. Muscle Maker, Inc., a Nevada corporation, continued as the surviving entity of the migratory merger. Pursuant to the migratory merger, the Company changed its state of incorporation from California to Nevada and each share of its common stock converted into one share of common stock of the surviving entity in the migratory merger. No dissenters’ rights were exercised by any of the Company’s stockholders in connection with the migratory merger. All share and per share information has been retroactively adjusted to reflect merger with a $0.0001 par value per share.
~~MMI and its subsidiaries is the “Company”.~~
The Company operates under the name Muscle Maker Grill and is a franchisor and owner operator of Muscle Maker Grill restaurants. As of September 30, 2019, the Company’s restaurant system included eight company-owned restaurants, and thirty-one franchise restaurants. A Muscle Maker Grill restaurants offers quality food freshly prepared with the Company’s proprietary recipes created with the guest’s health in mind. The menu is protein based, and features various supplements, health food snacks, along with a nutritious children’s menu.
Going Concern and Management’s Plans

As of ~~September~~June 30, ~~2019,~~2020, the Company had a cash balance, a working capital ~~deficiency~~surplus and an accumulated deficit of ~~$1,983,306, $5,484,122,~~$3,161,195, $214,643, and ~~$29,777,110,~~$60,088,290, respectively. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, the Company incurred a pre-tax net loss of ~~$2,348,829~~$1,501,425 and ~~$5,374,914,~~$6,993,688, respectively. These conditions indicate that there is substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date of the issuance of these condensed consolidated financial statements.

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

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

NOTE 2 – REVERSE STOCK SPLIT

Effective ~~January 31, 2018,~~December 11, 2019, pursuant to authority granted by the ~~stockholders~~board of directors of the Company, the Company implemented a ~~3-for-4~~1-for-7 reverse split of the Company’s issued common stock (the ~~“Second~~“Third Reverse Split”). All share and per share information has been retroactively adjusted to reflect the ~~Second~~Third Reverse Split for all periods presented.
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of ~~September~~June 30, ~~2019,~~2020, and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 are not necessarily indicative of the operating results for the full year. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto for the year ended December 31, ~~2018, included in this filing.~~2019. The balance sheet as of December 31, ~~2018~~2019 has been derived from the Company’s audited financial statements.

Principles of Consolidation

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

Use of Estimates

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

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

● the ~~fair value of assets acquired, and liabilities assumed in a business combination;~~
● ~~the~~ assessment of recoverability of long-lived assets, including property and equipment, goodwill and intangible assets;
● the estimated useful lives of intangible and depreciable assets;
● estimates and assumptions used to value warrants and options;
● the recognition of revenue; and
● the recognition, measurement and valuation of current and deferred income ~~taxes~~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.
9

MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

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

The Company considers all highly-liquid instruments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

~~Convertible Instruments~~
The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with Topic 815 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The accounting treatment of derivative financial instruments requires that the Company record embedded conversion options and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Embedded conversion options and any related freestanding instruments are recorded as a discount to the host instrument.
If the instrument is determined not to be a derivative liability, the Company then evaluates for the existence of a beneficial conversion feature by comparing the market price of the Company’s common stock as of the commitment date to the effective conversion price of the instrument.
~~As of September 30, 2019, and December 31, 2018, the Company did not have any derivative liabilities on its balance sheets.~~
Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, ~~2019,~~2020, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its condensed consolidated financial statements and disclosures.
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815),” which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The guidance can be applied using a full or modified retrospective approach. The Company does not believe the adoption of the standard will have a material impact on its condensed consolidated financial statements or disclosures.
~~MUSCLE MAKER, INC. AND SUBSIDIARIES~~
~~Notes to Condensed Consolidated Financial Statements~~
~~NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued~~
~~Recent Accounting Pronouncements, continued~~

In June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718),” (“ASU 2018-07”). ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments. Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different. ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity — Equity-Based Payments to Nonemployees. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than a Company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company is currently evaluating ASU 2018-07 and its impact on the condensed consolidated financial statements.
MUSCLE MAKER, INC. AND SUBSIDIARIES
~~In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). These amendments provide clarifications and corrections~~Notes to ~~certain ASC subtopics including the following: Income Statement - Reporting Comprehensive Income~~Condensed Consolidated Financial Statements
NOTE 3 – Overall (Topic 220-10), Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from Equity – Overall (Topic 480-10), Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations - Income Taxes (Topic 805-740), Derivatives and Hedging – Overall (Topic 815-10), and Fair Value Measurement – Overall (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.SIGNIFICANT ACCOUNTING POLICIES, continued
Recent Accounting Pronouncements, continued

In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”). The amendments in ASU 2018-10 provide additional clarification and implementation guidance on certain aspects of the previously issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) and have the same effective and transition requirements as ASU 2016-02. Upon the effective date, ASU 2018-10 will supersede the current lease guidance in ASC Topic 840, Leases. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2018-10 is effective for emerging growth companies for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. The Company is currently assessing the impact this guidance will have on its condensed consolidated financial statements.
~~MUSCLE MAKER, INC. AND SUBSIDIARIES~~
~~Notes to Condensed Consolidated Financial Statements~~
~~NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued~~
~~Recent Accounting Pronouncements, continued~~

In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” (“ASU 2018-11”). The amendments in ASU 2018-11 related to transition relief on comparative reporting at adoption affect all entities with lease contracts that choose the additional transition method and separating components of a contract affect only lessors whose lease contracts qualify for the practical expedient. The amendments in ASU 2018-11 are effective for emerging growth companies for fiscal years beginning after December 15, ~~2019,~~2020, and interim periods within those fiscal years. The Company is currently assessing the impact this guidance will have on its condensed consolidated financial statements.

In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“Topic 842”) (“ASU 2019-01”). These amendments align the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in Topic 820, Fair Value Measurement) should be applied. (Issue 1). The ASU also requires lessors within the scope of Topic 942, Financial Services—Depository and Lending, to present all “principal payments received under leases” within investing activities. (Issue 2). Finally, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. (Issue 3). The transition and effective date provisions apply to Issue 1 and Issue 2. They do not apply to Issue 3 because the amendments for that Issue are to the original transition requirements in Topic 842. This amendment will be effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating ASU 2019-01 and its impact on its unaudited consolidated financial statements and financial statement disclosures.
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Revenue Recognition

During the first quarter 2019, the Company adopted Topic 606 “Revenue from Contracts with Customers” for revenue recognition related to contracts with customers and applied the guidance modified retrospectively. Under the new guidance, revenue is recognized in accordance with a five-step revenue model, as follows: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. In applying this five-step model, we have made significant judgments in identifying the promised goods or services in our contracts with franchisees that are distinct, and which represent separate performance obligations. The change between Topic 605 and Topic 606, primarily impacted the way the Company recognized franchise fees. Under Topic 605 franchise fees were recognized upon opening of a restaurant or granting of a new franchise term at a point in time while under Topic 606 franchise fees are ~~recognizes~~recognized on a straight-line basis over the life of the related franchise agreements and any exercised renewal periods. The impact of the adoption of Topic 606 resulted in an adjustment of ~~$568,540~~$875,902 in ~~retained earnings~~accumulated deficit and deferred revenues.

Restaurant Sales

Retail store revenue at Company operated restaurants is recognized when payment is tendered at the point of sale, net of sales tax, discount and other sales related taxes. The Company recorded retail store revenues of ~~$821,684~~$659,939 and ~~$2,438,284~~$1,897,366 during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively. The Company recorded retail store revenues of ~~$721,300~~$815,837 and ~~$3,246,041~~$1,616,600 during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively.

The Company sells gift cards which do not have an expiration date, and it does not deduct dormancy fees from outstanding gift card balances. The Company recognize revenues ~~form~~from gift cards as restaurant revenues once the Company performs its obligation to provide food and beverage to the customer ~~is satisfies upon~~simultaneously with the redemption of the gift ~~card.~~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 ~~$165,412~~$52,870 and ~~$563,772~~$173,779 during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. The Company recorded revenue from royalties of ~~$244,820~~$191,810 and ~~$736,384~~$398,360 during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations.
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Franchise Royalties and Fees, continued

The Company provides the franchisees with management expertise, training, pre-opening assistance, and restaurant operating assistance in exchange for the multi-unit development fees and franchise fees. The Company capitalizes these fees upon collection from the franchisee, ~~which~~these fees are then ~~recognizes~~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~~revenues from franchise fees of ~~$16,132~~$75,190 and ~~$342,649~~$89,630, respectively, during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively,~~2020, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. The Company recorded ~~revenue~~revenues from franchise fees of ~~$20,000~~$273,336 and ~~$125,000~~$326,517, respectively, during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018, respectively,~~2019, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations.

The Company has supply agreements with certain food and beverage vendors. Pursuant to the terms of these agreements, rebates are provided to the Company based upon the dollar volume of purchases for all company-owned and franchised restaurants from these vendors. Rebates earned on purchases by franchise stores are recorded as revenue during the period in which the related food and beverage purchases are made. The Company recorded revenue from rebates of ~~$71,200~~$14,233 and ~~$220,120~~$54,915 during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, which is included in franchise royalties and fees on the accompanying ~~condensed~~ consolidated statements of operations. The Company recorded revenue from rebates of ~~$59,260~~$63,939 and ~~$268,588~~$148,920 during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. Rebates earned on purchases by Company owned stores are recorded as a reduction of ~~cost of goods sold~~food and beverage costs during the period in which the related food and beverage purchases are made.

Other Revenues

~~Through its subsidiary CTI which was sold in May 2018,~~Gift card breakage is recognized when the likelihood of a gift card being redeemed by the customer is remote and the Company ~~derived revenue from~~determines there is not a legal obligation to remit the ~~sale~~unredeemed gift card balance to the relevant jurisdiction. The determination of ~~POS computer systems, cash registers and camera systems, and from~~ the ~~provision of related consulting and support services, which generally include implementation, installation and training services.~~gift card breakage rate is based upon the Company’s specific historical redemption patterns. The Company ~~recognized revenue when persuasive evidence of an arrangement existed, delivery~~recognizes gift card breakage by applying its estimate of the ~~product or service has occurred,~~rate of gift card breakage on a pro rata basis over the ~~fee was fixed or determinable and collectability was reasonably assured. The Company recorded $0 and $244,633, respectively,~~period of ~~revenues from these technology sales and services during~~estimated redemption. Gift card liability is recoded in other current liabilities on the condensed consolidated balance sheet. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2020, the Company determined that no gift card breakage is necessary based on current redemption rates.
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 ~~and customer deposits received~~are recognized in ~~connection with technology sales and services by CTI (see Note 10 – Deferred Revenue).~~income as performance obligations are satisfied.

~~Customer deposits received for technology sales or services are recorded as deferred revenue and recognized when the sale is complete, or the service is performed.~~
~~MUSCLE MAKER, INC. AND SUBSIDIARIES~~
~~Notes to Condensed Consolidated Financial Statements~~
~~NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued~~
Franchise Advertising Fund Contributions
Under the Company’s franchise agreements, the Company and its franchisees are required to contribute a certain percentage of revenues to a national advertising fund. The Company’s national advertising services are provided on a system-wide basis and, therefore, not considered distinct performance obligations for individual franchisees. In accordance with Topic 606, the Company recognizes these sales-based advertising contributions from franchisees as franchise revenue when the underlying franchisee ~~sales occur.~~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 ~~condensed~~ consolidated statement of operations in an amount that is greater than the revenue recorded for advertising contributions. Conversely, when an advertising contribution fund is under-spent at a period end, the Company will accrue advertising costs up to advertising contributions recorded in revenue. The Company recorded contributions from franchisees of ~~$39,030~~$32,454 and ~~$116,423,~~$54,050, respectively, during the three and ~~nine~~six months ended ~~September~~June 30, 2020, respectively, which are included in franchise advertising fund contributions on the accompanying condensed consolidated statements of operations. The Company recorded contributions from franchisees of $38,494 and $77,393, respectively, during the three and six months ended June 30, 2019, which is included in franchise advertising fund contributions on the accompanying condensed consolidated statements of operations.

Impacts on Financial Statements

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

December 31, 2018 New Revenue
Standard
Adjustment January 1, 2019 December 31, 2018
New Revenue
Standard
Adjustment
January 1, 2019
Deferred revenues $ 907,948 $ 568,540 $ 1,476,488 $ 907,948 $ 875,902 $ 1,783,850
Accumulated deficit 23,833,656 568,540 24,402,196 23,833,656 875,902 24,709,588

Advertising

Advertising costs are charged to expense as incurred. Advertising costs were approximately ~~$14,624~~$25,092 and ~~$18,237~~$128,735 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, and approximately ~~$3,638~~$196 and ~~$23,237~~$3,613 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 respectively, and are included in general and administrative expenses in the accompanying condensed consolidated statements of operations.
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued

Net Loss per Share

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

The following securities are excluded from the calculation of weighted average diluted common shares at ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, because their inclusion would have been anti-dilutive:
~~MUSCLE MAKER, INC. AND SUBSIDIARIES~~
~~Notes to Condensed Consolidated Financial Statements~~
~~NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES, continued~~
~~Net Loss per Share, continued~~
September 30, June 30,
2019 2018 2020 2019
Warrants 5,296,048 1,507,048 2,537,264 738,721
Options 33,750 33,750 4,821 4,821
Convertible debt 7,841,846 2,972,070 32,350 1,108,109
Total potentially dilutive shares 13,171,644 4,512,868 2,574,435 1,851,651

Major Vendor

The Company engages various vendors to distribute food products to their Company-owned restaurants. Purchases from the Company’s largest supplier totaled ~~75%~~82.95% and ~~81%~~84.41% of the Company’s purchases for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively. Purchases from the Company’s largest supplier totaled ~~81%~~75% and ~~77%~~84% of the Company’s purchases for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively.

~~Controlling and Non-Controlling Interest~~Fair Value of Financial Instruments

The ~~profits~~Company measures the fair value of financial assets and ~~losses~~liabilities based on the guidance of ~~CTI were allocated among~~ the ~~controlling interest~~Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures” (“ASC 820”).
ASC 820 defines fair value as the ~~CTI non-controlling interest~~exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the ~~same proportions~~principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The carrying amounts of accrued liabilities approximate fair value due to the short-term nature of these instruments. The carrying amounts of our short–term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates, taken together with other features such as ~~their membership interests from January~~concurrent issuance of common stock and warrants, are comparable to rates of returns for instruments of similar credit risk.
See Note 12 – Equity – Warrant and Options Valuation for details related to a accrued compensation liability being fair valued using Level 1 ~~2018 through May 24, 2018.~~inputs.

Reclassifications

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

Subsequent Events

The Company evaluated events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation and transactions, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed in Note 1513 – Subsequent Events.
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
~~NOTE 4 – ACQUISITION~~
~~Midtown Acquisition~~
On August 22, 2019, the Company acquired a franchisee store in Midtown, New York, as a corporate store (the “Midtown Acquisition”). The purchase price of the store was $121,464, of which $35,116 related to equipment purchased and the remaining $86,348 was accounted for as goodwill. The Company paid cash of approximately $35,000 and also assumed a liability of approximately $86,000 which is recorded in accounts payable and accrued expenses.

NOTE 54 - LOANS RECEIVABLE

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company’s loans receivable consists of the following:

September 30, 2019 December 31, 2018
Loans receivable, net $ 146,416 $ 112,911
Less: current portion (19,092 ) (37,155 )
Loans receivable, non-current $ 127,324 $ 75,756
During August 2019, the company advanced money to a former franchisee and issued a loan receivable in the amount of $60,186. The loan is payable in 120 monthly payments consisting of principal and interest of 12%, with the payments becoming due as of December 1, 2019.

June 30,
2020

December 31,
2019

Loans receivable, net $ 128,587 $ 137,389
Less: current portion (40,364 ) (38,712 )
Loans receivable, non-current $ 88,223 $ 98,677

Loans receivable includes loans to franchisees and a former franchisee totaling, in the aggregate, ~~$146,416~~$128,587 and ~~$112,911,~~$137,389, net of reserves for uncollectible loans of $55,000 ~~and $55,000~~ at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019, respectively. The loans have original terms ranging up to 10 years, earn interest at rates ranging from 2% to 12%, and are being repaid on a weekly or monthly basis.
~~NOTE 6 – LOAN RECEIVABLE FROM RELATED PARTY~~
~~At September 30, 2019 and December 31, 2018, the Company’s loan receivable from related party consisted of the following:~~
~~September 30, 2019~~ ~~December 31, 2018~~
~~Loans receivable from related party, net~~ $ - ~~650~~
~~Less: current portion~~ - ~~(650~~ )
~~Loans receivable from related party, non-current~~ $ - -

NOTE 75 – PROPERTY AND EQUIPMENT, NET

As of ~~September~~June 30, ~~2019,~~2020 and December 31, ~~2018~~2019 property and equipment consists of the following:

September 30, 2019 December 31, 2018
June 30,
2020

December 31,
2019

Furniture and equipment $ 559,203 $ 282,896 $ 727,218 $ 617,712
Leasehold improvements 1,249,628 626,368 1,581,174 1,518,293
1,808,831 909,264 2,308,392 2,136,005
Less: accumulated depreciation and amortization (414,891 ) (271,977 ) (665,812 ) (489,126 )
Property and equipment, net $ 1,393,940 $ 637,287 $ 1,642,580 $ 1,646,879

Depreciation expense amounted to ~~$42,950~~$81,337 and ~~$142,914~~$176,686 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively. Depreciation expense amounted to ~~$31,580~~$47,004 and ~~$95,526~~$99,964 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively.
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

NOTE 86 – GOODWILL AND OTHER INTANGIBLE ASSETS, NET

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

A summary of the intangible assets is presented below:

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

Weighted average remaining amortization period at September 30, 2019 (in years) 8.6
Intangible Assets Trademark Franchise Agreements Total
Intangible assets, net at December 31, 2019 $ 2,524,000 $ 514,815 $ 3,038,815
Amortization expense - (31,816 ) (31,816 )
Intangible assets, net at June 30, 2020 $ 2,524,000 $ 482,999 $ 3,006,999

Weighted average remaining amortization period at June 30, 2020 (in years) 7.6

Amortization expense related to intangible assets amounted to ~~$16,083~~$15,908 and ~~$47,723~~$31,816 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively. Amortization expense related to intangible assets amounted to ~~$16,083~~$15,908 and ~~$50,089~~$31,640 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively.

