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Edited Transcript of GRIL.OQ earnings conference call or presentation 29-May-20 8:30pm GMT

Q4 2019 Muscle Maker Inc Earnings Call

Jun 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Muscle Maker Inc earnings conference call or presentation Friday, May 29, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ferdinand Groenewald

Muscle Maker, Inc. - CFO

* Michael J. Roper

Muscle Maker, Inc. - CEO & Secretary

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Presentation

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Michael J. Roper, Muscle Maker, Inc. - CEO & Secretary [1]

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Good afternoon, everybody. It's Mike Roper here on the call. I appreciate you guys joining our call today. Before I kind of get started, I wanted to quickly throw out an early apology in the event that you hear some dogs barking or my neighbor's mowing or any of that kind of weird stuff. I think I've pretty much quieted everybody down, but if something bizarre happens, I apologize in advance.

So good afternoon, and welcome to the Muscle Maker Grill Annual 2019 Results Conference Call. On the call today is myself, Michael Roper, the Chief Executive Officer; and Ferdinand Groenewald, our Chief Financial Officer. (Operator Instructions) We will not be taking live questions on today's call, but we will be addressing several frequently asked questions at the end of the presentation. Please note that this call is being recorded.

I'd like to now turn it over to Ferdi Groenewald, our Chief Financial Officer. Ferdi?

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Ferdinand Groenewald, Muscle Maker, Inc. - CFO [2]

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Thank you, Mike. Hello, everyone, and welcome to our annual 2019 earnings call. This is our first call as a public company, and we are excited to have everyone on the call today. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at musclemakergrill.com/investor-relations.

I will begin by reminding you that certain statements and projections made in this presentation about our future business and future results constitute forward-looking statements. These statements are based on management's current business and market expectations and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and in our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements.

We will start today's call with prepared remarks from Michael Roper, Chief Executive Officer, after which we will address several frequently asked questions. And with that, I'd like to turn the call back over to Michael.

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Michael J. Roper, Muscle Maker, Inc. - CEO & Secretary [3]

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Thanks, Ferdi, and good afternoon, again, everyone. We hope everyone's doing well, staying safe and remaining diligent in the fight against COVID-19. Our recent restructuring and subsequent IPO, we'll discuss 2019's financial results and what to expect in the coming year in a few minutes. But I did want to start by saying how proud and grateful I am of all of our employees for their positive attitude and providing their best efforts in the fight against COVID-19. I also want to thank our supply chain partners who've been dedicated to delivering our food ingredients and sanitizing supplies in a healthy and safe way, helping to keep our employees, food and customers as safe as possible.

Let me start by updating everyone on our response to COVID-19 and the initiatives we're taking as a company. As cases of coronavirus started to grow in the U.S., we set up daily and weekly calls to stay current with market trends, regulations and mandates on COVID-19 based on feedback from the CDC, FDA, state and local agencies. This communication allowed us to formulate a plan to address the safety and sanitation needs of our business. We instituted multiple safety and sanitizing techniques. Some of these included eliminating eat-in dining, implemented social distancing protocols, we increased sanitation of high-touch, high-traffic areas, and are providing masks and hand sanitizer for employees. We adjusted our app so customers can leave instructions, requesting curbside pickup or carryout, while also adding or expanding our delivery platforms, random employee temperature checks and new employee sick leave policies.

In addition to these changes, we're also researching and pilot testing a proprietary and patented technology that shows exciting promise, and we hope to share with you in more detail soon. The process has industry-wide potential, but our primary and immediate concern is to pursue every opportunity to provide as safe an environment as possible to our employees and our customers. We'll continue to follow recommended guidelines from various state and local governments to allow the safe execution and reopening or expanding services for our restaurants. All of these initiatives give our employees and customers' confidence that Muscle Maker Grill remains committed to keeping them safe.

Lastly, I'd like to address the necessary steps our company has taken to help keep as much of our workforce employed as possible during the COVID-19 pandemic. We've worked with various vendors to reduce monthly expenses, received deferred payment options, canceled services where possible, and basically, we left no stone unturned in reducing costs. In addition, the executive team has taken deferrals on their salaries to help lessen the monthly cost basis.

Finally, we filed for the SBA's PPP loan program and received our funding on May 16 in the amount of $866,300. These funds are intended to be used for payroll, rent, health care and utilities. Most importantly, these funds will allow us to continue to keep as many people employed as possible. We anticipate our payroll to increase in the near future as we open new locations such as the 2 Chicago ghost kitchens, reopen temporarily closed locations and increase available hours to our employees as anticipated sales levels improve as the country begins to reopen the economy.

While nearly everyone has been impacted in some way from the recent COVID-19 pandemic, we see opportunity within the recent economic dislocation. Our strategy focuses on a nontraditional location growth model. We are not encumbered by a traditional four-wall location footprint and instead, we are able to swiftly capitalize on new opportunities in the nontraditional location arena as the restaurant industry adapts to a new normal. Nontraditional locations include things like military.

