If you were reading the SmallCapNetwork newsletter a year ago or more, then you’re already familiar with SpongeTech Delivery Systems (SPNG) and Applied DNA (APDN) – two names we’ve been watching for a while now, biding our time in anticipation of a point where their respective stocks start to reflect the company’s potential. Well, Applied DNA shares are up 70% year-to-date, and SpongeTech shares are up 225% for the week. It’s about time; you can say you “knew them when.”

Actually, it may be a tad premature to pop the champagne bottles just yet. These are great moves (and fully deserved in most regards), but you don’t want to take off your trader’s hat just yet.

If you got into SpongeTech at any point in March, we suggest you go ahead and take short-term profits – you’ve definitely got them. The stock’s been hot lately … perhaps a little too hot for this rally to be permanently sustained.

If you’re in SPNG at a higher price (pre-March), you may be in the hole or about even. Be forewarned this thing may go lower again before it goes higher again, so don’t blindly expect sunshine and roses from here on out.

That said, if March’s sales results are an indication of what to expect going forward (and I think it is), then this is now a profitable $100 million company. And it’s not a fluke either – SpongeTech has been growing the top and bottom line (as they said they would) for six quarters now. Dilution or not, shares are worth more now than they were then.

And there’s the rub, this concept of worth. It has been for more than a year. Just because a stock “should be” worth a certain price doesn’t mean it will be. That’s why I suggested leaving your trader’s hat on a while longer – there’s been a long disconnect between SPNG’s value and SPNG’s actual price. Maybe the recent jolt solved the problem. We’ll see.

With that understood, we think based on current sales and projected revenue, SpongeTech’s stock is actually worth about 20 cents per share. Will it get there? That’s a great question. We’ll just say the last three days have jump-started the best attempt we’ve seen so far.

As for Applied DNA, this stock trades more on future potential than current results. That’s fine, though it completely changes your approach. This particular issue requires a bit of a chess match – what will the market be thinking about Applied DNA and its news in the near future? Since the chart can often clue you in as to what’s coming, we’ve been watching APDN’s chart as much as we’ve been reading its news.

That’s what got our attention in February…. a rally out of nowhere, and on strong volume. Of course APDN pulled back a bit, but it was low-volume selling. Since then the stock has made a partial recovery.

APDN is still a trader’s stock more than an investor’s stock, but it’s at least proving to be trade-worthy. Perhaps this is an omen of good news on the horizon. In the meantime, the bears aren’t putting up a fight.

Anyway, we just wanted to remind all of our veteran fans about these two tickers, and present them to any newcomers. We’ve been following both companies for a while, and it looks like the effort could finally start to pay off.

You need this kind of ongoing analysis and follow-through to get the most out of the micro-cap market, and you’re not going to get it anywhere else but through our free e-newsletter. Sign up today, and we’ll let you know when to get in and out of SpongeTech Delivery Solutions (OTC: SPNG), Applied DNA (OTC: APDN) and all our other micro cap picks.

I swear I’m not making this up. For all you who jokingly referred to the small cap company SpongeTech (SPNG) as the cartoon character SpongeBob (SpongeBob Squarepants), well, you may not have known how right you’d eventually be. As of today, SpongeTech is licensed to create a SpongeBob bath sponge. Like all of SpongeTech’s sponges, these children’s bath sponges are pre-loaded with soap…perfect for kids and easy for parents.

Yes, I promised to drop this company, and I will. I just thought this was too good to not mention. If there was ever a more appropriate product/licensing tie-in, I can’t think of it.

Frankly, I think this is one of the very first marketing venues I would have tried to tap. SpongeBob is huge; the cartoon attracts 70 million viewers every month. (And I admit it…I occasionally get roped into being one of those viewers by my two nephews. It’s not a bad show actually.) The target customer is the same for both the show and the sponge…2 to 5 year olds.

I wonder if this product line could be the one that really puts the company on the map. I can’t wait to see the product - should be pretty hilarious.

There’s also a ‘Dora the Explorer’ and a ‘Go Diego Go!’ sponge on the way, but those clearly don’t have the same brilliantly-ridiculous charm that you get when you turn a talking, cartoon sponge into a real, functional sponge.

I’ll see if I can get a picture.