NOTE 97 – ACCOUNTS ~~PAYABLES~~PAYABLE AND ACCRUED EXPENSES

Accounts payables and accrued expenses consist of the following:

September 30, 2019 December 31, 2018
June 30,
2020
December 31, 2019
Accounts payable $ 935,432 $ 841,334 $ 737,363 $ 857,846
Accrued payroll 186,063 181,452 81,729 139,320
Accrued vacation 18,757 -
Accrued professional fees 257,994 296,518 248,324 329,826
Accrued board members fees 125,187 143,108 8,054 59,864
Accrued rent expense 307,769 618,120 192,644 269,644
Accrued compensation expense⁽¹⁾⁽²⁾ 284,855 -
Sales taxes payable⁽¹⁾⁽³⁾ 224,717 297,160 253,831 329,089
Accrued interest 647,173 433,494 21,752 520,682
Accrued interest, related parties 1,795 - - 79,523
Other accrued expenses 15,711 76,194 41,007 45,154
$ 2,720,598 $ 2,887,380
Total Accounts Payable and Accrued Expenses $ 1,869,559 $ 2,630,948

(1) The Company accrued a liability of $142,855 related to an aggregate of 28,571 shares of common stock earned by a consultant upon the completion of the initial public offering pursuant to their consulting agreement entered into on September 12, 2018, which has not been issued by the Company to date due to an administrative delay.
(2)
Included within accrued compensation expense is a liability of $142,000 related to 200,000 stock options to be issued by the Company. See Note 1311 – Commitments and Contingencies – Consulting Agreements for details related to the Options.
(3) See Note 11 – Commitments and Contingencies –Taxes for detailed related to delinquent sales taxes.
~~MUSCLE MAKER, INC. AND SUBSIDIARIES~~
~~Notes to Condensed Consolidated Financial Statements~~

NOTE 108 – DEFERRED REVENUE

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, deferred revenue consists of the following:

September 30, 2019 December 31, 2018
June 30,
2020

December 31,
2019

Franchise fees $ 958,998 $ 801,107 $ 1,121,899 $ 1,210,719
Unearned vendor rebates 75,411 106,841 44,035 64,953
Less: Unearned vendor rebates, current (75,411) (106,841 ) (44,035 ) (64,953 )
Less: Franchise fees, current (56,220) (801,107 ) (53,253 ) (57,744 )
Deferred revenues, non-current $ 902,778 $ - $ 1,068,646 $ 1,152,975

NOTE 119 – OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

September 30, 2019 December 31, 2018
Gift card liability $ 126,089 $ 122,221
Co-op advertising fund liability 287,927 240,226
Advertising fund liability 265,227 245,039
$ 679,243 $ 607,486
~~NOTE 12 – NOTES PAYABLE~~
~~Convertible Notes~~
~~15% Senior Secured Convertible Promissory Notes~~
From January 1, 2019 through September 30, 2019, the Company entered into Securities Purchase Agreements (“SPA”) with several accredited investors (the “Investors”) providing for the sale by the Company to the investors of 15% Senior Secured Convertible Promissory Notes (the “SPA Notes”) in the aggregate amount of $2,973,000, of which a $100,000 was to related parties. The SPA Notes bear interest at 15% per annum paid quarterly and mature 18 months from issuance.
As amended on April 10, 2019, the Investors may elect to convert all or part of the SPA Notes, plus accrued interest, at any time into shares of common stock of the Company at a conversion price of $1.00 (the “Fixed Conversion Price”); provided, however, in the event the per share price of a public offering multiplied by twenty five percent (25%) at the time of the listing of the shares of common stock on an exchange (the “Listing Event”) is less than $1.00 (the “Discounted Public Offering Price”) then the conversion price shall be reset to equal the Discounted Public Offering Price. In the event the Investors are required to execute a Lock Up Agreement concurrent with a public offering at the time of the Listing Event, then the Fixed Conversion Price shall be 17.5% of the per share offering price paid by the investors in the public offering in conjunction with an uplisting to a national exchange.

June 30,
2020

December 31,
2019

Gift card liability $ 90,004 $ 88,673
Co-op advertising fund liability 294,844 298,662
Advertising fund liability 260,825 265,308
$ 645,673 $ 652,643
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

NOTE 1210 – NOTES PAYABLE ~~continued~~

Convertible Notes ~~continued~~
Convertible Note Payable to Former Parent
As of June 30, 2020, the Company had an amount of $82,458 in convertible notes payable to Former Parent outstanding.

15% Senior Secured Convertible Promissory Notes ~~continued~~

~~In addition to~~During the ~~SPA Notes, the Investors also received warrants to purchase common stock of 1,486,500 shares of~~six months ended June 30, 2020, the Company ~~(the “SPA Warrants”). The Investors are entitled to purchase a number~~repaid an aggregate of shares equal to 50% of the conversion shares of common stock of the Company. The SPA Warrants are exercisable for five years at an exercise price of $1.20. In the event the conversion price is adjusted as contemplated above, then the exercise price shall adjust to equal 120% of the adjusted conversion price. The Investors may exercise the SPA Warrants on a cashless basis.
~~The Company granted the Investors piggyback registration rights with respect to the shares of common stock underlying the SPA Notes and the SPA Warrants.~~$450,000 in 15% senior secured convertible promissory notes.

12% Secured Convertible ~~Notes~~Note
During ~~April 2019, Muscle USA entered into security purchase agreement (“April 2019 SPA”) with~~ the ~~several accredited investors (“April 2019 Investors”) providing for the sale by~~six months ended July 30, 2020, the Company torepaid the ~~investors of~~$75,000 12% secured convertible ~~notes (“April 2019 Notes”) in the aggregate amount of $3,500,000 (the “April 2019 Offering”).~~
The April 2019 Notes bear interest at 12% per annum, paid quarterly, and mature 18 months from issuance. The April 2019 Investors may elect to convert all or part of the April 2019 Notes, plus accrued interest, at any time into shares of common stock of the Company at a conversion price of $2.00 per share (the “April 2019 Conversion Price”); provided, however, in the event the per share price of a public offering multiplied by fifty percent (50%) at the time of the Company listing on a national exchange (the “April 2019 Discounted Public Offering Price”) is less than $2.00 then the April 2019 Conversion Price shall be reset to equal the lesser of (i) April 2019 Discounted Public Offering Price or (ii) a price per share equal to a $20 million valuation.
In addition to the April 2019 Notes, the Investors also received 875,000 warrants to purchase common stock of the Company (the “April 2019 Warrants”) that entitle the holders to purchase a number of shares equal to 50% of the conversion shares of common stock of the Company. The April 2019 Warrants are exercisable for five years at an exercise price of 115% of the conversion price.
Upon the occurrence of the listing of the Company’s common stock on a national securities exchange, the sale of all or substantially all of the Company’s stock, the sale or licensing of all or substantially all of the Company’s assets or any combination of the foregoing, the entire unpaid and outstanding principal amount and any accrued interest thereon under the April 2019 Notes shall automatically convert in whole without any further action by the holders.
As long as the April 2019 Notes remain outstanding, the Company has agreed that, among other items, it will only use proceeds from the sale of the April 2019 Notes and exercise of the April 2019 Warrants for specific corporate purposes as set forth in the April 2019 SPA, will not incur or permit indebtedness or liens unless permitted and will not enter into variable priced transactions. The Company and the April 2019 Investors entered into Security and Pledge Agreements providing that the obligations to the April 2019 Investors are secured by substantially all of Muscle USA’s assets.
~~MUSCLE MAKER, INC. AND SUBSIDIARIES~~
~~Notes to Condensed Consolidated Financial Statements~~
~~NOTE 12 – NOTES PAYABLE, continued~~
~~Convertible Notes, continued~~
~~12% Secured Convertible Notes, continued~~
~~The Company granted the April 2019 Investors piggyback registration rights with respect to the shares of common stock underlying the April 2019 Notes and the April 2019 Warrants.~~promissory note.

Other Convertible Notes

~~On or about January 23,~~During the six months ended June 30, 2020, the Company repaid a $25,000 other convertible note payable.
As of June 30, 2020 and December 31, 2019, the Company ~~and certain~~has another convertible note holders, including related parties, agreed to extend the maturity date of the convertible notes payable, as amended and extended on or about August 2018, in the aggregate principal amount of $1,550,000, of which $400,000 was to related parties, to be upon the earlier of (a) January 24, 2020 or (b) the first day the company’s stock is publicly traded. All interest due and payable on the notes, shall be converted into shares of common stock at a conversion price of $1.00 per share.
~~During April 2019, the Company repaid convertible notes~~ payable in the ~~aggregate principal~~ amount of ~~$150,000, of~~$100,000 which ~~$100,000 belong to related parties. In addition, the company issued 111,666 of the company’s common stock as payment for the interest incurred on the~~is included within convertible notes ~~payable repaid in the aggregate amount of $111,666.~~
~~In accordance with ASC 470-20 “Debt with Conversion~~payable. See Note 11 – Commitments and ~~other Options”, the intrinsic value~~Contingencies – Litigation, Claims and Assessments for details related to the $100,000 other convertible notes results in a beneficial conversion feature which is recorded as a debt discount with a corresponding credit to additional paid in capital. The relative fair value of the warrants at the date of grant is also recorded as a debt discount. For the nine months ended September 30, 2019 the Company recorded aggregate debt discounts of $548,354 and $548,020, related to the warrants and the beneficial conversion feature, respectively, on the convertible notes and for the nine months ended September 30, 2018 the Company recorded aggregate debt discounts of $359,900 and $3,051,080, related to the warrants and the beneficial conversion feature, respectively, on the convertible notes, which were amortized over the expected terms of the respective notes.note payable.

Other Notes Payable

On ~~or about January 23, 2019,~~May 9, 2020, the Company entered into a Paycheck Protection Program Promissory Note and ~~certain note holders, including related parties, agreed~~Agreement with Greater Nevada Credit Union, pursuant to ~~extend~~which the Company received loan proceeds of $866,300 (the “PPP Loan”). The PPP Loan was made under, and is subject to the terms and conditions of, the PPP which was established under the CARES Act and is administered by the U.S. Small Business Administration. The current term of the PPP Loan is two years with a maturity date of May 9, 2022 and contains a favorable fixed annual interest rate of 1.00%. Payments of principal and interest on the ~~notes~~PPP Loan will be deferred for the first six months of the term of the PPP Loan until November 9, 2020. Principal and interest are payable monthly and may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Under the terms of the CARES Act, recipients can apply for and receive forgiveness for all, or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as ~~amended and extended on or about August 2018,~~set forth in the ~~aggregate principal amount of $560,000~~PPP, including, but not limited to, ~~be upon~~payroll costs (as defined under the ~~earlier of (a) January 24, 2020~~PPP) and mortgage interest, rent or ~~(b) the first day the company’s stock is publicly traded. All interest due~~utility costs (collectively, “Qualifying Expenses”), and ~~payable~~ on the ~~notes, shall be converted into shares~~maintenance of ~~common stock at a conversion price~~employee and compensation levels during the eight-week period following the funding of ~~$1.00 per share.~~
~~During April 2019,~~the PPP Loan. The Company believes that it has been using the proceeds of the PPP Loan, for Qualifying Expenses. However, no assurance is provided that the Company ~~repaid other notes payable in the aggregate principal amount of $560,000, of which $335,000 belong~~will be able to ~~related parties. In addition, the company issued 479,323~~obtain forgiveness of the ~~company’s common stock as payment for the interest incurred on the other notes payable repaid~~PPP Loan in ~~the aggregate amount of $479,323.~~whole or in part.

On May 14, 2019, the Company issued a $91,000 promissory note to a related party. The note has a stated interest rate of 15% over the original term of one year with monthly interest payments. The note becomes due in one year or the first day the Company trades publicly on an exchange. This note was repaid in full during the first quarter of 2020.
On October 10, 2019, the Company issued a $300,000 five-year promissory note to a former franchisee with an eight percent interest rate. During the three and six months ended June 30, 2020, the Company repaid $13,377 and $25,873, respectively, of the five-year promissory note.
During December 2019, the Company issued a note payable in the principal amount of $300,000. The note has an original issue discount of 20%. The note become due in full on or before February 21, 2020. The note has been repaid during the first quarter of 2020.
On February 3, 2020, the Company issued a note payable in the principal amount of $150,000. The note has an original issue discount of 20%. The note become due in full on or before February 21, 2020. The note has been repaid during the first quarter of 2020.
As of June 30, 2020, the Company had an aggregate amount of $1,132,864 and $0 in other notes payable and other notes payable, related party, respectively. The notes had interest rates ranging between 1% - 8% per annum, due on various dates through October 10, 2024.
The maturities of other notes payable as of June 30, 2020, are as follows:
Principal
Repayments due as of Amount
06/30/2021 $ 435,733
06/30/2022 542,231
06/30/2023 62,875
06/30/2024 68,094
06/30/2025 23,931
$ 1,132,864
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

