About a week ago SPKL filed its year end audited financial statement, and this is the first time I’ve had an opportunity to comment on the results.
For those of you who would like to learn more about this rapidly growing fast casual restaurant chain, please go to our information center on the company- you will find every edition and BLOG I’ve ever published on SPKL. You’ll find it at http://www.otcjournal.com/Spicy-Pickle-Franchising-Inc/SPKL/af/profile/
There were no surprises at all in the 10K- it was just as I predicted it would read, which is probably why it was not a market moving event.
The revenue number is pretty small- that’s a reflection of the annual revenues last year being comprised mainly of the royalties of about 8% they collect on each store. In the 10k annual report there were no company owned stores included- which means there were no big top line numbers. Since the end of the year, one company owned store has opened which they built, and 3 have been acquired from franchisees. Two more are under construction right now. The total will be five before too long, which will equate to about $3.5 to $3.8 million in annual sales. Since they delivered $1.2 million in sales for the year, next year is virtually guaranteed to be at least triple that number, but that’s based on where the company is today just from the company owned stores. It’s early in the year. There are many more growth opportunities for the remainder of the year.
The far greater news out of the 2007 numbers is the balance sheet improvements. SPKL finished the year with $5.4 million in cash vs $1.2 million the previous year, and $6.4 million in assets. Thanks to the $5.9 million financing in mid December at $.85 per share, the company finished the year in great shape. The cash will go down in 2008, but the revenues and gross profits will go up as SPKL invests the money in expansion.
Therefore, over the course of 2008, you will see quite dramatic top line percentage improvements, a deterioration of cash on the balance sheet as it is invested, and reduced losses- perhaps even profits by the back half of the year. The company will certainly turn cash flow positive later in the year.
The only negatives I can even come up with on SPKL are the slipping stock price and the temporary vacuum of new store openings.
The company has not opened a new store since the middle of December, but it’s not due to lack of opportunity. As is the case with construction, a few of the properties we thought would be open by now have been hit with delays- construction, permitting, etc. The delays have just about run their course, and 6 or 7 new ones will open over the next couple of months, and there should be a much larger number in the back half of the year.
Current commitments from franchisees have the total number of eventual stores at about 130 now. Just to clarify for those who are confused by the numbers- there are 36 opened and operating today- about 7 or 8 under construction- about the same number with signed leases awaiting the commencement of construction, and another 10 or so leases in various stages of negotiation. That leaves about 75 more stores committed to and paid for to open over the coming years.
On to the technical picture.
This stock began trading publicly in August of ’07. It was a self underwritten IPO at $.40 per share. After catching fire in the short run, it succumbed to Bear Market selling pressure. Pretty much all technical levels of resistance have given way. My SSL on the stock was $.90, so if you are still in, you should be long term. This is a good choice to be long term in my view.
I believe before the Bear Market is over, the stock could be vulnerable to go back and fill the gap from its very early trading days. That gap is like a vacuum, and nature wants to go back and fill the void.
I know it’s tough to see on the chart, but in order to fill that gap, the stock would have to trade back down to $.71.
If the stock can grind it’s way down there, I believe the trip would be very short lived, as there are a lot of investors following the company and looking for the bottom to get really engaged.
About 2 years ago right now, CEO Marc Geman called me to discuss raising capital. At the time, SPKL had a total of 12 stores open and about 20 franchises sold in all. Today, the number of open stores has gone up 200%- 12 to 36- and the number of franchises sold has gone up 550%- 20 to 130. The growth rate is accelerating because the management is excellent, the concept is strong, the franchisees are making money, and the food is simply great.
I believe SPKL will be a repeat of Commerce Planet (OTC BB: CPNE) with a more positive ending. Long term subscribers will recall I first featured CPNE in 2005 at $1, and it found its way to $2. Then, we had a tough market and the company stumbled- it was $.30 in the Fall of 2006. By the spring of ’07 the stock was at a high of $3.50- a ten bagger off the bottom of the pullback. They since have sabotaged their own success.
For SPKL it will be deja vu all over again with one main difference- the SPKL business model has far stronger legs. Each of those restaurants is an annuity that can contribute pretty much forever.
I believe this stock is going to $3 or $4 in the next Bull Market. I can’t say when it’s going to be, but I believe it will happen. You have a once in a lifetime opportunity to accumulate this one during the economic slow down. Today, you can pick up the stock at the same level the $6 million December financing was priced at ($.85)- two board members put in $1.4 million of the $6 of their family money. I personally invested $102k out of my Defined Benefit money. Worth noting.
Comments and questions are welcome.
I recommend a letter from Marc Geman to shareholders. Just a simple one with here is what we’ve done and here is where we are going and include any new initiatives if applicable (breakfast, catering progress, dinner, new menu items). Thanks for passing it along.
