Sports Teams Awaiting Spongetech Audit

SpongeTech sponges
SpongeTech sponges

In the history of sports marketing, there has never been a brand that has gone from zero to everything like SpongeTech, the infomercial sponge companythat is now sponsoring at least 35 sports teams.

Just like the economy had benefited SpongeTech in the form of cheaper commercial time, the economy also allowed them to get into sports arenas around the country as teams were desperate to fill signage space.

They got prime space in Citi Field and at the New Yankee Stadium and in the background for New York Giants interviews on gameday. They bought the practice jersey rights to the Cincinnati Bengals that yielded them more than $350,000 in advertising exposure on HBO’s "Hard Knocks," according to sponsorship evaluation firm, Joyce Julius & Associates. It even got its name onto the court at Arthur Ashe Stadium during the U.S. Open.

Having done a documentary on the informercial business, I was initially skeptical about seeing so much SpongeTech so soon. I had learned that for every $1 you spent on an infomercial, you had to gross $2 in order to stay alive for another week.

SpongeTech might have been able to get deals with teams, but they weren’t free. Their director of marketing Jack Schwartzberg told the SportsBusiness Journal that, in 2009, the brand’s marketing budget was $20 million. That’s an outrageous number for a company that had just announced it would gross $50 million on their fiscal year, which ended May 31.

You can’t possibly get that 1-to-2 ratio if you spend 40 percent of gross on marketing alone. Pre-tax profitability, by the way, was announced to be $10 million.

So it was great that SpongeTech was becoming a household name, but at what cost?

Earlier this month, the Securities and Exchange Commission announced the temporary suspension of trading on its penny stock, which at the time had hit six cents a share, so that the company could answer questions about the accuracy of their auditing practices.

Awaiting the results of the financials from a new auditor will not only be a group of stockholders who are now part of a class action lawsuit against the company and its top officers, but the sports teams that have deals with the company.

One team official told CNBC that it had a multi-year deal with the company that provided for either the team or Spongetech to get out early. The official said that SpongeTech did pay for its 2009 signage, but that the rest of the deal has been canceled.

The class action suit, filed on Friday, seeks to compensate shareholders if the company did misstate their financial information, among other charges. SpongeTech officials have said that the company had a problem with its auditor.

Since the suit was filed, Laurence Rosen – whose lawyer who is representing the plaintiffs -– says he has received more e-mails from people who want to be part of the case than any other case he has ever worked on.

Depending on the information the SEC receives, it can choose to lift the suspension of the company’s shares so that it could trade again next Monday.

SpongeTech officials were not immediately available for comment.

Questions? Comments?