Business Context and Reporting Period
This Form 8-K, dated February 7, 2017, reports material corporate actions by Noodles & Company (a Delaware corporation) approved by its Board of Directors. The filing details a private placement of equity securities, an amendment to the company's credit agreement, and a strategic decision to close underperforming restaurant locations to improve financial performance.
Key Financial Metrics and Capital Structure
- Capital Raised: $18.5 million in gross proceeds from the sale of 18,500 shares of Series A Convertible Preferred Stock and warrants to L Catterton.
- Debt Restructuring: Quarterly amortization payments of $2.5 million under the credit agreement are suspended until the end of the second fiscal quarter of 2018.
- Anticipated Charges:
- Non-cash impairment charge: $30.5 million to $31.5 million for the fiscal quarter ended January 3, 2017.
- Restaurant Closing Liabilities: Estimated total of $24.0 million to $29.0 million (including $23.0 million to $28.0 million for lease terminations and ~$1.0 million for severance).
- Expected charges for closing liabilities: $17.5 million to $19.5 million.
- Ownership Structure: L Catterton and Argentia currently own approximately 51.6% of outstanding voting power. Upon conversion of the new preferred stock, this aggregate ownership would rise to approximately 58.3%.
Material Changes and Strategic Initiatives
The company is executing a significant turnaround strategy involving the closure of approximately 55 underperforming restaurants in the first and second quarters of 2017. These locations, many opened in the last two to three years in newer markets, have generated negative cash flow. The proceeds from the private placement are designated to satisfy liabilities associated with these closures (lease terminations, broker fees, severance) and to fund capital expenditures for remaining business initiatives.
Additionally, the company amended its credit agreement to increase financial flexibility. Key changes include the restoration of the ability to request a $15.0 million increase in the credit facility commitment and revisions to the Consolidated EBITDA definition to allow add-backs for restaurant closing and data breach costs.
Guidance, Risks, and Unusual Items
- Preferred Stock Terms: The Series A Convertible Preferred Stock carries an 8.0% annual dividend rate, increasing by 0.5% per month after six months up to a maximum of 18.0%. Dividends accrue starting six months post-issuance or upon completion of specified equity offerings totaling $50.0 million.
- Warrants: Investors received warrants to purchase 1,913,793 shares of Class A Common Stock at $4.35 per share, exercisable for five years beginning six months after issuance.
- Liquidity Risks: The company notes that if Restaurant Closing Liabilities exceed estimates, available proceeds for other purposes may be reduced, potentially requiring additional borrowing under the credit facility.
- Data Breach: Proceeds will also be used to satisfy liabilities related to a data security incident that occurred in 2016.
Investor Verification Checklist
- Verify the actual execution of the 55 restaurant closures and the final cost of lease terminations versus the $24.0 million to $29.0 million estimate.
- Monitor the company's ability to meet revised financial covenants under the amended credit agreement, particularly regarding the suspension of amortization payments.
- Assess the impact of the non-cash impairment charge ($30.5 million to $31.5 million) on the company's reported earnings for the quarter ended January 3, 2017.
- Review the dilution impact on existing shareholders given that L Catterton and Argentia will control approximately 58.3% of voting power upon conversion.
- Confirm whether the company achieves the $50.0 million equity offering threshold required to trigger specific dividend or conversion conditions on the preferred stock.