I have been working on my own "primer" for new investors brought in by Beacon. This is VERY long and there is really nothing new here at all for IHUB regulars (y'all can just skip it or ideally make corrections). This is just a compilation of stuff I have gleaned from public sources. I figured I would post it hear and then post a link over at Yahoo.
WHY I THINK SPNG IS A RAGING TABLE POUNDER
by Wadi Rum
SPNG is a two-part investment -- the fundamentals and the squeeze.
FUNDAMENTALS:
1. They sell high-tech sponges. Until now, they have mostly been selling the auto sponge, but they have a pet sponge, kid bath sponges, kitchen/bath cleaning sponges, sunscreen sponges, and reputedly 2 pharma applications. They just signed deals for the kid sponges with Viacom (Spongebob, Dora, Diego) and MGM (Pink Panther, which is going to be polished up an re-released). They are in Krogers, Walmart South America, Price Chopper. They are advertised on Howard Stern and a ton of sports venues. Rumors are swirling about Petco, etc.
2. They are growing at a very rapid pace. Revs for all of 2008 (which ended May 31) were 5M. In Q1 they exceeded that annual total. Q2 will double Q1 (they have guided for 11M, but they've been doing great on internet sales, the auto show, etc). They have guided for an average of 15M per quarter in Q3 and Q4. And Metter said that 2010 will "dwarf" 2009 based on the deals they have announced and the several deals they apparently cannot yet announce.
3. Net margins are stable at 20 percent. They have said they believe they will be stable through the rest of 09 AND 2010.
4. They are doing a great job collecting their receivables. Between end of Q4 08 (May 31, 08) and end of Q1 09 (Aug 31, 08) they REDUCED their ratio of A/R to revenues. Some posters have said that they have no real buyers. Well, the proof is in this key metric (as well as citings in stores, audits, etc). Their internet sales have especially high margins and are paid for immediately, so I would expect to see further improvement in this ratio, since the internet sales really took off in Q2.
5. Take care to understand the advertising pre-pays and pre-paid production. They have to put cash out the door to get advertising and to get sponges to sell. For some reason, this has mystified some posters. Yes, it is a drain on cash, but then the cash comes in (with a health profit) when they ship. This seems entirely normal to me. Not sure why it has befuddled others.
6. All of the pre-paids to fund such rapid growth has created a need for capital. They said at the start of the summer that they were not going to need more dilution. Well, they did not get bank financing (we're in a credit crunch) and they had amazing deals starting at them, so they went to the well to get the money to keep the growth flying.
7. Where do they get financing? They get it by selling shares to RME, a company controlled by management. These guys have a lot of money (Carter's clothes is a family biz). So, no need for the classic toxic financing. They have issued a ton of shares to RME since May, but here's the kicker: RME HAS GIVEN SPNG THE OPTION TO BUY BACK THE SHARES AT THE ISSUE PRICE AT ANY TIME UNTIL SPRING OF 2010. DO YOURSELF A FAVOR AND MODEL THIS TWO WAYS -- once with the full number of shares (809M) and again with the 660M RME shares treated like a $13M loan. The RME shares are DOUBLY RESTRICTED. They are unregistered and they are covered by the option grants (so that selling would put them in the position of having issued uncovered calls). The RME options are in 2 parts. The first is in the July 8K. The second (for the more recently-issued shares) has been discussed in a PR, but we have not seen this in an SEC filing.
7b. There is some reason to suspect that the company has already bought back some RME shares or converted them to debt or converted them to many fewer higher-priced preferred shares. The company gagged the transfer agent toward the end of October, either to dilute with impunity or to catch the shorts unawares when the share count drops precipitously. I think the latter.
8. 809M was the number as of Oct 15. Maybe it is higher, or maybe it is lower. The company announced that they were nearly done with a 50M share buyback (from the float).
9. If all 1B authorized shares are out there and not being bought back, then we would have revs of 50M in 09, earnings of 10M, and EPS of 1 penny per share. IF the RME shares have disappeared, we have less cash and/or more debt, but EPS is 5 cents or higher for 09... Slap on a P/E of 5 and that would be 10-bagger. When 2010 "dwarfs" this, we could be looking at fundamentals that support a price over 50 cents on a conservative valuation. So, there is considerable value here, even if we never see a squeeze...
