The $100m Question About SPNG And Corporate Ethics
June 11th, 2009 at 2:03 am Posted by The Dean
Greed is good in corporate America, or at least so said Gordon Gecko. But whose greed are we really talking about?
I can say without a doubt that there are hundreds of Wall Street firms violating basic SEC code of conduct every day by placing the desires of their own greed over the needs of the corporation. The result? Hundreds, if not thousands of stocks will crash and burn as officers and directors run their companies into the ground for the sake of their own personal interests (even at profitable companies!).
I use Spongetech Delivery Systems, Inc. (SPNG) as example of a company that is profitable, yet doomed to failure because their officers and directors are not looking out for the interests of the common shareholders.
Spongetech (SPNG) produces sponges with soap and wax built right into the sponge using patented technology. The company has advertised with the New York Mets, New York Yankees, the Price is Right and QVC and consumers are reacting very favorably, as SPNG recorded a $4.9 million net income for the nine months ending February 28, 2009– an increase of 4,900% over the comparable period in 2008.
SPNG‘s profits appear to be growing faster-than-a-speeding-bullet, has a P/E less than 2 and even produces branded SpongeBob SquarePants bath sponges (red hot)… so what gives with the stock price? Although SPNG has experienced tremendous growth over the past 2 years the stock is down from $0.25 all the way to under $0.02.
I believe the answer begins with the intentions of the officers and directors at SPNG, which, in my opinion, are not in line with maximizing shareholder value. According to the company’s latest annual report SPNG officers and directors consist of Michael Metter (promoter), Steven Moskowitz (promoter) and Frank Lazauskas. All three of these individuals are directors of RM Enterprises International according to the company’s SB-2 filed on 4/11/06.
Why does this matter?
RM Enterprises International has been financing SPNG for years and at very unfair terms including this toxicity as disclosed in the 2007 10K:
From January of 2008 through June 2008, the Company issued an aggregate of 267,154,132 shares of common stock to RM Enterprises International, Inc., a company that is our majority stockholder and which is controlled by our officers and directors, in consideration of the advance to the Company of an aggregate of $4,918,432.46 by RM Enterprises International, Inc. Such shares were issued in tranches at the time of each of the advances of funds to the Company at a 40% discount from the market price on the date of each such advance. The average per share issuance price for the shares was $0.0184.
SPNG was generating a profit during this entire period (01/08-06/08) yet they were unable to finance the company by issuing shares (basically to themselves) at a 40% discount to market? I find that very hard to believe.
In fact, hundreds of millions of shares in SPNG have been ‘granted’ to RM Enterprises International since 2006, resulting in an increase of the total shares outstanding from 33,733,626 to 714,440,927 between February 2006 and February 2009.
The value of SPNG thus diverges into two paths — the value of:
- Spongetech Delivery Systems, Inc. the company; and
- the value of shares of SPNG common stock
While the actual company has exploded in the last year, the management team chose to raise capital laregly from themselves (in the form of RM Enterprises) at unbelievable discounts to market prices and as a result, Spongetech officers, directors and affiliates are able to profit substantially more because they were able to get stock in multiple ways:
-Directly through their position as an officer for the company; and
-Indirectly through their RM Enterprises, Inc.
So here is a reality check for all investors: There are hundreds (if not thousands) of similar management teams on Wall Street doing the exact same thing— utilizing public entities to line their own pockets through affiliated transactions and stock dilution.
Hello Dean,
I am actually share holder of this company and I’ve been wondering what’s been going on with all those great news about growing revenue and dropping price… What you explain here makes perfect sense.
I have one question: On Feb 2 SPNG announced retirement of additional 30 mil shares and decreasing total # of shares outstanding by 29% since they started repurchasing shares. “This should be a very positive statement to our investors, shareholders, and the public market that we are growing and here to stay” as the CEO, Michael Metter said. Does it mean that we are dealing with some kind of scam?
Thank you
Very distressing to an owner of SPNG stock. Can you suggest any course of action or just get out?
I also own SPNG and got in very recently around the 0.02 mark. The statements about retiring shares is positive, but is it wishfull thinking for these managers to bring the OS down to an appropriate level and let the shareholders have their share.
Thanks,
Jeff
Hey Dean, I have a question for you, who was purchasing the diluted stock? It went from 100M to 700M, RM “purchased” blatantly stole, if you ask me, 270M shares, but what about the other 430M shares? Who were those purchased by? The three Musketeers (Metter, Moskowitz, and Lazauskas) obviously had something to gain from the 270M shares, That’s clear. They got discount prices just because they could. But what about the other shares, what does that say? Why would the dilute the stock then? What did they have to win from that?
They are a Delaware company. Go to the Delaware Secretart of State website. You can get more up to date info re: number or new or existing shares. It would seem foolish and shortsighted for these guys to screw the investors. Given the marketing campaign, they would end up looking like real scumbags to more than just shareholders, and squander a potential
landslide of profits spanning across several markets and the globe.