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Not to keep dwelling on something we put to bed a couple of weeks ago, but you may be interested to know that small cap company SpongeTech Delivery Systems (SPNG) has raised its 2009 revenue forecast from $35 million to $40 million. The announcement was prompted by significant orders from new customers.

Concerns had been expressed that SpongeTech’s customer base was limited to two big ones, and really only three significant buyers. Adding some new ones will help stave off some of that isolation risk.

The stock seems to be responding a little, though it’s still not even challenging last week’s highs. Nothing new there. On the other hand, it’s been tough to distinguish between a stock’s organic weakness and the market’s overall bearish tide.

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I kinda’ wish I would have waited until today to officially end our coverage of micro cap stock pick SpongeTech Delivery Systems (SPNG), though I’m not entirely sure it would have mattered. CEO Michael Metter sent out what has become a fairly routine letter to shareholders. Once again, the company’s growth is mind-boggling. Yet, once again, the market doesn’t seem to care.

All the same, since we’re the ones who stirred the pot a little over a year ago by suggesting it, we’ll wind down our coverage of this micro cap stock by giving the company the next-to-last word. (We always get the final last word.)

Here are some of the highlights from the letter:

• The company is on pace to do about $11 million in sales during their fiscal Q2 (which they’re in now). They did about $5.5 in fiscal Q1, and about $4.0 million in last fiscal Q4.
• They still expect to do about $35 million for the full fiscal year.
• Earnings in Q2 will be equivalent (on a percentage basis) to prior quarters. Their net margin in Q4 was right at 30%, and about 18% in Q1. So, we’re assuming their net this time around will be $2.5 to $3.0 million.
• They’ve got a lot of new products and new venues yet to be tapped.

Our take? A year ago we would have been pleasantly stunned at any company’s ability to double revenues from one quarter to the next. However, we’ve seen big growth repeatedly from SpongeTech, and the stock didn’t budge once. The swing to a profit (a nice one at that)? Didn’t matter - the stock still didn’t budge.

The issue was two-fold, though each fold was related.

First, the market just couldn’t get past the dilution; nobody realized the dilution was more than worth it (i.e. the P/E and P/S got wildly lower).

The second issue was just the company’s lack of communication regarding said dilution. The management team just let investors find out about the dilution the hard way…by letting them stumble across it in the 10Q.

One or the other issue can be overcome. When you have to overcome both though, well, let’s just say I’m not entirely surprised the stock suffered.

Still, as we finish the final chapter on the SpongeTech story, I’ll repeat what I said a few days ago - this is one of the strangest occurrences of ‘undervalued’ that I’ve ever seen. I had faith that the market would eventually ‘get it’. And, they still might. They haven’t yet though.

As it stands right now, the forward-looking P/E is something like 2.16, and the forward-looking P/S is around 0.52. Just amazing. I have no reason to doubt they’ll get the results they’re looking for either; they’ve met or exceeded every forecast they’ve made since we’ve been covering them.

Another time and another place, SPNG may have been a monster winner. If you’re still holding it, I don’t think you’re crazy. We just have to move on (the site) to make room for some other ideas.

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We were surprised by how little response we got regarding Saturday’s thoughts about SpongeTech’s (SPNG) potential privatization. Maybe it was because the market was going to hell in a handbasket. Or, maybe it was just because we had no evidence or facts to back the idea up - it was merely an idea. Either way, we finally got a response back from a reader who’s been thinking about it. Since it’s a discussion worth putting out there in the public, we will….

Sir,

Concerning Spongetech, does the management not already control the stock/company? I believe they gave themselves the majority voting power/control in the July 8K:

“the Company agreed to issue an aggregate of 4,000,000 shares of Class B Stock to Mr. Moskowitz. Such Class B Stock is entitled to 100 votes per share on all matters for each share of Class B Stock owned”

My only concerns with the stock is if the big AR will be collected from last quarter, if a bank line to fund operations can be achieved to eliminate future dilution and the seemingly constant manipulation of the stock on the market through German exchanges and within OTC market. The volume has certainly been interesting recently as the price per share has dropped yet Accumulation/Dist line has gone up.

A new concern of privatization has surfaced with me too. As a shareholder of course, I dont want the company to be taken private now. It would be stealing the company away from me as I have invested for a year, been diluted to help grow the company, but have seen no Return on Investment (as far as the stock price is concerned). The company valuation in my book, is worth at least .10 a share (even if a $50 mil market cap) if not more based on future probable growth. As you have pointed out, it is definitely undervalued here. Please do NOT give the company any ideas about buying the long term shareholders out for pennies when this stock ’should’ be 25 cents (if not more) in the not too distant future.