NOTE 1311 – COMMITMENTS AND CONTINGENCIES

~~Employment~~Consulting Agreements

On ~~May 1, 2018,~~February 18, 2020, the Company ~~appointed Michael J. Roper as Chief Executive Officer (“CEO”)~~entered into a professional services agreement with a company to provide advice on business development of food stores and delivery kitchen operations. In addition, they will review and advise the Company on potential acquisition targets, including financial analytics for post-merger entities and provide assistance in preparing pro-forma financial information. The term of the agreement commences from the effective date on February 18, 2020 and expires on February 18, 2021. Pursuant to the terms of the agreement, the Company agreed to issue 300,000 shares of the Company’s common stock and 100,000 three-year cashless warrants with an exercise price of $5.00 per share upon signing of the agreement as payment. The grant date fair value of the warrants of $191,000 was recorded in general and administrative expense as stock-based compensation. The Company rescinded the issuance of 100,000 warrants and 300,000 shares of the Company’s common stock in July 2020. See Note 13 – Subsequent Events – Consulting Agreement Settlement for more details.
On February 24, 2020, the Company entered into ~~an Employment~~a Consulting Agreement with ~~Mr. Roper. During~~consultants with experience in the area of corporate finance, investor communication and financial and investor public relations. The term of the agreement is for two months from the effective date on February 27, 2020 and expires on April 27, 2020. Pursuant to the terms of the agreement, the Company agreed to pay $215,000 in cash and to issue 10,000 shares of the Company’s common stock. In the event the Company elects to not extend the term of the agreement, ~~Mr. Roper will be entitled~~it is to ~~a base salary at~~notify the ~~annualized rate~~consultants within five days of ~~$250,000 and will be eligible for a discretionary performance bonus to be paid in cash or equity. Mr. Roper is also entitled to 100,000~~the conclusion of the 60-day term. As of June 30, 2020, the company issued the 10,000 shares of common stock ofand paid the ~~Company that will be issued upon a Public offering of at least $3,000,000. In addition, Mr. Mohan resigned as Interim President of the Company.~~
On May 29, 2018, Ferdinand Groenewald, the Vice President of Finance, Principal Financial Officer and Principal Accounting Officer, notified the Company that he is resigning from his positions with the Company and its subsidiaries effective May 29, 2018.
On September 26, 2018, the Company rehired Ferdinand Groenewald as Chief Financial Officer of the Company and entered into an Employment Agreement with Mr. Groenewald. Pursuant to the agreement, Mr. Groenewald will be employed as Chief Financial Officer of the Company for a period of two years unless earlier terminated$215,000 in cash pursuant to the terms of the agreement. ~~During~~
On April 8, 2020, the Company entered into a professional service agreement with a consultant to provide advice on investor outreach and institutional engagements The Consultants will also provide continuous market insight and interpret our trading activity. The term of the agreement ~~Mr. Groenewald will be entitled to a base salary at~~commenced from the ~~annualized rate of $150,000~~execution date and will be eligible for a discretionary performance cash bonuses which will include $10,000 upon completion of the audit for the year ended December 31, 2017 and $25,000 and up to 10,000 shares of common stock upon completion of a public offering of not less than $3 million together with listingends on a national exchange (the “Public Offering”), which may be increased to 25,000 in the event $5 million is raised. Mr. Groenewald’s salary will increase to $175,000 upon closing of the Public Offering. Mr. Groenewald is also eligible to participate in employee benefits plans as the Company may institute from time to time that are available for full-time employees. In addition, pursuant to board approval, Mr. Groenewald is entitled to 110,000 shares of common stock of the Company that will be issued upon a Public Offering of at least $3,000,000.
~~On September 26, 2018, the Company appointed Kenneth Miller as Chief Operating Officer of the Company and entered into an Employment Agreement with Mr. Miller.~~April 1, 2021. Pursuant to the ~~agreement, Mr. Miller will be employed as Chief Operating Officer~~terms, the Company agreed to pay the consultant in the form of non-qualified stock options to acquire 200,000 shares of the ~~Company~~Company’s common stock, exercisable at $2.50 per share for a period of ~~two years unless earlier terminated~~one year. The Options are fully vested upon the signing of this agreement. In addition, the option is callable by the Company in the event the market price of its shares close above $3.50 per share for five consecutive dates upon which the consultant will have three days to elect to exercise or forfeit the options. The Company has not issued the options pursuant to the original terms of the ~~agreement. During the term of the~~ agreement Mr. Miller will be entitled to a base salary at the annualized rate of $200,000, which will be increased to $275,000 upon successful closing of the Public Offering. Mr. Miller is also entitled to 100,000 shares of common stock ofand on August 11, 2020, the Company and the consultant entered into an amendment and agreed that ~~will~~the 200,000 non-qualified stock options shall be issued upon the Company’s shareholders approval of its 2020 Incentive Stock Plan. See Note 12 – Equity – Warrants and Options Valuation for details related to the accrued compensation expense.
Litigations, Claims and Assessments
In 2017, Limestone Associates LLC (“Limestone”) filed a Public offering of at least $3,000,000. Mr. Miller is eligible for a discretionary performance cash and equity bonuses which will include cash of $50,000 and 75,000 shares of common stock upon completioncomplaint against ARH in the Civil Court of the ~~Public Offering, which may be increased to 125,000 shares~~City of New York, County of New York, #78549/2017 for commercial non-payment of rent for the amount of $25,748 plus cost and disbursements of this proceeding. In May 2018, Limestone filed a complaint against ARH and Robert E. Morgan (the former CEO of the Company) in the ~~event $5 million is raised. Mr. Miller is also eligible to participate~~Supreme Court of the State of New York, County of New York, index # 154469 seeking $1,357,243 in ~~employee benefits plans as~~damages for rent, interest and other expenses.
In May 2018, the Company, ~~may institute from time~~Former Parent and Mr. Morgan were listed as defendants to ~~time that are available~~a lawsuit filed by Crownhall Realty, LLC (“Crownhall”) in the Supreme Court of the State of New York county of New York, #154467. Crownhall is seeking $1,034,087 in damages for ~~full-time employees.~~rent, interest and other expenses.
On October 3, 2018, the Company, ARH and Mr. Morgan entered into a settlement agreement with Crownhall and Limestone agreeing to forfeit all security deposits, pay an upfront amount of $25,000 and an additional $175,000 to be paid over 20 months. This agreement settles litigation surrounding two closed locations, which the plaintiffs were seeking a total of $2,391,330 in past damages for rent, interest and other expenses. As of the date of the filing of these condensed consolidated financial statements the settlement has been paid in full.
On March 27, 2018 a convertible note holder filed a complaint in the Iowa District Court for Polk County #CVCV056029 against the Company for failure to pay the remaining balance due on a promissory note in the amount of $100,000, together with interest, attorney fees and other costs of $171,035. On June 6, 2018 a default judgement was entered against the Company for the amount of $171,035. The Company repaid an aggregate amount of $71,035, consisting of principal and interest, as of the date of the filing of this report. As of June 30, 2020, the Company has accrued for the liability in convertible notes payable in the amount of $100,000 and accrued interest of $21,031 is included in accounts payable and accrued expenses.
In May 2018, Resolute Contractors, Inc., Quality Tile, MTL Construction, Genesis Electric, JNB Interiors and Captive Aire filed a Mechanics Lien for labor, service, equipment and materials in the total amount of $98,005. The Company intends to set up various payment plans with these vendors. As of June 30, 2020, the Company has accrued for the liability in accounts payable and accrued expenses.
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

NOTE ~~13 – COMMITMENTS AND CONTINGENCIES, continued~~
~~Employment Agreements, continued~~
On October 26, 2018, the Company entered into an Employment Agreement with Michael Roper, which replaced his employment agreement from May 2018. Pursuant to the Employment Agreement, Mr. Roper will continue to be employed as Chief Executive Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon listing the Company on a national exchange and raising $3,000,000 (the “IPO”). During the term of the Employment Agreement, Mr. Roper will be entitled to a base salary at the annualized rate of $250,000, which was increased to $275,000 upon achieving various milestones required by the Investors that participated in the September 2018 Offering and will be increased to $350,000 upon the Company completing the IPO. Mr. Roper will be eligible for a discretionary performance bonus to be paid in cash or equity, provided, however, no cash bonus will be paid until the closing of the IPO. Mr. Roper is entitled to $100,000 bonus upon closing of the IPO. Mr. Roper is also entitled to 100,000 shares of common stock of the Company that will be issued upon a Public offering of at least $3,000,000. In addition, pursuant to board approval on June 29, 2019, Mr. Roper is entitled to 250,000 shares of common stock of the Company that will be issued upon a Public Offering of at least $3,000,000. In the event the Company raises $3 million or $5 million upon completion of a public offering together with listing on a national exchange, then Mr. Roper will receive 150,000 restricted stock units or 250,000 restricted stock units, respectively. In addition, Mr. Roper will receive 100,000 restricted stock units upon the one- and two-year anniversaries of his employment.
On October 26, 2018, the Company entered into an Employment Agreement with Kevin Mohan. Pursuant to the Employment Agreement, Mr. Mohan will be engaged as Chief Investment Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon the IPO. During the term of the Employment Agreement, Mr. Mohan will be entitled to a base salary at the annualized rate of $156,000, which will be increased to $175,000 upon the IPO. Mr. Mohan will be eligible for a discretionary performance bonus to be paid in cash following the closing of the IPO. Mr. Mohan is entitled to $50,000 bonus upon closing of the IPO. In the event the Company raises $3 million or $5 million, then Mr. Mohan will receive 100,000 restricted stock units or 200,000 restricted stock units, respectively. In addition, pursuant to board approval on June 29, 2019, Mr. Mohan is entitled to 250,000 shares of common stock of the Company that will be issued upon a Public Offering of at least $3,000,000.
On May 5, 2019, the Company entered into an Employment Agreement with Rodney Silva. Pursuant to the Employment Agreement, Mr. Silva will be engaged as Vice President of Brand Development/Franchise Sales of the Company for a period of eighteen months unless earlier terminated pursuant to the terms of the agreement. The Employment Agreement will be automatically extended upon the IPO. During the term of the Employment Agreement, Mr. Silva will be entitled to a base salary at the annualized rate of $150,000. Mr. Silva will be eligible for a discretionary performance bonus to be paid in cash following the closing of the IPO. Mr. Silva is also eligible to participate in employee benefits plans as the Company may institute from time to time that are available for full-time employees.
~~MUSCLE MAKER, INC. AND SUBSIDIARIES~~
~~Notes to Condensed Consolidated Financial Statements~~
~~NOTE 13 – COMMITMENTS AND CONTINGENCIES, continued~~
~~Employment Agreements, continued~~
On May 6, 2019, the Company appointed Aimee Infante as Chief Marketing Officer of the Company and entered into an Employment Agreement with Ms. Infante. Pursuant to the Employment Agreement, Ms. Infante will be employed as Chief Marketing Officer of the Company for a period of two years unless earlier terminated pursuant to the terms of the Employment Agreement. During the term of the Employment Agreement, Ms. Infante will be entitled to a base salary at the annualized rate of $125,000, which will be increased to $150,000 upon the completion of a public offering of not less than $3 million together with listing on a national exchange (the “Public Offering”). Following the closing of the Public Offering, Ms. Infante will receive a one-time $10,000 cash bonus and will be entitled to an annual cash bonus based on 25% of her base salary subject to satisfying specific written criteria. The Company agreed to issue Ms. Infante 5,000 restricted stock units upon closing of the Public Offering, which may be increased to 10,000 restricted stock units if the Public Offering is in excess of $5 million. Ms. Infante is also eligible to participate in employee benefits plans as the Company may institute from time to time that are available for full-time employees.
~~Consulting Agreements~~
On September 12, 2018, the Company entered into a Consulting Agreement with a professional business and financial expert to provide the Company financial and business advice including, but not limited, to discussing financing, potential business opportunities and potential acquisition. In addition, the consultant will help the Company select an underwriter to conduct an offering and will work with Company to prepare for the offering. Pursuant to the terms of the agreement the Company agreed to pay $140,000 in cash and to issue 250,000 restricted shares of the Company’s common stock on or before September 30, 2018. In addition, the Company agrees to pay the following additional fees (i) $70,000 in cash and 70,000 in restricted shares upon performance of the first milestones per the SPA, (ii) $70,000 in cash and 70,000 in restricted shares upon performance of the second milestones per the SPA and (iii)$150,000 in cash and 200,000 in restricted shares upon the completion of both the contract and the Company’s offering. As of September 30, 2019, the company issued an aggregate of 390,000 shares of common stock pursuant to the agreement, paid a $280,000 in cash pursuant to the terms of the agreement.
On May 24, 2019, the Company entered into a Consulting Agreement with a project management group to assist with various financial matters, documentation and presentations as needed. Pursuant to the terms of the agreement, the Company will pay $5,000 per month until the contract is cancelled by either party with written notice.
During July 2019, the Company entered into a Consulting Agreement, effective as of July 1, 2019, with an advisory group to provide strategic business services in connection with a future offering. The term of the agreement is for one year. Pursuant to the terms of the agreement, the Company issued 290,000 restricted shares of common stock and agreed to pay a cash fee of $75,000 upon signing the agreement.
During July 2019, the Company entered into a Consulting Agreement with a consultant with a background in menu and recipe development to develop a new menu and recipes for a new healthy restaurant concept called Healthy Joe’s. The Company will issue an aggregate of 11,500 shares of common stock as payment pursuant to the terms of the agreement and reimburse the consultant for any out of pocket expenses in connection with the services provided pursuant to the agreement. As of September 30, 2019, the Company issued 3,500 shares to the consultant pursuant to the agreement.
~~Board Compensation~~
On July 16, 2019, the board of directors approved a board compensation plan that would compensate the board members for their deferred compensation for 2019, 2018 and 2017. The board members are eligible for cash compensation of $4,500 or $9,000 per year. To be paid as follows: (i) directors serving on the board during 2018 and 2017, will be granted shares is lieu of payment as the letter agreements set forth certain terms pursuant to which the directors will serve as directors of the Company.
In addition, on an ongoing basis pursuant to the approved board compensation plan each director will receive 10,000 shares of common stock per year for service as director, 1,300 shares of common stock per year for service on each committee and 1,000 shares of common stock per year for service as chair for such committee. The shares of common stock for committee service will be limited to two committees.
The Company will issue shares of common stock as follows, which shall be prorated for a partial year: (i) directors that served as directors during the year ended December 31, 2017 will each receive 5,000 shares of common stock, (ii) directors that served as directors during the year ended December 31, 2018 will each receive 10,000 shares of common stock and (iii) directors that served as directors during the year ended December 31, 2019 will each receive 10,000 shares of common stock.
As directors have not received compensation for services to date, the Company agreed to provide equity in lieu of cash compensation and equity compensation for services rendered during 2017, 2018 and 2019. For past director services in lieu of cash unpaid to date: (i) directors that served as directors during the year ended December 31, 2017 will each receive shares of common stock valued at $4,500 to be priced at the price per share of the Company’s public offering in connection with its uplisting (the “Uplisting Offering”), (ii) directors that served as directors during the year ended December 31, 2018 will each receive shares of common stock valued at $9,000, which shall be prorated for a partial year of service, to be priced at the price per share of the Uplisting Offering and (iii) directors that served as directors during the year ended December 31, 2019 through the date of the Uplisting Offering will each receive shares of common stock valued at $9,000, which shall be prorated for a partial year of service, to be priced at the price per share of the Uplisting Offering. Following the public offering, directors will be paid cash for the balance of 2019.
On August 5, 2019 the Company authorized the issuances of an aggregate of 119,046 shares of common stock, valued at a $1.00 per share, to the members of the board of directors. As of September 30, 2019 the Company accrued a total of $125,187 related to board compensation.
~~Litigations, Claims and Assessments~~
In 2017, Limestone Associates LLC (“Limestone”) filed a complaint against ARH in the Civil Court of the City of New York, County of New York, #78549/2017 for commercial non-payment of rent for the amount of $25,748 plus cost and disbursements of this proceeding. In May 2018, Limestone filed a complaint against ARH and Robert E. Morgan (the former CEO of the Company) in the Supreme Court of the State of New York, County of New York, index # 154469 seeking $1,357,243 in damages for rent, interest and other expenses.
~~MUSCLE MAKER, INC. AND SUBSIDIARIES~~
~~Notes to Condensed Consolidated Financial Statements~~
~~NOTE 13 – COMMITMENTS AND CONTINGENCIES, continued~~
~~Litigations, Claims and Assessments, continued~~
In May 2018, the Company, Former Parent and Mr. Morgan were listed as defendants to a lawsuit filed by Crownhall Realty, LLC (“Crownhall”) in the Supreme Court of the State of New York county of New York, #154467. Crownhall is seeking $1,034,087 in damages for rent, interest and other expenses.
On October 3, 2018, the Company, ARH and Mr. Morgan entered into a settlement agreement with Crownhall and Limestone agreeing to forfeit all security deposits, pay an upfront amount of $25,000 and an additional $175,000 to be paid over 20 months. This agreement settles litigation surrounding two closed locations, which the plaintiffs were seeking a total of $2,391,330 in past damages for rent, interest and other expenses. As of September 30, 2019, the Company has accrued for the liability in accounts payable and accrued expenses.
On March 27, 2018 a convertible note holder filed a complaint in the Iowa District Court for Polk County #CVCV056029 against the Company for failure to pay the remaining balance due on a promissory note in the amount of $100,000, together with interest, attorney fees and other costs of $171,035. On June 6, 2018 a default judgement was entered against the Company for the amount of $171,035. The Company repaid an aggregate amount of $71,035, consisting of principal and interest, as of the date of the filing of this report. As of September 30, 2019, the Company has accrued for the liability in convertible notes payable in the amount of $100,000 and accrued interest of $18,045 is included in accounts payable and accrued expenses.
In April 2018, the Company and Former Parent was listed as a defendant in a lawsuit filed by a landlord (“Former Landlord”) in the Superior Court of the State of California. The Former Landlord is seeking $531,594 in damages for rent, interest and other expenses. The original lease was for a 5-year period and commenced on or about September 30, 2015. On January 15, 2019, the Company and the Former Landlord entered a settlement and release agreement. Pursuant to the settlement the Company shall pay the amount of $531,594 as follows (i) first payment of $49,815, net of security deposit of $11,185, on or before January 23, 2019, (ii) second payment of $25,000 on or before February 28, 2019 and (iii) thereafter sixty-nine payments of $6,400 on or before the 15^thof each month beginning on March 15, 2019. Conditioned on the Company making twelve timely installment payments of $6,400, the Company would be released of the remaining liability pursuant to the judgement. As of September 30, 2019, the Company has accrued for the liability in accounts payable and accrued expenses.
On May 4, 2018, Stratford Road Partners, LLC (“Stratford”) filed suit against the Company’s subsidiary for non-payment of rent in the small Claims court in the State of North Carolina. Since then the property has been vacated and the landlord offered a settlement of $10,000 with no further lease obligation. On June 5, 2019 the Company signed the settlement agreement and made the payment to the landlord. As of September 30, 2019, the Company has accrued for the liability in accounts payable and accrued expenses.
In May 2018, Resolute Contractors, Inc., Quality Tile, MTL Construction, Genesis Electric, JNB Interiors and Captive Aire filed a Mechanics Lien for labor, service, equipment and materials in the total amount of $98,005. The Company intends to set up various payment plans with these vendors. As of September 30, 2019, the Company has accrued for the liability in accounts payable and accrued expenses.
~~MUSCLE MAKER, INC. AND SUBSIDIARIES~~
~~Notes to Condensed Consolidated Financial Statements~~
~~NOTE 13~~11 – COMMITMENTS AND CONTINGENCIES, continued

Litigations, Claims and Assessments, continued

On December 12, 2018, the Company was listed as a defendant to a lawsuit filed by a landlord in the Superior Court of the State of California. Fountain Valley is seeking approximately $121,000 in damages for rent, interest and other expenses. On February 15, 2019, the Company entered into a settlement agreement and payment plan in the amount of $85,000. The Company agreed to make the following payments (i) $15,000 on or before March 15, 2019, and (ii) ten monthly installments of $7,000 commencing on April 15, 2019 and continuing monthly on the 15th day of each month though January 15, 2020. The company has accrued for the liability in accounts payable and accrued expenses and has been making repayments pursuant to the settlement agreement.
On As of January 18, 2019, the Company entered into an expense reimbursement agreement with an employee in connection with unreimbursed expenses incurred on behalf of the Company in the amount of $81,140 recorded in accounts payable and accrued expenses as of March 31, 2019. The Company shall pay the employee as follows (a) $1,750 upon execution of the agreement, (b) $1,000 a week commencing on January 25, 2019 ending May 24, 2019, (c) a onetime payment of $40,000 on the earlier of March 31, 2019 or when the Company fully received the anticipated funding from the a tranche of the 15% Senior Secured Convertible Notes and (d) a onetime payment of $21,390 on the earlier of May 31, 2019 or when15, 2020, the Company has ~~fully received the anticipated funding from the second tranche of the 15% Senior Secured Convertible Notes. As of September 30, 2019,~~met all their obligations and the full amount has been ~~repaid.~~paid.

