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Wake
Up & Smell the Panini - Spicy Pickle Evolves |
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 The
plan became a reality for Spicy Pickle (OTCBB:
SPKL) yesterday, when the company closed a financing deal that
should allow them to start opening several corporate-owned stores.
These stores will be in addition to the franchised stores already
popping up left and right (with more on the way). The impact for shareholders
is straight-forward - owning their own restaurants means the company
has much better top and bottom line potential.
Details
of the deal are simple enough - the company raised a net of about $5.7
million by selling a combination of convertible preferred shares and common
stock warrants. The convertible preferred stock can convert into shares
of common stock at a fixed conversion price of $.85 per share. The warrants
can convert into common stock at $1.60 per share, and are good for a period
of five years.
So
what does this mean for investors you ask?
The
franchise model is nice, as it generates recurring revenue someone else
does most of the work to create. On the other hand, owning your own restaurant
- as opposed to letting a franchisee operate one - gives the company
access
to 100% of the top and bottom line for each store. When you start looking
at the comparative math, all of a sudden the idea makes good sense.
 Just
to review some of the metrics from our initial profile, the average Spicy
Pickle restaurant does around $700,000 in sales each year. Of that amount,
about 7% is collected as royalties. So, each store annually contributes
about $50,000 to the company's top line. Since the franchisee takes care
of each store's costs, that $50K is mostly free and clear. So, while
the net may seem small, the margins are huge.
But
clearly there's more profit to be generated than the $50,000 or so. (Why
else would all these franchisees want to open more and more stores?)
Well, by owning their own stores, the company can tap into 100% of the
profit potential of each unit.
Great,
but what does this really mean for investors, you ask again?
The
preferred-stock piece of the deal could inject 7 million shares into the
float at $.85 each, and the common sock warrants could add another 5.2
million shares at $1.60. Just for comparison, there are about 47 million
shares outstanding. So, the dilution impact is low.
What
I like best about the news is the warrant side of the deal...the $1.60
level is considerably higher than Friday's close at $1.11. Therefore, the
funders want the same thing all the other shareholders want - for the
stock to go higher.
I
know, I know...so what does this ultimately mean to you?
I estimate
the amount of money they raised should be enough to open somewhere between
12 and 15 corporately-owned restaurants. That translates into revenues
somewhere between $8.5 million and $10 million per year. More importantly,
the company retains 100% of each store's net income.
Just
for comparison, the company did $261K in revenues last quarter - exclusively
with franchises (about 27 of them at the time). Annualized, that's
a little over $1 million per year. Of course, there may be four times
that number of franchises a year from now.
In
the meantime, I estimate it could take about the same year to get the corporate-owned
stores up and running as well.
Roughly
100 franchised units in addition to, say 12 company-owned restaurants?
Yeah....I think we're all going to look back a year from now and see phenomenal
growth, making yesterday's financing a wise and very fruitful decision.
I also have to believe the company's growth is going to be reflected in
the stock's value. Speaking of...
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Proof
of the Pudding is in the Panini |
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I thought
it was fitting how yesterday's financing news was released hand-in-hand
with news that two more restaurants had been opened. For those of
you keeping track, that's the 34th and 35th unit now in operation. It's
also the ninth store they've opened in eleven weeks, and the franchisees
keep clamoring for more.
In
that light, it occurred to me a few days ago this may the ultimate
litmus test for the company - the demand from franchisees.
 The
company obviously likes the concept and menu, since they're the ones who
launched the idea in the first place. And, consumers like the idea as well,
since the restaurants are drawing quite a crowd. (Who wouldn't like great
food at a great value?)
However,
in terms of being a viable business, I think it's the franchisees
who have their finger on the pulse of Spicy Pickle's potential. Why?
Because these are the same people doing the lion's share of the work, and
assuming the lion's share of the risk.
What
tells me that Spicy Pickle's are here to stay is the number
of units some of these restaurateurs are trying to reserve. Some franchisees
of other restaurants might be willing to open one unit as an experiment...maybe
even two. If it doesn't fly, so be it - they'll move on to other things.
However,
that's not really what we're seeing. What we're seeing are territories
(multiple units) being reserved, sometimes even before the first Spicy
Pickle in the area is even in operation.
Take
for instance the news from Mid-November. The company announced a lease
for a store in San Diego had been signed. But, the same franchisee had
already committed to 12 units...even before the first one was opened
there. The store that was opened in Hattiesburg, Mississippi on October
22nd? That franchisee has committed to three stores. The Spicy Pickle
that opened in Fishers, Indiana on October 19th was the first of ten
scheduled
for the area.
The
point is, considering these people are making big commitments early on,
I think they see some longevity and profits here. That carries more weight
with me than anything else, pointing to the strength of the concept.
 One
final note...I view Friday's move to a close of $1.11 as a gift to anybody
who was just waiting on the right entry opportunity. Though it was a move
lower, I also think it was a move that washed out any would-be sellers.
As
you can see, SPKL pushed up and off that low if $1.10 later in the day.
Had it been an epidemic, it would have kept pressing lower. More than that,
$1.10 was close to the same low we made last month before a sharp rebound
move. I'd say a major support line was being formed there, which
reduces some of the risk of entering a position at this point.
All
of that upside potential though - as well as Friday's selling - pales
in comparison to one last tidbit behind the financing. A hefty $1.3
million of the funding came from two board members, while the rest
came from institutional investors as well as some of the company's early
backers.
