AS FILED WITH THE SECURITY AND EXCHANGE COMMISSION ON FEBRUARY 25, 2005
REGISTRATION NO. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SPONGETECH DELIVERY SYSTEMS, INC.
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(Name of small business issuer in its charter)
Delaware 2840 54-2077231
------------------------------ ---------------------------- -------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
The Empire State Building, 350 Fifth Avenue, Suite 2204, New York, New York
10118 (212) 594-4175
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(Address and telephone number of principal executive offices)
Michael L. Metter, Spongetech Delivery Systems, Inc.
The Empire State Building, 350 Fifth Avenue, Suite 2204, New York,
New York 10118 (212) 594-4175
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(Name, address and telephone number of agent for service)
COPIES TO:
Richard A. Friedman, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
(212) 930-9700
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
(COVER CONTINUES ON FOLLOWING PAGE)
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED SECURITY (1) PRICE REGISTRATION FEE
------------------------------------------ --------------------- ---------------------- --------------------- ---------------------
Units consisting of one share of Common
Stock, par value $.001 per share
(:Common Stock") and one Redeemable
Class A Warrant ("Class A Warrant')
entitling the holder to purchase one
share of Common Stock 8,000,000 $0.25 $2,000,000 $235.40
------------------------------------------ --------------------- ---------------------- --------------------- ---------------------
Common Stock includable in Class A
Warrants 8,000,000 (2) (2) (2)
------------------------------------------ --------------------- ---------------------- --------------------- ---------------------
Common Stock issuable upon exercise of $470.80
Class A Warrants 8,000,000 $0.50 4,000,000
------------------------------------------ --------------------- ---------------------- --------------------- ---------------------
Common Stock, $.001 par value per share 17,259,344 $0.25 4,314,836 $507.86
------------------------------------------ --------------------- ---------------------- --------------------- ---------------------
Total Registration Fee $1,214.06
===================================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(e) under the Securities Act of 1933.
(2) In accordance with Rule 457, no separate registration fee is required.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED FEBRUARY 25, 2005
SPONGETECH DELIVERY SYSTEMS, INC.
UP TO 8,000,000 UNITS CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE REDEEMABLE CLASS A WARRANT
AND
17,259,344 SHARES OF
COMMON STOCK
We are offering a minimum of 2,000,000 units, up to a maximum of
8,000,000 units, on a "best-efforts" basis, at an offering price of $.25 per
unit. Each unit consists of one share of common stock, $.001 par value, and one
redeemable class A warrant. The units are being offered for a period of 60 days,
subject to an extension of up to an additional 30-day period. If the minimum
amount of the offering is not sold within the offering period, investors' funds
will be promptly returned without interest or deduction. Pending release, all
proceeds of the offering will be deposited in a non-interest bearing escrow
account with Continental Stock Transfer & Trust Company, Inc.
We intend to sell the units through our officers, directors or
employees, but we reserve the right to make sales through registered
broker-dealers. If we make such sales through broker-dealers, we reserve the
right to pay commissions to them of up to 10% of the sales price and pay them an
additional non-accountable expense allowance of up to 3% of the sales price.
This prospectus also relates to the resale of 17,259,636 additional
shares, including an aggregate of 11,282,375 shares to be offered by Michael L.
Metter (1,665,000 shares), Steven Moskowitz (2,803,333 shares), Thomas Monahan
(100,000 shares), Frank Lazauskas (3,330,000 shares) and The Rubin Family
Irrevocable Stock Trust (3,391,868 shares), all of whom are affiliates of us.
There is currently no public market for the Spongetech Delivery Systems, Inc.'s
securities. Until such time as a market price for our common stock is quoted on
the OTC Bulletin Board, all of the selling shareholders will sell their shares
at a price of $0.25 per share. Thereafter, they may sell their shares in public
or private transactions, at prevailing market prices or at privately negotiated
prices. We will not receive any proceeds from the sale of the shares of common
stock by the selling shareholders.
YOUR INVESTMENT IN OUR UNITS INVOLVES A HIGH DEGREE OF RISK. BEFORE
INVESTING IN OUR COMMON STOCK, YOU SHOULD CONSIDER CAREFULLY THE RISKS DESCRIBED
UNDER "RISK FACTORS" BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ___________, 2005
TABLE OF CONTENTS
Page
----
Prospectus Summary 1
Selected Financial Data 2
Risk Factors 6
Use of Proceeds 11
Market for Common Equity and Related Stockholder Matters 11
Dividend Policy 12
Dilution 12
Capitalization 12
Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
Business 16
Legal Proceedings 19
Management 19
Executive Compensation 20
Certain Relationships and Related Transactions 21
Security Ownership of Certain Beneficial Owners and Management 23
Description of Securities 24
Selling Stockholders 26
Share Eligible for Future Sale 28
Plan of Distribution 28
Indemnification 31
Legal Matters 31
Experts 31
Additional Information 32
PROSPECTUS SUMMARY
The following summary highlights selected information contained in
this prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "RISK
FACTORS" section, the financial statements and the notes to the financial
statements. As used throughout this prospectus, the terms "Spongetech"
"Spongetech Delivery Systems," the "Company," "we," "us," and "our" refer to
Spongetech Delivery Systems, Inc.
SPONGETECH DELIVERY SYSTEMS, INC.
We design, produce, market and distribute cleaning products for
vehicular use utilizing patented technology relating to sponges containing
hydrophilic, which are liquid absorbing, foam polyurethane matrices. Our
products can be pre-loaded with detergents and waxes which are absorbed in the
core of the sponge then gradually released during use. We have also designed and
started to test market, but have not yet produced or sold, products using the
same hydrophilic technology for bath and home use. We license the rights to
manufacture and sell our products from H.H. Brown Shoe Technologies, Inc. (d/b/a
Dicon Technologies), the holder of the relevant patents relating to the
hydrophilic sponges. We license the rights to manufacture and sell our products
from H.H. Brown Shoe Technologies, Inc. (d/b/a Dicon Technologies), the holder
of the relevant patents relating to the hydrophilic sponges.
Our principal executive offices are located at The Empire State
Building, 350 Fifth Avenue, Suite 2204, New York, New York 10118. Our telephone
number is (212) 594-4175.
OUR CORPORATE HISTORY
We were formed on June 18, 1999, under the name Romantic Scents, Inc.
On June 12, 2001, Romantic Scents, Inc. changed its name to RSI Enterprises,
Inc., and, on October 2, 2002, changed its name to Spongetech International Ltd.
On July 15, 2002, we entered into a stock purchase agreement with Nexgen
Acquisitions VIII, Inc. pursuant to which our sole stockholder, RM Enterprises
International, Inc. received 12,000,000 shares of Nexgen Acquisitions VIII, Inc.
and thereby became its majority stockholder. The transaction was accounted for
as a reverse acquisition using the purchase method of accounting, whereby RM
Enterprises International, Inc., our sole shareholder, retained approximately
63% of the outstanding common stock. Thereafter, on October 9, 2002, Nexgen
Acquisitions VIII, Inc. changed its name to Spongetech Delivery Systems, Inc. On
December 16, 2002, we changed our domicile to Delaware. Spongetech Delivery
Systems, Inc. (formerly Nexgen Acquisitions VIII, Inc.) merged with and into us
so that we became the surviving company. Immediately subsequent to the merger,
we changed our name to Spongetech Delivery Systems, Inc.
We have incurred losses since inception and we expect to incur losses
for the foreseeable future. For the six-months ended November 30, 2004, and the
fiscal years ended May 31, 2004 and May 31, 2003, we incurred net losses of
$17,172, $2,056,526 and $265,517, respectively. As of November 30, 2004 we had
an accumulated deficit of $2,692,210 and a working capital deficiency of
$1,928,152. These conditions raise substantial doubt about our ability to
continue as a going concern.
1
THE OFFERING
Common stock outstanding
before the offering.................... 33,952,636shares.
Securities offered by Spongetech......... Up to 8,000,000 units, each consisting of
one share of common stock and one redeemable
class A warrant. The common stock and the
redeemable class A warrant will become
separately tradable after 90 days from the
initial closing of this offering, or sooner
in our discretion. We will issue a press
release if we determine to allow the common
stock and class A redeemable warrants to
become separately tradable prior to 90
days.
Common stock offered by selling
stockholders........................... 17,259,344 shares
Common stock to be outstanding after
the offering
Minimum Offering......................... Upon completion of the minimum offering
there will be 35,952,636 shares of common
stock and 2,000,000 redeemable class A
warrants outstanding.
Maximum Offering......................... Upon completion of the maximum offering
there will be 41,952,636 shares of common
stock and 8,000,000 redeemable class A
warrants outstanding.
Redeemable Class A Warrants
Exercise Terms........................... Each redeemable class A warrant entitles the
registered holder thereof to purchase, at
any time from the date the warrants become
separately tradable, until ______, 2010
(five years after the date hereof), one
share of common stock at an exercise price
of $0.50 per share, subject to adjustment.
Redemption............................... The redeemable class A warrants are
redeemable by us at a redemption price of
$0.001 per warrant, upon at least 30 days'
prior written notice, commencing on
_________, 2005 (six months after the date
hereof), if the average of the closing high
bid prices of the common stock exceeds $1.00
for five consecutive trading days ending on
the third day prior to the date on which
notice is given.
Risk Factors............................. See "Risk Factors," beginning on page 3 for
a description of certain factors you should
consider before making an investment in our
common stock.
Use of proceeds.......................... We will use the proceeds from the sale of
all or any portion of the 8,000,000 units
offered by us for working capital and
general corporate purposes. We will not
receive any proceeds from the sale of any of
the 17,259,344 shares of common stock
subject to resale by the selling
stockholders under this prospectus
2
Forward-Looking Statements............... This prospectus contains forward-looking
statements that address, among other things,
our strategy to develop our business,
projected capital expenditures, liquidity,
and our development of additional revenue
sources. The forward-looking statements are
based on our current expectations and are
subject to risks, uncertainties and
assumptions. We base these forward-looking
statements on information currently
available to us, and we assume no obligation
to update them. Our actual results may
differ materially from the results
anticipated in these forward-looking
statements, due to various factors.
SELECTED FINANCIAL DATA
The selected statement of operations data for the two fiscal years
ended May 31, 2004 and 2003 and the six months ended November 30, 2004 and 2003,
and the following selected balance sheet data as of May 31, 2004 and August 31,
2004 are derived from our audited financial statements included elsewhere in
this prospectus and have been audited by Drakeford & Drakeford, LLC. The
following selected financial data have been prepared in accordance with
generally accepted accounting principles. The financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto appearing elsewhere in the prospectus.
The selected statement of operations data for the two fiscal years
ended May 31, 2004 and 2003 and the six months ended November 30, 2004 and 2003,
(unaudited) and the following selected balance sheet data as of May 31, 2004 are
derived from our financial statements included elsewhere in this prospectus. The
following selected financial data have been prepared in accordance with
generally accepted accounting principles. The financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto appearing elsewhere in the prospectus.
