In This Edition...

* A Recession is a Matter of Geography for Spicy Pickle 
* China Energy Recovery's Litmus Test 
* Bio-Matrix - Still Going
 

	A Recession is a Matter of Geography

What do you do when your local economy grinds to a halt, disrupting your aggressive growth plans? A lot of small cap companies have been like deer caught in headlights this year. A few of them, however, made a smart choice - they moved their attention to geographies where the economy didn't stink. What was sewn internationally is now being reaped. 

If you thought Spicy Pickle's (OTCBB: SPKL) growth plans had been put on ice, you weren't alone. At the end of 2007 we were expecting a new store to open about every week. When the recession kicked in though, most of those openings were put on hold. It wasn't surprising or unusual given the environment - that's just the cyclical nature of the beast. 

What most didn't see at the time, however, was something Spicy Pickle had kept in the background - plans for international expansion. 

Rather than try and fight an uphill battle, Spicy Pickle was savvy enough to divert time and attention to a geography where money was flowing much better... Canada. It took a while to get the deal done, but the company has officially added Vancouver's Bread Garden Urban Cafe chain to the Spicy Pickle family. There's no recession there - Vancouver is thriving. 

There are eleven Bread Gardens up and running, which obviously removes the headache of hunting for new store sites and then trying to sign a lease with a stubborn landlord. In fact, the deal was so 'turn-key' that Bread Garden's revenues and profits will show up on Spicy Pickle's books from day one of the union. 

The acquisition doesn't involve any cash - it's an all stock deal, so the balance sheet won't take a hit. That'll be good, since it lets the company remain flexible in this rocky U.S. economy. Spicy Pickle's cash position and cash flow will actually improve now that they have 19 company-owned restaurants (11 Bread Gardens and 8 Spicy Pickles) contributing to the top line. Those royalties from franchisees are nice, but the high-dollar cash flow lies in ownership of restaurants. 

As for the stock, the 5.1 million shares issued (and 3.0 million warrants) is actually a fairly small price for shareholders to pay. There are 48 million shares issued and outstanding already, so the maximum dilution here is less than 20% long-term, and only about 10% in the short run. The upside? I'm estimating cash flow has roughly doubled. Plus, with the Bread Garden chain already being profitable, there's an immediate benefit to the company's bottom line. 

Speaking of the stock, the last time I talked about it my basic message was to steer clear until the chart started to look healthier (advice that applied to most stocks at the time). Since then though, SPKL appears to have stabilized, finding support around 40 cents. 

I still believe this stock is going to generally trade in the same direction as the overall market. However, I also think it has considerably more upside potential than the average stock right now. We also looked at the market's potential bottom in Tuesday's edition, and now we've seen some evidence that Spicy Pickle - at the corporate level - isn't as stifled as we may have thought. 

If you're really a value seeker and long-term investor, I think SPKL is pretty attractive at 42 cents. A lot of the proverbial planets may have lined up over the last few days. 
 

	The Litmus Test

You can make a long list of arguments in favor of China Energy Recovery (OTCBB: CGYV). Revenue is growing, they recently swung to a profit, and they own a key patent on a technology the Chinese government is almost forcing companies to adopt.

None of those reasons holds a candle to the biggest argument of all though... are more customers really willing to pay for CER's waste-heat recovery systems?

We knew so far the answer had been yes, as sales have been rising since 2006. The real proof of customer demand came yesterday though, when China Energy Recovery announced Two Lions Fine Chemical Co. had purchased another waste heat system for their new sulfuric acid plant.

The first purchase of a system could be chalked up as an experiment. The second purchase of the same equipment isn't an experiment though ... it's a message that the cost/benefit ratio of these systems is indeed fiscally advantageous to the power plants using them. In other words, it's cheaper in the long run (and even in the short run) to install one of China Energy's systems. CER passed the litmus test.

Anyway, the numbers here are impressive. The 50 MW heat recovery system Two Lions is installing comes with a price tag of $3.2 million. How big is that? Just for comparison, China Energy Recovery did $9.9 million in sales in the first half of 2008, and that was for several installations. The average system retails for just under $200K, so clearly a $3.2 million system is a whopper. 

Expensive? On the surface, sure. There's a lot more to the story though.

If the name Two Lions rings a bell, it might be because it's the same company that sold $2.5 million worth of carbon credits last week. And, they'll be able to sell those carbon credits over and over again each year. How'd they do it? They already have a CER system installed at their current plant. And, it's about the same size as this one...50 MW. 

Do the math here. That first installation - which probably cost around $3 million as well - can now provide revenue of around $2.5 million per year, in perpetuity. In less then two years the equipment will pay for itself in carbon credit sales alone. This doesn't even count the dollars saved in energy expenses, which can also be millions of dollars per year. It's no wonder Two Lions opted to buy another one for their new plant... the math says they'd be crazy not to.