On or about March 7, 2019, the Company was listed as a defendant to a lawsuit filed by a contractor in the State of Texas. The contractor is claiming a breach of contract and is seeking approximately $32,809 in damages for services claimed to be rendered by the contractor. The Company is working with legal counsel in order to reach a settlement. As of ~~September~~June 30, ~~2019,~~2020, the Company accrued $30,000 for the liability in accounts payable and accrued expenses.

On ~~May 6, 2019,~~January 23, 2020, the Company ~~entered into~~was served a ~~commission’s payment~~judgment in the amount of $130,185 for a breach of a lease agreement in ~~the aggregate amount of $45,894~~Chicago, Illinois, in connection with ~~past due commission recorded~~a Company owned store that was closed in 2018. As of June 30, 2020, the Company has accrued for the liability in accounts payable and accrued expenses as of March 31, 2019. The Company shall pay the employee the outstanding commission balance as follows (a) $10,894 upon execution of the agreement and (b) $7,000 per month for five months starting on May 31, 2019. As of September 30, 2019, the full amount has been repaid.expenses.

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. In the opinion of management after consulting legal counsel, such matters are currently not expected to have a material impact on the Company’s financial statements.

The Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable ~~settlements.~~settlements after consulting legal counsel.

~~Operating~~Operation Lease

On ~~August 1, 2019,~~June 26, 2020, the Company was informed that one of their leases for a future military location was terminated due to the current economic environment as a result of COVID-19.
Kitchen Service Agreement
On February 26, 2020, the Company entered into a ~~settlement agreement~~Kitchen Services Agreement with a ~~landlord~~major delivery-only kitchen concept. The Kitchen Services Agreement provides for five initial locations starting in ~~connection with~~ the ~~prior executive office in Houston, Texas as~~Chicago market. In addition, the Company ~~vacated~~has placed deposits for an additional five locations to be determined. The Kitchen Services Agreement provide the ~~property on April 30, 2018. The~~ Company ~~owed the landlord the sum of $58,522. The landlord agreed to accept $32,283 as full payment of the damages. Pursuant~~with access to the ~~settlement we will make three equal payments of $10,761~~delivery-only locations for a one-year term with ~~the first payment to be made on August 2, 2019, the second payment is to be made on September 1, 2019~~an automatic one-year renewal unless terminated by either party. The delivery-only locations are set up for third party delivery and ~~the final payment is to be made on October 1, 2019. As of September 30, 2019, the remaining unpaid amount of $10,761, is included in accounts payable and accrued expenses.~~
~~Trademark~~
~~During July 2019~~provide that the Company ~~filed an application~~must pay monthly license fees, processing service fees and storage service fees. The monthly license fees for the five initial locations range from $3,000 to register a trade name and service mark for “Healthy Joe’s” that will be used in connection with the development and operating of potential Healthy Joe’s restaurants. If the trademark is approved,$4,000. The monthly license fees become due 14 days after the Company ~~will license~~is granted access to the rights to use the Healthy Joe’s trademark and intellectual property to its wholly-owned subsidiaries, Muscle Maker Development and Muscle Maker Corp., and to further sublicense them to our franchisees for use in connection with Healthy Joe’s restaurants.location.

Taxes

The Company failed in certain instances in paying sales taxes collected from customers in specific states that impose a tax on sales of the Company’s products. The Company had accrued ~~$224,717~~$253,831 and ~~$297,160~~$329,089 which includes penalties and interest as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, related to this matter.
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

NOTE 1412 – EQUITY

Common Stock

On February 17, 2020 the Company authorized the issuance of an aggregate of 25,616 shares of common stock to the members of the board of directors as compensation earned through the end of the fourth quarter of 2019.
On March 31, 2020, the Company issued 75,000 shares of common stock of the Company to a consultant that assisted the Company in the area of investor relations and capital introduction.
On April 21, 2020, the Company issued an aggregate of 51,105 shares of common stock in exchange for accrued interest related to convertible notes that where converted in 2019 in the amount of $357,735.
On June 1, 2020, the Company issued 5,000 shares of common stock of the Company to a consultant with an aggregate fair value of $10,150.
On June 5, 2020, the Company issued 15,000 shares of common stock of the Company to a digital marketing consultant with an aggregate fair value of $46,050.
On June 24, 2020 the Company authorized the issuance of an aggregate of 4,340 shares of common stock to the members of the board of directors as compensation earned through the end of the first quarter of 2020.
See Note 1211 – ~~Notes Payable – Convertible Notes, and Notes Payable – Other Notes Payable. See Note 13 – Commitments and Contingencies – Board Compensation and~~ Commitments and Contingencies – Consulting Agreements for details related to additional stock issuances ~~for~~during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~
2020.

~~Warrant Valuation~~Closing of Offering

On February 12, 2020, the Company priced its initial public offering of 1,540,000 shares of common stock at a price of $5.00 per share. The Company ~~has computed~~started trading on the ~~fair value of warrants granted using~~Nasdaq Capital Market on February 13, 2020 under the ~~Black-Scholes option pricing model. The expected term used for warrants issued to non-employees is the contractual life.~~ticker symbol “GRIL”. The Company ~~is utilizing an expected volatility figure based~~closed on ~~a review~~the offering on February 18, 2020, yielding proceeds of $6,780,000, net of underwriters and other fees of $920,000. Upon closing of the ~~historical volatilities, over a period of time, equivalent~~offering the Company issued 123,200 warrants to the ~~expected life~~underwriters as part of the instrument being valued, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.their agreement.

Restricted Common Stock

On February 18, 2020, the Company issued an aggregate of 216,783 shares of restricted common stock of the Company, with an aggregate value fair value of $1,083,915, to the executive team pursuant to their employment agreements as part of completing the initial public offering. Subsequent to the June quarter the Company and the employees agreed to cancel the restricted common stock. See Note 13 – Subsequent Events – Restricted Common Stock Cancellations for more details related to the cancellations.
At ~~September~~June 30, ~~2019,~~2020, the ~~unamortized~~unrecognized value of the restricted common stock was ~~$101,265.~~$40,602. The unamortized amount will be expensed over a weighted average period of ~~1.26~~0.51 years. A summary of the activity related to the restricted common stock for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 is presented below:

Weighted
Average Grant Weighted
Average Grant
Total Date Fair Value Total Date Fair Value
Outstanding at January 1, 2019 42,442 $ 6.34
Outstanding at January 1, 2020 2,426 $ 65.33
Granted 430,000 1.00 216,783 5.00
Forfeited (11,470 ) 9.33 - -
Vested (443,918 ) 1.23 (218,009 ) (5.34 )
Outstanding at September 30, 2019 17,054 $ 5.94
Outstanding at June 30, 2020 1,200 $ 65.33

Stock-Based Compensation Expense

Stock-based compensation related to restricted stock issued to employees, directors and consultants and warrants issued to consultants amounted to ~~$431,631~~$277,077 and ~~$613,333~~$3,625,220 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, of which ~~$429,315~~$276,525 and ~~$611,191~~$3,624,116, respectively, was recorded in general and administrative expenses and ~~$2,316~~$552 and ~~$2,142~~$1,104, respectively, was recorded in labor expense within restaurant operating expenses. Stock-based compensation related to restricted stock issued to employees, directors and consultants amounted to ~~$33,876~~$(123,431) and ~~$350,100~~$181,702 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, of which ~~$33,102~~$(124,019) and ~~$347,779~~$177,246 was recorded in general and administrative expenses and ~~$774~~$588 and ~~$2,321~~$4,457 was recorded in labor expense within restaurant operating expenses.
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

NOTE 1412 – EQUITY, continued

Warrant and Options Valuation
The Company has computed the fair value of warrants granted and options accrued for as accrued compensation expense using the Black-Scholes option pricing model. The expected term used for warrants and options issued to non-employees is the contractual life. The Company is utilizing an expected volatility figure based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.
The options accrued for in accrued compensation expense had a grant date fair value of $46,000 on April 8, 2020. The Company recorded a mark to market fair value adjustment of $96,000 on the consolidated statement of operations during the three and six months ended June 30, 2020. The Company has estimated the fair value of the options using the Black-Scholes model using the following assumptions: expected volatility of 66.77%, risk-free rate of 0.16-0.23%, expected term of 1 year, expected dividends of 0%, and stock price of $1.70 – 2.71.
Warrants
See Note 11 – Commitments and Contingencies – Closing of Offering Agreements for details related to additional warrants issuances during the six months ended June 30, 2020.

A summary of warrants activity during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 is presented below:

Number of Warrants Weighted Average
Exercise Price Weighted Average
Remaining Life
In Years Number of Warrants Weighted
Average
Exercise Price Weighted
Average
Remaining Life
In Years
Outstanding, December 31, 2018 2,184,548 $ 3.38 3.3
Outstanding, December 31, 2019 2,450,287 $ 5.51 3.7
Issued 2,361,500 1.61 5.0 223,200 6.00 -
Exercised - - - - - -
Forfeited - - - (194,514 ) 19.92 -
Outstanding, September 30, 2019 4,546,048 $ 2.46 3.6
Outstanding, June 30, 2020 2,478,973 $ 4.38 3.5

Exercisable, September 30, 2019 4,546,048 $ 2.46 3.6
Exercisable, June 30, 2020 2,478,973 $ 4.38 3.5

The grant date fair value of warrants granted during the ~~nine~~three and six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 was determined on the date of issuance using the Black-Scholes option pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company calculates the expected volatility using the historical volatility of comparable companies over the most recent period equal to the expected term and evaluates the extent to which available information indicates that future volatility may differ from historical volatility. The expected dividend rate is zero as the Company does not expect to pay or declare any cash dividends on common stock. The risk-free rates for the expected terms of the stock ~~options~~warrants are based on the U.S. Treasury yield curve in effect at the time of the grant. The Company has not experienced significant exercise activity on ~~stock options.~~warrants. Due to the lack of historical information, the Company determined the expected term of its ~~stock option~~warrant awards issued using the simplified method. In applying the Black-Scholes option pricing model, the Company used the following assumptions:

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
Risk free interest rate 1.61 - 2.32 % 2.67 - 2.96 % 1.61 - 2.62 % 2.20 - 3.13 %
Contractual term (years) 5.00 3.00-5.00 5.00 5.00-3.00
Expected volatility 58.24-88.10 % 51.50-53.60 % 52.64 – 88.10 % 51.50 - 55.37 %
Expected dividend 0.00 % 0.00 % 0.00 % 0.00 %
27
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Risk free interest rate - % 2.11 - 2.32 % 1.37 % 2.11 - 2.62 %
Contractual term (years) - 5.00 3.00 5.00
Expected volatility - % 58.24 % 55.33 % 52.64 - 58.24 %
Expected dividend - % 0.00 % 0.00 % 0.00 %
MUSCLE MAKER, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

NOTE 1513 – SUBSEQUENT EVENTS

~~Acquisition of Bronx~~Delivery-only location
Subsequent to June 30, 2020, the Company opened two delivery-only location pursuant to the Kitchen Services Agreement.
Restricted Common Stock Cancellations

On ~~October 10, 2019,~~August 11, 2020, various members of the executive team entered into an agreement individually with the Company ~~acquired a former franchisee location~~to cancel an aggregate of 216,783 shares of restricted common stock of the Company previously issued in the ~~Bronx, New York, as a corporate store (the “Bronx Acquisition”).~~ first quarter of 2020 and acknowledge that no further compensation is due under their employment agreements.
Consulting Agreement Settlement
The ~~purchase price~~Company rescinded the issuance of 100,000 warrants and 300,000 shares of the ~~store was $600,000,~~Company’s common stock in July 2020 that were issued in the first quarter of which $30,000 related to equipment purchased and the remaining $570,000 was accounted for as goodwill. The purchase price is payable as follows: $300,000 that was paid at closing and the remaining $300,000 is payable2020, pursuant to a ~~five year promissory note with an eight percent interest rate.~~
~~Board Compensation~~
~~On October 19, 2019~~consulting agreement. Although the shares were duly authorized and validly issued, the Company rescinded the stock and warrants as it did not have the required amount of equity authorized under its 2019 Incentive Stock Plan. Following the ~~issuances~~rescission of ~~an aggregate of 26,242 share~~the warrants and shares of common stock, the consultant threatened to commence legal proceedings against the ~~members~~Company and demanded the Company to re-issue the 300,000 shares of common stock and 100,000 warrants and to provide the Consultant registration rights. In order to settle and avoid the time commitment and expense associated with potential litigation, the Company and the Consultant entered into a Settlement Agreement (“Settlement Agreement”) on August 11, 2020 whereby the Company agreed to issue 300,000 shares of common stock within 5 five days of entering into the Settlement Agreement. These shares will not be issued subject to any equity plan. The Company agreed to register the shares of common stock in consideration of a release by the Consultant. In addition, as part of the ~~board~~Settlement Agreement the Company will issue 100,000 stock options upon the approval of ~~directors.~~the 2020 Equity Incentive Plan.
ITEM 2 ~~ITEM 2~~ 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 ~~September~~June 30, ~~2019~~2020 and ~~2018~~December 31, 2019 and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. 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” refers to the name under which our corporate and franchised restaurants do business. This ~~Annual~~Quarterly 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~~Quarterly 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,~~ “forecast,” “model,” “proposal,” “should,” “may,”~~“intend,~~ “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 1A for~~For a detailed discussion of ~~some of~~risk factors affecting us, see “Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the ~~uncertainties, risks and assumptions associated with these statements.~~year ended December 31, 2019.
OVERVIEW

We operate under the name Muscle Maker Grill as a franchisor and owner-operator of Muscle Maker Grill restaurants. As of ~~September~~June 30, ~~2019,~~2020, our restaurant system included ~~eight~~eleven Company-owned restaurants and ~~thirty-one~~twenty franchised restaurants.

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

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

As of ~~September~~June 30, ~~2019,~~2020, we had an accumulated deficit of ~~$29,777,110~~$60,088,290 and expect to continue to incur ~~substantial~~ operating and net losses for the foreseeable future. In its report on our consolidated financial statements for the fiscal year ended December 31, ~~2018,~~2019, our independent registered public accounting firm included an explanatory paragraph relating to our ability to continue as a going concern. See “Liquidity and Capital Resources – Availability of Additional Funds and Going Concern” and Note 1 – Business Organization and Nature of Operations, Going Concern and Management’s Plans to Notes to Consolidated Financial Statements for additional information describing the circumstances that led to the inclusion of this explanatory paragraph.
Key Financial Definitions

Total Revenues

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

Food and Beverage Costs

Food and beverage costs include the direct costs associated with food, beverage and packaging of our menu items at company-operated restaurants partially offset by vendor rebates from ~~company owned~~company-owned stores. The components of food, beverages and supplies are variable in nature, change with sales volume, are affected by menu mix and are subject to fluctuations in commodity costs. The current management team in place since May 2018 has the opinion that food and beverage costs for 2017 and 2018 are too high and has begun implementing multiple operational changes to lower food and paper costs.

Labor

Restaurant labor costs, including preopening labor, consists of company-operated restaurant-level management and hourly labor costs, including salaries, wages, payroll taxes, workers’ compensation expense, benefits and bonuses paid to our company-operated restaurant-level team members. Like other cost items, we expect restaurant labor costs at our company-operated restaurants to increase due to inflation and as our company restaurant revenues ~~grows.~~grow. Factors that influence labor costs include minimum wage and employer payroll tax legislation, mandated health care costs and operational productivity established by the management team. The current management team in place since May 2018 has the opinion that labor costs for 2017 and 2018 are too high and has begun implementing operational changes to lower restaurant level labor costs overall.
Rent

Restaurant rent, including preopening rental charges, consist of company-operated restaurant-level rental or lease payments applicable to executed rental or lease agreements. In many cases these rental payments may include payments for common area maintenance as well as property tax assessments. ~~The current management team in place since May 2018 has the opinion that rent costs for 2017 and 2018 as a percentage of total restaurant sales are too high.~~ Our rent strategy ~~moving forward~~mostly 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 a downside protection for lower volume locations. While we cannot guarantee a favorable variable rent expense in all future leases, ~~it is in our forecasts~~we have forecasted average rental costs as a percentage of total sales at an 8% ~~average level.~~.