I’m still long on them. If next quarterly report shows an increase of shares or failure to re-purchase shares as previously stated, then it may be time to re-consider…
The retiring of shares was simply just another PR spin as was the share buyback PR. The simple fact that the TA is still gagged explains it all. In the history of stocks, there has almost never been a good reason for a company to gag he TA. SPNG will be no different IMO. The top guys have a shady past to say the least imo. They are now tripling the offer when you buy, meaning return customers will be few,and who washes their car when there is snow on the ground? The start of winter is also the end of baseball season which accounts for a major part of their advertising. They will also need huge amounts of cash to promote Spongebob when it arrives. I see a reverse split coming if they indeed intend to get on NASDAQ. While sales numbers are huge, the things behind the curtain will bring it all down in my opinion.
It appears that he is a fool.
So glad I found your post. I have held SPNG shares since Feb. 09 and have watched the PPS go up and down all along holding my Long shares. Sold half of them today for a 5 month gain of $120,000 dollars. Thank you for saving me.
Looks like thesponge jumped ship about a week too early. Assuming he bought in at $0.02 and sold at $0.10, he had 1.5 million shares. He missed out on a possible 1-week gain of over $200k. Ouch.
Where your article falls short is the failure to mention the company option to buy back those shares sold to RM. I am uneasy about the arrangement also but if handled properly, this funding becomes the exact opposite of toxic funding (0% loans are always nice).
This is all in my honest opinion. I could not presume to advise anyone what they should do! I have made a very major commitment of $$ to this stock – 4.75M shares at 2.4 cents average. I have not sold any shares yet. But you should do your own DD. Call up management if you are thinking of making a serious investment. Don’t bother them with calls about 50K shares, but they will spend a lot of time with you regardless of the size of your position. Bill Young (IR) is a good place to start, but the real deal is Moskowitz. IF you have trouble getting through, then take that as a good thing. It may be that they are not talking because of the Nasdaq stuff. (FWIW, I have never spoken with Metter, and the emails I’ve received from him were rather offensive (mine to him might have been a tad over the line as well — LOL).
In previous installments, I used to say that I would NOT buy SPNG based on the potential for a squeeze – but rather to focus on the fundamentals. Well, now we are at 16 cents, and while I see fair value being much higher, getting to fair value would *only* (LOL) be a double or quadruple from here. At the same time, I am becoming a stronger and stronger believer in the squeeze. So, now I rate this as a very strong buy based on the fundamentals — and a table pounder based on the squeeze.
How rare is it that you have BOTH a fundamentals play and a squeeze play on the same stock?
@thesandman2205
Ouch… you’ll be missing out thanks to the DEAN. .20cents and rising.. I’m confident in this company. They have a bright future ahead for them.
salpirwani is up 1 million dollars if he/she is still in (on 114k investment). That’s not bad
That’s quit your day job / retire early type of $. I don’t know if this is going to $1, I’m skeptical of that, but it is making a lot of money for investors and longs. If this is some sort of pump, at some point bad news will come through, but maybe not?
the bad news came today, it is dropping like a burning missile! So much for my gains, so much for my investment, down huge.
I wanted to thank The DEAN for his advise on SPNG….I made some money on it. But it is nice to know that the cat you are swinging is dead.
it hit $0.22, I figured it was funny business. I had read some articles posted by @_thedean and some others earlier in the morning which warned of a major pump-and-dump, thanks you for the lesson Dean!
These are the guys who bought up all the new shares. The Spongetech attorney’s: each attorney, and the whole group.
Number of Shares Owned as of
Name of Shareholder Address of Shareholder December 9, 2008
Levin & Associates Co., 1301 East 9th St., Suite 1100 425,000
LPA
Cleveland, OH 44114
Joel Levin 2467 Stratford Road 7,655,000
Cleveland Hts., OH 44118
Mary Jane Levin 2467 Stratford Road 6,830,000
Cleveland Hts., OH 44118
The Ava Levin Educational 2467 Stratford Road 1,100,000
Trust
Cleveland Hts., OH 44118
Thomas A. Muzilla 2996 Kingsley Road 2,350,000
Shaker Hts., OH 44122
Terence Ryan 2650 Fairmount Blvd. 138,000
Cleveland Hts, Ohio 44106
Susan Hunt Levin 2650 Fairmount Blvd. 1,847,000
Cleveland Hts, Ohio 44106
Guerman Nemirovski 14014 Shaker Blvd.., Apt. 502 3,207,786
Shaker Hts, OH 44120
Reid Levin 12469 Cedar Rd., Apt. 9 424,341
Cleveland Hts, Oh 44106
Laurence E. Saulino 3123 North Martadale Drive 200,000
Akron, OH 44333
Joel Trockman 232 19th St., NW, #7410 6,344,700
Atlanta, GA 30363
George R. Louis 141 Finch Road 10,461,133
Ringwood, NJ 07456