Small Cap Network Blog

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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