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, Seamless, ~~etc.~~and others. The fees associated with these third-party delivery services can range up to 25% of the total order being delivered. Management believes delivery is a critical component of our business model and industry trends will continue to push consumers towards delivery. Our cost structure will need to be adjusted to reflect a different pricing model, portion sizes, menu offerings, ~~etc~~and other considerations to potentially offset these rising costs of delivery.
Other Expenses Incurred for Closed Locations

Other expenses incurred for closed locations consists of primarily of restaurant operating expenses incurred subsequent to store closures as the Company still has to certain obligations to vendors due to signed agreements.
Depreciation and Amortization

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

General and administrative expenses include expenses associated with corporate and administrative functions that support our operations, including wages, benefits, travel expense, stock-based compensation expense, legal and professional fees, training, and other corporate costs. This expense item also includes national advertising and marketing campaigns to promote brand awareness which includes, but is not limited to, television, radio, social media, billboards, point-of-sale materials, sponsorships, and multi-media. We expect ~~we will~~to incur incremental general and administrative expenses as a result of ~~this offering and as~~becoming a public ~~company.~~listed company on the Nasdaq capital market. A certain portion of these expenses are related to the preparation of an initial stock offering and should be considered one-time expenses.
Other ~~Income (Expense)~~Expense, net
Other ~~(expenses) income~~expenses primarily consists of amortization of debt discounts on the convertible notes payable and interest expense related to other notes payable and convertible notes payable.
Income Taxes

Income taxes represent federal, state, and local current and deferred income tax expense.
Consolidated Results of Operations

Three Months Ended ~~September~~June 30, ~~2019~~2020 Compared with Three Months Ended ~~September~~June 30, ~~2018~~2019

The following table represents selected items in our condensed consolidated statements of operations for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively:

For the Three Months Ended
For the Three Months Ended June 30,
September 30, 2020 2019
2019 2018
Revenues:
Company restaurant sales, net of discounts $ 821,684 $ 721,300 $ 659,939 $ 815,837
Franchise royalties and fees 252,744 324,080 142,293 529,085
Franchise advertising fund contributions 39,030 - 32,454 38,494
Other revenues - -
Total Revenues 1,113,458 1,045,380 834,686 1,383,416

Operating Costs and Expenses:
Restaurant operating expenses:
Food and beverage costs 339,454 266,678 255,329 286,264
Labor 347,786 266,817 342,823 339,221
Rent 96,832 66,599 139,604 88,645
Other restaurant operating expenses 113,292 60,084 100,552 138,634
Total restaurant operating expenses 897,364 660,178 838,308 852,764
Costs of other revenues - -
Preopening expenses 46,764 -
Depreciation and amortization 59,033 47,663 97,245 62,912
Other expenses incurred for closed locations - 269,659 - 23,809
Franchise advertising fund expenses 39,030 - 32,454 38,494
General and administrative expenses 1,514,123 916,268 1,213,851 966,539
Total Costs and Expenses 2,509,550 1,893,768 2,228,622 1,944,518
Loss from Operations (1,396,092 ) (848,388 ) (1,393,936 ) (561,102 )

Other (Expense) Income:
Other (expense) income, net 112,673 65,933 (10,360 ) 2,757
Interest expense, net (614,100 ) (94,655 ) (1,129 ) (465,956 )
Loss on sale of CTI - -
Loss on change in fair value of accrued compensation (96,000 ) -
Amortization of debt discounts (451,310 ) (267,358 ) - (518,305 )
Total Other Expense, net (952,737 ) (296,080 )
Total Other Expense, Net (107,489 ) (981,504 )

Loss Before Income Tax (2,348,829 ) (1,144,468 ) (1,501,425 ) (1,542,606 )
Income tax provision - - - -
Net Loss (2,348,829 ) (1,144,468 ) $ (1,501,425 ) $ (1,542,606 )
Net loss attributable to the non-controlling interest - -
Net Loss Attributable to Controlling Interest $ (2,348,829 ) $ (1,144,468 )
Revenues

Company total revenues totaled ~~$1,113,458~~$834,686 for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$1,045,380~~$1,383,416 for the three months ended ~~September~~June 30, ~~2018.~~2019. The ~~6.51% increase~~39% decrease was primarily attributable to ~~more stores generating restaurant sales, net of discounts in the current period compared to the prior period, partially offset by~~ a decrease in franchise royalties and ~~fees.~~fees due to fewer franchisee stores, and a decrease in restaurant sales due to temporary closures of our corporate stores due to the Covid-19 epidemic.

We generated restaurant sales, net of discounts, of ~~$821,684~~$659,939 for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$721,300,~~$815,837, for the three months ended ~~September~~June 30, ~~2018.~~2019. This represented ~~an increase~~a decrease of ~~$100,384, or 13.9%,~~$155,898 which is primarily ~~attributable~~due to ~~a higher~~the temporary closure of five corporate owned ~~store count during the current period~~stored as a result of Covid-19 compared to the prior period.

Franchise royalties and fees for the three months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ totaled ~~$252,744~~$142,293 compared to ~~$324,080,~~$529,085, respectively. The ~~$71,336~~$386,792 decrease is primarily attributable to ~~lower royalty revenue from franchisees as there are~~a decrease in initial franchise fees of $198,146 compared to the prior year due to fewer franchisee ~~location during~~agreement terminations in the current period, asa decrease in royalty income of $138,940 due to fewer franchisee locations, lower sales volumes and temporary closures of franchised locations due to Covid-19 and a decrease in vendor rebates of $49,706. In addition, the company purchased two franchisee locations included in the current period compared to the prior period ~~due to store closures.~~resulting in lower franchise fees.

Franchise advertising fund contributions for the three months ended ~~September~~June 30, 2020 and 2019 totaled ~~$39,030.~~$32,454 compared to $38,494, respectively.

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 three months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ totaled ~~$339,454,~~$255,329, or ~~41.3%~~38.7%, as a percentage of restaurant sales, and ~~$266,678,~~$286,264, or ~~37.0%~~35.1%, as a percentage of restaurant sales, respectively. The ~~$72,776~~$30,935 decrease was primarily due to the temporary closure of three corporate owned stores and the decrease in restaurant sales during period due to the impact of Covid-19.
Restaurant labor for the three months ended June 30, 2020 and 2019 totaled $342,823, or 51.9%, as a percentage of restaurant sales, and $339,221, or 41.6%, as a percentage of restaurant sales, respectively. The 10.3% increase as a percentage of restaurant sales is a direct result of inefficiencies that is typically attributed to opening or acquiring new locations as it takes time to establish operational efficiencies and due to the impact of Covid-19 limiting our operations at our restaurants to maintain social distancing ordinances.
Restaurant rent expense for the three months ended June 30, 2020 and 2019 totaled $139,604, or 21.2%, as a percentage of restaurant sales, and $88,645, or 10.9%, as a percentage of restaurant sales, respectively.
Other restaurant operating expenses for the three months ended June 30, 2020 and 2019 totaled $100,552, or 15.2% as a percentage of restaurant sales, and $138,634, or 17.0% as a percentage of restaurant sales, respectively. The $38,082 decrease is attributed to the impact of Covid-19 as certain services have been temporary suspended due to the temporary store closures and various limited services at open locations, as mandated by state ordinance, due to Covid-19.
Preopening expense for the three months ended totaled $46,764 resulted from expense incurred prior to the opening of our Company owned store that opened during the second quarter of 2020.
Depreciation and amortization expense for the three months ended June 30, 2020 and 2019 totaled $97,245 and $62,912, respectively. The $34,333 increase is primarily attributable to depreciation expense related to additional property and equipment acquired for new store build outs and the remodeling of an existing company owned restaurant compared to the prior period.
General and administrative expenses for the three months ended June 30, 2020 and 2019 totaled $1,213,851, or 145.4% of total revenues, and $966,539, or 69.9% of total revenues, respectively. The $247,312 increase is primarily attributable to an increase in salaries of approximately $37,000, an increase in professional fees of approximately $183,000 and an increase in advertising expense of approximately $25,000.
Loss from Operations
Our loss from operations for the three months ended June 30, 2020 and 2019 totaled $1,393,936 or 167% of total revenues and $561,102 or 40.6% of total revenues, respectively. The increase of $832,834 in loss from operations is primarily attributable to an increase in total costs and expenses of approximately $284,000 and a decrease in total revenues of approximately $548,000.
Other Expense, net
Other expense, net for the three months ended June 30, 2020 and 2019 totaled $107,489 and $981,504, respectively. The $874,015 decrease in expense was primarily attributable to a decrease in amortization of debt discounts of $518,305, a $464,827 decrease in interest expense, net as the majority of the convertible notes where converted as of Q4 2019 therefore no further interest expense is being incurred, partially offset by a increase in other expense of $13,117 and an increase in a loss on change in fair value of accrued compensation expense of $96,000.
Net Loss
Our net loss for the three months ended June 30, 2020 decreased by $41,181 to $1,501,425 as compared to $1,542,606 for the three months ended June 30, 2019, resulting from a decrease in other expense, net partially offset by an increase in our loss from operations.
Six Months Ended June 30, 2020 Compared with Six Months Ended June 30, 2019
The following table represents selected items in our condensed consolidated statements of operations for the six months ended June 30, 2020 and 2019, respectively:
For the Six Months Ended
June 30,
2020 2019

Revenues:
Company restaurant sales, net of discounts $ 1,897,366 $ 1,616,600
Franchise royalties and fees 318,324 873,797
Franchise advertising fund contributions 54,050 77,393
Total Revenues 2,269,740 2,567,790

Operating Costs and Expenses:
Restaurant operating expenses:
Food and beverage costs 721,023 575,609
Labor 929,443 618,234
Rent 284,281 186,835
Other restaurant operating expenses 432,912 254,319
Total restaurant operating expenses 2,367,659 1,634,997
Preopening expenses 46,764 -
Depreciation and amortization 208,502 131,604
Other expenses incurred for closed locations - 27,519
Franchise advertising fund expenses 54,050 77,393
General and administrative expenses 6,343,254 2,070,575
Total Costs and Expenses 9,020,229 3,942,088
Loss from Operations (6,750,489 ) (1,374,298 )

Other Expense:
Other income, net (13,548 ) (108,993 )
Interest expense, net (94,733 ) (648,421 )
Loss on change in fair value of accrued compensation (96,000 ) -
Amortization of debt discounts (38,918 ) (894,373 )
Total Other Expense, Net (243,199 ) (1,651,787 )

Loss Before Income Tax (6,993,688 ) (3,026,085 )
Income tax provision - -
Net Loss $ (6,993,688 ) $ (3,026,085 )
29
Revenues
Company total revenues totaled $2,269,740 for the six months ended June 30, 2020 compared to $2,567,790 for the six months ended June 30, 2019. The 11.61% decrease is attributed a decrease in franchise royalties and fees, partially offset by an increase in restaurant sales.
We generated restaurant sales, net of discounts, of $1,897,366 for the six months ended June 30, 2020 compared to $1,616,600, for the six months ended June 30, 2019. This represented an increase of $280,766, or 17.4%, which is attributable to an increase of approximately $1,111,300 in restaurants sales due to additional stores that were open in current period compared to prior period, partially offset by a decrease of approximately $830,600 in restaurant sales which resulted from the temporary closure of three corporate owned stores in the current period as compared to the prior period due to Covid-19.
Franchise royalties and fees for the six months ended June 30, 2020 and 2019 totaled $318,324 compared to $873,797, respectively. The $555,473 decrease is primarily attributable to a decrease in initial franchise fees of $236,887 as there were fewer franchisee agreement terminations in the current period as compared to the prior period, a decrease in royalty income of $224,581 due to fewer franchisee locations, due to the impact of Covid-19 that resulted in lower sales and temporary closures of franchised locations and a decrease in vendor rebates of $94,005 due to lower sales and fewer franchisees in the current period compared to the prior period.
Franchise advertising fund contributions for the six months ended June 30, 2020 and 2019 totaled $54,050 compared to $77,393, respectively.
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 six months ended June 30, 2020 and 2019 totaled $721,023, or 38.0%, as a percentage of restaurant sales, and $575,609, or 35.6%, as a percentage of restaurant sales, respectively. The $145,414 increase primarily is due to a higher store count during the period as compared to the prior period resulting in higher sales and a slight increase of 2% in restaurant and food beverage cost as a percentage of sales.
Restaurant labor for the six months ended June 30, 2020 and 2019 totaled $929,443, or 49.0%, as a percentage of restaurant sales, and $618,234, or 38.2%, as a percentage of restaurant sales, respectively. The $311,209 increase results primarily due a higher store count during the period as compared to the prior period as the Company opened and acquired more stores as compared to the prior period. In addition, the increase in labor as a percentage of sales is a direct result of inefficiencies that is typically attributed to opening or acquiring new locations as it takes time to establish operational efficiencies.

Restaurant ~~labor~~rent expense for the ~~three~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ totaled ~~$347,786,~~$284,281, or ~~42.3%~~15.0%, as a percentage of restaurant sales, and ~~$266,817,~~$186,835, or ~~37.0%~~11.6%, as a percentage of restaurant sales, respectively. The ~~$80,969~~ increase ~~results~~of $97,446 is directly attributed to the acquisition of the two franchise locations in the current period as compared to the prior period.
Other restaurant operating expenses for the six months ended June 30, 2020 and 2019 totaled $432,912, or 22.82% as a percentage of restaurant sales, and $254,319, or 15.7% as a percentage of restaurant sales, respectively. The $178,593 increase is primarily due to higher third party merchant fees, utility fees and insurance expenses attributed to a higher store count during the period as compared to the prior period as the Company opened and acquired more stores as compared to the prior period.

~~Restaurant rent~~Preopening expense for the ~~three~~six months ended ~~September~~June 30, ~~2019 and 2018~~2020, totaled ~~$96,832, or 11.8%, as a percentage~~$46,764 resulted from expense incurred prior to the opening of ~~restaurant sales, and $66,599, or 9.2%, as a percentage of restaurant sales, respectively.~~
Other restaurant operating expenses for the three months ended September 30, 2019 and 2018 totaled $113,292, or 13.8% as a percentage of restaurant sales, and $60,084, or 8.3% as a percentage of restaurant sales, respectively. The $53,208 increase is primarily due a higherour Company owned store ~~count~~that opened during the ~~period as compared to the prior period as the Company opened and acquired more stores as compared to the prior period.~~second quarter of 2020.

Depreciation and amortization expense for the ~~three~~six months ended ~~September~~June 30, 2020 and 2019 totaled $208,502 and ~~2018 totaled $59,033 and $47,663,~~$131,604, respectively. The ~~$11,370~~$76,898 increase is primarily attributable to depreciation expense related to ~~additions of~~additional property and equipment acquired for new store build outs and the remodeling of an existing company owned restaurant compared to the prior ~~periods.~~period.
30
General and administrative expenses for the ~~three~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ totaled ~~$1,514,123,~~$6,343,254, or ~~136%~~279.5% of total revenues, and ~~$916,268,~~$2,070,575, or ~~87.6%~~80.6% of total revenues, respectively. The ~~$547,704~~$4,272,679 increase is primarily attributable to an increase in ~~salaries~~one-time bonuses of approximately ~~$61,000,~~$1,354,000 which is directly attributed to the stock issued to the executive team upon the completion of the offering resulting in stock-based compensation expense of $1,083,915 and $235,000 in cash bonus payments, an increase one-time consulting expense of approximately $2,391,000 which is mainly attributed to stock issued to consultants which resulted in stock-based compensation expense of $2,315,016, an increase in ~~professional fees and consulting expenses~~advertising expense of approximately ~~$355,000 due to restricted stock issuance to consultants,~~$125,000 and an increase in ~~bad debt expense~~one-time professional fees of approximately ~~$147,000 related~~$350,000 mainly due to fees incurred in connection with the ~~forgiveness of royalties owed by a franchisee.~~Company’s offering.

Loss from Operations

Our loss from operations for the ~~three~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ totaled ~~$1,396,092~~$6,750,489 or ~~125.4%~~297.4% of total revenues and ~~$848,388~~$1,374,298 or ~~81.2%~~53.5% of total revenues, respectively. The increase of ~~$547,704~~$5,376,191 in loss from operations is primarily attributable to an increase in total costs and expenses of approximately ~~$382,000,~~$5,078,141, partially offset by the increase in total revenues of approximately ~~$68,000.~~$298,050. The increase in total costs and expenses of approximately $5,078,141 is primarily due to one-time expenses of approximately $3,506,000 incurred in connection with our offering of which approximately $3,386,000 of the expenses consisted of non-cash expenses in the form of stock-based compensation.

