If at first you don’t succeed, try again.
Muscle Maker Grill, the healthy fast-food franchise, has filed registration documents with federal regulators to raise at least $7 million in an initial public offering.
The Burleson, Texas-based company, which has struggled with operating losses for years, plans to use the funds “for general corporate purposes.”
The potential IPO comes just two years after Muscle Maker failed to generate any interest in its Regulation A+ mini IPO. The company at the time hoped to raise $20 million with its offering, but instead raised less than $150,000.
Mini IPOs are less restrictive than traditional IPOs. They’re traditionally reserved for companies that don’t have access to traditional IPO markets that depend on larger, institutional investors.
That makes Muscle Maker’s IPO step unusual, to say the least.
The financial challenges that likely doomed Muscle Maker’s initial effort are still there. The company is struggling with weak sales and increasing costs. It has been closing locations and can’t make money on its existing operations. Now it is banking on delivery, and the high fees that come with it, to generate more sales.
Muscle Maker operates 39 locations in 14 states, plus two in Kuwait. Franchisees operate all but eight of them. But it operated 53 locations two years ago and has faced lawsuits over closed locations.
The company focuses on “healthy-inspired, high-quality, made-to-order, lean, protein-based meals,” including chicken, seafood, pasta, burgers, wraps and flatbreads, along with salads, protein shakes and smoothies.
Muscle Maker is planning aggressive franchise growth, particularly in nontraditional locations such as military bases.
It has big plans for delivery. Some franchise locations in urban areas get as much as 80% of their sales that way. But the costs are steep: up to 25%. “Our cost structure will need to be adjusted to reflect a different pricing model, portion sizes, menu offerings, and other considerations to potentially offset these rising costs of delivery,” the company said in its IPO filing.
Muscle Maker’s financial losses have led to questions about its ability to continue operating. Auditors have given it a “going concern” warning, suggesting “substantial doubt” about its viability.
Revenues are down 20%, to just $3.7 million, in the first nine months of 2019. It reported a net loss of $5.4 million, though that was an improvement over the $6.7 million loss in the same period a year ago.
The company has less than $2 million in cash and has a working capital deficit of $5.5 million. Its accumulated deficit is nearly $30 million.
Muscle Maker has made some improvements more recently. In the third quarter ended Sept. 30, the company generated $1.1 million in revenues, up more than 6% over the same period a year ago. Yet it still finished with a wider, $1.4 million operating loss in the period and a net loss of $2.3 million, more than double its net loss in the same period a year ago.
Same-store sales were not available, but they are down so far in 2019 and were down in 2018. Muscle Maker is hoping that marketing, new menu initiatives and improved speed of service will improve that number.
They’ll need to improve, too. Food and beverage costs at company locations were 41.3% of sales in the third quarter, up 430 basis points from the same period a year ago. Labor costs were 42.3%, up 530 basis point. Rent was 11.8% of sales. “Other restaurant operating expenses” were 13.8%, up 500 basis points.
Much of the increase in costs was associated with the company’s acquisition of a pair of franchisee-owned locations. Still, add all these costs up and the restaurants are at a deficit of 9.2%.
All of these losses are putting considerable pressure on the company to raise sales. But even if it can quickly increase revenues, it needs to raise cash. Thus, the IPO.
Muscle Maker needs to raise $350,000 by the end of December to “satisfy the company’s monthly expenses and continue in operation.”
To fund its plan for 2020, the company needs to raise “a minimum” of $5.75 million.
“Our inability to raise capital could require us to significantly curtail or terminate our operations,” Muscle Maker said in its filing.