Looking foward to a reply from you.

Thanks for the e-mail.

Yes, management already had a controlling interest in the voting stock, one way or the other. They didn’t really need to add any more voting shares in July, so it didn’t matter at that point. Still not sure why they did, but whatever.

I hear what you’re saying about actually collecting on that nice AR (accounts receivable) line. However, they’ve had a nice, fat AR line for a couple of quarters now, and haven’t seemed to have a problem collecting yet. So, I think we’re ok there…

I agree - if they can get some cash on hand and stop selling stock to finance growth, that would be huge. That’s the story I’ve been telling for close to a year now … as the company has continued to pile on dilution. (Geez.) Maybe the end of it is near though - they now seem to have more cash than ever before. Only the next 10Q will really tell us about more dilution, or lack of it. I assume nothing until then.

As for the manipulation, the more I think about it, the more I don’t think the shorts and the naked shorts are killing this stock. I just think the stock can’t get traction. That’s more market-related than company-related. Stinks. However, I do think Metter’s wrong on that matter. We’ll see. One way or the other though, this stock should be trading higher than it is.

I also noticed how the AD line was climbing while the stock was falling. That can persist for a while, but it’s lasted too long now. If it was going to ‘get right’ based on buying volume, it should have by now.

Don’t worry - I don’t think I planted any privatization seeds with the company they weren’t already thinking about. The rumor has been batted around before; it just seems more plausible now. That’s why I brought it up.

I’m with you on this thing being undervalued. SpongeTech is one of the few companies actually getting great results right now, and it just hasn’t paid off for investors. As bad as the dilution has been, the benefit has been even better. The market doesn’t get it though. So, even though we’re ‘right’, it doesn’t matter. I don’t mind losing money when I’m wrong about a company. But when I’m right and still lose? Irritating.

The only thing I can say is if the company does try to go private, hold onto your shares for dear life. They’ll probably be able to pay a nice premium, and I suspect current owners will be able to hold out for something well above five cents. That’s still a relatively big ‘if’ though.

In the meantime, I remain cautious but optimistic. I’m not buying any more, but I think SPNG could eventually take off if the market can get over its bigger problems.

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Well, I’m not entirely surprised to see this morning’s letter from SpongeTech (SPNG) CEO Michael Metter. (We may have even helped prompt it.) It was a follow-up letter to the recent 8K, in which we learned more about the stock-as-collateral loan from RM Enterprises. My take? Metter answers some of the concerns by making a good point, but other questions still aren’t answered.

In the company’s defense, the stock is restricted, so it’s not going to be sold anytime soon. That’s good for current owners. I’m not sure how much longer it’s restricted (I think the issue dates are staggered), but I think Metter and the management team do recognize that if they do sell it, it will likely drive the price under what they paid for it…..which was something around 1.9 cents. That’s a plus for shareholders.

The letter still doesn’t answer the question about why stock had to be put up (newly issued, no less) as collateral for the loan. Why not just a regular debt loan? If it’s going to be repaid internally, what’s the difference?

He also pointed out that the odds of them getting a bank loan were nil. No argument there - that’s pretty much the case with any upstart. I have no issue with that fact.

One thing that’s been obvious but so far unstated….for as much dilution and discounted stock purchases - potential or otherwise - we’ve seen, the guys running the company are putting up and risking their own money. If it were someone else’s money, I’d be completely unimpressed. They’re putting their money where their mouth is though.

Still no explanation yet on authorizing the additional 400 million shares. As I mentioned before, why do it if you’re not going to need it?

Bottom line? The question is simple - will the per-share value be greater with the benefit of this dilution, or would we have been better off without dilution of the per-share value, knowing that sales would have been considerably weaker? (Which is the lesser of two evils?)

My math says just accept the dilution and the uncertainty of the stock buy-back, as it’s still a better reward than no growth (which has been funded by the dilution). I’m still not wild about it, but you have to keep the bigger picture in mind.