Other Expense, net

Other expense, net for the ~~three~~six months ended ~~September~~June 30, 2020 and 2019 totaled $243,199 and ~~2018 totaled $952,737 and $3,136,048,~~$1,651,787, respectively. The $656,568 decrease in expense was primarily attributable to an increase in amortization of debt discounts of $183,863 and an increase in interest expense incurred in connection with convertible and other notes payable of approximately $519,000, partially offset by an increase in other income, net of approximately $47,000 due to other income on settlements of accounts payables.
~~Net Loss~~
Our net loss for the three months ended September 30, 2019 decreased by $1,204,361 to $2,348,829 as compared to $1,144,468 for the three months ended September 30, 2018, resulting from an increase in other expense as discussed above. Our net loss attributable to the controlling interest was $2,348,829 and $1,144,468 for the three months ended September 30, 2019 and 2018, respectively.
~~Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018~~
~~The following table represents selected items in our condensed consolidated statements of operations for the nine months ended September 30, 2019 and 2018, respectively:~~
For the Nine Months Ended
September 30,
2019 2018
Revenues:
Company restaurant sales, net of discounts $ 2,438,284 $ 3,246,041
Franchise royalties and fees 1,126,541 1,129,972
Franchise advertising fund contributions 116,423 -
Other revenues - 244,633
Total Revenues 3,681,248 4,620,646

Operating Costs and Expenses:
Restaurant operating expenses:
Food and beverage costs 915,063 1,193,908
Labor 966,020 1,383,941
Rent 283,667 537,588
Other restaurant operating expenses 367,611 621,312
Total restaurant operating expenses 2,532,361 3,736,749
Costs of other revenues - 114,388
Depreciation and amortization 190,637 145,615
Other expenses incurred for closed locations 27,519 473,378
Franchise advertising fund expenses 116,423 -
General and administrative expenses 3,584,698 3,713,743
Total Costs and Expenses 6,451,638 8,183,873
Loss from Operations (2,770,390 ) (3,563,227 )

Other (Expense) Income:
Other (expense) income, net 3,680 60,314
Interest expense, net (1,262,521 ) (826,155 )
Loss on sale of CTI - (456,169 )
Amortization of debt discounts (1,345,683 ) (1,914,038 )
Total Other Expense, net (2,604,524 ) (3,136,048 )

Loss Before Income Tax (5,374,914 ) (6,699,275 )
Income tax provision - -
Net Loss (5,374,914 ) (6,699,275 )
Net loss attributable to the non-controlling interest - (2,071 )
Net Loss Attributable to Controlling Interest $ (5,374,914 ) $ (6,697,204 )
~~Revenues~~
Company total revenues totaled $3,681,248 for the nine months ended September 30, 2019 compared to $4,620,646 for the nine months ended September 30, 2018. The 20.3% decrease was primarily attributable to store closures in the prior period therefore fewer stores generating revenues in the current period as compared to the prior period and due the sale of CTI during May 2018.
We generated restaurant sales, net of discounts, of $2,438,284 for the nine months ended September 30, 2019 compared to $3,246,041, for the nine months ended September 30, 2018. This represented a decrease of $807,757, or 24.9%, which is primarily attributable to closures of corporate owned stores during the prior period as compared to the current period.
Franchise royalties and fees for the nine months ended September 30, 2019 and 2018 totaled $1,126,541 compared to $1,129,972, respectively. The $3,431 decrease is primarily attributable to an increase of approximately $216,000 in recognition of deferred revenue for franchise agreements pursuant to adoption of the new revenue accounting standard, partially offset by a decrease in royalty income of approximately $173,000 as there are fewer franchise store location as compared to the prior period and a decrease of approximately $48,000 in vendor rebates due to fewer franchise owned stores in the current period as compared to the prior period.
~~Franchise advertising fund contributions for the nine months ended September 30, 2019 totaled $116,423.~~
Other revenues decreased from $244,633 for the nine months ended September 30, 2018 to $0 for the nine months ended September 30, 2019, representing a decrease of $244,633 or 100%. The decrease is attributed to the sale of CTI in May 2018.
~~Operating Costs and Expenses~~
Restaurant food and beverage costs for the nine months ended September 30, 2019 and 2018 totaled $915,063, or 37.5 as a percentage of restaurant sales, and $1,193,908, or 36.8%, as a percentage of restaurant sales, respectively. The $278,845 decrease results primarily from various company owned store closures in the prior period compared to the current period.
Restaurant labor for the nine months ended September 30, 2019 and 2018 totaled $966,020, or 39.6%, as a percentage of restaurant sales, and $1,383,941, or 42.6%, as a percentage of restaurant sales, respectively. The $417,921 decrease results primarily due to company owned store closures as compared to the current period.
Restaurant rent expense for the nine months ended September 30, 2019 and 2018 totaled $283,667, or 11.8%, as a percentage of restaurant sales, and $537,588, or 16.6%, as a percentage of restaurant sales, respectively. The $174,640 decrease in rent expense is primarily due to the closure of company owned stores in the prior period compared to the current period.
Other restaurant operating expenses for the nine months ended September 30, 2019 and 2018 totaled $367,611, or 15.1% as a percentage of restaurant sales, and $621,312, or 19.1% as a percentage of restaurant sales, respectively. The $253,701 decrease is primarily due to store closures compared to the current period and improved efficiencies.
Cost of other revenues for the nine months ended September 30, 2019 and 2018 totaled $0, or 0%, as a percentage of other revenues, and $114,388, or 46.8%, as a percentage of other revenues, respectively. The decrease is due to the sale of CTI in May 2018.
Depreciation and amortization expense for the nine months ended September 30, 2019 and 2018 totaled $190,637 and $145,615, respectively. The $45,022 increase is primarily attributable to depreciation expense related to additions of property and equipment compared to the prior periods.
General and administrative expenses for the nine months ended September 30, 2019 and 2018 totaled $3,584,698, or 97.4% of total revenues, and $3,713,743, or 77.1% of total revenues, respectively. The $129,045 decrease is primarily attributable to a decrease of approximately $137,000 in general and administrative CTI expenses due to the sale of CTI.
~~Loss from Operations~~
Our loss from operations for the nine months ended September 30, 2019 and 2018 totaled $2,770,390 or 75.3% of total revenues and $3,563,227 or 77.1% of total revenues, respectively. The decrease of $792,837 in loss from operations is primarily attributable to a decrease in total costs and expenses of approximately $1,732,235, partially offset by the decrease in total revenues of approximately $939,000 due to fewer corporate owned stores generating revenues in the current period as compared to the prior period.
~~Other Expense, net~~
~~Other expense, net for the nine months ended September 30, 2019 and 2018 totaled $2,604,524 and $3,136,048, respectively. The $531,524~~$1,408,588 decrease in expense was primarily attributable to a decrease in amortization of debt discounts of ~~approximately $568,000,~~$855,455, a $553,688 decrease ~~due to~~in interest expense, net as the ~~loss on sale~~majority of ~~CTI~~the convertible notes where converted as of ~~approximately $456,000~~Q4 2020 therefore no further interest expense is being incurred and a $95,445 decrease in other expense, net, partially offset by an increase of $96,000 in ~~interest expense~~the loss on change in fair value of ~~approximately $436,000 incurred in connection with the convertible notes and other notes payable.~~accrued compensation.

Net Loss

Our net loss for the ~~nine~~six months ended ~~September~~June 30, ~~2019 decreased~~2020 increased by ~~$1,359,344~~$3,967,603 to ~~$5,374,914~~$6,993,688 as compared to ~~$6,699,275~~$3,026,085 for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, resulting from aan increase in our loss from operations partially offset by an decrease in ~~loss of operations and total~~ other expense, net as discussed above. ~~Our net loss attributable to our controlling interest was $5,374,914 and $6,697,204 (net of non-controlling interest of $2,071) for the nine months ended September 30, 2019 and 2018, respectively.~~
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Liquidity and Capital Resources

Liquidity

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

September 30, 2019 December 31, 2018
Cash $ 1,983,306 $ 357,842
Working Capital Deficiency $ 5,484,122 $ 3,918,443
Convertible notes payable, including related parties and Former Parent, net of debt discount of $1,340,590 and $1,582,378, respectively $ 8,879,868 $ 2,307,853
Other notes payable, including related parties $ 91,000 $ 560,000
June 30, 2020 December 31, 2019
Cash $ 3,161,195 $ 478,854
Working Capital Surplus (Deficiency) $ 214,643 $ (3,707,541 )
Convertible notes payable, net of debt discount of $0 and $38,918, respectively $ 182,458 $ 693,540
Other notes payable, including related party $ 1,132,864 $ 682,807

Availability of Additional Funds and Going Concern

~~Based upon our~~Although we have a working capital ~~deficiency and~~surplus of $214,643, we presently have an accumulated deficit of ~~$5,484,122 and $29,777,110, respectively,~~$60,088,290, as of ~~September~~June 30, ~~2019, plus our use of $3,296,216~~2020, and we utilized $3,834,131 of cash in operating activities during the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, therefore we require additional equity and/or debt financing to continue our operations. These conditions raise substantial doubt about our ability to continue as a going concern for at least one year from the date of this filing.

Our principal source of liquidity to date has been provided by ~~(i) investment from American Restaurant Holdings, a private equity restaurant group, (ii)~~ loans and convertible loans from related and unrelated third parties, ~~and (iii)~~(ii) the sale of common stock through private ~~placements. More specifically, American Restaurant Holdings has invested over $5 million~~placements and the (iii) and the recent closed public offering.
The pandemic novel coronavirus (COVID-19) outbreak, federal, state and local government responses to COVID-19 and our Company’s responses to the outbreak have all disrupted and will continue to disrupt our business. In the United States, individuals are being encouraged to practice social distancing, restricted from gathering in ~~growth~~groups and in some areas during the first quarter of 2020 continuing through the third quarter of September 2020. As a result of the disruption and volatility in the global capital ~~into~~markets, we have seen an increase in the cost of capital which adversely impacts access to capital.
On May 9, 2020, the Company entered into Paycheck Protection Program Promissory Note and Agreement with Greater Nevada Credit Union, pursuant to ~~date. Additionally,~~which the Company received loan proceeds of $866,300 (the “PPP Loan”). The PPP Loan was made under, and is subject to the terms and conditions of, the PPP which was established under the CARES Act and is administered by the U.S. Small Business Administration. The term of the PPP Loan is two years with a maturity date of May 9, 2022 and contains a favorable fixed annual interest rate of 1.00%. Payments of principal and interest on the PPP Loan will be deferred for the first six months of the term of the PPP Loan until November 9, 2020. Principal and interest are payable monthly and may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Under the terms of the CARES Act, recipients can apply for and receive forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs (as defined under the PPP) and mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”), and on the maintenance of employee and compensation levels during the eight-week period following the funding of the PPP Loan. The Company believes that it has been ~~funded through~~using the proceeds ~~from the issuance of 15% Senior Secured Promissory Notes and 12% Secured Convertible Notes offer through various private offering in the aggregate amount of approximately $8,003,000 as~~ of the ~~date~~PPP Loan, for Qualifying Expenses. However, no assurance is provided that the Company will be able to obtain forgiveness of ~~filing of this report.~~the PPP Loan in whole or in part.

We expect to have ongoing needs for working capital in order to (a) fund operations; plus (b) expand operations by opening additional corporate-owned restaurants. To that end, we may be required to raise additional funds through equity or debt financing. However, there can be no assurance that we will be successful in securing additional capital. If we are unsuccessful, we may need to (a) initiate cost reductions; (b) forego business development opportunities; (c) seek extensions of time to fund our liabilities, or (d) seek protection from creditors.

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

If we are able to raise additional capital, we do not know what the terms of any such capital raising would be. In addition, any future sale of our equity securities would dilute the ownership and control of your shares and could be at prices substantially below prices at which our shares currently trade. Our inability to raise capital could require us to significantly curtail or terminate our operations. We may seek to increase our cash reserves through the sale of additional equity or debt securities. The sale of convertible debt securities or additional equity securities could result in additional and potentially substantial dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties.
Our condensed consolidated financial statements included elsewhere in this 10-Q document have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate our continuation as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

Sources and Uses of Cash for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018~~2019

During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, we used cash of ~~$3,296,216~~$3,834,131 and ~~$1,752,878,~~$2,013,398, respectively, in operations. Our net cash used in operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was primarily attributable to our net loss of ~~$5,374,914,~~$6,993,688, adjusted for net non-cash items in the aggregate amount of ~~$2,303,898~~$3,986,469 and ~~$225,098~~$826,912 of net cash provided by changes in the levels of operating assets and liabilities. During the six months ended June 30, 2019 and 2018, we used cash of $2,013,398 and $1,312,858, respectively, in operations. Our net cash used in operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 was primarily attributable to our net loss of ~~$6,699,275,~~$3,026,085, adjusted for net non-cash items in the aggregate amount of ~~$3,473,758, partially offset by $768,102~~$1,212,209 and $199,522 of net cash provided by changes in the levels of operating assets and liabilities.

During the ~~nine~~six months ended ~~September~~June 30, 2020, net cash used in investing activities was $163,585, of which $172,387 was used to purchase property and, partially offset by $8,802 of loans collections from franchisees. During the six months ended June 30, 2019, net cash used in investing activities was ~~$932,422,~~$286,279, of which ~~$864,451~~$305,511 was used to purchase property and equipment, ~~$60,186 was used to issue a loan to a former franchisee and $35,116 was used to acquire a former franchisee location ,~~ partially offset by ~~$27,331~~$19,232 of loans repayments by franchisees and a related party. During the nine months ended September 30, 2018, net cash used in investing activities was $12,148, of which $43,834 was used to purchase property and equipment and to issue loans to franchisees in the amount of $9,689, partially offset by $41,375 of loans repaymentscollections by franchisees and a related party.

Net cash provided by financing activities for the ~~nine~~six months ended ~~September~~June 30, 2020 was $6,680,057 of which $6,780,000 proceeds from the offering, net of underwriter’s discount and offering costs, $150,000 proceeds from other notes payable, $866,300 proceeds from the PPP loan, partially offset by repayments of various convertible notes of $550,000 and $566,243 of repayments of other notes payables, including a related party. Net cash provided by financing activities for the six months ended June 30, 2019 was ~~$5,854,000~~$5,354,000 of which $191,000 proceeds from convertible notes ~~related party and notes payable~~ from other related ~~party~~parties and ~~$6,373,000~~$5,873,000 proceeds from convertible notes to various parties, partially offset by repayments of various convertible notes and other notes payable, including a related ~~party,~~parties, of $150,000 and $560,000 of repayments of other notes payables, including a related parties. Net cash provided by financing activities for the nine months ended September 30, 2018 was $1,530,226 of which $650,000 proceeds from convertible notes from other related parties, $384,000 proceeds from convertible notes to various parties, $460,000 proceeds from other notes payables, $85,576 net proceeds from initial public offering and $180,000 proceeds from the sale of restricted common stock, offset by $100,000 repayments of a convertible note payable, related party and $129,350 net repayments of advances to Former Parent.party.
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Critical Accounting Policies

Use of Estimates

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

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

● ~~the fair value of assets acquired, and liabilities assumed in a business combination;~~
● the assessment of recoverability of long-lived assets, including property and equipment, goodwill and intangible assets;
● the estimated useful lives of intangible and depreciable assets;
● estimates and assumptions used to value warrants and options;
● the recognition of revenue; and
● the recognition, measurement and valuation of current and deferred income ~~taxes~~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 as well as franchise agreements ~~and a non-compete agreement~~ which are amortized ~~on a straight-line basis~~ over their estimated useful lives of 13 ~~years and 5 years, respectively.~~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.
34
Revenue Recognition

During the first quarter 2019, the Company adopted Topic 606 “Revenue from Contracts with Customers” for revenue recognition related to contracts with customers and applied the guidance modified retrospectively. Under the new guidance, revenue is recognized in accordance with a five-step revenue model, as follows: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. In applying this five-step model, we have made significant judgments in identifying the promised goods or services in our contracts with franchisees that are distinct, and which represent separate performance obligations. The change between Topic 605 and Topic 606, primarily impacted the way the Company recognized franchise fees. Under Topic 605 franchise fees were recognized upon opening of a restaurant or granting of a new franchise term at a point in time while under Topic 606 franchise fees are recognized on a straight-line basis over the life of the related franchise agreements and any exercised renewal periods. The impact of the adoption of Topic 606 resulted in an adjustment of $875,902 in accumulated deficit and deferred revenues.

Restaurant Sales

Retail store revenue at ~~company~~Company operated restaurants is recognized when payment is tendered at the point of sale, net of sales tax, discount and other sales related taxes. The Company recorded retail store revenues of ~~$821,684~~$659,939 and ~~$2,438,284~~$1,897,366 during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively. The Company recorded retail store revenues of ~~$721,300~~$815,837 and ~~$3,246,041~~$1,616,600 during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively.

The Company sells gift cards which do not have an expiration date, and it does not deduct dormancy fees from outstanding gift card balances. The Company recognize revenues ~~form~~from gift cards as restaurant revenues once the Company performs obligation to provide food and beverage to the customer ~~is satisfies upon~~simultaneously with the redemption of the gift ~~card.~~card or through gift card breakage, as discussed in Other Revenue 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 ~~$165,412~~$52,870 and ~~$563,772~~$173,779 during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. The Company recorded revenue from royalties of ~~$244,820~~$191,810 and ~~$736,384~~$398,360 during the three and ~~Nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, which is included in franchise royalties and fees on the accompanying condensed 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, ~~which~~these fees are then ~~recognizes~~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~~revenues from franchise fees of ~~$16,132~~$75,190 and ~~$342,649~~$89,630, respectively, during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively,~~2020, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. The Company recorded ~~revenue~~revenues from franchise fees of ~~$20,000~~$273,336 and ~~$125,000~~$326,517, respectively, during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018, respectively,~~2019, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations.

