Crumbs Bake Shop has executed a binding term sheet relating to a pending sale of not less than $10 million aggregate principal amount of its senior unsecured convertible promissory notes to accredited investors, the company said April 11. Crumbs intends to use the net proceeds of the transaction to fund its store growth and real estate strategies as well as for working capital.
Crumbs entered into the binding term sheet with Michael Serruya, co-founder and co-owner of Yogen Früz, Markham, Ont., a chain of more than 1,300 frozen yogurt stores in Canada and 34 other countries. Crumbs would agree to sell the notes to a company controlled by the Serruya family and other accredited investors.
The holders of the notes would be entitled to convert the debt into shares of Crumbs’ common stock at any time at a conversion price of $2.50 per share.
The five-year notes carry an interest rate of 7% with an option for crumbs to pay interest in common stock shares in lieu of cash but at a rate of 10%. The conversion of the note and the issuance of common stock are subject to NASDAQ and shareholder approval if more than 19.9% of the company’s outstanding stock would be issued.
Following the closing, Crumbs would agree that its board of directors will nominate Mr. Serruya or a designee of Mr. Serruya for election to the board at each annual meeting of stockholders for so long as Mr. Serruya holds the notes.
“The board believes that Mr. Serruya’s experience in food and snack retailing will be beneficial to the company,” Crumbs Bake Shop said.
Closing of the transaction is conditioned on the parties’ successful negotiation of definitive transaction agreements, the approval of the NASDAQ to list the shares of or designate for quotation and other customary closing conditions.
As of April 9, Crumbs had 67 locations in 10 states and the District of Columbia. The locations included 17 stores in super regional malls.
In the fiscal year ended Dec. 31, 2012, Crumbs Bake Shop had a net loss of $10,346,000, which compared to a net loss of $2,541,000 in the previous year. Adjusted losses before interest, taxes, depreciation and amortization were $3,692,000, which compared to $587,000 in the previous year. As of Dec. 31 the company had $7,668,000 of current assets.
Fiscal-year net sales increased to $43,029,000 from $39,882,000 in the previous year.
The company estimates that in the fourth quarter Hurricane Sandy resulted in $700,000 in lost sales as a consequence of about 230 fully or partially lost operating days spread across 45 stores in New England, the Northeast and mid-Atlantic.
Crumbs suffered a net loss of $6,424,000 in the fourth quarter, which compared to a net loss of $2,998,000 in the previous year’s fourth quarter. Adjusted fourth-quarter losses before interest, taxes, depreciation and amortization were $1,810,000, which compared to $476,000 in the previous year’s fourth quarter. Fourth-quarter net sales dropped to $10,776,000 from $10,993,000.
“Despite real progress on several of our strategic initiatives during the period, our financial results for the fourth quarter were certainly disappointing and below our expectations,” said Julian R. Geiger, president and chief executive officer. “While Hurricane Sandy effectively eliminated the critical Halloween selling period for us, economic headwinds also played a significant role in affecting our performance.
"While very pleased with the customers' reaction to, and resulting performance in, our new mall kiosks and stores, sales in many of our pre-existing street locations continued to deteriorate. We understand the importance of reversing this trend and making this initiative our top priority. In those instances where we feel that certain underperforming stores may not make an appropriate contribution to the company and its bottom line, we will be active in identifying ways to close those stores on an economic and timely basis consistent with our needs."
In 2013, the company said Crumbs will seek to strike a balance between opening new stores in super regional malls, upgrading selected existing street stores and closing certain stores that are identified as being incapable of reaching acceptable financial performance.
Crumbs in 2013 now expects adjusted losses before interest, taxes, depreciation and amortization of $3.9 million, which compared to a previous estimate of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $3.2 million. Crumbs expects net sales of about $57 million in 2013, compared to a previous estimate of $73 million. Crumbs has opened up nine stores so far in 2013 and anticipates having opened 20 stores by the end of the year.
