Spongetech Delivery Systems, Inc. (fka SPNGQ)

[palmwalk]

The $100m Question About SPNG And Corporate Ethics

ORIGINAL SOURCE:
http://collegestock.com/blog/penny-stock-failures-bad-management-on-wall-street-spng/


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.