Update: SPNG Report By Honors Student Rajat
June 14th, 2009 at 7:11 pm Posted by The Dean
Spongetech Delivery Systems (OTCBB: SPNG) – which makes sponges infused with soap and wax – has been generating quite the buzz lately – and not only among consumers who love their sponges, but also in the trading community, which seems to love the stock.
SPNG has been drawing in lots of interest from investors due to a variety of corporate announcements and forward-looking statements.
- Spongetech has announced explosive earnings for the year 2009, particularly for Q4 ’09. The company projects that earnings will grow even more in 2010.
- Spongetech has announced orders by retailers such as Costsco & Walgreens and there are rumors among investors that other large retailers (e.g. Wal-Mart) will also take orders from Spongetech.
- Spongetech is seeking listing on the NASDAQ exchange
These and other developments have been extremely positive for the company. The stock has been trending significantly higher ever since the beginning of June – moving up approximately 700% from $0.0384 to $0.29. Additionally, the volume of trades has increased significantly throughout the month of June.
SPNG had a very interesting day of stock trading on Friday June 14, 2009. The stock opened at $0.24 and moved up to a 2-year high of $0.29. Around mid-day the stock came of the highs of the day and then began to recede in price gradually.
At around that time an extremely LARGE market sale of 50 million shares hit the tape which significantly drove down the price. Many other investors noticed this down-turn in the stock price and became overly emotional and panicked. They must have felt the end was near for SPNG and they put in their sell orders to exit the stock. The result was that the price reached a day low of $0.09 – a decline of more than 70% off the highs! The stock rebounded before the day was over after a favorable news article about sponge orders was released.
This strange behavior for SPNG brings to question what the future for the stock – and the company – will actually be.
Many stocks trading on the OTC markets – the OTCBB and PK exchanges – are subject to extreme swings. Emotion seems to drive these markets (almost exclusively at times) as overly excited investors become very confident in a company and buy into it driving the stock price higher and higher. At any sign of weakness, those same excited investors will panic and run for the exits causing a potentially large down-swing in the price of the stock.
Spongetech appears to show many signs of a bright future – the company is profitable and has many promising developments on the horizon. However, one point of concern with Spongetech is the management – Michael Metter, Steven Moskowitz, and Frank Lazauskas.
All three directors of Spongetech are known stock promoters. In the business of stock promotion, an entity – such as a marketing company – will contact a stock promoter to promote a particular company – with the expectation that new investors will be attracted to the company, thereby driving the price of the stock up. Stock promoters are usually compensated with shares of common stock or with cash for their promotional services.
As excited investors enter into the marketplace for a promoted stock, the price of the stock will eventually reach a particular level, sometimes more than 100% increase than the price at time of promotion. At that point, large shareholders – which may have acquired shares at much lower prices – will decide sell their shares in the open market. As a result, the large shareholders – which may include the original entity itself – will take fairly large profits nicely from the increase in stock price.
Quite simply stock promoters are salesmen – their job is to sell their audience on a product or service at the highest price they can receive. Stock promoters and salesman both present only one point of view – and generally do not offer objective, balanced information to potential investors.
As an example, a company that has recently been promoted is Hydrogenetics, Inc (PK: HYGN). HYGN currently owns 100% of Buffalo Biodiesel, which has signed several exciting contracts recently. When HYGN was being promoted, I myself was extremely interested in investing. As such, I contacted Buffalo Biodiesel numerous times to speak to someone about the contracts and the company. Even though I left numerous messages, I never received a call back from anyone and never was able to get a live person on the phone.
The company HYGN experienced a great deal of investor interest and the stock price soared. However, as the HYGN promotional campaign progressed the stock reached a high of 0.27 on fierce buying (an increase of over 2,000%), but has since crashed down as extremely large sellers have driven the price down.
The experience I had with Buffalo Biodiesel and the strange price action for the HYGN stock raised several questions for me. Why did I never receive a call back from Buffalo Biodiesel? Were the contracts that Buffalo Biodiesel signed legitimate? Is all the news and being generated simply present to create hype in the stock? Is HYGN a “pump and dump” campaign – as is so common among OTC stocks?
As mentioned earlier, the leaders of Spongetech – Metter, Moskowitz and Lazauskas – are known stock promoters. Spongetech has issued a very, very large number of shares to a company called RM Enterprises International, Inc – at steep discounts to the market price. The directors of RM Enterprises are Metter, Moskowitz and Lazauskas. Spongetech has also continued to issue new shares over the past year – causing extreme dilution of its shares.
The actions of any stock promoter should always be questioned to help separate noise from actual news. As such I have several questions about SPNG stemming from SEC filings, price action, news and rumors.
- What is the role of RM Enterprises International, Inc. in the corporate marketplace? Why have so many shares of SPNG been issued to RM Enterprises – essentially the shares of SPNG have been issued to the directors themselves. Does RM Enterpise exist for the sole benefit of Spongetech?
- As owner of a large number of shares of SPNG, what would happen if RM Enterprises sold its stock holdings into the market over a period of one week?
- Is Spongetech trending higher largely because of hype, news reports and expectations? What would happen if even a single negative news report was released?