THE SQUEEZE
10. I am deeply skeptical of talk about squeezes. However, it appears we have a huge short position. The story I have read is that shorts sold a ton of shares and then approached management. They said they would go away if management sold them the covering shares at a low price. Management did not want to dilute the shares, so they told them to f*** off. Now a year later they are in a position to move decisively.
11. What is the evidence of a short position? Metter has said that the float is under 100M. Care is needed, because there are several non-textbook definitions of float floating around. But 809M O/S minus 660M RME is 150M, of which 50 might have been bought back. So I would say that non-insider shares are probably between 100 and 150M, where I am using the insider positions as of May 31. There is reason to suspect (based on message board chatter) that management has purchased additional shares. They do NOT need to report these, because they file as a 1933 Act company (their assets fall below the 1934 Act threshold).
12. Let's take the higher number (150M shares). Recent 13Gs show that 82M shares of this are held by 2 groups (call them Furth&Friends or FF). Also, a market maker BMAS has NEVER appeared on the ask, and they have purchased 80M for somebody (call them BMAS). Furth has stated in Yahoo posts ("Alfie")that BMAS is NOT the naked short covering. So, we have run out of shares. There are at least 2 more 13Gs in the works -- Alaninvestor's and one that Micro will tell you about (both post on Yahoo). Alaninvestor asked for holders with over 2M shares to contact him -- he got an unverified total of 92M shares. Micro would need to have 40M in his group to file. Alan said that several large holders in FF did not want to participate in the filing. And then there are the family members of management, employees, and the more than 2,200 (TWO THOUSAND) other investors. If the average investor only has $1K worth of stock, that 2,200 translates into another 100M shares plus or minus. Some calculations put the number of short shares at more than 200M -- TWICE the float and several times the shares that are neither insider nor closely held.
13. The shorts could probably cover this if it was just small holders. However, if one allows for some tightly held shares by insiders and family and employees, it appears that two groups (FF and BMAS) EACH HAVE FRICKIN CORNERED THE SHORT.
14. I repeat: 2 groups have cornered the short. Even if the short buys every single loosely held share by us weak-kneed retail stooges, the short still has to sit down at a table with both FF and BMAS to determine what the short will have to pay. Shades of VW and Porsche.
15. So what will bring the shorts to the table? What will make them cover? Well, maybe the company reverse merges into a shell company. Or perhaps a dividend or CUSIP change. Or, maybe they get taken private. Maybe they get bought out. Several posters have been mapping out scenarios. Check out posts by Soapy Bubbles and GeeMoneyDollars on IHUB, for instance. I have no idea what is going to happen. All I know is that the company has gagged the TA (which gives them the ability to make moves on the sly until Jan 16, when the 10Q comes out).
Who seems to have the most reliable info? Well, Doug Furth posts on this board as Alfie. He definitely is in a position to have a lot of good info and he needs to avoid making a bunch of lies. He says he has seen the DTC sheets to get evidence that a short in fact is here. Alaninvestor is in his group. I have mentioned 2 IHUBBERs (Soapy and GMD). Micro (Yahoo) has good info, but is frustrated that management has not moved against the shorts sooner. Snakecorleone is very good (not the very amusing clone who is a hot babe). TTurner does a good job of pulling info together. Carpediem is great on understanding the long-term fundamentals. SirZ has just pulled it all together in a tremendous pair of posts (this is a reply to his). And then there is Reaper, Puppy, Premier, Wrinkles, Joanneg, etc, etc. I apologize for leaving out so many other excellent posters -- the SPNG boards on IHUB and Yahoo are both excellent.
This is all in my honest opinion. 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 honestly believe this stake has a good chance of making me some serious money, 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. I have never spoken with Metter.
Remember, IF they gagged the TA to pull their move together in secret, then they must implement their plan before Jan 16 (or perhaps 15th). So, that would either entail starting soon after Jan 1 or right away. So, I would not take too long to decide.
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