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.
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…