THERE IS A SUBSTANTIAL RISK OF FAILURE ASSOCIATED WITH MTY FRANCHISES. MTY AVERAGED AN 11% CLOSURE RATE IN FIVE YEARS WHILE CHARGING FRANCHISEES $239 MILLION IN KICKBACKS ON TOP OF REGULAR FEES. THEY CLOSED 2,594 LOCATIONS FROM 2016 THROUGH Q2, 2021. KICKBACKS CAUSE FRANCHISES TO COLLAPSE!

MTY’S BOARD MADE FALSE STATEMENTS TO INVESTORS WHILE ENGAGING IN A COVER-UP TO CONCEAL THAT IT WAS REPORTING FALSE DATA TO HIDE THAT ITS FRANCHISE NETWORK IS COLLAPSING. ITS CHAIRMAN, STANLEY MA, SOLD $43 MILLION OF STOCK WITHOUT CORRECTING THE FALSE STATEMENTS TO INVESTORS—POTENTIALLY COMMITTING INSIDER TRADING. MTY THEN INCREASED KICKBACKS BY $5.3 MILLION ON FRANCHISEES AND AUTHORIZED $3 MILLION IN ANNUAL DIVIDENDS TO STANLEY MA.

MTY's Fake Stock Value

Updated on November 27, 2021

Kickbacks are “commercial bribes” that can cause franchises to close in masse. Franchisors require franchisees to buy products from their distribution network. If the franchisor requires the distributor to pay a kickback to the franchisor, the distributor adds the amount of the kickback to the owner’s cost.

For example, a pizza franchisor may negotiate a 60¢ per bottle kickback with a soda distributor for the exclusive right to sell to its franchisees. If the distributor normally sells soda for 50¢ a bottle, it will now sell to the franchisees at the “artificially high” price of $1.10 to cover the kickback to the franchisor. (The same arrangement occurs with the franchisee’s other food, paper and supply products.) Because the pizza shop must compete with the sub shop next door that sells the same brand of soda at a cost of only 50¢ and with other pizza shops in the area, the franchisee becomes less profitable until it eventually goes out of business.

MTY admits it uses kickbacks to improve the appearance of its performance, albeit in cloaked and sanitized language. Its 2020 Annual Report discloses that kickbacks “are recognized as revenue… and are recorded in other franchising revenue” (PDF pg. 66). MTY’s federal disclosure for its flagship brand, Cold Stone Creamery, reveals that MTY charged franchisees more than $24M (“approximately 12.5%… of revenue”) in kickbacks during 2020. That money may be used at MTY’s “sole and absolute discretion” (PDF pg. 54).

Kickbacks can be deadly to a company’s franchise network. They are paid by franchisees in addition to franchise fees to be exclusively used by the franchisor. They can be thought of as a virtual unlimited line of credit that is repaid in store closures as opposed to cash. The more kickbacks the franchisor takes, the more stores close until the franchise network quickly collapses.

When a franchise network is unable to grow organically, it’s because the franchisees refuse to reinvest due to a lack of profitability. Instead, they choose to close their stores to stop the financial losses. This is demonstrated in MTY’s failure to grow its franchise network organically—instead closing an annually increasing and staggering average of 442 locations in the four years before the pandemic (or annual average closures of 619 through 2020). As more of these sales-producing locations closed, MTY assessed a higher volume of kickbacks each year to plug its ailing finances. As a result, an increasing number of stores closed in each of the four years.

After paying $394.2M for 2,879 locations in 2016, MTY closed 2,594 MTY locations in the following five years. MTY’s management squandered all but 285 of the Kahala store count with its high franchise failure rate. The company’s inability to grow organically has also had an economic effect on the company that would not be forgiven by securities investors.

For example, before the pandemic, MTY reported $55.5M in kickbacks in 2018 (PDF pg. 90). During 2019, kickbacks increased 15% to $63.7M (PDF pg. 107). The same year, the company reported $550.9M in revenue, an EBITDA of $147.4M and earnings totaling $77.7M. Thus, MTY derived 12% of its revenue, 43% of its EBITDA and an unbelievable 82% of its earnings from kickbacks before the pandemic.

Thus, MTY was only 18% in the food service business during 2019 and 82% in the kickback business. EBITDA grew 18% during 2019 while MTY’s unrestrained kickbacks grew 15%. The company’s kickbacks have negatively impacted the profitability of an already strained franchise network causing even more closures. (We have more articles coming that highlight differences between Lefebvre’s comments during the Q3, 2021 conference and what franchisees are telling us.)