Yeah, this is one of those things the rest of the market might not 'get' because they don't see the big picture right now, which is why I'm pounding the table again this week. The question is, do you think it will it show up on China Energy's top and bottom lines at a later date? I think it will, which could excite other investors later. Of course, the stock could be considerably more expensive by that point. That's why you have to be bold when it comes to making fundamental decisions.
 

	Still Going

We're three for three today in terms of finding small cap stocks still making progress. Bio-Matrix Scientific Group (OTCBB: BMSN) rounds out today's hat-trick by letting us know they're still on track to generate revenue as a cord blood storage facility.

We first introduced Bio-Matrix based on their potential as a storage facility for stem cells derived from adipose tissue. In the meantime, they've started to cultivate a cord blood storage business. (The two are surprisingly distinct, primarily because of the license required to operate each type of facility.) 

Anyway, the company has to test the entire process first before doing so with 'real' specimens. And, per their recent news release, they've done just that. The tests aren't completely over; these same specimens are also part of ongoing quality control testing. Logistically though, they've proven they can receive and process these cord blood units.

The success so far is enough to merit further negotiations with potential cord blood storage customers. Many of these companies needed to see the successful receipt and processing of specimens (which they just did), so Bio-Matrix can now come back to the table with an even more attractive proposition. 

There's still no word about when this venture will generate revenue, but this gets them much closer to that point.
 

	Bottom Line

While we got three doses of good news from three of our small cap followings, I don't want to give you the wrong impression by implying you should blindly plow into a position for all three stocks. Let's face it - there are bigger forces at work here, and Washington D.C.'s rescue package is going to set the tone for the near-term. That could impact these three stocks (and all stocks), for better or worse.

That said, I'm encouraged about how all three of these companies have pushed through the recession and found ways to keep making progress. They'll be better for it when things really start to hum for the economy.

Plus, I don't want to suggest these three stocks won't move higher in the near-term - they may well do it, and you should respond appropriately. I think Spicy Pickle is the strongest recovery candidate in the short run.

At the very least I want you to put these three tickers back on your watchlist, as I think they'll all be trade-worthy soon. When? I can't say exactly, but I believe soon. If we keep them nearby (mentally) we can respond when the right time comes. The companies are doing their part - we just need the charts to flinch.

Stay tuned to the blog for the specifics on how to best time any trades for these stocks. In the meantime, here's the Spicy Pickle news.
 

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MarketByte LLC has been paid a fee of $40,000 and 100,000 shares of China Energy Recovery for coverage of the company. TGR Group LLC, a company affiliated with MarketByte LLC, has also received $40,000 in cash and 100,000 shares of China Energy Recovery for coverage of the company. In addition, MarketByte LLC has managed a budget of approximately $500,000 for DVD production and distribution of video related to China Energy Recovery. All costs associated with the DVD production were pass through in nature, and MarketByte LLC received no profit and or additional compensation of any kind with regard to DVD production and distribution. In additions, the editor and affiliates have purchased a total of 42,940 additional shares at an average cost of $3.21 per share. The aforementioned shares may be sold at any time without notice. Transactions are disclosed an updated weekly on the web site.

TGR Group, LLC has been paid a fee of $30,000 cash and 250,000 shares of newly issued restricted stock by Bio-Matrix Scientific Group, Inc. for coverage of the Company. 

Larry Isen, the editor and publisher of the OTC Journal, through various entities he controls, has purchased 1,200,441 shares of Spicy Pickle at an average cost of $.2125 per share. These purchases were made in Spicy Pickle private offerings. The aforementioned purchases were made between August of 2005 and August of 2006. On 12/15/07, on entity controlled by Larry Isen participated in an additional financing wherein 12 shares of convertible preferred, converting at $.85 into 120,000 shares and 90,000 warrants with an exercise price of $1.60 were purchased. In addition, Larry Isen has received 785,000 shares of Spicy Pickle common stock for consulting services and has purchased 213,343 shares in the open market at an average cost of $.89 cents per share. In addition, MarketByte LLC, an entity controlled by Larry Isen, has received a fee of $30,000 cash, and 300,000 newly issued restricted shares for coverage of Spicy Pickle. TGR Group LLC, the publisher of the Small Cap Network, has received $30,000 and 300,000 newly issued restricted shares for coverage of Spicy Pickle. Mr. Isen is an affiliate of TGR Group. In addition, two other individuals affiliated with TGR Group have purchased a total of 300,000 shares at $.25 per share, 21,961 in the open market at $.76 per share and received an additional 70,000 for consulting services. Current positions of the aforementioned can be found at www.otcjournal.com and www.smallcapnetwork.com in the Spicy Pickle information section. 

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