If you are a risk-adverse investor, turn away now because the company I am about to tell you about is the epitome of a high-risk, high-return investment.  SpongeTech Delivery System Inc. ((SPNG.OB)) is a start-up company specializing in an innovative sponge technology that is poised to revolutionize home and personal cleaning.   The company’s mission is to provide a cost-effective, environmentally friendly alternative to the out-of-date cleaning technology by combining the washing and cleaning agents with the sponge, thus providing a significant cost savings for the consumer and adding a new convenience. These pre-loaded ingredients use specially formulated ingredients that allow multiple uses of the sponge with the application of water and squeezing while keeping the sponges 99% bacteria-free even after multiple uses.

SpongeTech® uses an innovative and patented nonabsorbent “sponge-based” technology which utilizes hydrophilic (liquid absorbing) foam and polyurethane matrices. The Company’s sponges are specially configured with an outer contact layer and an inner matrix, the latter of which comes pre-loaded with specially formulated soaps and wax that are released when the sponge is soaked and applied to a surface with minimal pressure.  The company has formed 5 wholly-owned subsidiaries including: SpongeTech® Auto, Inc., SpongeTech® Pets, Inc., SpongeTech® Health & Beauty, Inc., SpongeTech® Kitchen & Bath, Inc., and SpongeTech® Medical, Inc.  Their most popular products are their Car Sponge, Child Care-Puddle Pals (bath-time fun for children), Uncle Norman’s Pet Sponge, and the Gold Bar Tub and Tile Cleaner.

Revenues Erupt

The company, which was initially formed in 1999 with very limited operations, has taken major steps within the last year as they have begun investing heavily in marketing and have seen their products start to fly off the shelves.  With sales of only $64,000 in the first quarter of 2007 (fiscal year ends May 31), explosive expansion in 2008 resulted in over $5.5 million in sales for the first quarter of 2009, during the three months ended August 31.  The company is poised for more success going forward with $30-35 million in orders already booked through the last nine months of fiscal 2009 with full-year estimates of $35-40 million.

Increasing Exposure

The company’s successful marketing and advertising campaign includes deals with WFAN Radio, the Business TalkRadio Network®, the Lifestyle TalkRadio Network®, SNY Television Network (home of the New York Mets), and the YES Television Network (home of the New York Yankees).  They also have become better known through their advertising on Sirius Satellite Radio’s “The Howard Stern Show,” “Mad Dog Radio Show” with Chris Russo, as well as on NASCAR Radio.  The company has also recently entered into joint-venture with premium event ticket intermediary, First Hand Tickets, Inc.  A newly acquired deal with MGM Consumer Products will give SpongeTech the opportunity to manufacture and market Pink Panther themed products to include a pet grooming sponge and a childcare bath sponge with retail distribution to begin no later than June of 2009.  Another way SpongeTech is trying to grab consumers’ attention is through a a partnership with Nickelodeon and Viacom Consumer Products to market and sell soap and sunscreen-infused sponges for children under the brands of SpongeBob SquarePants, Dora the Explorer, and Go! Diego Go!

Risks Present

The risks are there, however, as with any small company just breaking into the market, especially during a recessionary economy as we are in currently.  Some major risks to highlight include the share dilution as financing activities have been primarily paid for by the company’s stock, although a stock repurchase plan is in the works.  Also, the company is currently supplied by a single manufacturer that operates mostly in the U.S. but does conduct some operations in China.  Also, even as new agreements have been made with companies such as Ace Hardware and Kroger to sell their products, Spongetech’s three top customers for the last quarter accounted for 67.6% percent of sales.

Obviously there are many unknowns out there and the large ramp-up in operations adds many challenges, but the opportunities are present even in this difficult economy.

- Chris Barrella

Disclosure: Author is long SPNG.OB