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office buildings, airports and new venues, such as delivery-only ghost kitchens.

While we continue to look at traditional locations through our franchising efforts, the corporate growth strategy focuses on a nontraditional location model. Since our mid-February IPO, we've announced continued expansion on the military front with the opening of our first marine base at Camp Elmore in Virginia and the lease and construction start for our location at Fort Bragg, North Carolina. Our growing presence as a healthy food provider to military bases will continue. With the 2 recent announcements, our military footprint will now increase to 7 locations.

Recently, we announced a 10-location agreement for delivery-only ghost kitchens. The delivery-only model, which is a capital-light, company-owned expansion opportunity by which we can significantly increase our footprint, geographic reach and brand awareness, begins with the first 5 locations covering the Chicago market. Construction has started, and management has been hired on the first 2 locations, and we project the first restaurant to be open in June and the second location to be open and operating in July. We anticipate that we'll begin construction on 2 additional ghost kitchen sites in the Chicago market over the next 30 days with an anticipated opening in early Q3. We feel the delivery-only kitchen model fits both the current environment and the future of quick service restaurant segments.

Additionally, within the nontraditional niche, we've previously expressed interest in pursuing the university opportunity, which fits our strategic targeting, representing a large captive audience with less economic sensitivity.

I want to take this moment right now to make a new and exciting announcement. The company is announcing it has signed a new 4-location agreement with the Northern Virginia Community College system. We are working hard in pursuing our goal to have these locations ready to be opened for the fall semester. This new 4-location agreement continues to expand our presence in nontraditional locations and is the beginning of ongoing efforts to bring our healthier-for-you food to universities and colleges. This agreement also allows for concession sales and potentially alcohol sales across the college system. We are very excited about this opportunity and look forward to continued expansion in the nontraditional university and college areas.

We continue to pursue the in-hand opportunities, some of which we've previously announced and some that you should be hearing more about soon. We continue to see our pipeline of attractive nontraditional opportunities grow. We'll continue to focus on this nontraditional niche because we feel it uniquely positions us in specific areas that are less economically sensitive in normal times and the high barriers to entry provide attractive competitive positioning.

Now with all that said, I want to get into the 2019 results, but I think it's important to note that our IPO occurred about halfway into Q1 of 2020, so these 2019 results reflect the last full quarter as a private company and the execution of the final stages of the restructuring and turnaround plan. Also during Q4, and in preparation for the IPO, we experienced an increase in operating expenses related to professional services that were required to complete the IPO.

In Q4 of 2019, we also converted a significant portion of our debt into equity, resulting in a restructured balance sheet but causing the company to recognize in excess of $23 million in onetime noncash accounting charges. This conversion strengthened our balance sheet and positioned the company to successfully complete its Q1 IPO, but it certainly skewed our results for the year as they accounted for roughly 83% of the reported annual losses.

On an operating basis, the company generated $4.96 million in revenue with $3.47 million coming from restaurant sales of company-owned locations and $1.35 million from franchise royalties and fees. On these revenues, we reported a loss from operations of $3.65 million. I think it's really important to note that these numbers are indicative of why I was brought into Muscle Maker and why I brought my team with me. This company had a good core concept and presence in the healthy niche, but it was definitely in need of a turnaround, and the efforts in 2019 to reposition the company for the planned growth of 2020 are not reflected in the backwards-looking operating results. Given that these numbers are nearly 6 months stale at this point and so much has changed, both in the company and the world, I want to pivot now and talk more forward-looking.

As evidenced in the earlier announcement regarding the 4 college locations that we're beginning to build out, we've seen tremendous demand for our healthier-for-you offering across both our Muscle Maker and Healthy Joe's concepts. We'll continue to focus on these company-owned nontraditional opportunities like the current endeavors in the military and university channels as well as the expansion into the ghost kitchen markets with the first 2 Chicago locations. Now that we're beginning to see the reopening efforts coming to fruition across most sectors and geographies, we'll begin to execute on our existing pipeline of opportunities with a higher level of confidence that we're allocating capital to locations that we expect to generate incremental revenue for us in the near future.

At this point, we believe we are positioned to execute on our pipeline, and we are in an enviable position of being able to choose how we allocate capital based on targeted returns as there's far more demand for our locations than we can currently service. We want to take a measured approach to building a footprint that leads to operating profitability and self-funded growth.

Due to the delayed filing of this 10-K due to the current environment and because we'll likely have our Q1 results, and hopefully, some additional items to discuss in the near term, I'm going to end this here and we'll address some frequently asked questions that I think can be more productive than an interactive Q&A as we get our hands around being an early stage public company.

Before I get into questions, I'd like to again extend my personal appreciation to all of our employees, franchise owners and customers for continuing to support our company during these trying times, and we wish everyone and their families safe and good health.