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the For the
Six Months Ended year ended
November 30, May 31,
------------------------ --------------------
2004 2003 2004 2003
---- ---- ---- -----
(unaudited) (unaudited)
Sales $ 0 $ 2,123 $ 1,858 $ 342,019
Cost of goods sold 0 5,136 1,600 299,617
---------- --------- -------- ----------
Gross profit (loss) 0 (3,013) 258 42,402
---------- --------- -------- ----------
Operating expenses
Selling 0 25,052 39,535 55,261
General and
Administrative
expenses 15,030 25,462 2,007,953 241,428
Depreciation expense 2,142 2,750 4,284 10,830
------- -------- -------- ----------
Total operating expenses 17,172 53,264 2,051,772 307,519
-------- -------- -------- ---------
Loss before provision
for income taxes (17,172) (56,277) (2,051,514) (265,117)
Other income and expenses
Interest expense 0 5,012 400
-------- ----- ------ -------
Total income and
expense 0 5,012 400
Net loss ($17,172) $ (56,277) $(2,056,526) $(265,517)
======== ======== ========= ========
Basic and diluted (loss)
per common stock
Net loss per share -
basic and diluted $ (.01) $ (.01) $ (.01) $ (.01)
========= ========= ======== =========
Weighted average common
shares outstanding 18,985,000 18,985,000 18,985,000 18,985,000
========== =========== ========== ==========
3
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Six
Months Ended For the
November 30, Year Ended May 31,
------------- ------------------
2004 2003 2004 2003
(unaudited)(unaudited)
Operating Activities:
Net loss $(17,172) $(56,277) $(2,056,526) $(265,517)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities
Value of contributed officer
compensation 0 0 0 39,000
Bad debts 0 0 0 13,909
Depreciation 2,142 2,750 4,284 10,830
Common stock subscribed in release
of company debt 0 0 526,814 0
Changes in operating assets and
liabilities
Accounts receivable 0 0 15,003 (1,395)
Inventories 0 852 852 48,061
Prepaid expense and other
current assets 0 0 0 118
Accounts payable and accrued
expenses 0 (1,836) (121,404) 94,383
Accrued compensation 15,000 0 1,789,500 0
Income taxes payable 0 0 0 400
Due to related parties 0 15,871 (159,578) 30,949
--------- ------- -------- --------
Net cash provided by (used in)
operating activities (30) (38,640) (1,055) (29,262)
--------- -------- -------- ---------
Investing Activities:
Acquisition of property and
equipment 0 (728) 0 (7,700)
--------- -------- -------- --------
Net cash used in investing
activities 0 (728) 0 (7,700)
--------- ------- -------- --------
Financing Activities:
Proceeds from factor, net 0 13,608 0 (13,608)
Proceeds of note payable - related
party 0 25,000 0 51,500
--------- --------- -------- ---------
Net cash provided by
financing activities 0 38,608 0 37,892
--------- --------- -------- ---------
Net increase (decrease) in cash (30) (760) (1,055) 930
Cash - beginning 50 1,105 1,105 175
-------- ------- ------- ------
Cash - end $ 20 $ 345 $ 50 $ 1,105
======== ======= ======= ======
4
Unaudited Unaudited
November 30, November 30, May 31, May 31,
2004 2003 2004 2003
Balance Sheet Data
Total Assets $ 31,153 $37,205 $33,325 $56,710
Stockholders Deficiency $(1,897,463) $(406,856) $(1,880,291) $(350,579)
5
RISK FACTORS
Our business involves a high degree of risk. Potential investors should
carefully consider the risks and uncertainties described below and the other
information in this prospectus before deciding whether to invest in shares of
our common stock. If any of the following risks actually occur, our business,
financial condition, and results of operations could be materially and adversely
affected. This could cause the trading price of our common stock to decline,
with the loss of part or all of an investment in the common stock.
RISKS RELATING TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION AND EXPECT TO INCUR LOSSES FOR
THE FORESEEABLE FUTURE.
We incurred net losses of $17,172 and $2,056,526 during the six months
ended November 30, 2004 and for the year ended May 31, 2004, respectively. As of
November 30, 2004 we have a working capital deficit of $1,928,152. Because of
these conditions, we will require additional working capital to develop business
operations. We have not achieved profitability and we can give no assurances
that we will achieve profitability within the foreseeable future, as we fund
operating and capital expenditures, in such areas as sales and marketing and
research and development. We cannot assure investors that we will ever achieve
or sustain profitability or that our operating losses will not increase in the
future, which could cause investors to lose the entire amount of their
investment.
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH AN EVALUATION OF OUR PROSPECTS
CAN BE MADE. FOR THAT REASON, IT WOULD BE DIFFICULT FOR A POTENTIAL INVESTOR TO
JUDGE OUR PROSPECTS FOR SUCCESS.
We were organized in July 1999 and have had limited operations since
our inception from which to evaluate our business and prospects. There can be no
assurance that our future proposed operations will be implemented successfully
or that we will ever have profits. Our limited financial resources are
significantly less than those of other companies, which can develop alternatives
to our current and pending product lines in the U.S. If we are unable to sustain
our operations, you may lose your entire investment. We face all the risks
inherent in a new business, including the expenses, difficulties, complications
and delays frequently encountered in connection with conducting operations,
including capital requirements and management's potential underestimation of
initial and ongoing costs. In evaluating our business and prospects, these
difficulties should be considered.
WE NEED SIGNIFICANT INFUSIONS OF ADDITIONAL CAPITAL, WHICH MAY RESULT IN
DILUTION TO YOUR OWNERSHIP AND VOTING RIGHTS IN US.
Based upon our current cash reserves and forecasted operations, we
believe that we will need to obtain at least $500,000 in outside funding to
implement our plan of operation over the next twelve months. Our need for
additional capital to finance our business strategy, operations, and growth will
be greater should, among other things, revenue or expense estimates prove to be
incorrect. If we fail to arrange for sufficient capital in the future, we may be
required to reduce the scope of our business activities until we can obtain
adequate financing. We may not be able to obtain additional financing in
sufficient amounts or on acceptable terms when needed, which could adversely
affect our operating results and prospects. Debt financing must be repaid
regardless of whether or not we generate profits or cash flows from our business
activities. Equity financing may result in dilution to existing stockholders and
may involve securities that have rights, preferences, or privileges that are
senior to our common stock.
OUR INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE
FINANCING.
For the year ended May 31, 2004, our independent auditors stated that
our financial statements for the year ended May 31, 2004 were prepared assuming
that we would continue as a going concern. Our ability to continue as a going
concern is an issue raised as a result of recurring losses from operations and
cash flow deficiencies from our inception. We continue to experience net losses.
Our ability to continue as a going concern is subject to our ability to generate
a profit and/or obtain necessary funding from outside sources, including
obtaining additional funding from the sale of our securities, increasing sales
or obtaining loans and grants from various financial institutions where
possible. Our continued net losses and stockholders' deficit increases the
difficulty in meeting such goals and there can be no assurances that such
methods will prove successful.
6
IF WE ARE NOT ABLE TO MANAGE GROWTH OF OUR BUSINESS, OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS WILL BE NEGATIVELY AFFECTED.
We anticipate a period of significant growth. This growth could
cause significant strain on our managerial, operational, financial and other
resources. Success in managing this expansion and growth will depend, in part,
upon the ability of our management to effectively manage the growth of our
business. Any failure to manage the proposed growth and expansion of our
business could have a material adverse effect on our financial condition and
results of operations.
OUR FUTURE SUCCESS IS DEPENDENT, IN PART, ON THE PERFORMANCE AND CONTINUED
SERVICE OF OUR OFFICERS.
Our performance and future operating results are substantially
dependent on the continued service and performance of Michael L. Metter, our
President and Steven Moskowitz, our Secretary. If their services become
unavailable, our business and prospects would be adversely affected. We do not
currently maintain "key employee" insurance for any of our executive officers or
other key employees and do not intent to obtain this type of insurance until
such time as we have positive cash flow and are profitable. The loss of their
services could have a material adverse effect on our financial condition,
operating results, and on the public market for our common stock.
OUR LICENSE IS LIMITED TO PRODUCTS FOR USE IN THE CLEANING OF VEHICLES; AND WE
MAY NOT BE ABLE TO EXPAND OUR BUSINESS INTO THE SALE OF OTHER PRODUCTS USING THE
SAME TECHNOLOGY.
We rely on our license agreement with Dicon for the development of our
products. Our principal product and our products that are under development
utilize the hydrophilic sponge technology that we license from Dicon. We rely on
Dicon to protect and enforce key patents held by Dicon, relating to the
hydrophilic technology. Dicon's patent expires in 2017. In the past, we have
defaulted on the license by not meeting our minimum supply requirements. If we
default again, Dicon may terminate the agreement or make the license
non-exclusive. If we lose our license, we may not be able to make alternative
arrangements on terms acceptable to us, or at all. We do not currently have any
alternative plans for which to purchase hydrophilic sponges. Any loss of our
license could materially adversely affect our business, financial condition and
results of operations.
OUR EXCLUSIVE LICENSE IS LIMITED TO ONE FUNCTION. IF WE ARE UNABLE TO EXPAND
THIS LICENSE TO OTHER AREAS, OUR GROWTH WILL BE SIGNIFICANTLY LIMITED.
Our license agreement with Dicon is limited to hydrophilic sponges
used to clean and polish land, sea and air transportation vehicles. Our business
plan calls for us to expand our product line using hydrophilic sponges into the
areas of personal hygiene and household cleaning. Although Dicon has orally
indicated that it will agree to expand our license to cover personal hygiene and
household cleaning products and has produced samples of both products for us, we
have no written assurances that Dicon will expand our exclusive license to
include additional product lines. If Dicon refuses to expand our license, we
will be unable to expand into new areas and our growth will be limited.
WE DEPEND ON PRODUCTS MADE USING ONE TECHNOLOGY; AND PRODUCTS USING DIFFERENT
TECHNOLOGIES MAY ATTRACT CUSTOMERS JEOPARDIZING OUR BUSINESS PROSPECTS.
Our cleaning products depend on the use of licensed technology relating
to sponges incorporating a hydrophilic (liquid absorbing) polyurethane matrix. A
number of factors could limit our sales of these products, or the profitability
of such sales, including competitive efforts by other manufacturers of similar
products, shifts in consumer preferences or the introduction and acceptance of
alternative product offerings. We have not developed products using other
technologies; and, thus, if our existing products or others based on the same
technology fail in the marketplace, our business would fail.
OUR LICENSOR MAY NOT BE SUCCESSFUL IN DEFENDING THE PATENTS ON OUR LICENSED
TECHNOLOGY AGAINST INFRINGEMENT; AND, AS A RESULT, WE MAY BE UNABLE TO COMPETE
AGAINST COMPANIES SELLING PRODUCTS USING THE SAME TECHNOLOGY AS WE DO.
7
In the event a competitor infringes upon our licensed technology,
our licensor may be unable to successfully assert patent infringement claims. In
that event, we may encounter direct competition using the same technology on
which our products are based and we may be unable to compete. If we cannot
compete with competitive products, our business will fail. In addition, if any
third party claims that our licensed products are infringing their intellectual
property rights, any resulting litigation could be costly and time consuming and
would divert the attention of management and key personnel from other business
issues. We also may be subject to significant damages or injunctions preventing
us from selling or using some aspect of our products in the event of a
successful patent or other intellectual property infringement claim. Any of
these adverse consequences could have a material adverse effect on our business
and profitability.
THROUGHOUT OUR SALES HISTORY, WE HAVE DEPENDED ON ONE CUSTOMER FOR ALMOST ALL OF
OUR SALES. IF THAT CUSTOMER DOES NOT GIVE US REPEAT ORDERS, WE WILL NOT BE ABLE
TO CONTINUE IN BUSINESS.
In the past, we have relied on one customer, TurtleWax, for a
significant percentage of our orders. We are exploring ways to market our
automobile cleanser and wax product, children's bath and home cleaning products
through other marketing channels. To date, these channels have generated little
revenues for our automobile product and no revenues for our other products. We
can offer no assurance that these efforts will ever prove to be commercially
viable for us. If we are unable to expand our client and sales base, we may have
no existing business or prospects for new business and our business would fail.
WE DEPEND ON ONE MANUFACTURER FOR ALL OUR PRODUCTS; AND IF THAT MANUFACTURER IS
UNWILLING OR UNABLE TO PRODUCE OUR ORDERS IN THE QUANTITIES REQUIRED AND AT THE
PRICE AND QUALITY WE REQUIRE FOR SALES, WE WILL BE UNABLE TO CONTINUE IN
BUSINESS.
Our licensor is also our manufacturer. Our reliance on a sole supplier
involves several risks, including our potential inability to obtain adequate
supplies and reduced control over pricing and timely delivery. Although the
timeliness, quality and pricing of deliveries from our licensor has been
acceptable to date there can be no assurance that supplies will be available on
an acceptable basis or that delays in obtaining new suppliers will not have an
adverse effect on us. If we lose this manufacturer there is no guarantee that we
will be able to make alternate arrangements that will be acceptable to us. Our
inability to obtain adequate supplies of hydrophilic sponges, chemicals,
packaging materials, or finished products would prevent us from fulfilling
orders and would result in the decline or failure of our business.
THE MARKETPLACE MAY BE INDIFFERENT TO OUR PRODUCTS; IN WHICH CASE OUR BUSINESS
WILL FAIL.
Our hydrophilic sponges, and products based on them, feature an
internal structure which holds detergents and waxes which are released only when
squeezed. However, potential users may be satisfied with the cleaners, waxes and
applicators they are presently using. Thus, we may expend our financial and
personnel resources on design, marketing and advertising without generating
concomitant revenues. If we cannot generate sufficient revenues to cover our
overhead, manufacturing and operating costs, we will fail.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS MAY IMPOSE ADDITIONAL COSTS, WHICH MAY
ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Because our cleaning products are regulated by the Consumer Product
Safety Commission under authority of the Hazardous Substances Act. The Consumer
Product Safety Commission's jurisdiction covers most non-cosmetic, non-drug
substances used in the home. The Federal agency develops voluntary standards
with industry and issues and enforces mandatory standards or bans consumer
products if no feasible standard would adequately protect the public. It
conducts research on potential product hazards and obtains the recall of
products that it believes pose potential risk for serious injury or death, or
arranges for their repair. Additionally, the Consumer Product Safety Commission
informs and educates consumers through the media, state and local governments,
private organizations and by responding to consumer inquiries on, among other
things, what safety features to look for in products. We are not currently
subject to direct federal, state or local regulation other than the Hazardous
Substances Act and regulations applicable to businesses generally or directly
applicable to retailing or electronic commerce. However, from time to time in
the future, Congress, the FDA or any other federal, state, local or foreign
8
legislative and regulatory authorities may impose additional laws or regulations
that apply to us, repeal laws or regulations that we consider favorable to us or
impose more stringent interpretations of current laws or regulations. Any such
developments could have a material adverse effect on our business, financial
condition and results of operations.
