Spongetech Delivery Systems, Inc. (fka SPNGQ)

[MorningLightMountain]

what ever happened to Doug Furth????

Spongetech Is All Wet

The SEC wants to examine the books of a major sports advertiser—and here’s why.

By Roddy Boyd
Posted Wednesday, May 5, 2010 - 12:35pm
http://www.thebigmoney.com/articles/recycled/2010/05/05/spongetech-all-wet?page=full

Today, Spongetech's chief executive and president, Michael Metter, and its chief operating officer and chief financial officer, Steven Moskowitz, were arrested on conspiracy to commit securities fraud. A press release from the U.S. Attorney office stated that the two grossly overstated sales figures and reported purchase orders from five customers that did not exist. In September 2009, Roddy Boyd looked into the suspicious company, which the SEC had begun a formal investigation into. That piece is reprinted below.

Over the past year, tens of millions of American sports fans have asked themselves the same questions at some point: “What is that Spongetech sign doing in the outfield?” followed closely by “What the hell is Spongetech?”

Let’s handle the second question first. Spongetech [3] (SPNGE) is a Manhattan-based company whose product seeks to answer a question no one has ever really cared to ask before, something along the lines of: “How do I cut out the bucket part of the equation when I wash my car or dog by hand?” Voila! Behold the soap-infused sponge, which at $9.95 is both biodegradable and can be used several times.

On another level, the Spongetech sign wound up in the outfield because traditional sports marketing heavyweights AIG, Merrill Lynch, and Citibank self-incinerated [4] upon Mount Leverage in 2008.

But to a certain sort of capital markets observer, Spongetech is something else, not seen in a long while: a full-bore pump-and-dump scheme that will, when all is said and done, likely have harvested the wallets of thousands of penny-stock speculators and earnest individual investors who thought they had found the proverbial "next thing." It may not be the worst of such schemes. Unlike most pump-and-dumps, in which a few in-the-know sharpies drive a stock’s price to the moon and then sell it down to the basement, Spongetech has an actual product. Whatever is left of this company in the end, there will be something that someone—presumably the legion of bucket-haters among the do-it-yourself set—can dust off and sell in the market.

Still, the Securities and Exchange Commission didn’t initiate a formal investigation of the company and its management [5] last week for nothing.

The company’s filings lead the skeptical reader to some pretty clear conclusions. The first is that Spongetech exists primarily to sell stock, and pretty much everything else comes second. At one point in early spring the company had more than 1.2 billion shares outstanding. Late Friday, as the pump collapsed, it had increased the authorized share count to 3 billion. By way of comparison, in the spring, the company—with reported sales of about $5 million a year—had roughly the same amount of shares outstanding as eBay [6] (EBAY); with 3 billion shares issued, they would have a slightly larger float than Procter & Gamble [7] (PG).

In short, Spongetech uses the capital markets as a sort of ATM, selling stock and raising cash as the next sponsorship deal is struck. This is not illegal or even really unethical, but neither is it a terribly good idea. It works as a strategy as long as the stock’s price goes up, because the minute it stops accelerating, the shareholder is stuck under a mountain of stock certificates, partnered up with a management that appears quite willing to keep selling all the way down.

Take a look at this chart and decide for yourself whether Spongetech’s magical share-issuance machine strategy worked.

Flash Player 9 or higher is required to view the chartClick here to download Flash Player now//

To keep the troops rallied, or, more accurately, to keep a new stream of suckers lined up, Spongetech went to the Internet stock promoters whose “investor relations” work churns out a steady stream of dubious e-mails and faxes promising trading riches to the inept, clueless, and the delusional.

They came up with some doozies.

There was the multiply SEC-sanctioned Larry Isen [11], a partner in the TGR Group LLC, which touted Spongetech stock in return for $30,000 in cash and 750,000 restricted shares. In an e-mail, Isen said he was only a minority partner in TGR with a small stake in the company and does not recall if he economically benefitted from Spongetech in any fashion. He said he wrote about the company purely out of interest in its prospects. In addition to the five or so other promoters, there was the king of SEC-flouting touts, Jonathan Lebed [12], whose fee of 1,250,000 free-trading shares was footed by an investor named Doug Furth. Lebed did not respond to e-mailed questions.

Furth is no ordinary investor, however. The Solon, Ohio-based Furth is the owner, via his Signature Equity Fund, of 41 million shares or 5.1 percent of the company [13], as of last November. An activist of sorts, Furth is a mainstay of the Yahoo Finance Spongetech investor message boards, where, as he admitted to me, he posts as “Alfie31555.” Furth insists that he disclosed his ownership stake on the Yahoo forum. A verbal bomb-thrower of the highest order, Alfie31555 brooks no criticism of Spongetech and has saved his bitterest vitriol for short-sellers and the reporters he sees as being used by them.