- Is there truth to the rumor that the SEC is investigation SPNG? Normally the SEC only investigates companies if there is reason to believe there is security fraud at place.
- If SPNG really wants to be listed on NASDAQ, why will they not allow all information to be public. Currently it is not possible to talk with the Transfer Agent for SPNG about history of stock activity. This information should be readily available to all investors since SPNG is a public company. A real sign that the company is serious about NASDAQ listing is allowing the Transfer Agent to talk with all investors openly.
Currently the price action in SPNG appears to be suspicious and unstable – the stock is not trading up and down based on normal market flow. Instead it appears similar patterns of HYGN, CADD, CVRG and others – which are known “pump and dump” schemes. A glance at the multi-year price history for SPNG will show some similarities to a pump-and-dump chart pattern.
Is Spongetech a company that is being run by stock promoters with the primary purpose of being pumped and dumped? Or is Spongetech a legitimate company that is bound for success? We will know more in the coming weeks – but currently the price action, management crew and repeated hype-style news articles, and questions that remain unanswered point to a risky investment when it comes to SPNG.
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*This article was written by Rajat Chopra (choprar@gmail.com). Rajat held a position in SPNG on June 10 and sold for a 10% gain and then again held a position in SPNG on June 12 and sold for a 30% loss.
Good article with one exception tkaen. You state that the company issued new shares. In truth, they authorized new shares. If these shares are still held by the treasury there is no dillution of stock. The reason for this, so I have been told, is to be prepared for a buy out or merger. They were advised by legal council to do so prior to the submittal of the application for a NASDAQ listing, as once the application was submitted they would be hampered from changing the corporate share structure.
I am long on SPNG with over a 1/4MM shares. I belive they will do fine down the road as a big borad stock. Last night on AMC movie channel, two spongetech commercials were aired during prime time, during the new show, “the Cleaner”. Not ironic that they chose that spot. Point being that despite questionable past of management, the company is poised for a much bigger presence in the market place down the road, most likely as a buy out opportunity to a larger company like Proctor and Gamble or JJ or the like.
It’s not only the promoters. Obummer keeps promising things, then changes, then says he wants to limit CEO salaries (which is Socialism), and it’s tough for a great product to struggle up through all the crap that is delat out, not to mention the small penny stock guys trying to make a few pennys. This is a great product, give it a chance. I only have 20,000 shares for long-term, but they DO have a product, not a fake engine like PGYC had, so let SPNG run and give it a chance in the open market; it’s great!
First off, you guys need to go back and take Accounting 101 again.
SPNG lost $9.9 million on the products they sold for the nine months ending Feb 28 2009 actually.
http://www.sec.gov/Archives/edgar/data/1201251/000114420409021409/v146656_10q.htm
Just cursor down to page F-5 … the cash flow section of the 10-Q.
Now look at the Operating activities section of the report. It shows that SPNG was cash flow negative to the tune of about 170k.
However, that figure is understated since it includes the proceeds from the sale of stock, which is clearly not an operating activity for the company.
So how much did the proceeds from the sale of stock add to SPNG’s cash flow?
About $9.7 million.
Back that out, as you should, since that’s clearly a financing cash flow and not an operating cash flow, and you’ve got a company that just lost $9.9 million for the nine months ending Feb 28 2009.
And they’re not going to make it up on volume with Dicon either.
The Dicon acquisition was paid for with the proceeds of sales of stock, which is why the shareholders in Spongetech just got diluted big time from outstanding shares of 365 million a year ago to 722 million shares outstanding today.
But I’m sure Moskowitz and Metter appreciate the really, really nice payday the shareholders gave them.
Moreover, you can take this company’s PR releases with a large grain of salt, since it ought to be obvious to anyone that SPNG is really in the business of selling stock, not sponges.
And the number of orders don’t mean squat either, since SPNG recognized revenues at the time the orders are shipped, not when the orders are received.
Moreover, SPNG doesn’t have the working capital to meet the orders they’re telling the shareholders they’re receiving, since the company has a net profit margin, after tax, of something on the order of 84% or so. That suggests that every dollar’s worth of orders coming in the front door, the company has 84 about cents going out for COGS, related overhead expenses and taxes.
And Spongetech is only collecting about 67 cents of every dollar they recognize as revenues in the company’s income statement. That’s why during the period ending Feb 28 2009 the company booked sales (or revenues, if you wish) of $31.1 million but also had a corresponding increase in its A/R balances of $10 million. That’s clearly shown by the cash flow statement as well.
And since SPNG is only collecting about 67 cents of every dollar they bill in cash, the company is cash constrained to the eyeballs.
In other words, for Spongetech to be able to meet $20 M worth of orders they’d have to have about $16.8 million in cash on hand since all of their product manufacturing expenses are paid for in cash. And Accounts Receivable that they can’t and don’t collect don’t count.
Take Spongetech’s most recent Form 10-Q to any CPA and ask how much cash this company took to the bank for the nine month period ending Feb 28 2009 from the company’s normal, ongoing, day-to-day business operations and he’ll verify the numbers I put up above. And that’s a more useful proxy for how this company is doing as an ongoing economic entity than all the PR stuff the company releases combined.
But believe who and what you wish.
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