IN THE EVENT THAT ONLY THE MINIMUM OFFERING IS SOLD, WE MAY NOT HAVE SUFFICIENT
PROCEEDS TO IMPLEMENT OUR BUSINESS PLAN.
If only the minimum offering is sold, we may not have sufficient
proceeds to implement our sales, marketing and business expansion or fund our
working capital. To the extent that other sources of funds are not available, we
will not be able to expand operations beyond current levels and we may be
required to cease some or all of our operations.
RISKS RELATED TO THIS OFFERING
OUR UNITS, COMMON STOCK AND REDEEMABLE CLASS A WARRANTS HAVE NO PRIOR PUBLIC
TRADING MARKET AND WE CANNOT ASSURE LIQUIDITY FOR YOUR SECURITIES.
Prior to this offering, there has been no active public market for
our units, common stock or redeemable class A warrants. We cannot predict the
extent to which a trading market will develop, if at all, or how liquid that
market may become. The initial public offering price of our units, common stock
and the exercise price of the class A redeemable common stock purchase warrants
was determined by us, based upon our assessment of our value compared to others
in our market and the general market for publicly traded securities. This may
not be indicative of the market price of our units after this offering. The
offering price of our units is not related to assets, earnings, book value, or
other criteria traditionally used to value companies. You should not consider
the offering price as representative of the actual value of our units. The price
of our units is subject to change due to market conditions and other factors. We
cannot assure that you will be able to resell our units at the offering price.
OUR COMMON STOCK AND REDEEMABLE CLASS A WARRANT PRICES MAY FALL UPON THE FUTURE
SALE OF ADDITIONAL SHARES OF OUR COMMON STOCK.
Future sales of our common stock in the public market, or even the
possibility of such sales, may materially and adversely affect the market price
of our common stock and redeemable class A warrants. There were 33,952,636
shares of common stock outstanding before this offering. Substantially all of
such shares are "restricted securities" within the meaning of Rule 144 of the
Securities Act of 1933. All of these restricted shares of our common stock will
become eligible for resale under Rule 144 within one year from the day that the
shares offered herein are deemed "effective" by the Securities & Exchange
Commission.
INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF OUR COMMON
STOCK'S BOOK VALUE.
If you purchase our units in this offering, the net tangible book
value of the common stock will experience immediate and substantial dilution.
Giving effect to the sale of the minimum number of offered units, we would have
a net tangible book value of approximately $(.07) per share so that persons
purchasing units in this offering would suffer an immediate dilution of $.32 per
share or 128% from the offering price of $0.25 per unit. Giving effect to the
sale of the maximum number of units offered, our net tangible book value would
be approximately $.00 per share or dilution to you of $.25 per share or 100% of
the public offering price. See "Dilution."
REDEMPTION OF REDEEMABLE CLASS A WARRANTS COULD DEPRIVE YOU OF YOUR RIGHT TO
EXERCISE YOUR WARRANTS.
The redeemable class A warrants are redeemable by us, at a
redemption price of $.001 per warrant, upon at least 30 days' prior written
notice, commencing on __________, 2005 (six months after the date hereof), if
the average of the closing high bid prices of the common stock exceeds $1.00 for
five consecutive trading days ending on the third day prior to the date on which
notice took effect. If the redeemable class A warrants are redeemed, the holders
will lose their right to exercise their warrants except during such 30 day
redemption period. Redemption of the redeemable class A warrants could force the
holders to exercise the warrants at a time when it may be disadvantageous for
the holders to do so or to sell the warrants at the then current market value.
UNLESS THE PRICE OF OUR COMMON STOCK TRADES ABOVE $0.50, YOU MAY NEVER HAVE AN
OPPORTUNITY TO EXERCISE YOUR REDEEMABLE CLASS A WARRANTS, RESULTING IN A
COMPLETE LOSS OF THEIR VALUE.
The redeemable class A warrants are exercisable at a price of $0.50
per share. Unless our common stock trades above that price, you will have no
incentive to exercise the warrants. If our common stock does not trade above
$0.50 per share within five years, there would be no reason for you to exercise
the warrants and they will become worthless.
9
RISKS RELATED TO OUR COMMON STOCK
THERE IS PRESENTLY NO MARKET FOR OUR COMMON STOCK AND SUCH MARKET MAY NOT
DEVELOP.
At the present time, no market for our common stock exists. A market
for our common stock is in large part predicted on our future earnings as well
as our ability to be successfully listed on an exchange such as the
Over-the-Counter Bulletin Board. If are not approved to be traded on the
Over-the-Counter Bulletin Board or if we do not generate revenue or a profit, no
market for our common stock may be developed.
OUR COMMON STOCK MAY NOT BE ABLE TO TRADE ON THE OVER-THE-COUNTER BULLETIN
BOARD. IF OUR STOCK IS UNABLE TO TRADE ON THE OTCBB, OUR INVESTORS MAY BE UNABLE
TO SELL THEIR SHARES PUBLICLY JEOPARDIZING OUR ATTEMPT TO FUND OUR OPERATIONS.
We intend that our securities trade on the Over-the-Counter Bulletin
Board. However, we can offer no assurance that our securities will so trade and,
if they do trade on the OTCBB, whether an active trading market will be
established or, if established, whether it can be maintained. If our shares do
not trade on the OTCBB, they may trade on the Pink Sheets, a non-automated
market, with a consequential lack of liquidity.
OUR CONTROLLING SHAREHOLDERS MAY EXERCISE SIGNIFICANT CONTROL OVER US FOLLOWING
THIS OFFERING, DEPRIVING OTHER STOCKHOLDERS OF THE ABILITY TO ELECT DIRECTORS OR
EFFECT OTHER CORPORATE ACTIONS.
The shares offered in this prospectus represent a minority portion
of our outstanding voting shares. Before this offering, our directors, executive
officers and principal shareholders beneficially owned approximately 80% of the
outstanding shares of our common stock. Following this offering, they will
beneficially own approximately 77% of our outstanding shares assuming completion
of the minimum offering, or approximately 66% if the maximum offering is sold.
Our shareholders do not have cumulative voting rights with respect to the
election of directors. If our principal shareholders vote together, they could
effectively elect all of our directors. See "Principal Stockholders."
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny
stocks, the broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
10
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
USE OF PROCEEDS
If the minimum number of units are sold, we estimate that we will
receive net proceeds of approximately $400,000 ($500,000 of gross proceeds, less
offering expenses of $100,000) from our sale of the 2,000,000 units offered by
us. If the maximum number of units are sold, we estimate that we will receive
net proceeds of approximately $1,900,000 ($2,000,000 of gross proceeds, less
offering expenses of $100,000) from our sale of the 8,000,000 units offered by
us. This estimate is based on an initial public offering prices of $0.25 per
unit and is before deduction for any commissions or non-accountable expenses we
may pray to registered broker-dealers, if any. We have no currently plans,
arrangements or agreements to offer any units through registered broker-dealers.
We expect to use the net proceeds of the "best efforts" offering for the
following purposes: (1)
Minimum Maximum
Product development (2) $100,000 $ 700,000
Marketing (3) 100,000 700,000
Payment of accounts 100,000 100,000
payable and indebtedness
Working capital 100,000 400,000
Total $400,000 $1,900,000
(1) Assumes that all product development, marketing and accounts payable come
from the "best efforts" offering and not from operations.
(2) Products to be developed from prototype to manufacturing stages include
household cleaning products and personal care products
(3) Marketing will include infomercials and international markets.
We will not receive any proceeds from the 17,259,344 additional shares
of common stock subject to resale by the selling stockholders under this
prospectus.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR SECURITIES
There is no market for our common stock.
As of February 24, 2005, there were approximately 50 holders of record
of our common stock.
WE HAVE APPOINTED OLDE MONMOUTH STOCK TRANSFER CO, INC., ATLANTIC
HIGHLANDS, NJ, AS TRANSFER AGENT FOR OUR SHARES OF COMMON STOCK.
11
Equity Compensation Plan Information
As of February 24, 2005, we have not had any equity compensation plans
outstanding.
DIVIDEND POLICY
We have not paid any cash dividends on our common stock and we
currently intend to retain any future earnings to fund the development and
growth of our business. Any future determination to pay dividends on our common
stock will depend upon our results of operations, financial condition and
capital requirements, applicable restrictions under any credit facilities or
other contractual arrangements and such other factors deemed relevant by our
Board of Directors.
DILUTION
As of November 30, 2004, our net tangible book value was $(1,897,463)
or $(.10) per share of common stock. Net tangible book value per share is
determined by dividing a company's tangible net worth (total assets, net of
intangible assets, less total liabilities) by the number of outstanding common
shares. After giving effect to the conversion of trade payables and other loans
into shares of common stock and the conversion of shares of common stock in
exchange for services performed on our behalf for an aggregate of 14,967,636,
and assuming the sale of the minimum offering of 2,000,000 shares of common
stock, the pro forma net tangible book value per share after the offering would
be (.07), without taking into account any change in our net tangible book value
after November 30, 2004 and after deducting estimated offering expenses. This
represents an immediate increase in the net tangible book value of $.01 per
share to existing shareholders. The following table illustrates this per share
dilution:
ASSUMING ASSUMING
MINIMUM 50% of 75% of MAXIMUM
OFFERING OFFERING OFFERING OFFERING
-------- -------- ------- -------
Assumed public offering price per share $0.25 $0.25 $0.25 $0.25
Net tangible book value per share as of
November 30, 2004 (.10)
Increase per share attributable to this offering .03 .06 .08 .10
Pro forma net tangible book value per share
after this offering (.07) (.04) (.02) .00
Dilution to new investors .32 .29 .27 .25
Percentage of Dilution 128% 116% 108% 100%
The following table sets forth the number of shares of common stock
purchased from us, the total consideration paid and the average price per share
paid by the existing shareholders and by new investors in this offering on a pro
forma basis as of November 30, 2004.
Shares Purchased Total Consideration
---------------------- ----------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ---------- ------- ---------
Assuming Minimum Offering:
Existing Shareholders 33,952,636 94.4% $2,535,247 83.53% $0.07
New Investors 2,000,000 5.6% $ 500,000 16.47% $0.25
Total 35,877,636 100% $3,035,247 100% $0.08
CAPITALIZATION
The following table summarizes our long-term obligations and
capitalization as of November 30, 2004, and as adjusted as of that date to
reflect (i) the sale of the 2,000,0000 units offered in the prospectus and our
application of the estimated net proceeds, and after deducting the estimated
offering expenses. The information in the table assumes an initial public
12
offering price of $0.25 per unit. The information in the table should be read in
conjunction with the more detailed combined financial statements and notes
presented elsewhere in this prospectus.
November 30, 2004
Actual As Adjusted (1)
----------- ---------------
Long-term obligations [including/less] current portion 0 0
Stockholders' equity:
Common stock $.001 par value;
authorized [50,000,000] shares; issued
and outstanding shares 18,985 35,952
Preferred stock, $.001 par value;
authorized 5,000,000 shares;
no shares issued and outstanding 0 0
Additional paid in capital 248,948 2,999,295
Common stock subscribed 526,814 0
Deficit (2,692,210) (2,692,210)
Net Stockholders' equity (deficiency) (1,897,463) 343,037
----------- -----------
Total capitalization (deficiency) $(1,897,463) $ 343,037
=========== ===========
(1) Includes the conversion of trade payables and other loans into shares of
common stock and issuance of shares in exchange for services performed on our
behalf for a total of 14,967,636 shares and assumes the sale of the minimum
offering of 2,000,000 shares of common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this prospectus are not purely historical
statements, but rather include what we believe are forward-looking statements.
The forward-looking statements are based on factors set forth in the following
discussion and in the discussions under "Risk Factors" and "Business." Our
actual results could differ materially from results anticipated in these
forward-looking statements. All forward-looking statements included in this
document are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements.
