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 October 9, 2021
MTY admits it uses kickbacks to enhance its revenue 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). For example, Cold Stone’s federal disclosure reveals that MTY charged franchisees more than $24M (“approximately 12.5%… of revenue”) in kickbacks that may be used in MTY’s “sole and absolute discretion” (PDF pg. 54).
Kickbacks can be deadly to a company’s franchise network because they are paid by franchisees in addition to franchise fees and franchisees likely received no benefit from them. They can cause franchise networks to collapse in a relatively short period of time. As such, they can be twice a burden to franchisees with zero benefits.
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. As more of these sales producing locations closed, MTY has assessed a higher volume of kickbacks. This in turn, negatively impacts the franchisees’ profitability and causes more franchises to fail.
CEO Eric Lefebvre and Audit Chairman Gary O’Connor potentially put their careers, integrity and legal jeopardy on the line when they made false statements to investors to cover-up the company’s collapsing franchise network. Why? As we pointed out earlier, after paying $394.2M for 2,879 locations in 2016, MTY closed 2,594 MTY locations in the following five years. MTY squandered all but 285 of the Kahala count with its high franchise failure rate. The company’s inability to grow organically has had an economic effect on the company that would not be forgiven by securities investors so apparently, they felt it had to be covered up.
In addition to the revenue “recognized” through its kickback scheme, even prior to the pandemic, MTY shielded its franchisee profit issue through acquisitions. For example, MTY reported $63.7M in kickbacks (PDF pg. 107) during 2019. This was a 15% increase from its $55.5M in kickbacks in 2018 (PDF pg. 90). The company also reported $550.9M in revenue and $147.4M in earnings in 2019. Thus, MTY derived 12% of its revenue and 43% of its earnings from kickbacks before the pandemic.
However, the company’s overall earnings only grew 18% during 2019 while its kickbacks grew 15%. The bulk of its remaining 2019 growth was derived from the acquisition of Papa Murphy’s. Without large acquisitions like Kahala and Papa Murphy’s, MTY’s operations failures are prima facie.
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. It sometimes experiences ice cycle-like spikes several times a day with no news that justifies these aggressive movements with such high frequency. (We have charts and data that we’ve been collecting as evidence for the past six months that better demonstrates this. We may publish a sampling at a later date to better illustrate this activity.)
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 that 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 year-over-year kickbacks gives us a better sense of the company’s true stock value. 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, MTY’s stock sat at $49.77. 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—up 81% in the past year.
However, after adjusting for MTY’s $5.3M kickback increase, MTY’s Q2, 2021 financials reflect 825 additional closures, a $19.5M decline in revenues, a $4.8M decline in earnings, and a $132M decline in system sales compared to 18 months earlier just before Lefebvre and O’Connor misled investors on 2/24/20. Similarly, MTY’s Q3, 2021 financials disclosed another $16.7M in kickbacks (pg. 19). Without the kickbacks, MTY’s Q3, 2021 revenue is $134.1, EBITDA is $33M and net income is just $7.6M.
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, after adjusting for MTY’s $5.3M kickback increase, MTY’s Q2, 2021 financials reflect 825 additional closures, a $19.5M decline in revenues, a $4.8M decline in earnings, and a $132M decline in system sales compared to 18 months earlier just before Lefebvre and O’Connor misled investors on 2/24/20.
If the stock was sitting at $49.77 prior to the pandemic with substantially better key indicators across the board, what is it worth in its rapidly diminishing state, during a pandemic no less, as the adjusted Q2, 2021 results reflect? Logic might lead one to believe a 43% decline, which would result in a price of $28.37. 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. Sound somewhat familiar? 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.
MTY is inevitably headed towards a crisis moment when its fake value is reconciled with its true value. At that point, stakeholders will vindicate their financial losses, which will likely lead to civil and criminal accountability.
A cover-up “always makes things worse”.