The only downside I see is that the market’s probably not going to be interested in being a net buyer of SPNG until some of these potential dilutive forces are taken off the table (i.e. RM’s stock is bought back). That makes this a long-term idea, which is fine since they’re also going to be doing $30 million in sales over the next 18 months. This should be a long-term idea.

Here’s the letter.

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Say whatever you want about their fund-raising and stock issuance, but you can’t deny SpongeTech Delivery Systems (SPNG) is selling the living daylights out of their product. With our last look they had $30 million in orders; now the total’s been cranked up to $34.2 million (excluding any delivered/booked orders this past week).

The customer was the Dubai Export Company…a prior customer of the car wash sponge. This $4.2 million order is their third, and biggest, yet. Most of the order was for more auto wash sponges, but a few household cleaning sponges were requested as well.

The third order from this company, and each on is incrementally bigger? Hmmm. Ya’ think maybe that’s a sign of growing demand? I do.

Don’t hear me wrong. When I look at the whole capitalization thing and how RM Enterprises - also managed by SpongeTech’s management - happens to be the biggest shareholder, coupled with the deep discount they got on their shares, I have to scratch my head. I don’t like dilution and disparity. Who does?

On the other hand, I can not and will not deny this….SpongeTech is making good use of the funds they’ve raised. More specifically, they’re generating more revenue than they’re spending on the effort. Margins have always been good, and the ROI on marketing has been just as solid. So, I have little (ok, no) doubt we’ll see profits once again when we finally get last quarter’s numbers.

Dilution? Yeah, yeah….I’ll grumble with you. I’m also looking a the bigger picture though - the company is profitable. If my post-dilution shares are more profitable than my pre-dilution shares, they can dilute all they want. That’s the overarching point/question I hope we’re all keeping in mind.

In any case, I’ll remind all of us again that SpongeTech has sent a steady stream of this ‘new’ and ‘large’ order news over the last few months. They’ve got a back log (12 to 18 months) of $34 million, but three quarters ago did about $260K in sales. You’re in their ‘growth’ stage. All things weighed fairly, I still really like this opportunity.

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Not that CEO letters to shareholders are ‘news’ events, but sometimes you really do get some good information from them. SpongeTech’s (SPNG) CEO Michael Metter wrote such a letter today. I’m not going to rehash the typical PR hype, but there were a couple of things I didn’t know that I think you should know too. They’re nothing earth-shattering, but could potentially change your overall opinion.

1. For the first half of the current (first) quarter (6/1 thru 7/15), they did about $2.4 million in sales. They’re on pace to do $5 million in sales for the quarter (which ends on August 31st). Revenue is getting better each quarter. You may recall they expected to report $3.8 for Q4 of last year (which ended on May 31st). We don’t have the official Q4 numbers yet, but Q1 is on pace to be significantly better than Q4.
2. The current sales backlog (confirmed orders but no revenue booked yet) now stands at $30 million….which was pretty much what I figured back on the 10th.
3. For every dollar they spend on advertising, they’re getting $1.60 worth of sales. That’s pretty strong, and a key point worth remembering. The data reprises one of my (and your) long-standing contentions about SpongeTech…if they’re going to sell stock to raise marketing funds, is the benefit going to more than outweigh the downside? Now we have a rough idea, though I don’t think the question is completely answered. Dilution has been heavy, but did dilution devalue the stock by the same 60% that those dollars benefited the stock? Personally, that’s not a rate of return (the upside compared to the downside) I’d be satisfied with, but…..
4. What if the sales created once by the marketing effort also prompted repeat business that didn’t require any marketing (or dollars) to generate? We know that 70% of sales over the web are re-orders. What if 70% of non-web customers created by the commercials also end up being repeat customers? Does that mean the company is actually getting $2.72 worth of revenue benefit for every marketing dollar spent? With that scenario, I’m significantly more enthused.

The letter had more, but I’ll let you read it for yourself. Just click here to read Metter’s comments to shareholders.

As for my take, numbers 1 and 2 are what I expected. Numbers 3 and 4 really point to the issue shareholders are grappling with now. Read my other blog entry for all those details; I can summarize it here very simply - the company seems to be focused on growing the long-term business, so much so that the short-term books can be scary to investors.

That’s why we’re at an inflection point with SPNG. If you’re an investor for the long-haul, no biggie….you have to spend money to make money. If you’re looking to get rich in a short period of time, it’s not likely to happen.