OVERVIEW
We design, produce, market and distribute cleaning products for
vehicular use utilizing patented technology relating to hydrophilic sponges,
which are liquid absorbing, foam polyurethane matrices. Our products can be
pre-loaded with detergents and waxes, which are absorbed in the core of the
sponge then released gradually during use. We have also designed and have
started to test market, but have not yet produced or sold, products using the
same hydrophilic technology for bath and home cleaning use. We license the
rights to manufacture and sell our products for vehicular use from H.H. Brown
Shoe Technologies, Inc., d/b/a Dicon Technologies, the holder of the relevant
patents relating to the hydrophilic sponges.
CORPORATE BACKGROUND
We were formed on June 18, 1999, under the name Romantic Scents, Inc.
On June 12, 2001, Romantic Scents, Inc. changed its name to RSI Enterprises,
Inc., and, on October 2, 2002, changed its name to Spongetech International Ltd.
On July 15, 2002, we entered into a stock purchase agreement with Nexgen
Acquisitions VIII, Inc. pursuant to which our sole stockholder, RM Enterprises
International, Inc. received 12,000,000 shares of Nexgen Acquisitions VIII, Inc.
and thereby became its majority stockholder. The transaction was accounted for
13
as a reverse acquisition using the purchase method of accounting, whereby RM
Enterprises International, Inc., our sole shareholder, retained approximately
63% of the outstanding common stock. Thereafter, on October 9, 2002, Nexgen
Acquisitions VIII, Inc. changed its name to Spongetech Delivery Systems, Inc. On
December 16, 2002, we changed our domicile to Delaware. Spongetech Delivery
Systems, Inc. (formerly Nexgen Acquisitions VIII, Inc.) merged with and into us
so that we became the surviving company. Immediately subsequent to the merger,
we changed our name to Spongetech Delivery Systems, Inc.
RESULTS OF OPERATIONS
SIX MONTHS ENDED NOVEMBER 30, 2004 AND 2003
Net sales for the six months ended November 30, 2004 were $0 as
compared to $2,123 for the six months ended November 30, 2003, a decrease of
$2,123. Management attributes this decrease to its inability to promote, market,
and sell its automotive product due to lack of capital.
We have no open purchase orders at this time. We have consistently
depended on one customer for almost all of our sales. If this customer does not
give us new orders in the future, our operations will not be profitable and we
will not be able to continue in business.
During the six months ended November 30, 2004, we had minimal sales of
$0. Our gross profit for the six months ended November 30, 2004 was $0 as
compared to $(3,013) for the six months ended November 30, 2003. Management
attributes this decrease in gross profit to no sales during this period.
Operating expenses for the six months ended November 30, 2004 were
$17,172 as compared to $53,264 for the period ended November 30, 2003. The
decrease of $36,092 is the result of a decrease of sales expenses for the
period. Included in total operating expenses for the period November 30, 2003
were selling expenses of $25,052, general and administrative expenses of $25,462
and depreciation expense of $2,750.
Net loss for the six months ended November 30, 2004 was ($17,172) or
($.01) per share as compared to a net loss of ($56,277) or ($.01) per share for
the sixth months ended November 30, 2003. The decrease in net losses were the
result of less selling expenses for the six months ended November 30, 2004
compared to the six months ended November 30, 2003.
FISCAL YEARS ENDED MAY 31, 2004 AND 2003
Net sales were $1,858 for the fiscal year ended May 31, 2004 as
compared to $342,019 for the fiscal year ended May 31, 2003. This decrease is
primarily attributed to no capital for production.
Cost of sales was $1,600 or 86% of net sales for the fiscal year ended
May 31, 2004 as compared to $299,617 or 87.6% of net sales for the fiscal year
ended May 31, 2003.
Operating expenses for the fiscal year ended May 31, 2004 increased to
$2,051,772 from $307,519 for the fiscal year ended May 31, 2003. This increase
of $1,744,253 was a result of increased compensation that was exchanged for
stock. Selling expenses for the fiscal year ended May 31, 2004 included
commissions of $3,552, travel expenses of $3,538, public relations of $14,945
and advertising of $17,500. General and administrative expenses for the year
ended May 31, 2004 included the value of services rendered by the officers and
consulting expenses of $1,953,631, office expenses of $14,973, professional
expenses of $38,243, telephone expenses of $1,842, offering expenses of $1,250
and expenses relating to the factoring of our accounts receivable of $2,507.
Net loss for the fiscal year ended May 31, 2004 was ($2,056,526) or
($.01) per share as compared to net loss of ($265,517) or ($.01) per share. The
increase in the net loss of $1,791,009 in fiscal year 2004 compared to fiscal
year 2003 is the result of the increase in expenses for professional fees and
compensation.
14
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2004, we had cash of $20. We had cash of $50 at May
31, 2004. During the six months ended November 30, 2004, net cash used by
operating activities aggregated $(30), primarily attributed to the net loss of
$17,172 less non-cash expenses of $15,000. Net cash provided by financing
activities for the six months ended November 30, 2004 was 0.
During the six months ended November 30, 2004, net cash used in
operating activities aggregated $30 as compared to $38,640 used in the six
months ended November 30, 2003. Net cash used by operating activities was
primarily attributed to the net loss of $56,277 for the six months ended
November 30, 2003.
Net cash used in investing activities during the six months ended
November 30, 2004 aggregated $0, as compared to $728 used in the six months
ended November 30, 2003. This decrease is attributed to the purchasing of office
equipment in the six months ended November 30, 2003.
Net cash provided by financing activities for the six months ended
November 30, 2004 was $0 as compared to $38,608 during the six months ended
November 30, 2003. This increase is primarily attributed to proceeds from
factoring and related party notes incurred during the six months ended November
30, 2003.
The only increase in accrued compensation between the fiscal year ended
May 31, 2004 and November 30, 2004 has been to accounting and professional fees.
The working capital (deficiency) at November 30, 2004 was $1,928,152 as
compared to a working capital (deficiency) of $1,913,122 at May 31, 2004. These
factors create substantial doubt about our ability to continue as a going
concern. The recovery of assets and the continuation of future operations are
dependent upon our ability to obtain additional debt or equity financing and our
ability to generate revenues sufficient to continue pursuing our business
purpose.
We maintain a supply and requirements agreement with Dicon, a
manufacturing company that has the technological know-how and patented and
proprietary information relating to hydrophilic foam sponges and their
applications. The agreement, which grants us exclusive worldwide rights to
distribute the products was extended until July 2006 and requires us to purchase
all of our requirements from Dicon. Pursuant to the agreement, we must purchase
minimum annual required amounts from Dicon. We did not satisfy last year's
requirements and paid $1,894.51 to Dicon in December 2003 in connection with the
missed quantity requirements. We believe that this is the full amount that we
currently owe Dicon and have not accrued any additional amounts on our financial
statements
It is extremely difficult to itemize the price of each sponge purchased
from Dicon because the price charged includes the sponge or sponge kit,
packaging, storage and shipping. The price for each sponge or sponge kit,
including these ancillary items, ranged from $.85 to $1.42. The average price
per sponge or sponge kit was $1.12.
We have purchased the following sponge kits and sponges as of the date
of the prospectus:
25,000 kits, each consisting of a vehicular sponge, detail sponge and
chamois cloths
168,600 vehicular sponges
4,500 detail sponges
2,200 chamois cloths.
We are currently in negotiations with a major importer to South and
Central America for the purchase of 500,000 units allocated as follows: 150,000
single sponges and 350,000 kits during the third and fourth quarters of fiscal
year 2005, subject to approval of the translation of the packaging into Spanish
and Portuguese. We cannot guarantee that these negotiations will result in sales
or that the sales will be profitable.
15
BUSINESS
SPONGETECH DELIVERY SYSTEMS
We design, produce, market and distribute cleaning products for
vehicular and home use utilizing patented technology relating to hydrophilic
(liquid absorbent) foam polyurethane matrices.
THE TECHNOLOGY
We entered into a license agreement on July 1, 2001 for patented
technology relating to hydrophilic polyurethane matrices on an exclusive basis.
The technology is owned by and licensed from H.H. Brown Shoe Technologies, Inc.,
Greenwich, Connecticut (d/b/a Dicon Technologies), a majority-owned subsidiary
of Berkshire Hathaway, Inc. which owns the patent rights. Our license applies to
the cleaning and polishing of land, sea and air transportation vehicles. We have
an oral understanding but no written agreements with Dicon that would permit us
to develop products using the same sponge technology in other areas, including
household cleaning and personal care.
Our license is a continuing one for the full life of the design patent,
which was jointly developed by one of our former employees, and which covers the
design, manufacture and use of a liquid-absorbent layer in a "molded sponge
design." The patent expires in 2017.
The license agreement mandates that we purchase our hydrophilic sponge
products from Dicon unless Dicon ceases its business operations, either totally
or with respect to the manufacture of the molded sponge design within the scope
of the design invention as set forth in the agreement. If such event occurs, we
are permitted to use other manufacturers.
Pursuant to the license agreement, Dicon retains title to the
technology. Thus, when the license expires, we have to give up any and all
design rights to products that we have developed using the licensed technology.
Dicon pays all expenses in connection with filing and maintaining the patent.
Certain minimum quantities, as set forth in the requirements agreement with
Dicon as discussed below, are required to be purchased by us in order for us to
continue its exclusive use of the license. Dicon has the right, without
restriction, to license its technology in areas other than sponges for use in
cleaning and polishing transportation vehicles.
The technology has also been used to draw fluids out of a human body,
such as body odors, and store them in the polyurethane matrix. The technology
was originally contemplated for use in shoe liners, incontinence pads and
nursing pads. Currently, companies such as Payless Shoes and H.H. Brown Shoe
Company (the licensor) use the technology for inner soles to absorb sweat and
odors. Revlon is a licensee of the technology which it uses in a cosmetic
make-up removal product.
Our license is based on the discovery that if a sponge incorporating
the hydrophilic matrix is filled with detergents and waxes, the matrix would
retain these cleaning and polishing agents and could only be released when the
sponge is squeezed. Thus, soap or wax could be retained for many uses and the
sponge could be rinsed after use without losing the cleaning agent or wax.
SUPPLY AND REQUIREMENTS AGREEMENT
On July 1, 2001, we entered into an exclusive worldwide supply and
requirements agreement with Dicon under which we must purchase from Dicon
certain minimum quantities of our sponges containing the Dicon hydrophilic
matrix as follows:
Annual Period Number of Sponge Products
------------- -------------------------
1st annual period 250,000
2nd annual period 500,000
and each succeeding
annual period 1,000,000
at the following prices:
Aggregate Purchases Price per sponge product
------------------- ----------------------
50,000 to 100,000 $.817 sponge only
100,000 to 250,000 $.795 sponge only
Over 250,000 $.778 sponge only
16
In the event the minimum quantities are not ordered in each one-year
period, we must pay Dicon liquidated damages of $.20 per sponge for the
deficiency. If we fail to pay the damages within 30 days of the end of the
annual period, Dicon may terminate the license agreement or render our license
non-exclusive for all subsequent periods. Dicon may, after the first annual
period, raise the prices it charges for the sponges only if such increase is
based on bona fide increases in material and labor costs plus an appropriate
markup for overhead. The agreement was renewed until June 30, 2006. We may use
other manufacturers in the event of a breach by Dicon or in the event of force
majeure which prevents production for 90 days. We ordered in excess of the
minimum quantity for the first year of the contract but did not order the
minimum quantity for the remaining two years of the original agreement. In
December 2003, we paid $1,894.51 to Dicon for any missed requirements.
Dicon has designed and installed specialized equipment for producing
molded foam products containing this superabsorbent polymer infused with
detergents, soaps and waxes used as an absorbing and cleaning sponge product.
The agreement sets forth minimum purchase requirements and pricing for the basic
sponge product. Using its patented processes, Dicon manufactures products
derived from "Hydrophilic Urethane Chemistry." The hydrophilic system has two
parts, a hydrophilic pre-polymer phase and a water phase. During the water
phase, various water soluble active ingredients are introduced into the
products.
PRODUCTS
We have designed specially configured sponges containing an outer
contact layer and an inner matrix. Dicon, our licensor and manufacturer, loads
the inner matrix of the sponge with specially formulated soaps and, in our
licensed automotive cleaning and polishing product, soap and wax. When the
sponge is applied to a surface with minimal pressure, the soap or soap and wax
are simultaneously applied to the surface. When the sponge is not in use, the
hydrophilic matrix holds the soap so that it does not leech out of the sponge.
We believe that our use of the patent has great marketing potential. We
can choose any variety of cleansers, including anti-bacterial and abrasive
soaps. Thus, we may fine-tune our products for use on different kinds of
vehicles. New vehicles or those prepared for classic car shows require a gentle
cleaner, whereas older cars which have developed a film over the paint or where
the paint has faded may require a cleanser containing a compounding substance, a
gentle abrasive. Depending on the use of our vehicular sponge, we may include
wax, or may only include the cleanser.
