Did SpongeTech Swing to Profit?

Last week I mentioned SpongeTech Delivery Systems (OTCBB: SPNG) was nearing the announcement of their third quarter numbers. We saw a pretty big jump during Q2, but between December 1st and February 28th, even more things fell into place in terms of sales. Based on the forecast and backlog, we should be seeing seven-figure quarters now. 

Well, today's the day we find out of all the efforts are bearing fruit - they announced their quarterly earnings just a few moments ago. At the same time, we'll find out just how much input (expenses) had to be mustered to get the output (revenue) achieved. 

More specifically, we knew the company issued some stock in the previous quarter to pay for the early marketing efforts. We suspected there may be more of the same for Q3. The question was, how much would it take? And more importantly to you and me, would it be worth it? 

We'll look at both sides of the equation today; you can decide for yourself. Please do so though ...I guarantee you it's at least worth a read. 
 

	Just The Facts

OK, here are the basics ....compared to Q2's $331K in revenue, this quarter's $1.28 million is huge. For the first nine months of the fiscal year, that totals up to sales of $1.56 million. 

For the Q2 period (ending 11/30), SpongeTech saw a little net income, and for the six month period (Q1 and Q2), they saw a slight loss ..negligible in both cases. Well, for Q3, net income came in at $188K...their best quarter yet. 

Annualized (though the company is still exponentially growing their top line), that's a revenue run rate of $5.1 million per year - and they're profitable. Moreover, based on this most recent quarter, that 12-18 month backlog of +$18 million now seems more than plausible. 

Impressive? Yeah, I can't deny that - it's an impressive increase. Like I said though, being in business is all about getting more out of the investment than you put in. Keep reading for the other side of the equation.
 

	At What Price? (It's All About the Valuation)

OK, we have to give credit where it's due - SpongeTech's advertising and marketing efforts are indeed driving new business. 

The question we asked last time though was the same one we'll ask now...how are they paying for all the advertising? If they're spending $1 to make $2, then great. Heck, I don't mind them spending $1 to make $1, it that's what will jump-start the revenue machine. The only thing I don't want to see is them spending $2 to make $1 on a one-time basis. (You might be surprised how many companies do just that.) 

In perusing last quarter's 10Q, we found they'd issued 42 million shares to finance the operation - mostly the television commercial. Though as investors it would have been nice to know about it beforehand, we're not naive enough to think they can get something for nothing. The assumption was they'd issue more stock to continue advertising in Q3. 

So, I'll reiterate the primary question here....how much stock issuance did it take to produce more than a triple in the top line in addition to decisive profits? 

According to the filing, the number of issued and outstanding shares is now 193 million. That's more than the 111 million I&O shares reported at the end of November. Just so you know though, that 193 million is less than I expected - they didn't need as much capital as I figured they would. The market cap is still only $6.08 million. 

Part of me can't stand any dilution, and I was fully prepared to get on my soapbox and say so. After thinking about the numbers above though, another part of me thinks maybe I was holding the company to an unrealistic valuation standard. You do have to spend money to make money, and you have to raise money to spend it. 

So, here's the bottom line valuation in terms we're all certainly familiar with ....an annualized P/S ratio of 1.2, and an annualized P/E ratio of 8.08. For reference, the market averages are a P/S ratio of 2.0, and a P/E of 17.9. Maybe the question we should be asking isn't even 'How many shares are issued?', but rather 'Is this stock valued appropriately?' 

As I said early on, I'll let you decide. As far as I'm concerned though, a P/S of 1.2 and a P/E of 8.08 is considerably better than a lot of other opportunities out there - especially when the growth potential is being realized. If the recent surge is a clue, the rest of the market agrees. 

Just click here for the 10-Q.

By the way, note that Spicy Pickle (OTCBB: SPKL) will be hosting a conference call tomorrow ...their first ever. Details are in the press release below. 
 

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