There’s never been any question of them getting bang for their marketing buck right now. The data verifies that. The million dollar question is, when will SpongeTech stop issuing stock to finance growth? I see it happening, but I don’t know when. When they do though, I can see the value being suddenly ‘unlocked’, and all the things they’re doing well will start getting traction.

I’ll wait, but I’m not holding my breath. Timing really is everything.

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Odds are you’ve already seen this morning’s letter from SpongeTech Delivery Systems’ (SPNG) CEO. Good stuff, as usual. I think much of it was expected boilerplate verbiage, with several key details added in. I learned a couple of new things that may help me evaluate the company.

However, I doubt many - if any - of you saw Monday’s 8K filing with the SEC. I have my watchlist set up to alert me whenever anything is filed, so I caught it early then. In my opinion, this filing was just as important (if not more important) than the letter. Besides, I find the best tidbits in the small print. So, I wanted to discuss the 8K as much as I did the letter. (The letter is discussed in a different blog entry.) 

While I’m always open-minded and optimistic, I’m always honest and objective too. That’s the whole basis of this site and our newsletter - capitalize on the good, and avoid the bad, but be able to spot the difference. This is my honest and objective view of the filing…

I have to confess, the 8K caught me a little off guard. That’s not to say I’m dumping SpongeTech - quite the opposite. But, to say I’m displeased would be an understatement….there’s a lack of transparency that’s making it tough to figure out just how well things are going on a per-share basis. However, nothing changes about the things they have done and are doing very well….which is ramping up revenues and profits. As such, I’m torn about what to say or do.

Here are the key points from the 8K:

• In the first half of the year, SpongeTech issued 267 million shares of common stock to RM Enterprises (at the end of the first half of the year, there were 400 million shares outstanding, so this is most of them). Needless to say, RM is by far the biggest shareholder. RM also happens to be managed by the same guys running SpongeTech. However, the sale of those shares to RM also raised $4.9 million.
• The previous limit of 400 million authorized shares is now 800 million. 750 million are common stock shares, 40 million are preferred, and 10 million are the new class B shares. Class B shares have 100 votes per share, versus the one vote per share the common stock gives their owners. Other than that, they’re basically the same as common shares with one exception…..they can’t be transferred to someone else not authorized by the company. All 10 million class B shares have been granted to three people: two in company management, and the third who is a consultant.
• The company’s different products (Puddle Pals, Auto Wash, Pet Sponges, etc.) are now each their own subsidiary, wholly-owned by the parent company SpongeTech. This does nothing to affect performance; they’re just shells to achieve a legal objective.

I can deal with RM being a majority shareholder. In fact, SpongeTech is authorized to buy those 267 million shares back at the price paid for them ($4.9 million). Maybe they will. I can also deal the six subsidiaries, since that really doesn’t have a fiscal effect.

What I’m trying to get my arms around is RM Enterprise’s role, and the additional 400 million shares recently authorized.

Well, after giving it some thought, here’s what I came up with.

I know the sale of stock to RM concerns a lot of you. It would concern me too, if I hadn’t done the math, and if RM’s folks didn’t have money on the line just like everyone else. They’re investors too though, and on the same side of the table as everyone else. The issue I have is the discount they got - they only paid about 1.8 cents per share, where you and I had to pay somewhere between 2 cents and 5 cents. I’ve seen discounts before, but geez….

The one thing on that front I’ll be curious to see is whether or not the company will actually buy back those 267 million shares they’re now authorized to. I distinctly remember SpongeTech saying this would happen way back when RM started buying them, so it’s plausible. My question is, if they’re going to buy those shares back, what’s the need for the extra 400 million? Just buy RM’s back and put them in the treasury.

That said, SpongeTech’s word is a little tainted with me. We were told no more dilution, and then they authorized 400 million more shares. Bear in mind ‘authorized’ shares doesn’t mean ‘issued’ shares. Maybe they just chose to authorize more as a precaution for the unknown. It makes me wonder though.

So, my bottom line is this….I like this company and its progress. I still don’t mind their rampant fund-raising by selling shares, because they truly are getting more out than they’re putting in. However, I don’t like the shell games, particularly when they’re not disclosed until after the fact. It makes it near-impossible to peg a per-share value when there’s not much transparency. I don’t think it’s dishonest - it’s just sloppy and a little insensitive to shareholders.