SALES AND MARKETING
In February 2004, we inaugurated a website, www.spongetech.com, to sell
our vehicular cleaning kit directly to the public. Since inception, we have sold
approximately 500 kits for aggregate sales price of approximately $4,750. We pay
the website hosting company, Harbor Enterprises, a 20% royalty from the sales
price on all Internet sales. We have not entered into a contract with Harbor
Enterprises. Either party may terminate the relationship at any time. We ship
directly to customers.
We have developed a children's bath foam sponge, with a "safe mesh"
coating which prevents tearing, in the shape of animals in various colors. The
sponges, which float, are infused with a gentle no-tear, non-irritating
anti-bacterial soap. The bath foam sponge does not lose its soap while it is
floating in the bath tub as the inner hydrophilic matrix retains the soap until
the child squeezes the sponge in use. We are exploring retail outlets to sell
this product, ranging from pharmacies to department stores. We also intend to
market this product directly. Dicon has orally agreed to manufacture this
product for us. We have not yet made sales and cannot offer any assurances that
sales will result from our proposed marketing campaign.
17
We have developed prototypes of household cleaning sponges infused with
anti-bacterial bath and kitchen soaps. The products are being testing by a
national detergent manufacturer for possible use under its logo and brand. We
cannot predict whether or not the manufacturer will purchase our sponges and, if
it does, whether the product will succeed in the marketplace.
NEW PRODUCT DEVELOPMENT
Our new product development program consists principally of devising or
testing new products, improving the efficiency of existing ones, evaluating the
environmental compatibility of products and market testing. We estimate that our
management devotes 2,000 hours to developing a product, its packaging and its
marketing campaign. We have never paid nor do we expect to ever have to pay cash
compensation for any product development activities. We are considering the
expansion of our product lines to include household cleaning products and
personal hygiene products. Dicon produced samples for us of our children's bath
foam sponge and household cleaning sponge. We have not yet signed an agreement
with Dicon in connection with the children's bath or household cleaning sponges.
NEW MARKETING
We are working on an agreement to sell our vehicular sponge to an
exporter of automotive products to South America, subject to the exporter's
approval of both Spanish and Portuguese language translations of the product's
packaging. TurtleWax and the Home Shopping Network have indicated that they
would like to continue their relationships with us and we are seeking expand the
range of products that we sell to our home line. We cannot warrant that any of
these discussions will result in contracts or purchase orders.
COMPETITION
We compete with international, national and local manufacturers and
distributors of soaps, detergents, waxes, sponges, cloths and other automotive,
household and bath products. Indirectly, in the automotive product area, we
compete with drive-through car washes. Our competition, for the most part, has
brand recognition and large marketing and advertising budgets. We face major
multinational competition in our proposed household and children's bath sponges.
Although our product is unique and patented, we cannot predict its acceptance in
any of the marketplaces for which it is designed.
We compete on the basis of the uniqueness of our sponge, which combines
efficiency and effectiveness compared to other vehicular cleaning products. Our
product avoids the preparation and clean-up of using sponges, liquid soaps and
pails of water. It also avoids the mess and limited storage life of traditional
liquid and paste waxes. In addition, our cleaning and wax product is much easier
to apply and does not have to be buffed. Our sponge which combines soap and wax
is considerable cheaper than the purchase of the individual cleaning and
application products, and our cleaning product is less expensive than the cost
of a sponge and liquid detergent.
We have in the past and intend to again explore retail markets, such as
Home Shopping Network to sell and provide greater public exposure to our
vehicular sponge product.
EMPLOYEES
We currently employ five people on a part-time basis of whom three are
members of the business and sales management team and two are staff.
DESCRIPTION OF PROPERTY
Since December 8, 2004, we have been occupying our principal offices,
which consist of 800 square feet of office space located at The Empire State
Building, 350 Fifth Avenue, Suite 2204, New York, New York 10118. The premises
are leased by members of the family of Steven Moskowitz, our secretary. Pursuant
to a sublease agreement, we paid 60,000 shares of our common stock as
consideration for the sublease. We pay directly for telephone, utilities and
other expenses.
18
LEGAL PROCEEDINGS
Except as described below, we are not currently a party to, nor is any
of our property currently the subject of, any pending legal proceeding. None of
our directors, officers or affiliates is involved in a proceeding adverse to our
business or has a material interest adverse to our business.
We are aware of a lawsuit commenced against, among others, Spongetech
International, Ltd. by Westgate Financial Corporation although, to date, it has
not been formally served. Plaintiff asserts a breach of contract against us
seeking damages of $11,049.82 with interest accrued thereon, costs and
reasonable attorney's fees. We intend to vigorously defend this matter once it
is duly served.
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, DIRECTOR NOMINEES AND KEY EMPLOYEES
The following table sets forth certain information regarding our
current Executive Officers, Directors and Key Employees:
Name Age Position Since
------------------------ --- ------------- ------
Michael Metter* 53 President,
Chief Executive Officer,
Director 5/2001
Steven Moskowitz* 40 Secretary,
Director 6/1999
Frank Lazauskas 44 Director 7/2001
Thomas Monahan 57 Chief Financial Officer 3/2004
---------
* Michael Metter and Steven Moskowitz are promoters of Spongetech. In addition,
RM Enterprises International, Jerome Schlanger and Michael Sorrentino were our
promoters.
BACKGROUND OF OFFICERS AND DIRECTORS
Michael Metter has been President, Chief Executive Officer and a Director since
May 2001. Mr. Metter has served as President of RM Enterprises International,
Inc., our majority stockholder, since April, 2001, and as its Chief Executive
Officer since March 2, 2004. He has been a director of Western Power and
Equipment Corp. (OTCBB) since February, 2003. Mr. Metter served as the President
of Azurel, Ltd. (OTCBB and subsequently Pink Sheets) from October 2002 to
February 2003, and as its Chief Operating Officer from October 2002 to June
2003. Since June 2002, Mr. Metter has served as President and Chief Executive
Officer of BusinessTalkRadio.net, a syndicated radio network based in Greenwich,
Connecticut. Since June 2003, he has been chairman of the board of Tiburon
Capital Group, a privately held holding corporation. He was compliance director
of Securities Capital Trading, Inc., a securities broker-dealer, from October
1998 to February 2001. On April 19, 2001, Mr. Metter filed a petition in
personal bankruptcy in the District of Connecticut, Bridgeport Division, and was
discharged on December 14, 2001. Mr. Metter received his MBA in Finance in 1975
and his B.A. in Marketing and Accounting in 1973 from Adelphi University.
19
Steven Moskowitz has been Secretary, Treasurer and a Director since June 1999.
Mr. Moskowitz has served as a director of RM Enterprises International, Inc.
since April 2001, and as its Secretary since March 2, 2004. He has been a
director of Western Power and Equipment Corp. (OTCBB) since February 11, 2003.
Mr. Moskowitz was CEO of Azurel, Ltd, (OTCBB and subsequently Pink Sheets) from
October 31, 2002 to October 10, 2003. He served as Vice President, Marketing and
Business Development for H. W. Carter & Sons, a distributor of children's
clothing, from 1987 to 2002. He was President of the H. W. Carter & Sons
division of Evolutions, Inc. from 1996 to 1997. Mr. Moskowitz served in various
capacities at Smart Style Industries, a manufacturer and distributor of
children's apparel, from 1986 to 1987 from sales assistant to Vice President
Sales and Marketing. He received his B.S. in Management from Touro College in
1986.
Frank Lazauskas has been a Director since July 2001. Mr. Lazauskas is the
founder and President of FJL Enterprises, Inc. and TNJ Enterprises, Inc., formed
in 1999 and 1997, respectively, which own and operate eight Dominos Pizza
Stores. He was elected a director of RM Enterprises International, Inc., our
majority stockholder, in March 2004. He received his B.A. in Mathematics from
Central Connecticut State University in 1983.
Thomas Monahan has been Chief Financial Officer since March 2004. Mr. Monahan
has been self-employed as a Certified Public Accountant since 1987. Mr. Monahan
received his B.S. in Accounting from Rutgers University in 1970 and his M.A. in
Marketing and Distributive Education from Montclair State College, Montclair,
New Jersey in 1975. Pursuant to our bylaws, our directors are elected at our
annual meeting of stockholders and each director holds office until his
successor is elected and qualified. Officers are elected by our Board of
Directors and hold office until an officer's successor has been duly appointed
and qualified unless an officer sooner dies, resigns or is removed by the Board.
There are no family relationships among any of our directors and executive
officers.
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for their services as directors
but are reimbursed for their reasonable expenses for attending board and board
committee meetings.
COMMITTEE OF THE BOARD OF DIRECTORS
We have an audit committee composed of Frank Lazauskas and Thomas Monahan.
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended May 31, 2004 and 2003,
the compensation we paid to our Chief Executive Officer(s) and any other
executive officers who earned in excess of $100,000 based on salary and bonus.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
--------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ------------------------------ -------------
ALL
OTHER SECURITIES OTHER
ANNUAL RESTRICTED UNDERLYING COMPEN-
NAME AND COMPEN- STOCK AWARD(S) OPTIONS/ LTIP SATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($) ($) SARs (#) PAYOUTS ($) ($)
--------------------------- ------- ------------- ---------- ----------- ---------------- ------------ ----------- --------
Michael Metter 2004 0 0 0 0 0 0 0
Chief Executive Officer 2003 0 0 0 0 0 0 0
OPTION GRANTS FOR THE FISCAL YEARS ENDED MAY 31, 2004 AND 2003
No options or SARS were granted to the named executive officers during fiscal
year ended May 31, 2004.
20
AGGREGATED OPTION EXERCISE FOR THE FISCAL YEARS ENDED MAY 31, 2004 AND 2003 AND
FISCAL YEAR-END OPTION VALUES
None.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table shows information with respect to each equity
compensation plan under which our common stock is authorized for issuance as of
the fiscal year ended May 31, 2004.
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------ ------------------------ ----------------------- ---------------------------
Plan category NUMBER OF SECURITIES WEIGHTED AVERAGE NUMBER OF SECURITIES
TO BE ISSUED UPON EXERCISE PRICE OF REMAINING AVAILABLE FOR
EXERCISE OF OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS (EXCLUDING SECURITIES
REFLECTED IN COLUMN (a)
------------------------------------ ------------------------ ----------------------- ---------------------------
(a) (b) (c)
------------------------------------ ------------------------ ----------------------- ---------------------------
EQUITY COMPENSATION PLANS APPROVED -0- -0- -0-
BY SECURITY HOLDERS
------------------------------------ ------------------------ ----------------------- ---------------------------
EQUITY COMPENSATION PLANS NOT -0- -0- -0-
APPROVED BY SECURITY HOLDERS
------------------------------------ ------------------------ ----------------------- ---------------------------
TOTAL -0- -0- -0-
------------------------------------ ------------------------ ----------------------- ---------------------------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We were incorporated in New York State on July 18, 1999 as Romantic
Scents, Inc. by RM Enterprises International, Inc. which was issued 5,000 shares
representing all our issued and outstanding capital stock in consideration of
forming our company. During fiscal 2001, RM Enterprises International
contributed $105,100, fiscal 2002, RM Enterprises International, Inc.
contributed $86,943, during fiscal 2003, $63,050, and during fiscal year 2004,
$15,000. These advances were all paid back to RM Enterprises International. RM
Enterprises International, Inc. may be considered a promoter. Michael Metter,
our President, and Steven Moskowitz, our Secretary, may also be considered our
promoters. Jerome Schlanger and Michael Sorrentino were former presidents of us
and may be considered promoters. Aside from the shares of our common stock which
it received in connection with our formation, RM Enterprises has received no
additional consideration from us for its activities related to our formation or
business.
The control persons of RM Enterprises International are Michael Metter,
Steven Moskowitz and Frank Lazauskas, all of whom are directors of RM
Enterprises International.
(1) The Mindy Moskowitz and Steven Moskowitz Trust for Mindy Moskowitz, Daniel
Moskowitz, Ilana Moskowitz and Gitty Moskowitz is the owner of 1,316,890 shares
of the capital stock. Trustees are Mindy Moskowitz, wife, and Susan Weisman,
sister of Steven Moskowitz, our Secretary. Steven Moskowitz disclaims beneficial
ownership of these shares.