With that, let me review some of the frequently asked questions. I've got 5 of these.

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Questions and Answers

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Michael J. Roper, Muscle Maker, Inc. - CEO & Secretary [1]

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The first question is, in the face of COVID-19 and its impact on the restaurant industry specifically, has the overall business plan changed as well as our growth plans?

And to answer that, and the best way to look at it is, and I think this is a common question, first off, and concern we get from various investors that contact us through Investor Relations. So let me just start by answering this by saying, despite the pandemic, in the company's view, our overall strategy has not changed. We are continuing to focus on nontraditional location growth opportunities with a primary focus on military bases, universities and delivery-only ghost kitchens. That hasn't changed. The original plan was to open 14 to 18 locations in 2020, but that has obviously been delayed a bit due to COVID-19 to a certain extent.

However, as indicated earlier, we're still opening locations such as Camp Elmore, we started construction on Fort Bragg, and we anticipate having our first 2 ghost kitchen locations opening in Chicago, and we just announced today the signing of our 4-location agreement with the Northern Virginia Community College system. We obviously are continuing to move forward with our overall plan. We really think of COVID-19 as a temporary gap in the plan, but the overall plan remains the same. We also believe COVID-19 will provide unique opportunities for our company as we're able to adjust quickly and accordingly to market conditions due to the fact that a portion of our operating sites are not encumbered to existing four-wall locations.

So question number 2 is, are we experiencing any supply issues due to COVID-19?

As of today, we're seeing very small disruptions, but we've been able to manage around any of these issues. For example, our tortilla supplier recently informed us they were only going to manufacture 2 flavors of tortilla. We simply made a quick recipe change to accommodate the temporary shortfall. The biggest issue so far has been items like masks and hand sanitizer. We've been supplying our locations with these products from various sources to ensure they remain in our locations for employees to use. Our biggest concern, though, is proteins such as chicken and beef as some manufacturers have been having problem with production as they've had disruptions in their processing plants due to COVID-19. We have identified alternate suppliers, if needed, as well as alternate recipes in the event a shortage materializes, but at this time, we don't anticipate any major issues.

So question number three is, how is our cash position?

As of today, we have roughly $3.4 million in working capital. We believe this is an adequate amount of cash to execute against our growth plans and sustain operations over the near term. While we cannot anticipate how long it will take to fully recover from the pandemic, we're starting to see sales slowly increase in our open locations while also starting to reopen temporarily closed locations. Many of our new locations require less capital than a typical restaurant, allowing us to expand while also managing cash on hand. Since becoming public, we've received a number of potential financing opportunities. I think our concept and our team, while still very new to the public arena, has been well received. As we mentioned in the statement before, the inbound interest we are receiving is significant. I feel fortunate that we're in a position to pick and choose where and with whom we grow at this point. Our focus will continue to be on developing an operating model that grows value for our shareholders. Along those lines, we're looking at some nondilutive growth capital options, although there is no guarantee that these opportunities will come to fruition.

So question number four is, how are your franchisees performing during COVID-19?

Well, as you would imagine, all franchisees are experiencing some of the same form of distress due to COVID-19 that we are, and it really depends on their location. While delivery is a large part of our business, we are not a drive-through-oriented fast food model. Drive-through seems to be one of the only bastions of strength as consumers are still limited in their options. Roughly 1/4 of all locations have temporarily closed. We do believe many locations will begin reopening over the coming weeks as the company opens up the economy in a safe manner. But this depends on the location of the business and the franchise owners' safety concerns.

We also, to help franchisees and cash flow, the company launched a royalty deferral program in April. The program allowed franchisees to defer a portion of their royalty payments. This program is reviewed every 30 days to allow expansion if the current economic environment requires such an expansion. And then finally, the majority of the franchisees applied for the PP funding program as well.

Question number five, this is our last question, how should we think about your trends for the balance of 2020?

While there's no question that the pandemic has disrupted our growth plan, we believe it's just that, a disruption or a delay. Thankfully, we were fortunate to have completed our IPO just prior to all of this happening. So we're not only well capitalized to endure a slowdown, but because that happened so close to our IPO, we had not committed CapEx dollars to projects that would remain shuttered. Going forward, I'm operating under a base assumption that we will return to normal, probably not likely in an overnight scenario, but more of an upward slope. As such, we're judiciously allocating capital based on what our partners are telling us regarding their own intentions.

Using the colleges as an example, our partners have told us that their intent is to have full matriculation for the fall semester. Assuming this is accurate, then these locations with existing four-wall operating history offer an attractive potential ROI. Campus environments create opportunities with limited identifiable competition and the sort of recession-resistant captive audience with discretionary spending capability that we continue to believe offer excellent opportunities. I'm very hopeful that based on our robust nontraditional pipeline, the balance of 2020 involves a number of announced growth initiatives similar to ones I've shared with you today.

With that said, this is going to conclude our call for today. Thank you.