The Company has supply agreements with certain food and beverage vendors. Pursuant to the terms of these agreements, rebates are provided to the Company based upon the dollar volume of purchases for all company-owned and franchised restaurants from these vendors. Rebates earned on purchases by franchise stores are recorded as revenue during the period in which the related food and beverage purchases are made. The Company recorded revenue from rebates of ~~$71,200~~$14,233 and ~~$220,120~~$54,915 during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, which is included in franchise royalties and fees on the accompanying ~~condensed~~ consolidated statements of operations. The Company recorded revenue from rebates of ~~$59,260~~$63,939 and ~~$268,588~~$148,920 during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. Rebates earned on purchases by ~~company~~Company owned stores are recorded as a reduction of ~~cost of goods sold~~food and beverage costs during the period in which the related food and beverage purchases are made.
35
Other Revenues

~~Through its subsidiary CTI which was sold in May 2018,~~Gift card breakage is recognized when the likelihood of a gift card being redeemed by the customer is remote and the Company ~~derived revenue from~~determines there is not a legal obligation to remit the ~~sale of POS computer systems, cash registers and camera systems, and from~~unredeemed gift card balance to the provision of related consulting and support services, which generally include implementation, installation and training services. We recognize revenue when persuasive evidence of an arrangement exists, deliveryrelevant jurisdiction. The determination of the ~~product or service has occurred,~~gift card breakage rate is based upon the ~~fee is fixed or determinable and collectability is reasonably assured.~~Company’s specific historical redemption patterns. The Company ~~recorded $0 and $244,633, respectively,~~recognizes gift card breakage by applying its estimate of ~~revenues from these technology sales and services during~~the rate of gift card breakage on a pro rata basis over the period of estimated redemption. Gift card liability is recoded in other current liabilities on the condensed consolidated balance sheet. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2020, the Company determined that no gift card breakage is necessary based on current redemption rates.

Deferred Revenue

Deferred revenue primarily includes initial franchise fees received by the Company, which are being amortized over the life of the ~~Company~~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.

Franchise Advertising Fund Contributions
Under the Company’s franchise agreements, the Company and its franchisees are required to contribute a certain percentage of revenues to a national advertising fund. The Company’s national advertising services are provided on a system-wide basis and, therefore, not considered distinct performance obligations for individual franchisees. In accordance with Topic 606, the Company recognizes these sales-based advertising contributions from franchisees as franchise revenue when the underlying franchisee ~~sales occur.~~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 ~~condensed~~ consolidated statement of operations in an amount that is greater than the revenue recorded for advertising contributions. Conversely, when an advertising contribution fund is under-spent at a period end, the Company will accrue advertising costs up to advertising contributions recorded in revenue. The Company recorded contributions from franchisees of ~~$39,030~~$32,454 and ~~$116,423,~~$54,050, respectively, during the three and ~~nine~~six months ended ~~September~~June 30, 2020, respectively, which are included in franchise advertising fund contributions on the accompanying condensed consolidated statements of operations. The Company recorded contributions from franchisees of $38,494 and $77,393, respectively, during the three and six months ended June 30, 2019, which is included in franchise advertising fund contributions on the accompanying condensed consolidated statements of operations.
Income Taxes

We account for income taxes under Accounting Standards Codification (“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 condensed consolidated statements of operations.

Recently Issued Accounting Pronouncements

See Note 3 to our condensed consolidated financial statements for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020.

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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
~~(a)~~ Evaluation of Disclosure Controls and Procedures

~~Our management,~~Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), the Company carried out an evaluation, with the participation of ~~our Principal~~the Company’s management, including the Company’s Chief Executive Officer and ~~Principal~~Chief Financial Officer ~~has evaluated~~of the effectiveness of ~~our~~the Company’s disclosure controls and procedures ~~over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act),~~ as of the end of the period covered by this ~~Annual Report. Based on such evaluation, our Principal~~report. The term “disclosure controls and procedures”, as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management, with the participation of the Company’s Chief Executive Officer and ~~Principal~~Chief Financial Officer, ~~have concluded that,~~evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this ~~Annual~~Quarterly Report on Form 10-Q. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective ~~because of a material weakness in our internal control over financial reporting as discussed below.~~
Notwithstanding this material weakness, our Chief Executive Officer and Chief Financial Officer have concluded that the Consolidated Financial Statements included in this Annual Report on Form 10-K present fairly, in all material respects, the financial position of the Company at September 30, 2019 and December 31, 2018 and the consolidated results of operations and cash flows for each of the fiscal years presented herein in conformity with U.S. generally accepted accounting principles.
~~(b) Management’s Annual Report on Internal Control Over Financial Reporting~~
Our management assessed the effectiveness of the Company’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), as of September 30, 2019. The framework used by management in making the assessment was the criteria set forth in the document entitled “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our management has determined that as of September 30, 2019, the Company’s internal control over financial reporting was not effective for the purpose for which it is intended and determine theredue to ~~be a material weakness.~~
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as required by Sarbanes-Oxley (SOX) Section 404(a). The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Principal Executive Officer and Principal Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with United States generally accepted accounting principles.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with US GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified the following material weaknesses in our internal control over financial reporting that existed as of ~~September~~June 30, ~~2019:~~2020, as discussed below.
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, we identified the following material weaknesses:

● The Company does not have written documentation of our internal control policies and procedures.
● The Company does not have sufficient resources in its accounting function, which restricts the Company’s ability to gather, analyze and properly review information related to financial reporting in a timely manner. ~~As a result, the Company has not completed our ASC 606 implementation process and, thus, cannot disclose the quantitative impact of adoption on our financial statements.~~ In addition, due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.

● The Company has inadequate controls to ensure that information necessary to properly record transactions is adequately communicated on a timely basis from non-financial personnel to those responsible for financial reporting.
● The Company has significant deficiencies in the design and implementation of IT controls, specifically in the following areas: data center and network operations, access security and change management.

As a company with limited resources, the Company does not have the resources to fund sufficient staff to ensure a complete segregation of responsibilities within the accounting function. However, Company management does review, and will increase the review of the financial statements. This action, in addition to future improvements identified above, will minimize any risk of a potential material misstatement occurring.
~~(c)~~ Changes in Internal Control over Financial Reporting

There ~~have been~~were no changes in our internal control over financial reporting (as that ~~occurred~~term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the ~~second~~ quarter ~~of the nine months~~ ended ~~September~~June 30, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
37
PART II - OTHER INFORMATION
~~Item 1.~~ ~~Legal Proceedings.~~
Item 1. Legal Proceedings.

From time to time, we are a defendant or plaintiff in various legal actions that arise in the normal course of business. We record legal costs associated with loss contingencies as incurred and have accrued for all probable and estimable settlements.

We are ~~not~~ currently involved in ~~any~~ material ~~disputes~~pending legal proceedings that have been previously disclosed in our filings with the Securities and ~~do not~~Exchange Commission under the Securities and Exchange Act of 1934, as amended. Below is a summary of the material legal proceedings that have ~~any~~become a reportable event or which have had material ~~litigation matters pending except:~~developments during the quarter ended June 30, 2020.

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

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

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

On March 27, 2018 a convertible note holder filed a complaint in the Iowa District Court for Polk County #CVCV056029 against the Company for failure to pay the remaining balance due on a promissory note in the amount of $100,000, together with interest, attorney fees and other costs of $171,035. On June 6, 2018 a default judgement was entered against the Company for the amount of $171,035. The Company repaid an aggregate amount of ~~$70,000,~~$71,035, consisting of principal and interest, as of the date of the filing of this report. As of ~~September 30, 2019,~~March 31, 2020, the Company has accrued for the liability in convertible notes payable in the amount of $100,000 and accrued interest of ~~$18,045~~$20,030 is included ~~in accounts payable and accrued expenses.~~
In April 2018, the Company and Former Parent was listed as a defendant in a lawsuit filed by a landlord (“Former Landlord”) in the Superior Court of the State of California. The Former Landlord is seeking $531,594 in damages for rent, interest and other expenses. The original lease was for a 5-year period and commenced on or about September 30, 2015. On January 15, 2019, the Company and the Former Landlord entered a settlement and release agreement. Pursuant to the settlement the Company shall pay the amount of $531,594 as follows (i) first payment of $49,815, net of security deposit of $11,185, on or before January 23, 2019, (ii) second payment of $25,000 on or before February 28, 2019 and (iii) thereafter sixty-nine payments of $6,400 on or before the 15^thof each month beginning on March 15, 2019. Conditioned on the Company making twelve timely installment payments of $6,400, the Company would be released of the remaining liability pursuant to the judgement. As of September 30, 2019, the Company has accrued for the liability in accounts payable and accrued expenses.
On May 4, 2018, Stratford Road Partners, LLC (“Stratford”) filed suit against the Company’s subsidiary for non-payment of rent in the small Claims court in the state of North Carolina. Since then the property has been vacated and the landlord offered a settlement of $10,000 with no further lease obligation. On June 5, 2019 the Company signed the settlement agreement and made the payment to the landlord. As of September 30, 2019, the Company has accrued for the liability in accounts payable and accrued expenses.

In May 2018, Resolute Contractors, ~~Inc,~~Inc., Quality Tile, MTL Construction, Genesis Electric, JNB Interiors and Captive Aire filed a Mechanics Lien for labor, service, equipment and materials in the total amount of $98,005. The Company intends to set up various payment plans with these vendors. As of ~~September 30, 2019,~~March 31, 2020, the Company has accrued for the liability in accounts payable and accrued expenses.
On December 12, 2018, the Company was listed as a defendant to a lawsuit filed by a landlord in the Superior Court of the State of California. Fountain Valley is seeking approximately $121,000 in damages for rent, interest and other expenses. On February 15, 2019, the Company entered into a settlement agreement and payment plan in the amount of $85,000. The Company agreed to make the following payments (i) $15,000 on or before March 15, 2019, and (ii) ten monthly installments of $7,000 commencing on April 15, 2019 and continuing monthly on the 15th day of each month though January 15, 2020. The company has accrued for the liability in accounts payable and accrued expenses and has been making repayments pursuant to the settlement agreement.
On As of January 18, 2019, the Company entered into an expense reimbursement agreement with an employee in connection with unreimbursed expenses incurred on behalf of the Company in the amount of $81,140 recorded in accounts payable and accrued expenses as of March 31, 2019. The Company shall pay the employee as follows (a) $1,750 upon execution of the agreement, (b) $1,000 a week commencing on January 25, 2019 ending May 24, 2019, (c) a onetime payment of $40,000 on the earlier of March 31, 2019 or when the Company fully received the anticipated funding from the a traunch of the 15% Senior Secured Convertible Notes and (d) a onetime payment of $21,390 on the earlier of May 31, 2019 or when15, 2020, the Company has ~~fully received the anticipated funding from the second traunch of the 15% Senior Secured Convertible Notes. As of September 30, 2019,~~met all their obligations and the full amount has been ~~repaid.~~paid.

On or about March 7, 2019, the Company was listed as a defendant to a lawsuit filed by a contractor in the State of Texas. The contractor is claiming a breach of contract and is seeking approximately $32,809 in damages for services claimed to be rendered by the contractor. The Company is working with legal counsel in order to reach a settlement. As of ~~September 30, 2019,~~March 31, 2020, the Company accrued $30,000 for the liability in accounts payable and accrued expenses.

On ~~May 6, 2019,~~January 23, 2020, the Company ~~entered into~~was served a ~~commission’s payment~~judgment in the amount of $130,185 for a breach of a lease agreement in ~~the aggregate amount of $45,894~~Chicago, Illinois, in connection with ~~past due commission recorded~~a Company owned store that was closed in 2018. As of March 31, 2020, the Company has accrued for the liability in accounts payable and accrued ~~expenses as~~expenses.
In the normal course of ~~March 31, 2019. The~~business, the Company ~~shall pay~~may be involved in legal proceedings, claims and assessments arising in the ~~employee~~ordinary course of business. In the ~~outstanding commission balance as follows (a) $10,894 upon execution~~opinion of management, such matters are currently not expected to have a material impact on the ~~agreement and (b) $7,000 per month for five months starting on May 31, 2019. As of September 30, 2019 the full amount has been repaid.~~Company’s financial statements.

On August 1, 2019, the Company entered into a settlement agreement with a landlord in connection with the prior executive office in Houston, Texas as the Company vacated the property on April 30, 2018. The Company ~~owed the landlord the sum of $58,522. The landlord agreed to accept $32,283~~records legal costs associated with loss contingencies as full payment of the damages. Pursuant to the settlement we will make three equal payments of $10,761 with the first payment to be made on August 2, 2019, the second payment is to be made on September 1, 2019incurred and ~~the final payment is to be made on October 1, 2019. As of September 30, 2019, the remaining unpaid amount of $10,761, is included in accounts payable~~accrues for all probable and ~~accrued expenses.~~estimable settlements after consulting legal counsel.

Muscle Maker or its subsidiaries failed in certain instances in paying past state and local sales taxes collected from customers in specific states that impose a tax on sales of the Company’s products during 2017 and 2018. The Company had accrued ~~a liability of $224,717~~$253,831 and $329,089 which includes penalties and interest as of ~~September~~June 30, 2020 and December 31, 2019, respectively, related to this matter. ~~All current state and local sales taxes from January 1, 2018 for open company owned locations have been fully paid and in a timely manner.~~ The Company has completed or is in discussions on payment plans with the various state or local entities for these past owed amounts.

Item 1A. Risk Factors.

Not applicable. See, however, Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Results and Financial Condition”) of our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the SEC on ~~August 21, 2019.~~May 29, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On ~~January 23, 2015,~~February 18, 2020, the Company entered into a professional services agreement with a company to provide advice on business development of food stores and delivery kitchen operations. In addition, they will review and advise the Company on potential acquisition targets, including financial analytics for post-merger entities and provide assistance in ~~connection with original capitalization~~preparing pro-forma financial information. The term of the ~~Company, MMI issued 4,339,285 shares~~agreement commences on February 18, 2020 and expires on February 18, 2021. Pursuant to the terms of ~~its common stock to ARH in exchange for cash of $3,645,000 and an obligation to repay an aggregate of $604,000 of principal due under Note I and Note II issued to MMF in connection with~~ the ~~acquisition of 74% of MMB.~~
~~On January 23, 2015, MMI issued 53,571 shares of common stock valued at $1.31 per share, or an aggregate of $70,000, to former members of MMF, in connection with the acquisition of 74% of MMB.~~
On January 24, 2015, MMI granted 21,428 shares of its common stock valued at $1.31 per share to its Director of Brand Development, in connection with the DBD Agreement. The shares vested immediately and MMI recorded stock-based compensation of $28,000 in connection with issuance of these shares.
~~On January 24, 2015,~~agreement, the Company ~~issued 45,918 shares of its common stock~~agreed to ~~the Director of Brand Development in exchange for cash proceeds of $1.31 per share, or $60,000.~~
On July 23, 2015 and August 28, 2015, the Company issued 80,356 and 53,571 shares of its common stock, and 3-year warrants for the purchase of 40,178 and 26,785 shares of common stock respectively, for aggregate cash proceeds of $750,000. The warrants are exercisable at $7.00 per share.
On December 15, 2016, the Company granted a three-year warrant for the purchase of 245,797 shares of MMI common stock at an exercise price of $9.33 to the Parent, in connection with the issuance of the 2016 ARH Note.
~~On April 21, 2016, the Company granted a three-year warrant for the purchase of 5,356~~issue 300,000 shares of the Company’s common stock atand 100,000 three-year cashless warrants with an exercise price of ~~$9.33~~$5.00 per share ~~to a franchisee and developer~~upon signing of the agreement as payment. The Company ~~in exchange for services.~~
~~On December 15, 2016, the Company granted a three-year warrant for the purchase of 245,797 shares of MMI common stock at an exercise price of $9.33 to the Parent, in connection with~~rescinded the issuance of ~~the 2016 ARH Note.~~
~~In May 2017, Muscle Maker granted 119,709 shares of its restricted common stock to its employees~~100,000 warrants and ~~consultants, with an aggregate grant date value of $1,117,403 or $9.33 per share.~~
~~On July 21, 2017, the Company issued 6,696 shares of common stock of the company to an investor at a purchase price of $7.47 per share providing $50,000 of proceeds to the Company.~~
~~On July 25, 2017, a warrant was exercised for the 5,356 shares of common stock of the Company at an exercise price of $9.33 per share for gross proceeds of $50,000.~~
~~On July 27, 2017, the Company issued stand-alone non-qualified stock options, not pursuant to a plan, to purchase an aggregate of 33,750~~300,000 shares of the Company’s common stock in July 2020 that were issued in the first quarter of 2020, pursuant to ~~its franchisees.~~
~~On August 25, 2017,~~a consulting agreement. Although the shares were duly authorized and validly issued, the Company ~~issued an aggregate~~rescinded the stock and warrants as it did not have the required amount of ~~42,856~~equity authorized under its 2019 Incentive Stock Plan. Following the rescission of the warrants and shares of common stock, of the ~~company~~consultant threatened to ~~investors at a purchase price of $7.47 per share providing $320,000 of proceeds to the Company.~~
~~On September 1, 2017,~~commence legal proceedings against the Company ~~issued 6,698~~and demanded the Company to re-issue the 300,000 shares of common stock and 100,000 warrants and to provide the Consultant registration rights. In order to settle and avoid the time commitment and expense associated with potential litigation, the Company and the Consultant entered into a Settlement Agreement (“Settlement Agreement”) on August 11, 2020 whereby the Company agreed to issue 300,000 shares of common stock within 5 five days of entering into the Settlement Agreement. These shares will not be issued subject to any equity plan. The Company agreed to register the shares of common stock in consideration of a release by the Consultant. In addition, as part of the ~~company to an investor at a purchase price~~Settlement Agreement the Company will issue 100,000 stock options upon the approval of ~~$7.47 per share providing $50,000 of proceeds to~~ the ~~Company.~~2020 Equity Incentive Plan.