For example, Furst’s ire was aroused on Sept. 22, when the New York Post reported that a former lawyer of Spongetech had written a letter to the SEC claiming that his signature was forged on dozens of corporate documents he had not written nor had even seen. In a post on Sept. 23 at 10:48 p.m., Furth described Post reporter Kaja Whitehouse as “Nothing more than a paid whore for the shorts” and described her reporting as “giving life to their skunkworks as their puppet.” Presumably Furth was no happier with Whitehouse’s subsequent article exposing the fact that five of Spongetech’s six largest customers are impossible to track down [14], with addresses and phone numbers that appear to be fake. To top it off, Whitehouse discovered that a Web hosting service that specialized in concealing contact information created Web sites for three of the six customers on the same day three weeks ago.

Furth, who, ironically, is the general partner of a fund seeking to finance clean and wholesome family movie production [15], declined comment on why he hired Lebed. He said his remarks on Whitehouse “speak for themselves” and maintains that he “has a hunch short-sellers are paying her off.” He said he was “exercising his constitutional rights to free speech” with respect to Spongetech and its prospects, and remains a proud owner of its stock. Whitehouse declined comment on Furth or his remarks.

Furth may want to save some of his vitriol for the courtroom, where he has a few legal entanglements [16] of his own [17]. He declined comment on the legal proceedings.

Another thing that becomes clear is that Spongetech’s financials are head-scratchingly implausible. Five customers who no one seems to be able to definitively locate comprise the majority of Spongetech’s sales which, according to the company, are slated to come in around $50 million for this year, with an estimated $11 million profit. Not bad considering that last year the company did $5.63 million in sales and $1.24 million in profit. This year’s totals are estimated, it should be noted, because their auditors resigned under a cloud of accounting sanctions [18], which will delay the release of Spongetech’s annual report. The new auditors also have had some scrutiny from accounting regulators, although Deloitte & Touche is slated to take over after the current annual report is released.

The first problem the skeptical investor should have is the explosive trajectory of revenue growth. Sales grew almost nine-fold without any meaningful sales from Wal-Mart [19] (WMT), Target [20] (TGT), AutoZone [21] (AZO), and Duane Reade (Spongetech does sell products on CVS.com, but they are discounted 50 percent). Direct sales, at least as of the 2008 annual report, weren’t so hot either, with 2,400 kits being sold for just under $38,000 over the previous four years. Without the Western hemisphere’s largest mass-market retailers, and little in the way of direct-to-consumer sales, how does the company accomplish this growth?

The second problem is that Spongetech is not converting any of this unprecedented sales growth to cash. As the order flow now would appear to be in the millions of units, and without any bank or debt financing in place, it’s not easy to see how it can afford to make and ship so many sponges.

For the nine months ending on Feb.29, the company booked $4.9 million in net income yet used $170,000 in cash, leaving it with a paltry $34,570 in the till.

The culprit for Spongetech’s weak cash position is the $14 million in accounts receivable balance as of the last quarterly report, but this misses the broader point: Even with so many sales being done overseas — the five customers who cannot be tracked down are all based abroad—some of this balance should be paid out and converted to cash. But it’s not: For the six months ending in November 2008 (the company is on a May 31 fiscal year), the accounts receivable balance was more than $10.8 million.

If someone really is buying all of these sponges abroad—despite a marketing effort that is 100 percent focused on the American consumer—the company is stretching out their payment cycle way past the standard 30-day, or even 90-day, cycle. Spongetech is not General Dynamics [22] (GD) or Intel [23] (INTC), so it can’t access overnight funding markets when its customers' checks are caught in the mail.

I called and e-mailed the company and its public relations firms—Lippert Heilshorn, which resigned from the account late last week, and the Dilenschneider Group—and heard back only from Dilenschneider’s Andrew Osterland. Via e-mail, he said Spongetech’s lawyers retained his firm only to help with one press release and to address the concerns raised in the New York Post stories. An e-mail was also sent to Steven Moskowitz, the company’s CFO, but no substantive reply has been received.

So, since I live near Spongetech CEO Michael Metter, I stopped by his lovely Greenwich, Conn. house on Saturday afternoon for an impromptu chat. A gruff, bald fiftysomething man came to the door and insisted that Michael Metter was not home. When I showed him a picture of Michael Metter I had printed from the Internet and pointed out that he looked almost identical, he became irritated. He refused to answer questions about the SEC investigation, the Post articles, or Michael Metter’s background as the head of a penny-stock boiler room [24], insisting that “Metter is not going to do any interviews.”

When I noted that he sure knew a lot about Michael Metter and his thinking, he walked away.

As I left, I knocked on his window and said, “Hey, Mike, can I leave my contact info?”

He turned around and said, “Sure.” I’m still waiting to hear back.

Roddy Boyd is a writer living in Connecticut.

http://www.thebigmoney.com/articles/recycled/2010/05/05/spongetech-all-wet?page=full