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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