Editor: We are looking at the possibility of an open conference call to shareholders, a recap of the company’s achievements in the past two years, and a few other things of that nature.
what was the date you personally invested 102k of your own money & at what price? also what is the lastest date you have sold shares? thank you –jack
Editor: I invested $102k in the convertible preferred along with the institutions in December through my Defined Benefit Plan. The Preferred converts at $.85 per share, and has warrants that convert at $1.60. It was all publicly disclosed. I am a consistent seller of a few shares every week- perhaps 5,000 to 10,000. It is all fully disclosed at the Spicy Pickle section on the web site, and updated every Monday morning. My goal is to recoup the funds I invested in December- once I have arrived there, I will sell no more at these prices. I believe my total position is somewhere in the range of 1.5 million shares at this time, the majority of which are being held for the long term. If the stock fills that $.71 gap, you will see me become a fairly aggressive buyer.
you knew about the stock going down to .85 now its going to fill the gap at .71 should we all sell? maybe it will go lower
Editor: I’m saying you should be prepared for the possibility it might happen. It also might not. I can’t say for sure, but I am thinking along those lines now, and preparing. I’ll be prepared to personally buy a lot if it happens. However, I’m not running out and selling all I have. I couldn’t sell it all if I wanted to due to the size of my position. I guess you have to decide for yourself on that issue. If you have a really big position, you might sell a little so you have liquidity if it gets there. If you have a very small position, you should probably just hold and see if you can set aside some capital to invest more if it goes there. I suggest the possibility and suggest you be prepared.
I was an investor but sold out @1.00 per share. I could not understand with all of the new store openings on the horizon why the stock price was going no where but down. Did I dell out to early? What is your time horizon on this stock should I get back into it now at these prices. Thank you.
Editor: You are in the perfect position right now. If you’ve been reading my content, you know I have been predicting this pullback. There is some early shareholder stock being sold. It will dry up pretty soon, and I believe the stock will turn around. $.70 is my target price for the stock technically. I believe at that level it will become an irresistible buy.
when most stocks come out with good numbers they move higher this one is going down why is that?
Editor: I’m not sure how many BLOGs I need to post to answer that question. It was in the last posting covering the year end numbers. I keep saying this stock is vulnerable to falling back to about $.70- It’s because there is some early shareholder stock for sale. I am trying to quantify it. Company is doing great, stock is under pressure. It is finite, and there will be a turn back up.
why did you not say anything about this gap when the stock was at 2.00, 1.50,1.00 now it back where we started from is this a insider deal.Now there a gap so something driving this stock down and its not the gap
Editor: Gee- do you think it might be more buying than selling? I’ve been predicting this, and it’s coming to fruition. I just don’t know why anyone is surprised. We are coming close to the end of this supply, and the stock will turn around soon.
after this stock was in a free fall did we here about the gap. I will ask again why did we not here about when it was 1.50 1.30 1.20 1.10 1.00
Editor: Sometimes it’s just not clear to me what I have to tell investors to make them understand how to be in the markets. I don’t know what more I could have said. I wrote several articles on the BEAR MARKET, making it very clear if you weren’t long term, you should get out of your positions. Things were going to be rough. Secondly, I wrote two articles on SSLs- Suggested Stop Losses- the SSL for SPKL has been prominently posted on the site for several months.- It’s on the left hand menu bar- It is and has been $.90- it you held it below that level, you became a long term investor. I wrote several articles on this as well. The short answer to your question is the gap wasn’t covered at those levels because it hadn’t come into play at those levels. Now that the stock has fallen down into this area, below all levels of technical support and the SSL which I suggested several months ago, the gap becomes the level to look at getting back in. If you are holding the stock and wanted to be out, it’s because you are simply not paying attention to the information I am providing about how to participate in these stocks. Sorry to be harsh, but I’ve been providing the information. At this point you should be long term and not worried about today’s price. I’m looking for a good level to buy once I am convinced it is fully blown out and ready to rebound. Hopefully, that answers your question.
Larry,
Recall that I hypothesized that the rate of company growth wasn’t sustainable and could cause a relapse of the stock price. Do you think this is what is going on or is something else happening and my hypothesis doesn’t mean enough to be causing the ‘collapse’?