What
does that tell you? When someone who sits on the board (or two people
in this case) puts that kind of money into an idea, it tells me
there's something very worthwhile about the opportunity.
Here's
the press release about the financing:
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Spicy
Pickle(R) Announces Closing of Private Financing in the Amount of $5,992,500
Funds Earmarked to Accelerate Growth of Company-Owned Stores
DENVER, CO --
Dec 14, 2007 -- Spicy Pickle(r) fast casual restaurants (OTCBB:
SPKL) today announced the closing of a private offering of its securities
in the amount of Five Million Nine Hundred Ninety Two Thousand Dollars
($5,992,500).
Earlier today,
Spicy Pickle(r) completed a private placement of 705 Units, priced at $8,500
per unit. Net proceeds of approximately $5.7 million, after commissions
and fees, were received by the Company.
Each unit contains
one share of convertible preferred, which converts into 10,000 shares of
common stock at a fixed conversion price of $.85 per share. The preferred
shares also carry a 5% dividend in the first and second year and a 7.5%
dividend in the third year.
In addition, each
unit contains 7,500 warrants, which convert into the common stock at $1.60
per share for a period of five years.
Of the approximately
$6 million raised, $1,300,000 came from two of Spicy Pickle's(r) independent
members of the board of directors and their immediate family. The remaining
funding came from two large institutional investors and several of the
early shareholders who had participated in previous rounds of financing.
Midtown Partners acted as placement agent for one for the institutional
investors.
The proceeds of
the offering will be used to rapidly accelerate the development of Company-owned
stores along with the continued development of the franchise system. Marc
Geman, the CEO of the Company, said: "These funds will kick-off the Company-owned
restaurant program under which we will develop, own and operate Spicy Pickle(r)
Restaurants. The Company restaurants will further support the franchise
system by adding additional training facilities and focusing on operations
and service alongside our multiple unit franchisee owners. Further, the
Company restaurants are expected to generate more bottom line revenue to
the Company than the current royalty provides from its franchisees. Taken
together, the franchise and Company-owned system should set the stage for
dramatic growth in the coming years."
The Company will
file the complete documents representing the transaction with the SEC.
The securities
issued by Spicy Pickle(r) have not been registered under the Securities
Act of 1933 or any state securities laws. Therefore, such securities may
not be offered or sold in the United States absent registration or an applicable
exemption from the registration requirements of the Securities Act of 1933
and any applicable state securities laws. This press release does not constitute
an offer to sell any securities or a solicitation of an offer to buy any
securities.
About Spicy Pickle(r):
Founded in 1999,
Spicy Pickle(r) Franchising, Inc. (OTC
BB:SPKL) serves high quality meats and fine artisan breads, baked fresh
daily, along with a wide choice of eight different cheeses, twenty-two
different toppings, and fourteen proprietary spreads to create healthy
and delicious panini and sub sandwiches with flavors from around the world.
As a leading "fast-casual" concept, Spicy Pickle(r) offers menu items that
are far beyond traditional fast food -- but without the price point of
casual dining. The hallmark of a Spicy Pickle(r) restaurant is quality,
service and an enjoyable atmosphere. The company is headquartered in Denver,
Colorado, with franchise locations now open across twelve states and many
more in development nationwide. For more about Spicy Pickle(r), including
franchise information and inquiries, visit http://www.spicypickle.com.
About Midtown
Partners & Co., LLC
Originally founded
in May 2000, Midtown Partners & Co., LLC is an investment bank focused
on private placement investment banking opportunities. The investment banking
group at Midtown Partners & Co., LLC was founded on the premise that
client relationships and industry focus are keys to the success of emerging
growth companies. Such companies require investment banking services from
a firm with a unique understanding of the marketplace and the nature of
these transactions. Midtown Partners was the 5th leading U.S. placement
agent in number of closed PIPE transactions for 2006 (source Placementtracker.com).
Additional information can be found at http://www.midtownpartners.com.
Forward-Looking
Statements:
Certain statements
in this press release, including statements regarding the number of restaurants
we intend to open, are forward-looking statements. We use words such as
"anticipate," "believe," "could," "should," "estimate," "expect," "intend,"
"may," "predict," "project," "target," and similar terms and phrases, including
references to assumptions, to identify forward-looking statements. The
forward-looking statements in this press release are based on information
available to us as of the date any such statements are made and we assume
no obligation to update these forward-looking statements. These statements
are subject to risks and uncertainties that could cause actual results
to differ materially from those described in the statements. These risks
and uncertainties include, but are not limited to, the following: factors
that could affect our ability to achieve and manage our planned expansion,
such as the availability of a sufficient number of suitable new restaurant
sites and the availability of qualified franchisees and employees; risks
relating to our expansion into new markets; the risk of food-borne illnesses
and other health concerns about our food products; changes in the availability
and costs of food; changes in consumer preferences, general economic conditions
or consumer discretionary spending; the impact of federal, state or local
government regulations relating to our franchisees and employees, and the
sale of food or alcoholic beverages; the impact of litigation; our ability
to protect our name and logo and other proprietary information; the potential
effects of inclement weather; the effect of competition in the restaurant
industry; and other risk factors described from time to time in our SEC
reports.
Contact:
COMPANY CONTACT:
Marc Geman
CEO
Spicy Pickle(r)
Franchising, Inc.
303-297-1902
Ext. 7000
Source: Spicy
Pickle Franchising, Inc. |
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