I was prepared to hammer the company on Monday following the 8K, but that wouldn’t have been fair. After thinking about it objectively and cooling off, I still encourage everyone to weigh the good against the bad. I’m still not happy, but I do think there could be a point in time when the company will stop financing its growth by selling stock. I was just hoping that would be now - not later. It’s killing investors in the meantime.

Personally, I wouldn’t bother getting out of a position, but I sure wouldn’t be a buyer until some of these issues are addressed.

OK, so we may not see anybody from SpongeTech Delivery Solutions (SPNG) accepting an Emmy anytime soon, but that wasn’t the point. The company wanted - and got - exposure. Of course, getting publicity is nothing new for this small cap company (and one of our small cap stock picks); they’ve been doing that for months. What was new his time around was the audience who heard the message. SpongeTech’s auto wash sponges were featured on LifeTime’s “The Balancing Act”.

The television show is a magazine-style production featuring, over the course of a half an hour, a handful of ways to live a better and easier life. Obviously a one-stop solution for washing and waxing your car is easier than finding a bucket, soap, and wax each time you want to give your vehicle a bath. So, it was a natural fit for the venue.

I’ll confess…..though the Lifetime channel really and truly is ‘television for women’, I watched the clip early this morning. It was a good segment. Viewers saw the sponges in action, which the company had donated for a charity car wash. In other words, it was great publicity in front of an audience that probably hadn’t seen the product yet.

I’m still of a mercenary mindset though - the ultimate benefit is more revenue. The website and ordering information was also cited during the segment. (Cha-ching.)

Then I had thought as I was watching this so-called ‘television for women’. I think women may be as receptive to all-in-one sponges as guys are….if not more so. Let’s face it - guys can be stubborn. Women tend to be more sensible and efficient. It’ll be curious to see what kind of response they get to the show, and if it generates a wave of orders. I think it will.

You can watch the clip yourself on the Lifetime “The Balancing Act” site, or eventually I think you’ll be able to view it from the SpongeTech site. It lasts about five minutes.

If for some reason you missed yesterday’s big news about the $4 million order for SpongeTech’s yet-to-be-launched tub and tile sponge, check it out. You may also want to know the company has officially launched their pet-bath sponge. You can order it online as well. I suspect it will follow the same success path the car wash sponge did.

Yep, things are going very well for this small cap pick. Now if we can just get the stock past 5 cents once and for all….

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I’ve generally tried to stay away from using the word ‘juggernaut’ to describe a company’s performance. It just sounds a little goofy to me. However, I have to call a spade a spade - that’s truly what bulletin board company SpongeTech Delivery Systems (SPNG) is.

When we first started following the company in November, the 12-18 month sales backlog was around $14 million. Now I estimate the 12-18 month backlog is in the neighborhood of $30 million. The current market cap? A mere $9.4 million…and they’re profitable.

The latest bump up in future revenue was announced this morning. SA Trading Company has ordered $4.1 million of the yet-to-be-launched tub and tile cleaning sponge. I guess that answers the question of whether or not the new product line will be well received. The SA Trading order will be delivered in January, while the retail version of the product will debut in the U.S. sometime in mid-2009.  

As for my math, we learned in early June the backlog was $27 million. Adding today’s $4 million to the mix would lead you to a backlog of $31 million. I tacked on another $1 million in orders (the aggregate of the smaller ones we didn’t hear about). Then, I subtracted $2 million or so for any sponges that were delivered over the previous five weeks. It’s an estimate, though I believe a fair one.

The bigger-picture point is, however, SpongeTech’s revenue is still picking up steam. And, when they enter the $7 billion market for household cleaning products with a unique and affordable product (the tube & tile sponge will cost around $4.99), I’m looking for even more acceleration. Frankly, as compelling as the auto-wash sponge is, I think the tub and tile sponge is where the real money is going to be.

Just a little hypothetical math here….if SpongeTech’s home cleaning sponge - branded as ‘Oh So Clean’ products - can capture a mere 0.5% of that market, that’s still $35 million annually.  Now combine that with the success of the car wash sponge, the likely success of their children’s ‘Puddle Pal’ sponges, and the potential of their recently-launched pet bath sponge. I think an annual revenue estimate of $75 million is low.

What kind of growth is this going to represent? Uncanny.