Thanks
BD
Editor: I’m not sure what the time frame was when you shared that observation, but if it was when the stock was north of $1.50, you should note that you and I were totally in agreement on that issue. I believe I published a BLOG suggesting it was time to take some or all profits at those levels back in late October. As far as the current status goes, the recent decline in the share price can be tracked directly to recent 144 and 144k filings to sell shares by certain shareholders. There are investors who owned this stock at $.06 from 2001- other more recent purchases have seen filings of late. I believe it is a timing issue. Early shareholders and other shares which became eligible to be free trading when the 144 regs changed on February 15th did not have a shot at liquidity in a healthy market. Many of these early investors don’t understand this is not a great time to sell, but they own the shares and have the right. In recent writings I have been warning investors the stock was setting up for a pullback. I don’t see the point in being heroic when investors sell at times of weakness. They will get a lot less due to their impatience. When I believe the market has absorbed these early stage excess supplies, I will suggest investors take a hard look once again. Technically, I believe it is likely the stock will fill the gap I alluded to in previous writings at $.69 to $.71. The growth rate of the company offers risk oriented investors a lot of upside from that level.
Larry if you look back at you blog you said this was a buy at 1.20 even better buy at 1.00 and great at .90 so what are you talking about just read your blogs you push this stock now every one should just sell and we all could get back in at .06 PS 40 stores by the end of 07 didn’t happen no new opening in 08
Editor: Things change, and my message changes according to the conditions. I never thought we’d see these levels, but I didn’t realize we would go into such a nasty bear market. I share the message based on the changing conditions and how I see them. If you want a blind fool who doesn’t face the reality of a situation and just says buy, buy, buy, then you are not at the right source of information. I am very close to this company, and I know a lot about the supply demand dynamics. I suspect there has been some early shareholder selling relative to prices and April 15th. I want to suggest it is time to aggressively come back into the stock, but I don’t want to do it until I perceive the supply side has dried up. In my view, those who have the courage to act when the time is right will make a lot of money. You simply have to accept that I call it like I see it, and things change. Your point about no new stores opening is well taken. That will change in pretty short order. A bunch will start opening soon, and it will continue through the summer. In the meantime, the new franchise signings have been outstanding to make up for the slow pace of new openings. Just like last year, there will be a lot of new openings in the back half of the year. Perhaps the stock is trading in part thanks to the vacuum of store openings, and that will be an opportunity for someone.
Ok Larry,answer the guestion you new about this all along the gap the share at .06 but you still said to buy as this stock was falling. not until it got to this levels co you change your mind. the market is up 5% this week so let stop talking bear market. And by the way of all your picks that have collapsed the list is long has any come back? I couldn’t find any
Editor: I’m not sure I understand if you have a question. If you are asking about SPKL, the answer is no, it is not a buy quite yet. The new 144 regs are the problem, and it’s simply a case of waiting for the sellers to be done. If you are asking about past picks, as I pointed out in a previous publication, in my view SPKL will be like CPNE before they screwed up the company- $1 to $2 in ’05, back to $.30 in late ’06, on to $3.50 in early ’07. The one big difference- SPKL’s business model is sound long term. Also- if you think one week is going to completely change investor sentiment on micros, you are living in fantasy land.
I’ve purchased a 770 shares at .70, hopefully all of those sevens will bring luck. I think that an open conference is a very good idea and could bring some good publicity to a relatively unknown company. Have you heard anything more about a conference call or other initiatives? Thank you
Editor: Daniel, I think you might be about one week early, but definitely in a range that should serve you well.
So are you going to make a post when you feel it is time to aggressive add to the position? The stock has moved below that .71 point you mentioned above.
Thanks
Editor: Will be publishing today or tomorrow morning. Time is not quite right yet. The selling has been related to some recent 144 filings, and it’s just about over.
Hello,
The stock is now below the .71 you mention above. What is your take on it now? Is it time to add to our positions?
Editor: About another week. 144 filers are pushing the shares down, but they will run out soon.
How come my comments are not making it through???
Editor: Read the BLOG information- they make it through once I have had a chance to answer.
I was looking at the 10K for Q4 2007 and I was shocked to see that personnel costs rose more than double from $800K in 2006 to $1.1 million in 2007!!!!! They mentioned that their personnel only increased from 18 in 2006 to 22 in 2007!!!
Can you expand on what is the justification for the personnel costs which more than doubled in 2007 and the net loss more than doubled in 2007 than it did in 2006???
Why is it so much and does this mean that upper management is poorly using fresh capital raised from shareholders.
Editor: The company’s build out in infrastructure is commensurate with their need to expand. That’s what the money was for. When I first looked at this company two years ago, it had about 10 stores open, and about 20 franchises sold in total. Today there are 36 open, and 130 franchises sold. Furthermore, they now own 4 corporate stores, soon to be 7 in total. That requires infrastructure. You make the investment in people first, then it translates to revenues and profits down the road. In addition, a lot of their 2007 expenses were non cash and one time related to going public. A good number right now in real cash is about $250,000 to $300,000 per month to run the company. I have done some work on this recently. They will cash flow break even now at about 50 stores about and about $1 million in franchise fees annually. We are closing in on those kinds of numbers. They are over $300k in franchise fees this year.