Apparently, Chairman Stanley Ma, felt MTY’s collapsing franchise network and shaky finances had to be covered up from shareholders and franchise investors. Such a revelation would almost certainly cause the stock to plummet and franchise investors to look to other companies. To do so, for years, its flagship brand published false data to its federal disclosures and other publications to hide its shrinking franchise network. (We believe this must be investigated as a potential federal crime similar to Bernie Madoff.)

Next he dispatched CEO Eric Lefebvre and Audit Chairman Gary O’Connor, who potentially put their careers, integrity and legal status on the line, to make false statements to investors to cover-up the company’s deteriorating condition. (We believe this must be investigated as a regulatory violation.)

We also believe someone with a financial interest in MTY’s stock has been manipulating the price. It’s not unusual for this stock to gain $1 or more in a matter of minutes or for the price to run up within minutes of closing with no market or company news that affects the value. (We have charts and data gathered over the past six months and we may publish a sampling at a later date.) We believe this conduct is intended to confuse investors and inspire emotional buying by the public much like that of a pump and dump scheme.

Kickbacks + Cover-Up + Potential Stock Manipulation = Fake Value

In Q2, 2021, MTY raised its kickbacks on franchisees by $5.3M year-over-year while admitting its franchisees are strained. We believe the increase in kickbacks, cover-up and potential manipulation has resulted in the company’s stock taking on fake value.

A comparison of MTY’s Q4, 2019 financials and its Q2, 2021 financials while adjusting for its increase in Q2, 2021 kickbacks year-over-year gives us a better sense of the fake value that’s been built into the company’s recent stock price. By adjusting for the $5.3M hike in franchisee kickbacks in Q2, 2021, we’re able to highlight what MTY’s performance looks like without the increase.

Prior to trading on 2/24/20 and just after MTY released its Q4, 2019 results, MTY’s stock sat at $49.77. During trading that day following Lefebvre and O’Connor’s false statements intended to cover-up MTY’s operational failures, the stock soared 9% to close at $54.25. More recently, following it’s Q2, 2021 results in July 2021, the stock has traded near record territory closing as high as $71.27 on 8/9/21. It’s up 81% in one year as of 9/12/21.

However, after adjusting for MTY’s $5.3M kickback increase, a comparison of MTY’s Q4, 2019 financials to its Q2, 2021 financials reflects 825 additional store closures, a $19.5M decline in revenue, a $4.9M decline in EBITDA, and a $3M decline in earnings compared to 18 months earlier. Similarly, MTY’s Q3, 2021 financials disclosed the company took another $16.7M in kickbacks from franchisees (pg. 19). Without the kickbacks, MTY’s Q3, 2021 revenue is $134.1, EBITDA is $33M and net income is just $7.7M. This results in a miniscule per share earnings of $0.31.

Such a poor performance would be unacceptable to shareholders, especially Chairman Stanley Ma, MTY’s “most important shareholder” (PDG pg. 32). Thus, MTY supplements its financials with kickbacks even though the company is aware that its earnings have declined 15% per year over five years and its debt has soared.

If the stock was sitting at $49.77 prior to the pandemic with substantially better key indicators across the board than MTY’s Q2, 2021 and Q3, 2021 results as adjusted above, logic dictates it should be worth far less than $49.77 today. However, the 43% ($21.50) increase in this case was attained by using kickbacks, a cover-up and potential stock manipulation to create fake value.

It should be noted that MTY’s fake value earned Stanley Ma a $171M gain during the one-year period of 8/7/20 – 8/9/21. This on the heels of his questionable insider sale of $43M when the stock became well overpriced after Lefebvre and O’Connor misled investors about MTY’s collapsing franchise network, which caused the stock to soar. (We believe this has to be investigated for insider trading before the statute of limitation runs similar to the investigation of Enron’s Jeffrey Skilling.) It should also be noted that the $5.3M kickback increase was just enough to pay for the reinstated quarterly dividend that earned Stanley Ma $3M annually.

The worse is yet to come because, in our view, MTY has entered a vortex from which it cannot recover. We believe MTY’s issues are so far gone they can only be remedied by the complete elimination of the kickbacks. As we discussed above, 82% of MTY’s shareholder value is derived from kickbacks. Assuming the elimination of the kickbacks would reduce the stock price proportionately, Stanley Ma’s recent portfolio value of 171M would fall to $31M. To think that such a reduction stands any chance of consideration by a man who was willing to prematurely reinstate the company’s dividend to earn $3M annually, is a nonstarter.

We believe MTY is in serious trouble and headed for failure if the company doesn’t take immediate and drastic measures to change its course. Currently, Stanley Ma is in the driver’s seat. If he waits for the stock to plummet on its own, it may be creditors, attorneys, prosecutors and regulators in the driver’s seat.

A cover-up “always makes things worse”.

MTY Food Group Executives & Other Photos