Just for perspective, SpongeTech expects to report revenue of $3.8 million for the quarter ended on May 31st. The quarter before that, they did $1.3 million in sales. Before that, quarterly revenue totaled up to $331K.

Or to say it another way, the company is still in the very early part of its high-growth phase….which is the exciting part to me.

I mentioned above the market cap was only $9.4 million. Just to explain why that’s such a big deal (almost to the point of being absurd), let’s just conservatively say the 12 month projected revenue is $20 million. I think that’s a bit low, but you get the idea.

With the average price/sales ratio for S&P 500 stocks currently right around 2.0, you could justify a market cap of $150 million for a company doing annual sales of $75 million. Folks, if SpongeTech is on track to only do $20 million in sales over the next twelve months, the market cap should be somewhere around $40 million with an average P/S of 2.0. In that line of reasoning you could argue the stock is only trading at 1/4 its potential value. At a full, normal valuation based on projections, the stock should be priced somewhere around 20 cents.  

Of course, the ‘if’ is the crux of the matter….at least for some investors. As for me, I personally have no doubt they’ll be doing the kinds of numbers they’re expecting to do. I’ve just seen too much growth in the past eight months to not expect it. From $331K three quarters ago to $3.8 million during the most recent quarter? And, the company is still adding capacity as well as product lines.

I’m not into table pounding, but I’ll make an exception for SpongeTech.

I don’t think the market is going to sit back and watch this company continue to inflate the top line at a triple-digit growth pace, grow the bottom line accordingly, and also let the stock linger at a ridiculously low price.

Along those lines, the stock’s big story remains the 5 cent mark. It seems like we’ve looked at this a dozen times, but for good reason. I think once the resistance at 5 cents is crossed once and for all, the stock will start to draw a crowd…..for technical as well as fundamental reasons. There’s a minor resistance level at 5.5 cents. Truthfully though, I’d rather be in a trade before such a breakout. I can see this thing surging in a blink of an eye.

SPNG remains one of the best ideas I think I’ve seen in a long time; the company is getting it done, and more. The stock, however, has yet to be driven up. I think it’s coming though, based on the valuation and growth measures I looked at above. What else could you ask for in a small cap investment?

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Did you see it? Did you see where our bulletin board stock pick SpongeTech Delivery Systems (SPNG) touched new multi-month highs today? OK, you probably didn’t. Visually, it’s almost imperceptible on a chart.

The stock hadn’t traded above 4.9 cents in months, though it had reached that high a handful of times in recent weeks. Today it actually reached 5 cents. I know what you’re thinking…it’s only a tenth of a cent. But hey - when you’re talking about a true penny stock, that’s a big deal.

On the other hand, SPNG didn’t stay there; it’s back to just under 4.9 cents now. But still, the ceiling is starting to crack.

The real story is still volume…which is also the reason I think breaking past 5 cents is inevitable. We’re gradually seeing accumulation bars (the green volume bars) get taller. At the same time, the bearish (red) volume bars are pretty short.

Bottom line - 5 cents is the line in the sand. Keep this one close.

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An e-mail we received today reminded me to remind all of you that we invite any and all inquiries. Our focus is small cap stocks, but if there’s a burning question all of our readers can learn from, send ‘em on. You can send us an e-mail, but if it’s just as easy, you’re always welcome to post a response to any blog entry. We’ll move it to an appropriate category, if need be. In the meantime, here’s today’s question about our coverage of small cap company SpongeTech (SPNG)….

Hi,
 
I’m an independent investor and find you blogs on Spongetech very interesting.
 
I had a few questions that I hoped you might be able to answer:
 
1) do you know the current shares outstanding and float?  It appears they’ve gone up about 400% since the end of last year?
 
2) based on their announcements, it looks like they sell their $19.99 kit for about $11.00 to distributors?
 
3) do you know their production capacity?   I understand they have a new warehouse, but was wondering how many units that can fulfill each quarter?
 
Thanks

Thanks for the question. No fanfare here - we’ll just answer them as straightforward as possible, and in order.