On ~~September 21, 2017,~~February 24, 2020, the Company ~~granted an aggregate amount~~entered into a Consulting Agreement with consultants with experience in the area of ~~32,136~~corporate finance, investor communication and financial and investor public relations. The term of the agreement is for two months from the effective date on February 27, 2020 and expires on April 27, 2020. Pursuant to the terms of the agreement, the Company agreed to pay $107,500 in cash per month and to issue 10,000 shares of ~~its restricted~~the Company’s common ~~stock at a price~~stock. In the event the Company elects to not extend the term of ~~$9.33 per share~~the Agreement, it is to ~~its directors.~~notify the consultants within five days of the conclusion of the 60-day term.

~~During the year ended December 31, 2017,~~On April 8, 2020, the Company ~~issued three-year warrants for~~entered into a professional service agreement with a consultant to provide advice on investor outreach and institutional engagements The Consultants will also provide continuous market insight and interpret our trading activity. The term of the ~~purchase~~agreement commenced from the execution date and ends on April 1, 2021. Pursuant to the terms, the Company agreed to pay the consultant in the form of ~~an aggregate of 380,483~~non-qualified stock options to acquire 200,000 shares of the Company’s common stock, exercisable at ~~$9.33.~~$2.50 per share for a period of one year. The Options are fully vested upon the signing of this agreement. In addition, the option is callable by the Company in the event the market price of its shares close above $3.50 per share for five consecutive dates upon which the consultant will have three days to elect to exercise of forfeit the options. On August 11, 2020, the Company and the consultant entered into an amendment and agreed that the 200,000 non-qualified stock options shall be issued upon the Company’s shareholders approval of its 2020 Incentive Stock Plan.

~~During the year ended December 31, 2017,~~On April 21, 2020 the Company ~~issued 1,314,753 shares of its common stock upon conversion of various ARH Notes in~~authorized the ~~aggregate principal amount of $5,361,177.~~
~~During the year ended December 31, 2017, the Company issued in connection with the issuances of the convertible promissory notes, three-year warrants for the purchase~~issuance of an aggregate of ~~84,736 shares of the Company’s common stock exercisable at the Conversion Price~~
~~On April 11, 2018, the Former Parent elected to partially convert the 2018 ARH Note for the principal of $392,542 into 785,085 shares of the Company’s common stock.~~
During the year ended December 31, 2018, the Company issued 1,504,425 shares of its common stock upon automatic conversion of various convertible notes in the aggregate principal amount of $1,850,340, 180,000 shares of common stock of the company to various investors at a purchase price of $1.00 per share providing $180,000 of proceeds to the Company and 250,000 restricted shares of common stock issued for services.
On March 31, 2019, the Company issued an aggregate of 140,000 shares of common stock of the Company to consultant at a $1.00 per share for services rendered pursuant to their consulting agreement dated September 12, 2018.
~~During July 2019, the Company issued an aggregate of 290,000 restricted shares of common stock to a consultant pursuant to the consulting agreement.~~
~~On August 5, 2019 the Company authorized the issuances of an aggregate of 119,046 share of common stock to the member of the board of directors~~
~~On August 5, 2019, the Company issued 3,500 shares to the consultant pursuant to the agreement.~~
~~On October 19, 2019 the Company authorized the issuances of an aggregate of 26,242~~25,616 share of common stock to the members of the board of ~~directors.~~directors as compensation earned through the end of the fourth quarter of 2019.
On April 21, 2020, the Company issued an aggregate of 51,105 shares of common stock in exchange for accrued interest earned on convertible debt with an aggregate fair value of $357,735.
On June 1, 2020, the Company issued 5,000 shares of common stock of the Company to a consultant.
On June 5, 2020, the Company issued 15,000 shares of common stock of the Company to a digital marketing consultant in exchange for certain services with an aggregate fair value of $46,050.
On June 24, 2020 the Company authorized the issuance of an aggregate of 4,340 share of common stock to the members of the board of directors as compensation earned through the end of the first quarter of 2020
The above shares were issued under the 2019 Equity Incentive Plan.

The offers, sales, and issuances of the securities described above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited or sophisticated person and had adequate access, through employment, business or other relationships, to information about us.
39

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

~~None.~~The Company rescinded the issuance of 100,000 warrants and 300,000 shares of the Company’s common stock in July 2020 that were issued in the first quarter of 2020, pursuant to a consulting agreement. Although the shares were duly authorized and validity issued, the Company rescinded the stock and warrants as it did not have the required amount of equity authorized under its 2019 Incentive Stock Plan. Following the rescission of the warrants and shares of common stock, the consultant threatened to commence legal proceedings against the Company and demanded the Company to re-issue the 300,000 shares of common stock and 100,000 warrants and to provide the Consultant registration rights. In order to settle and avoid the time commitment and expense associated with potential litigation, the Company and the Consultant entered into a Settlement Agreement (“Settlement Agreement”) on August 11, 2020 whereby the Company agreed to issue 300,000 shares of common stock within 5 five days of entering into the Settlement Agreement. These shares will not be issued subject to any equity plan. The Company agreed to register the shares of common stock in consideration of a release by the Consultant. In addition, as part of the Settlement Agreement the Company will issue 100,000 stock options upon the approval of the 2020 Equity Incentive Plan.
On August 11, 2020, various members of the executive team entered into an agreement individually with the Company to cancel an aggregate of 216,783 shares of restricted common stock of the Company previously issued in the first quarter of 2020 and acknowledge that no further compensation is due under their employment agreements.
40
Item 6. Exhibits.

Exhibit
No.
Exhibit Description
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS XBRL Instance Document*
101.SCH XBRL Schema Document*
101.CAL XBRL Calculation Linkbase Document*
101.DEF XBRL Definition Linkbase Document*
101.LAB XBRL Label Linkbase Document*
101.PRE XBRL Presentation Linkbase Document*

† Includes management contracts and compensation plans and arrangements
*Filed herewith.
+Previously filed.
41
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: ~~November~~August 19, ~~2019~~2020 MUSCLE MAKER, INC.

By: /s/ Michael J. Roper
Michael J. Roper
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Ferdinand Groenewald
Ferdinand Groenewald
Chief Financial Officer
(Principal Financial and Accounting Officer)
42

	Common Stock				Additional Paid-in			Accumulated			Total Controlling			Non- Controlling
	Shares		Amount		Capital			Deficit			Interest			Interest			Total
Balance - December 31, 2017		7,637,855	$	764	$	13,919,455		$	(17,052,086	)	$	(3,131,867	)	$	(69,928	)	$	(3,201,795	)
Beneficial conversion feature - Convertible Notes		-		-		2,537,008			-			2,537,008			-			2,537,008
Warrants issued in connection with convertible debt		-		-		12,332			-			12,332			-			12,332
Warrants issued and recorded as debt discount in connection with notes payable		-		-		305,055			-			305,055			-			305,055
Offering on March 29, 2018, net of underwriter’s discount and offering cost of $58,798		44,153		4		85,572			-			85,576			-			85,576
Conversion of convertible notes payable into common stock		553,425		53		899,287			-			899,340			-			899,340
Stock-based compensation: Amortization of restricted common stock		-		-		39,091			-			39,091			-			39,091
Net loss		-		-		-			(3,183,726	)		(3,183,726	)		(7,257	)		(3,190,983	)

Balance - March 31, 2018		8,235,433	$	821	$	17,797,800		$	(20,235,812	)	$	(2,437,191	)	$	(77,185	)	$	(2,514,376	)
Issuance of restricted stock		26,286		3		(3	)		-			-			-			-
Shares issued for common stock		180,000		18		179,982			-			180,000			-			180,000
Beneficial conversion feature - Convertible Notes		-		-		39,072			-			39,072			-			39,072
Beneficial conversion feature - Convertible Note to Former Parent		-		-		475,000			-			475,000			-			475,000
Warrants issued in connection with common stock and convertible debt		-		-		3,750			-			3,750			-			3,750
Warrants issued and recorded as debt discount in connection with notes payable		-		-		38,763			-			38,763			-			38,763
Conversion of convertible note payable to Former Parent into common stock		785,084		78		392,464			-			392,542			-			392,542
Stock-based compensation: Amortization of restricted common stock		-		-		27,133			-			27,133			-			27,133
Sale of interest in CTI		-		-		-			420,899			420,899			71,999			492,898
Net loss		-		-		-			(2,368,921	)		(2,368,921	)		5,186			(2,363,735	)

Balance – June 30, 2018		9,226,803	$	920	$	18,953,961		$	(22,183,834	)	$	(3,228,953	)	$	-		$	(3,228,953	)

Restricted stock issued as compensation for services		250,000		25		249,975			-			250,000						250,000
Beneficial conversion feature - Convertible Notes		-		-		143,591			-			143,591			-			143,591
Warrants issued in connection with common stock and convertible debt		-		-		143,699			-			143,699			-			143,699
Stock-based compensation Amortization of restricted common stock		-		-		33,876			-			33,876			-			33,876
Net loss		-		-		-			(1,144,557	)		(1,144,557	)		-			(1,144,557	)

Balance –September 30, 2018		9,476,803	$	945	$	19,525,102		$	(23,328,391	)	$	(3,802,344	)	$	-		$	(3,802,344	)

					Additional
	Common Stock				Paid-in			Accumulated
	Shares		Amount		Capital			Deficit			Total
Balance - December 31, 2018		1,489,686	$	148	$	20,990,373		$	(23,833,656	)	$	(2,843,135	)
Cumulative effect of change in accounting principle		-		-		-			(875,902	)		(875,902	)
Issuance of restricted stock		1,988		1		(1	)		-			-
Restricted stock issued as compensation for services		20,000		2		139,998			-			140,000
Beneficial conversion feature - Convertible Notes		-		-		217,800			-			217,800
Warrants issued and recorded as debt discount in connection with convertible notes payable		-		-		217,641			-			217,641
Stock-based compensation: Amortization of restricted common stock		-		-		165,133			-			165,133
Net loss		-		-		-			(1,483,479	)		(1,483,479	)

Balance - March 31, 2019		1,511,674	$	151	$	21,730,944		$	(26,193,037	)	$	(4,461,942	)
Common stock issued in exchange for interest earned on other notes payable		68,475		7		479,316			-			479,323
Common stock issued in exchange for interest earned on convertible notes payable		15,952		2		111,664			-			111,666
Beneficial conversion feature - Convertible Notes		-		-		330,220			-			330,220
Warrants issued and recorded as debt discount in connection with convertible notes payable		-		-		330,713			-			330,713
Stock-based compensation: Amortization of restricted common stock		-		-		(123,431	)		-			(123,431	)
Net loss		-		-		-			(1,542,606	)		(1,542,606	)

Balance - June 30, 2019		1,596,101	$	160	$	22,859,426		$	(27,735,643	)	$	(4,876,057	)

	Common Stock				Additional Paid-in			Accumulated
	Shares		Amount		Capital			Deficit			Total
Balance - December 31, 2018		10,427,803	$	1,043	$	20,989,478		$	(23,833,656	)	$	(2,843,135	)
Cumulative effect of change in accounting principle		-		-		-			(568,540	)		(568,540	)
Issuance of restricted stock		13,918		1		(1	)		-			-
Restricted stock issued as compensation for services		140,000		14		139,986			-			140,000
Beneficial conversion feature - Convertible Notes		-		-		217,800			-			217,800
Warrants issued and recorded as debt discount in connection with convertible notes payable		-		-		217,641			-			217,641
Stock-based compensation: Amortization of restricted common stock		-		16		165,117			-			165,133
Net loss		-		-		-			(1,483,479	)		(1,483,479	)

Balance - March 31, 2019		10,581,721	$	1,074	$	21,730,021		$	(25,885,675	)	$	(4,154,580	)
Common stock issued in exchange for interest earned on other notes payable		111,666		11		111,655			-			111,666
Common stock issued in exchange for interest earned on convertible notes payable		479,323		48		479,275			-			479,323
Beneficial conversion feature - Convertible Notes		-		-		330,220			-			330,220
Warrants issued and recorded as debt discount in connection with convertible notes payable		-		-		330,713			-			330,713
Stock-based compensation: Amortization of restricted common stock		-		-		(123,431	)		-			(123,431	)
Net loss		-		-		-			(1,542,606	)		(1,542,606	)

Balance - June 30, 2019		11,172,710	$	1,133	$	22,858,453		$	(27,428,281	)	$	(4,568,695	)
Common stock issued as compensation to board of directors		119,046		12		119,034			-			119,046
Restricted stock issued as compensation for services		290,000		29		289,971			-			290,000

Common stock issued as compensation for services		3,500		-		3,500			-			3,500
Stock-based compensation: Amortization of restricted common stock		-		-		19,085			-			19,085
Net loss		-		-		-			(2,348,829	)		(2,348,829	)

Balance - September 30, 2019		11,585,256	$	1,174	$	23,290,043		$	(29,777,110	)	$	(6,485,893	)

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

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

	June 30, 2020			December 31, 2019
Loans receivable, net	$	128,587		$	137,389
Less: current portion		(40,364	)		(38,712	)
Loans receivable, non-current	$	88,223		$	98,677

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

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

Weighted average remaining amortization period at September 30, 2019 (in years)				8.6

	(1)	The Company accrued a liability of $142,855 related to an aggregate of 28,571 shares of common stock earned by a consultant upon the completion of the initial public offering pursuant to their consulting agreement entered into on September 12, 2018, which has not been issued by the Company to date due to an administrative delay.
	(2)	Included within accrued compensation expense is a liability of $142,000 related to 200,000 stock options to be issued by the Company. See Note 1311 – Commitments and Contingencies – Consulting Agreements for details related to the Options.
	(3)	See Note 11 – Commitments and Contingencies –Taxes for detailed related to delinquent sales taxes.

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

	Principal
Repayments due as of	Amount
06/30/2021	$	435,733
06/30/2022		542,231
06/30/2023		62,875
06/30/2024		68,094
06/30/2025		23,931
	$	1,132,864

				Weighted Average Grant					Weighted Average Grant
	Total			Date Fair Value		Total			Date Fair Value
Outstanding at January 1, 2019		42,442		$	6.34
Outstanding at January 1, 2020							2,426		$	65.33
Granted		430,000			1.00		216,783			5.00
Forfeited		(11,470	)		9.33		-			-
Vested		(443,918	)		1.23		(218,009	)		(5.34	)
Outstanding at September 30, 2019		17,054		$	5.94
Outstanding at June 30, 2020							1,200		$	65.33

	Number of Warrants		Weighted Average Exercise Price		Weighted Average Remaining Life In Years		Number of Warrants			Weighted Average Exercise Price		Weighted Average Remaining Life In Years
Outstanding, December 31, 2018		2,184,548	$	3.38		3.3
Outstanding, December 31, 2019								2,450,287		$	5.51		3.7
Issued		2,361,500		1.61		5.0		223,200			6.00		-
Exercised		-		-		-		-			-		-
Forfeited		-		-		-		(194,514	)		19.92		-
Outstanding, September 30, 2019		4,546,048	$	2.46		3.6
Outstanding, June 30, 2020								2,478,973		$	4.38		3.5

Exercisable, September 30, 2019		4,546,048	$	2.46		3.6
Exercisable, June 30, 2020								2,478,973		$	4.38		3.5

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

	●	The Company does not have written documentation of our internal control policies and procedures.

	●	The Company does not have sufficient resources in its accounting function, which restricts the Company’s ability to gather, analyze and properly review information related to financial reporting in a timely manner. ~~As a result, the Company has not completed our ASC 606 implementation process and, thus, cannot disclose the quantitative impact of adoption on our financial statements.~~ In addition, due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.

	●	The Company has inadequate controls to ensure that information necessary to properly record transactions is adequately communicated on a timely basis from non-financial personnel to those responsible for financial reporting.

	●	The Company has significant deficiencies in the design and implementation of IT controls, specifically in the following areas: data center and network operations, access security and change management.

Exhibit No.		Exhibit Description
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document*
101.SCH		XBRL Schema Document*
101.CAL		XBRL Calculation Linkbase Document*
101.DEF		XBRL Definition Linkbase Document*
101.LAB		XBRL Label Linkbase Document*
101.PRE		XBRL Presentation Linkbase Document*

Date: ~~November~~August 19, ~~2019~~2020	MUSCLE MAKER, INC.

	By:	/s/ Michael J. Roper
		Michael J. Roper
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Ferdinand Groenewald
		Ferdinand Groenewald
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Large accelerated filer

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Smaller reporting company

Emerging growth company