(2) The trustees of The Rubin Family Irrevocable Stock Trust are Majorie Rubin
and Robert Shulman, CPA. The beneficiaries of The Rubin Family Irrevocable Stock
Trust are Linda Rubin, Andrew Rubin and Lisa Rubin. The Rubin Family Irrevocable
Stock Trust owns 2,000,000 shares of our common stock and 459,657 shares of the
capital stock of RM Enterprises.
21
(3) Jerome Schlanger was Treasurer and a director of RM Enterprises until his
resignation as of March 3, 2004. On July 15, 2002, under the name of RSI
Enterprises, we entered into a stock exchange agreement with Nexgen Acquisitions
under which we became a wholly-owned subsidiary. Our sole stockholder, RM
Enterprises, received 12,000,000 shares of the common stock of Nexgen
Acquisitions VIII and became its majority stockholder. Guy Cohen, as the owner
of Nexgen Holdings, Inc., the parent of Nexgen Acquisitions was the promoter of
Nexgen Acquisitions; and he received no additional consideration from us for his
activities. Mr. Cohen, on November 22, 2004, transferred his interest in Nexgen
Holdings to The Rubin Family Irrevocable Trust.
In September, 2002, the major stockholder of Nexgen Acquisitions VIII
transferred 2,000,000 shares to The Rubin Family Irrevocable Stock Trust, a
stockholder of RM Enterprises, but not a control person of RM Enterprises,
300,000 shares to Eugene Dworkis, 200,000 shares to Maurice Harroch and 500,000
shares to Falcon Crest Capital, Inc.
Michael Sorrentino, a former employee, loaned us $25,000 on February
21, 2001 payable on demand. We had been accruing interest at the rate of 10% per
annum. Between June 1, 2000 to May 31, 2001, RM Enterprises International, Inc.,
our majority stockholder, loaned us during the fiscal year ended May 31, 2001,
an aggregate of $51,930. The loan did not bear interest, and the maturity date
was extended to December 31, 2004. From November, 2002 through November 30,
2003, RM Enterprises International loaned us an aggregate of $73,600, payable on
demand. The loan which was now due December 31, 2004 did not bear interest. We
used these funds to pay rent in the amount of $15,000, telephone costs in the
amount of $7,500 and other administrative expenses relating to our occupancy of
our headquarters premises of $51,100. All of these loans were converted into
shares of our common stock.
In January 2003, we paid $24,500 to a company owned by Deborah Metter,
the wife of Michael Metter, our President, for marketing and promotional
services in connection with the preparation of an infomercial for the vehicular
sponge, including the use of her home. In 2003 and the first half of 2004, we
marketed our products on a radio talk show aired by BusinessTalkRadio.net, a
syndicated radio network of which Mr. Metter is President and CEO.
BusinessTalkRadio.net received a $1.00 commission on each item sold. We paid
BusinessTalkRadio.net an aggregate of $300 during that time but currently do not
advertise on the program.
From our inception in July 1999 until March 2, 2004, we occupied office
and warehouse space in premises in an industrial building leased by RM
Enterprises International. We paid RM Enterprises International an aggregate of
$15,000 for rent, $7,500 for telephone costs and $51,600 for administrative
costs. From March 3, 2004 through December 15, 2004, we occupied office space
rent-free in an office tower that was leased by the family of Steven Moskowitz.
We currently sublease office space from A&N Enterprises LLC, which is leased by
the family of Steven Moskowitz. We issued 60,000 shares of common stock to A&N
Enterprises as consideration for our use of the premises.
In January 2005, we issued and aggregate of 10,030,000 shares of our
common stock to our officers and directors, as compensation for services
performed on our behalf.
In January 2005, we issued 533,333 shares of our common stock to Steven
Moskowitz, our Secretary and Director, in exchange for $80,000 in debt.
In January 2005, we issued 466,667 shares of our common stock to RM
Enterprise International and 215,969 shares of our common stock to Flo Weinberg,
Inc., its wholly-owned subsidiary, in exchange for $106,527.25 in debt.
In January 2005, we issued 466,667 shares of our common stock to
American United Global, Inc., which is majority-owned by The Rubin Family
Irrevocable Stock Trust, in exchange for $70,000 in debt.
In January 2005, we issued 500,000 shares of our common stock to
Michael Sorrentino, in exchange for $75,000 in debt.
22
We believe that these transactions were on terms as favorable as could
have been obtained from unaffiliated third parties. All future transactions we
enter into with our directors, executive officers and other affiliated persons
will be on terms no less favorable to us than can be obtained from an
unaffiliated party and will be approved by a majority of the independent,
disinterested members of our board of directors, and who had access, at our
expense, to our or independent legal counsel.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of February 24,
2005, with respect to the beneficial ownership of the outstanding common stock
by (i) any holder of more than five (5%) percent; (ii) each of our executive
officers and directors; and (iii) our directors and executive officers as a
group. Except as otherwise indicated, each of the stockholders listed below has
sole voting and investment power over the shares beneficially owned.
-------------------------------- -------------------------- -------------------------------------------------
Shares of Common Stock Beneficially Owned(1)(2)
-------------------------------- -------------------------- -------------------------------------------------
Name Title Number Percent
-------------------------------- -------------------------- ------------------------- -----------------------
RM Enterprises International, 12,482,636 36.5%
Inc. (3)
1350 Broadway, Suite 210,
New York, New York 10018
-------------------------------- -------------------------- ------------------------- -----------------------
Rubin Family Irrevocable 7,377,667 21.4%
Stock Trust (4)
25 Highland Boulevard
Dix Hills, New York 11746
-------------------------------- -------------------------- ------------------------- -----------------------
Michael Metter (3)(5) President and Director 14,147,636 30.5%
One Tinker Lane
Greenwich, CT 06830
-------------------------------- -------------------------- ------------------------- -----------------------
Steven Moskowitz (3)(6) Secretary and Director 15,285,969 32.9%
1350 Broadway, Suite 210
New York, NY 10018
-------------------------------- -------------------------- ------------------------- -----------------------
Thomas Monahan Chief Financial Officer 100,000 *
3638 Oxford Avenue
Riverdale, New York 10463
-------------------------------- -------------------------- ------------------------- -----------------------
Frank Lazauskas (3)(7) Director 15,812,636 34.1%
51 Niagara Street
Newark, New Jersey 07105
-------------------------------- -------------------------- ------------------------- -----------------------
Officers and Directors 20,280,969 59.7%
(4 persons)
-------------------------------- -------------------------- ------------------------- -----------------------
* less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities.
Unless otherwise indicated below, the persons and entity named in the table have
sole voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable. Under rules adopted
by the SEC, shares of common stock issuable pursuant to warrants or options or
upon conversion of convertible securities, to the extent such warrants or
options or convertible securities are currently exercisable or convertible
within 60 days of the date of the prospectus, are treated as outstanding for
computing the percentage of the person holding such securities but are not
treated as outstanding for computing the percentage of any other person.
(2) The percentage of beneficial ownership is based on 33,952,636shares of our
common stock outstanding as of the date of the prospectus.
(3) Includes 12,266,667 shares of our common stock and 215,969 shares of our
common stock owned by Flo Weinberg, Inc., a wholly-owned subsidiary of RM
Enterprises International. The control persons of RM Enterprises International
23
are Michael Metter, Steven Moskowitz and Frank Lazauskas, all of whom are
directors of RM Enterprises International.
(4) Includes 6,911,000 shares of our common stock and 466,667 shares of common
stock owned by American United Global, Inc., of which The Rubin Family
Irrevocable Stock is a majority stockholder. The trustees of The Rubin Family
Irrevocable Stock Trust are Majorie Rubin and Robert Shulman, CPA. The
beneficiaries of The Rubin Family Irrevocable Stock Trust are Linda Rubin,
Andrew Rubin and Lisa Rubin. The Rubin Family Irrevocable Stock Trust also owns
459,657 shares of the capital stock of RM Enterprises International.
(5) Includes 1,665,000 shares of our common stock. Deborah Metter, wife of
Michael Metter, our President, is the beneficial owner of 1,768,470 shares of
our common stock representing her ownership of 103,470 shares of the capital
stock of RM Enterprises International and 1,665,000 shares of our common stock
held by her through her corporation, D.L. Investments, Inc. Michael Metter
disclaims beneficial ownership of the shares held by Deborah Metter.
(6) Includes 2,803,333 shares of our common stock. The Mindy Moskowitz and
Steven Moskowitz Trust for Mindy Moskowitz, Daniel Moskowitz, Ilana Moskowitz
and Gitty Moskowitz is the beneficial owner of 1,316,890 shares of our common
stock through its ownership of 1,316,890 shares of the capital stock of RM
Enterprises International. Trustees are Mindy Moskowitz, wife, and Susan
Weisman, sister of Steven Moskowitz, our secretary. Mr. Moskowitz disclaims
beneficial ownership of these shares.
(7) Includes 3,330,000 shares of our common stock. Mr. Lazauskas also
owns1,088,002 shares of the capital stock of RM Enterprises International.
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is
qualified in its entirety by the provisions of our Certificate of Incorporation,
with amendments, all of which have been filed as exhibits to our registration
statement of which this prospectus is a part.
CAPITAL STRUCTURE
Our authorized capital stock consists of 55,000,000 shares of capital
stock, par value $.001 per share, of which 50,000,000 shares are common stock
and 5,000,000 shares are preferred stock that may be issued in one or more
series at the discretion of the board of directors. As of the date hereof,
33,877,636 shares of common stock and no shares of preferred stock are issued
and outstanding.
UNITS
Each unit offered hereby consists of one share of common stock and one
redeemable class A warrant. The components of the unit will not be separately
transferable for a period of 90 days from the initial closing of this offering,
or sooner in our discretion. We will issue a press release if we determine to
allow the common stock and class A redeemable warrants to become separately
tradable prior to 90 days.
COMMON STOCK
We are authorized to issue 50,000,000 shares of common stock, $.001 par
value per share, of which 33,952,636shares are issued and outstanding as of the
date of the prospectus. Each outstanding share of common stock is entitled to
one vote, either in person or by proxy, on all matters that may be voted upon by
their holders at meetings of the stockholders.
Holders of our common stock:
o have equal ratable rights to dividends from funds legally available
therefore, if declared by our board of directors;
24
o are entitled to share ratably in all of our assets available for
distribution to holders of common stock upon our liquidation,
dissolution or winding up;
o do not have preemptive, subscription or conversion rights, or
redemption or sinking fund provisions; and
o are entitled to one noncumulative vote per share on all matters on
which stockholders may vote at all meetings of our stockholders.
Cumulative voting for the election of directors is not provided for in
our certificate of incorporation, which means that the holders of a majority of
the shares voted can elect all of the directors then standing for election.
Our certificate of incorporation provides that specified provisions may
not be repealed or amended except upon the affirmative vote of the holders of
not less than 2/3 of the outstanding stock entitled to vote. This provision
would enable the holders of more than 1/3 of our voting stock to prevent
amendments to the certificate of incorporation even if they were favored by the
holders of a majority of the voting stock.
PREFERRED STOCK
We may, subject to limitations prescribed by Delaware law:
o provide for the issuance of up to 5,000,000 shares of our preferred
stock in one or more series;
o establish from time to time the number of shares to be included in
each such series;
o fix the rights, preferences and privileges of the shares of each
wholly unissued series and any qualifications, limitations or
restrictions thereon; and
o increase or decrease the number of shares of any such series (but
not below the number of shares of such series then outstanding)
without any further vote or action by the stockholders.
Our board of directors may authorize the issuance of preferred stock
with voting or conversion rights that could adversely affect the voting power or
other rights of the holders of our common stock. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, have the effect of
delaying, deferring or preventing a change in control and may adversely affect
the market price of the common stock and the voting and other rights of the
holders of common stock. We have no current plans to issue any shares of
preferred stock.
REDEEMABLE CLASS A WARRANTS
Each redeemable class A warrant entitles the registered holder thereof
to purchase one share of common stock form us at a price of $0.50 per share,
subject to adjustment in certain circumstances, at any time from the date the
warrants become separately tradable until five years after the date hereof.
We may redeem the class A warrants at a redemption price of $0.001 per
class A warrant, upon at least 30 days' written notice, commencing on _________,
2005 (six months after the date hereof), if the average of the closing high bid
prices of the common stock exceeds $1.00 for five consecutive trading days
ending on the third day prior to the date on which notice of redemption is
given, and provided that a current prospectus relating to the underlying
securities is then in effect. All of the redeemable class A warrants must be
redeemed if any are redeemed. We will redeem the warrants if we are in need of
additional capital at a time when the common stock is trading above $1.00 and we
believe that other sources of capital are less advantageous.
25
The exercise prices and number of shares of common stock or other
securities issuable upon exercise of the redeemable class A warrants are subject
to adjustment in certain circumstances, including in the event of a stock
dividend, stock split, recapitalization, reorganization, merger or
consolidation.