1. No, all we have is the same information you have, which is from the last 10Q. We’re showing 196 million shares outstanding. I’m not sure about 400% more from last year, but we do know they’re issuing shares to pay for marketing efforts.. At first I wasn’t a big fan of the practice, but I have to stay they’re making more per share than they’re diluting. So, I don’t have a problem with it. Besides, the market cap is still ridiculously low.
2. That’s about right. We ball-parked $10 per unit. Their actual cost, however, is much less. I don’t know specifics, but I’d guess less than half of that is their cost. That’s why margins are so good, and when the company really starts to crank it up, I’m looking for huge margins. That brings up a point worth making….retail versus wholesale. Their wholesale per-unit profit is probably around $7, while their retail profit (what they sell via their site) I think is closer to $17. The flipside is, they can sell a lot more via wholesale as opposed to retail. Retail is where the big bucks are though. You need both venues though…for the time being anyway.
3. I don’t know their production capacity, though I don’t think they’re capped yet. They outsource the manufacturing, and I get the feeling there’s no ceiling. The new inventory storage facility is adequate too. If you’re wondering why the big backlog versus current sales, that’s not SpongeTech’s doing….their customers (the vendors) don’t want delivery yet. They want those big quantities later. I don’t see capacity being a problem in terms if that $20 million+ backlog.

Hope that helps.

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Another $4.9 million in orders? Yep - small cap company SpongeTech Delivery Systems (SPNG) just announced a big order from three buyers…two in Central/South America, and one on the east coast of the United States. By my count, that brings the 12-18 month sales forecast up towards something around $27 million for SpongeTech. And, if my figures are anywhere close to being right, this latest salvo starts to put SPNG into radically undervalued territory. 

I estimated a backlog of $24 million in late April. We’ll add today’s $5 million order, and subtract a couple of million bucks for orders that were shipped in the meantime. Paring those future deliveries down to just twelve months rather than eighteen, I’d guess we’re looking at about $20 million in sales between now and May of next year.

Here’s the crazy part - the company’s present market cap is $8.2 million. Using a conservative rule-of-thumb price/sales ratio of 2.0, SPNG is undervalued by about 75%. You could try to argue that sales are nothing without earnings, but SpongeTech is also profitable as of last quarter (and pretty decisively profitable).

The stock is getting traction on the news, of course.

Though we’ve seen unfinished breakout attempts before from SPNG shares, this is one I’m not going to let up on. THE COMPANY IS GETTING RESULTS. The stock will eventually reflect them. As I’ve said several times now, getting past 5 cents is the key. Getting above 6 cents could be enormous.

In the bigger picture, it’s worth noting that the customers placing these orders include Winn-Dixie and Wal-Mart Mexico. I also found it interesting that the east coast merchants ordered 900 free-standing displays to prominently present the sponges in their store. That tells me they see an opportunity with the product, and are getting serious about getting them sold.

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Spongetech Delivery Systems (SPNG) has turned into a marketing juggernaut. What makes this small cap company different than other marketing juggernauts is that they’re spending $1 to make $2….not the other way around. Per today’s news release, now they’re on track to draw revenue from coast to coast (plus Alaska and Hawaii). How so? They’ve got a new television commercial, and it’s playing in all 50 states.

You might recall the company did pretty well with television spots a few weeks ago in select markets. Web traffic and sales both went up to all-time high levels, and the company posted its first decisive profit. In short, the ads (or something) worked. Now they’re taking the same strategy and deploying it on a wider scale. I suspect we’ll see the same proportional result.

If you haven’t seen the ad yet, the word is it’ll be on the company’s website pretty soon.

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We already mentioned this a few days ago, but if you and your 12-or-under kid happen to be heading to Shea Stadium tonight to watch the Mets play the Washington Nationals, you might want to get their before 7:10 p.m.

Why? Tonight is SpongeTech Delivery System’s (SPNG) ‘Promotional Day’. The first 12,000 kids age 12 or under will receive a T-shirt commemorating Shea Stadium.

While any publicity is good, the word is the upside to being a game sponsor has already started. SpongeTech reports their website’s traffic has more than tripled since the radio ads and ancillary mentions - part of the sponsorship package - started a few day ago.

I don’t think that’s why this bulletin board stock pick is perking up again today though, following yesterday’s sleepy session. I think it’s up today because there’s a bigger trend now in place…one where the stock actually reflects its value. (It does happen every now and then ya’ know.)

As before, anything at or above 5 cents would represent higher highs, and possibly a rally effort. If it takes off, a revisit to 12 cents isn’t out of the question. That was our original price target for this small cap stock pick, and we’re sticking to it.

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