Spicy Pickle filed its 10Q quarterly financial filing yesterday, and there were no big surprises. Just as I suspected, top line numbers were up quite dramatically on a percentage basis, and the company continued to lose money.

Cash levels at the company are higher than they should be so action needs to be taken to either increase gross profits, lower costs, or raise money. In fact, what is likely to happen is some moderate combination of the three.

Here’s the story. SPKL delivered $1.4 million in revenues for the quarter. That’s up from $261k in the same quarter one year ago, or an increase of 424%. That’s a huge increase. It’s also about $200k higher than the previous quarter.

Losses came in at $1.3 million for the quarter, but as usual a bunch of the loss is paper loss- not cash flow loss. Of greater concern- at the end of the quarter, the company had about $800k left in cash. They really burned through about $1.1 million in the quarter.

In short, they have to slow their burn rate, or they simply won’t be around. Revenues will continue to rise, but expenses have to come down.

They are back on the expansion track now. Two new lease signings recently occurred, and there are a number of others just around the corner. I expect a number of new locations open by end of Q1 ‘09. Their Canadian subsidiary is starting to get traction as well. The September/October economic shock is wearing off, and things are getting back on track.

In the case of Spicy Pickle, the company came into 2008 geared up to open a new location about 3 to 4 times per month. The expansion just wasn’t there, then the recession hit. Now, adjustments need to be made.

Here’s an excerpt from the 10Q I find revealing about their direction:

“Our need to raise additional equity or debt financing and our ability to generate cash flow from operations will depend on our future performance and our ability to successfully implement our stated business and growth strategies. Our results of operations will also be affected by prevailing economic conditions. Many of these factors are beyond our control. If our working capital is insufficient to fund the implementation of our business plan (due to a change in our plans or a material inaccuracy in our assumptions, or as a result of unanticipated expenses, or other unanticipated problems), we will be required to seek additional financing sooner than currently anticipated in order to proceed with such implementation. In the event that we need additional capital and are unable to obtain it, we could be left without sufficient liquidity. We have the ability to reduce our overhead to meet the revenue flow from existing franchised restaurants. We are currently assessing the cuts that may be needed in future periods.”
It’s really a shame they got hit with this recession just as they were gearing up for major expansion. They had sold the franchises, they just needed a little more time.

I suspect the current recession is going to cost the company about a 12 to 18 months to get back on the 2007 growth track. The first half of 2008 they overspent relative to growth. In the second half of 2008 they will downsize considerably. In the first half of ‘09 they will deliver moderate growth, much lower expenses, and perhaps raise some capital. In the second half of 2009 they will get back on track, and become the company I was looking for in 2007.

So- here’s the short version. It’s going to be impossible to predict how the stock will trade for the rest of this year and into 2009. From the second half of 2009 on, it’s going to be a great stock to own. If they really ratchet down expenses, it could go up on that news. Once they accomplish reducing expenses, they will become more of a value play, then go on to become a growth story once again.

That’s how I see it. Of course, it is possible they could close their doors. In my view, not likely as they have recurring revenues, and who would walk away from that?

Comments and questions are welcome.