The redeemable class A warrants may be exercised upon surrender of the
warrant certificate on or prior to the expiration date at the offices of the
warrant agent, with the exercise form on the reverse side of the warrant
certificate completed and executed as indicated, accompanied by full payment of
the exercise price to the warrant agent for the number of redeemable class A
warrants being exercised. Holders of the redeemable class A warrants do not have
the rights or privileges of holders of common stock.
In order to comply with applicable laws in connection with the exercise
of the redeemable class A warrants and the resale of the common stock issued
upon such exercise, the redeemable class A warrants will be exercisable only if:
o at the time of exercise, we have an effective and current
registration statement on file with the Securities and Exchange
Commission covering the shares of common stock issuable upon
exercise upon such redeemable class A warrant; and
o such shares have been registered or qualified or deemed to be exempt
from registration or qualification under the securities laws of the
state of residence of the holder of such redeemable class A warrant.
We will use our best efforts to have all shares so registered or
qualified on or before any exercise date and to maintain a current prospectus
relating thereto until the expiration of the redeemable class A warrants,
subject to the terms of the warrant agreement. While it is our intention to do
so, there is no assurance that it will be able to comply. We therefore will be
required to file post-effective amendments to this registration statement when
subsequent events require such amendments in order to continue the registration
of the common stock underlying the redeemable class A warrants and to take
appropriate action under state laws. During any period in which we fail to
maintain the effectiveness of this registration statement, the warrantholders
will not be able to exercise their redeemable class A warrants.
REPORTS TO STOCKHOLDERS
We intend to furnish our stockholders with annual reports containing
audited financial statements as soon as practicable after the end of each fiscal
year. Our fiscal year ends on May 31.
TRANSFER AGENT
We have appointed Olde Monmouth Stock Transfer Co., Inc., Atlantic
Highlands, New Jersey, as transfer agent for our shares of common stock and
warrants.
SELLING STOCKHOLDERS
We are registering 17,259,344 of the shares, which are owned by our
stockholders. We will not receive any of the proceeds from sales of shares
offered under this prospectus.
All costs, expenses and fees in connection with the registration of the
selling stockholders' shares will be borne by us. All brokerage commissions, if
any, attributable to the sale of shares by selling stockholders will be borne by
selling stockholders.
The following table sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
26
Shares Beneficially Owned Shares Beneficially Owned
Prior to the Offering After the Offering (1)
------------------------ ---------------------------------
Total Percent Percent
Name Number Percent (2) Shares Assuming Assuming
Registered Minimum Offering Maxium Offering
-------------------------------- ------ ----------- ---------- ---------------- ---------------
Shinya Araki 5,000 * 5,000 -0-% -0-%
Neil Foley 5,000 * 5,000 -0-% -0-%
Jean Geyer 10,000 * 10,000 -0-% -0-%
Emma Hass 8,000 * 8,000 -0-% -0-%
Melvin Koeller 5,000 * 5,000 -0-% -0-%
Malcom McGuire 10,000 * 10,000 -0-% -0-%
Sue Neil 8,000 * 8,000 -0-% -0-%
Kevin O'Hara 8,000 * 8,000 -0-% -0-%
Olson Jeweler 5,000 * 5,000 -0-% -0-%
Bettye Oustz 8,000 * 8,000 -0-% -0-%
Angelo Palmisano 5,000 * 5,000 -0-% -0-%
Linda Chadwick 5,000 * 5,000 -0-% -0-%
Carol Polevoy 8,000 * 8,000 -0-% -0-%
Philip Wong 8,000 * 8,000 -0-% -0-%
Neil Cox 8,000 * 8,000 -0-% -0-%
Richard Blundell 10,000 * 10,000 -0-% -0-%
Ken Heng 10,000 * 10,000 -0-% -0-%
Donna Lutsky 5,000 * 5,000 -0-% -0-%
Jay Lutsky 5,000 * 5,000 -0-% -0-%
Tanna Sessions 5,000 * 5,000 -0-% -0-%
Dean Sessions 5,000 * 5,000 -0-% -0-%
Patsy Sessions 5,000 * 5,000 -0-% -0-%
Michelle Brown 5,000 * 5,000 -0-% -0-%
James John 8,000 * 8,000 -0-% -0-%
Arden Amos 10,000 * 10,000 -0-% -0-%
Robert Sessions 5,000 * 5,000 -0-% -0-%
Robert Sonfield 10,000 * 10,000 -0-% -0-%
Margot Krimmel 10,000 * 10,000 -0-% -0-%
Bonnie Carol 10,000 * 10,000 -0-% -0-%
Max Krimmel 10,000 * 10,000 -0-% -0-%
Renegade Consulting (3) 100,000 * 100,000 -0-% -0-%
Joel Pensley 775,000 2.5% 775,000 -0-% -0-%
Maurice Harroch 200,000 * 200,000 -0-% -0-%
Automotive United Group, Inc. 466,667 1.3% 466,667 -0-% -0-%
Flo Weinberg, Inc. (4) 215,969 * 215,969 -0-% -0-%
DDK and Company LLC (5) 500,000 1.5% 500,000 -0-% -0-%
Michael Sorrentino 500,000 1.4% 500,000 -0-% -0-%
Michael L. Metter (6) 14,147,636 30.5% 1,665,000 25.8% 22.9%
Steven Moskowitz (7) 15,285,969 32.9% 2,803,333 25.8% 22.9%
Thomas Monahan (8) 100,000 * 100,000 -0-% -0-%
Frank Lazauskas (9) 15,812,636 34.1% 3,330,000 25.8% 22.9%
A&N Enterprises LLC 310,000 * 310,000 -0-% -0-%
Robert J. Miller 100,000 * 100,000 -0-% -0-%
Reed Smith LLC 100,000 * 100,000 -0-% -0-%
Ahava Investments Inc. 500,000 1.4% 500,000 -0-% -0-%
Rubin Family Irrevocable 7,377,667 21.4% 3,391,868 10.9% 9.4%
Stock Trust (10)
D.L. Investments, Inc. 1,665,000 4.7% 1,665,000 -0-% -0-%
Touchdown Capital Inc. 250,000 * 250,000 -0-% -0-%
Irwin Pearl 32,500 * 32,500 -0-% -0-%
Patti DeMatteo 32,500 * 32,500 -0-% -0-%
Eliot F. Bloom 10,000 * 10,000 -0-% -0-%
(1) Applicable percentage ownership is based on 33,877,636 shares of common
stock outstanding as of February 24, 2005, together with securities exercisable
or convertible into shares of common stock within 60 days of February 24, 2005.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock that are currently
exercisable or exercisable within 60 days of February 24, 2005 are deemed to be
beneficially owned by the person holding such securities for the purpose of
computing the percentage of ownership of such person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person.
27
(2) Assumes that all securities registered will be sold.
(3) Joel Pensley has voting and investment power over the shares held by
Renegade Consulting, Inc.
(4) Flo Weinberg, Inc. is a wholly-owned subsidiary of RM Enterprises
International, Inc, which owns 36.5% of the common stock of Spongetech. Michael
Metter, Steven Moskowitz and Frank Lazauskas, the board of directors of RM
Enterprises International, hold voting and investment power over the shares held
by Flo Weinberg.
(5) Automotive United Group, Inc. is majority owned by The Rubin Family
Irrevocable Stock Trust. The trustees of The Rubin Family Irrevocable Stock
Trust are Majorie Rubin and Robert Shulman, CPA
(6) Michael Metter is the President and a director of Spongetech.
(7) Steven Moskowitz is the Secretary and a director of Spongetech.
(8) Tom Monahan is the Chief Financial Officer of Spongetech.
(9) Frank Lazauskas is a director of Spongetech.
(10) The Rubin Family Irrevocable Trust owns 21.1% of the common stock of
Spongetech. The trustees of The Rubin Family Irrevocable Stock Trust are Majorie
Rubin and Robert Shulman, CPA
SHARES ELIGIBLE FOR FUTURE SALE
On the date of the prospectus, 6,294,000 shares of common stock owned
by our stockholders, will be freely tradable without restriction under the
Securities Act. None of these shares are held by our "affiliates" as that term
is defined in Rule 144 under the Securities Act. We have outstanding 33,952,636
shares of our common stock.
SALE OF RESTRICTED SHARES. Shares of our common stock held by
affiliates will be eligible for sale in the public market, subject to certain
volume limitations and the expiration of applicable holding periods under Rule
144 of the Securities Act. In general, under Rule 144, persons who have
beneficially owned restricted shares for at least one year are entitled to sell
within any three-month period the number of shares which does not exceed the
greater of 1% of the number of shares of common stock then outstanding (which
will equal approximately 332,776 shares) or the average weekly trading volume of
the common stock during the four calendar weeks preceding the date on which
notice of such sale was files under Form 144 with the SEC. Sales under Rule 144
are also subject to manner of sale and notice requirements and to the
availability of current public information about us. Under Rule 144(k), a person
who has not been one of our affiliates at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, may resell the shares of common stock without complying
with the manner of sale, public information, volume limitation or notice
requirements of Rule 144.
We can offer no assurance that an active public market in our shares
will develop. Future sales of substantial amounts of our shares (including
shares issued upon exercise of outstanding options) in the public market could
adversely affect market prices prevailing from time to time and could impair our
ability to raise capital through the sale of our equity securities.
PLAN OF DISTRIBUTION
SHARES TO BE SOLD BY US
We are offering to sell a minimum of 2,000,000 units and a maximum of
8,000,000 units at a price of $0.25 per unit. The units will be offered to the
public on a "best-efforts, all-or-none" basis as to the minimum number of shares
and on a "best efforts" basis as to the remaining shares. There is no commitment
on the part of any person to purchase and pay for any shares. Our officers,
28
directors and/or employees will be offering the shares for sale, but they will
receive no compensation for their efforts in making any such offers or sales.
Our officers, directors and employees may only make sales if they can rely on
the exemption provided by Rule 3a4-1 under the Securities Exchange Act of 1934,
which permits such persons to sell securities under certain circumstances
without registration as a securities broker. Currently, Michael L. Metter, our
President and Chief Executive Officer, and Steven Moskowitz, our Secretary, will
offer the securities on behalf of Spongetech Delivery Systems. We may also
engage registered broker-dealers to offer and sell the units. We may pay any
such registered persons who make such sales a commission of up to 10% of the
sale price of each unit sold, and provide the registered persons a
non-accountable expense allowance of up to 3% of the sale price of each unit
sold. We have not entered into any underwriting agreement, arrangement or
understanding for the sale of the units being offered. In the event we retain a
broker who may be deemed an underwriter, we will file an amendment to this
registration statement with the Securities and Exchange Commission. This
offering is intended to be made solely by the delivery of this Prospectus and
the accompanying subscription application to prospective investors.
Prior to this offering there has been no public market for our common
stock. The offering price of the shares was determined by us based upon our
assessment of our value compared to others in our market, taking into account,
among other matters, the following:
o the relatively early stage of our development compared to others in
similar industries;
o the limited capital available to us through this offering or through
other sources;
o our ability to expand and develop our operations based upon the
capital provided by this offering;
o our potential value if we are successful in implementing our
business plan;
o a multiple of our revenues; and
o the general market for publicly traded securities.
The exercise price of the redeemable class A warrants was based solely
on our arbitrary assessment of a premium over the offering price of the
unit which we believe will provide some value to the redeemable class A
warrant. There can be no assurance that they will in fact have any
value. The offering price of the units and the exercise price of the
class A warrants bears no relationship to any recognized criteria of
value, nor is it necessarily indicative of the market price for the
units, common stock or redeemable class A warrants after this offering.
After the registration statement of which this prospectus forms a part
has been declared effective, we will provide to each prospective investor a copy
of the final prospectus relating to his offering which includes an agreement to
purchase units. In order to purchase the units, the subscription application in
the form attached to the prospectus and a check made payable to "Continental
Stock Transfer & Trust Company as Escrow Agent for Spongetech Delivery Systems,
Inc." should be completed and forwarded to us. Receipt by us of a subscription
agreement and/or deposit with the escrow agent of payment for the subscribed
units shall not constitute acceptance of a subscription. We reserve the fight to
withdraw, cancel or modify the offering hereby and to reject subscriptions in
whole or in part, for any reason.
The proceeds received under this offering will be deposited in an
on-interest bearing account with Olde Monmouth Stock Transfer Co., Inc. In the
event that less than the minimum gross proceeds from the sale of at least
2,000,000 units being offered are received within 60 days from the date hereof
(with an allowable additional 30-day extension), we will cancel this offering
and all proceeds received will be promptly refunded to purchasers without any
interest thereon.
Certificates representing your securities will not be issued until such
times as good funds related to the purchase of the units by such subscribers are
released form the escrow account to us by the escrow agent. Until such time as
certificates are issued to the subscribers, the subscribers will not be
considered shareholders of Spongetech Delivery Systems.
Subscribers have no right to a return of their subscription payments
held in the escrow account until we decide not to accept such subscription
payment.
29
SHARES TO BE SOLD BY THE SELLING STOCKHOLDERS
This prospectus also relates to the resale of up to 17,259,344
additional shares that are held by certain selling stockholders identified in
this prospectus. There is currently no public market for the Spongetech Delivery
Systems' securities. Until such time as a market price for our common stock is
quoted on the OTC Bulletin Board, the selling shareholders will sell their
shares at a price of $0.25 per share. Thereafter, they may sell their shares in
public or private transactions, at prevailing market prices or at privately
negotiated prices. We will not receive any proceeds from the sale of the shares
of common stock by the selling shareholders.
We will pay all expenses of registration incurred in connection with
this offering, but the selling stockholders will pay all brokerage commissions
and other similar expenses incurred by them.
The distribution of the shares by the selling stockholders is not
subject to any underwriting agreement. We expect that the selling stockholders
will sell their shares through customary brokerage channels, in private sales,
or in transactions under Rule 144 under the Securities Act.
The selling stockholders, our placement agent and other brokers and
dealers through whom sales of the shares are made may be deemed to be
"underwriters" within the meaning of the Securities Act, and the commissions or
discounts and other compensation paid to those persons could be regarded as
underwriters compensation.
From time to time, the selling stockholders may engage in short
sales, short sales against the box, puts and calls and other transactions in our
common shares, and will be able to sell and deliver the shares in connection
with those transactions or in settlement of securities loans. In effecting
sales, brokers and dealers engaged by the selling stockholders may arrange for
other brokers or dealers to participate in those sales. Brokers or dealers may
receive commissions or discounts from the selling stockholders (or, if any such
broker dealer acts as agent for the purchaser of those shares, from the
purchaser) in amounts to be negotiated (which are not expected to exceed those
customary in the types of transactions involved). Brokers and dealers may agree
with the selling stockholder to sell a specified number of shares at a
stipulated price per share and, to the extent those brokers and dealers are
unable to do so acting as agent for a selling stockholder, to purchase as
principal any unsold shares at the price required to fulfill the broker dealer
commitment to a selling stockholder.
At the time a particular offer of the shares is made, to the extent
it is required, we will distribute a supplement to this prospectus that will
identify and set forth the aggregate amount of shares being offered and the
terms of the offering. A selling stockholder may sell shares at any price. Sales
of the shares at less than market price may depress the market price of our
common stock. Subject to applicable securities laws, the selling stockholder
will generally not be restricted as to the number of shares that they may sell
at any one time, and it is possible that a significant number of shares could be
resold at the same time.
The selling stockholders and any other person participating in the
distribution of the shares will also be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated under it, including, without limitation, Regulation
M, which may limit the timing of purchases and sales of the shares by the
selling stockholder and any other person. Furthermore, Regulation M of the
Exchange Act may restrict the ability of any person engaged in the distribution
of the shares to engage in market-making activities with respect to the
particular shares being distributed for a period of up to five business days
prior to the commencement of the distribution. All of the foregoing may affect
the marketability of the shares and the ability of any person or entity to
engage in market-making activities with respect to the shares.
To comply with certain states securities laws, if applicable, the
shares may be sold in those jurisdictions only through registered or licensed
brokers or dealers. In certain states the shares may not be sold unless a
selling stockholder meets the applicable state notice and filing requirements.
30
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 102(b)(7) of the Delaware General Corporation Law, which we
refer to as the "DGCL," permits a provision in the certificate of incorporation
of each corporation organized under the DGCL eliminating or limiting, with some
exceptions, the personal liability of a director to the corporation or its
stockholders for monetary damages for some breaches of fiduciary duty. Our
Certificate of Incorporation eliminates the personal liability of directors to
the fullest extent permitted by the DGCL.
Section 145 of the DGCL, which we refer to as "Section 145," in
summary, empowers a Delaware corporation to indemnify, within limits, its
officers, directors, employees and agents against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement that they actually and
reasonably incur in connection with any suit or proceeding, other than by or on
behalf of the corporation, if they acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interest of the
corporation and, with respect to a criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.
With respect to any action by or on behalf of the corporation, Section
145 permits a corporation to indemnify its officers, directors, employees and
agents against expenses (including attorneys' fees) they actually and reasonably
incur in connection with the defense or settlement of the action or suit,
provided that person meets the standard of conduct described in the preceding
paragraph. No indemnification is permitted, however, in respect of any claim
where that person has been found liable to the corporation, unless the Court of
Chancery or court in which the action or suit was brought approves the
indemnification and determines that the person is fairly and reasonably entitled
to be indemnified.
As permitted by the DGCL, our bylaws provide that we are required to
indemnify our directors and officers, consultants and employees to the fullest
extent permitted by the DGCL, Subject to certain very limited exceptions, we are
required to advance expenses, as incurred, in connection with a legal proceeding
to the fullest extent permitted by the DGCL, subject to certain very limited
exceptions. The rights conferred in our bylaws are not exclusive. We have
obtained directors' and officers' liability insurance.
Insofar as indemnification for liabilities under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
provisions described above, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by our
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter as been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Spongetech Delivery Systems, Inc. by Sichenzia Ross Friedman Ference LLP, New
York, New York.
EXPERTS
Spongetech Delivery Systems' financial statements as of and for the
years ended May 31, 2004 and 2003, and the interim period ended November 30,
2004, included in this prospectus, have been audited by Drakeford & Drakeford,
LLC, independent registered public accountants, as stated in their report
appearing herein and are so included herein in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
31
ADDITIONAL INFORMATION
We have not previously been required to comply with the reporting
requirements of the Securities Exchange Act. We have filed with the SEC a
registration statement on Form SB-2 to register the securities offered by this
prospectus. The prospectus is part of the registration statement, and, as
permitted by the SEC's rules, does not contain all of the information in the
registration statement. For future information about us and the securities
offered under this prospectus, you may refer to the registration statement and
to the exhibits filed as a part of the registration statement.
In addition, after the effective date of this prospectus, we will be
required to file annual, quarterly, and current reports, or other information
with the SEC as provided by the Securities Exchange Act. You may read and copy
any reports, statements or other information we file at the SEC's public
reference facility maintained by the SEC at Judiciary Plaza, Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference room. Our SEC filings are also available to the public through the SEC
Internet site at http\\www.sec.gov.
32
INDEX TO FINANCIAL STATEMENTS
Part 1 - Financial Information
Page
----
Item 1 - Financial Statements
Report of Independent Auditors
Balance Sheets as of November 30, 2004 (unaudited) and May 31, 2004 F-3
Statements of Operations for the six months ended November 30, 2004
and 2003 (unaudited) and May 31, 2004 and 2003 F-4
Statements of Changes in Stockholders' Equity for the six months
ended November 30, 2004 (unaudited) and years ended May 31,
2004 and 2003 F-5
Statements of Cash Flows for the six months ended November 30,
2004 and 2003 (unaudited) and May 31, 2004 and 2003 F-6
Notes to Financial Statements F-7 - F-12
F-1
DRAKEFORD & DRAKEFORD, LLC
CERTIFIED PUBLIC ACCOUNTANTS
A LIMITED LIABILITY COMPANY
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of SPONGETECH DELIVERY SYSTEMS, INC.
We have audited the balance sheet of SPONGETECH DELIVERY SYSTEMS, INC. as of May
31,2004, and the related statements of operations, changes in stockholders'
equity (deficiency), and cash flows for the years ended May 31, 2004 and 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SPONGETECH DELIVERY
SYSTEMS, INC., as of May 31, 2004 and 2003, and the results of its operations
and its cash flows for the two years then ended, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
SPONGETECH DELIVERY SYSTEMS, INC. will continue as a going concern. As more
fully described in Note 1, the company has incurred operating losses since the
date of organization and requires additional capital to continue operations.
These conditions raise substantial doubt about the company's ability to continue
as a going concern. Management's plans as to these matters are described in Note
1. The financial statements do not include any adjustments to reflect the
possible effects on the recoverability and classification of assets or the
amounts and classifications of liabilities that may result from the possible
inability of SPONGETECH DELIVERY SYSTEMS, INC. to continue as a going concern.
S/Drakeford & Drakeford, LLC
January 15, 2005
F-2
SPONGETECH DELIVERY SYSTEMS, INC.
BALANCE SHEETS
November 30, May 31,
2004 2004
----------- -----------
(unaudited)
ASSETS
Current Assets
Cash $ 20 $ 50
Inventories 444 444
----------- -----------
Total current assets 464 494
Property and equipment 30,689 32,831
----------- -----------
Total assets $ 31,153 $ 33,325
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Accounts payable and
accrued expenses $ 122,516 $ 122,516
Accrued compensation 1,804,500 1,789,500
Income taxes payable 1,600 1,600
----------- -----------
Total current liabilities 1,928,616 1,913,616
Total long-term liabilities 0 0
----------- -----------
Total liabilities 1,928,616 1,913,616
----------- -----------
Shareholders' Equity (Deficiency)
Common stock, $.001 par value;
Authorized 50,000,000 shares;
issued and outstanding 18,985,000
and 18,985,000 shares as of
November 30, 2004 and May 31,
2004, respectively 18,985 18,985
Preferred stock $.001 par value;
Authorized 5,000,000 shares;
no shares issued and outstanding 0 0
Additional paid-in capital 248,948 248,948
Common stock subscribed 526,814 526,814
Deficit (2,692,210) (2,675,038)
----------- -----------
Total shareholders' equity (deficiency) (1,897,463) (1,880,291)
----------- -----------
Total liabilities and shareholders'
equity (deficiency) $ 31,153 $ 33,325
=========== ===========
See Independent Auditors' Report and notes to financial statements.
F-3
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the For the
Six Months Ended year ended
November 30, May 31,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Sales $ 0 $ 2,123 $ 1,858 $ 342,019
Cost of goods sold 0 5,136 1,600 299,617
------------ ------------ ------------ ------------
Gross profit (loss) 0 (3,013) 258 42,402
------------ ------------ ------------ ------------
Operating expenses
Selling 0 25,052 39,535 55,261
General and
Administrative
expenses 15,030 25,462 2,007,953 241,428
Depreciation expense 2,142 2,750 4,284 10,830
------------ ------------ ------------ ------------
Total operating expenses 17,172 53,264 2,051,772 307,519
------------ ------------ ------------ ------------
Loss before provision
for income taxes (17,172) (56,277) (2,051,514) (265,117)
Other income and expenses
Interest expense 0 5,012 400
------------ ------------ ------------ ------------
Total income and
expense 0 5,012 400
Net loss $ (17,172) $ (56,277) $ (2,056,526) $ (265,517)
============ ============ ============ ============
Basic and diluted (loss)
per common stock
Net loss per share -
basic and diluted $ (.01) $ (.01) $ (.01) $ (.01)
============ ============ ============ ============
Weighted average common
shares outstanding 18,985,000 18,985,000 18,985,000 18,985,000
============ ============ ============ ============
See Independent Auditors' Report and notes to financial statements.
F-4
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
For The Six Months Ended November 30, 2004 (Unaudited)
and Years Ended May 31, 2004 and 2003
Total
Additional Common Shareholders'
Number of Capital Paid-In Stock Equity
Shares Stock Capital Subscribed Deficit (Deficiency)
----------- ----------- ----------- --------- ----------- -----------
Balance -
June 1,2000 12,000,000 $ 12,000 $ -- $ -- $ (52,200) $ (40,200)
Net loss for year
ended May 31, 2001 -- -- -- (198,318) (198,318)
----------- ----------- ----------- --------- ----------- -----------
12,000,000 12,000 -- -- (250,518) (238,518)
Contributions -- -- 105,100 -- 105,100
----------- ----------- ----------- --------- ----------- -----------
Balance -
May 31, 2001 12,000,000 12,000 105,100 -- (250,518) (133,418)
Contributions -- -- 86,943 -- 86,943
Net loss for year ended
May 31, 2002 -- -- -- (102,477) (102,477)
----------- ----------- ----------- --------- ----------- -----------
12,000,000 12,000 192,043 -- (352,995) (148,952)
Issuance of
common stock 6,985,000 6,985 (1,595) -- 5,390
Value of services
contributed by
officers -- -- 58,500 -- 58,500
Net loss for the
year ended
May 31, 2003 (265,517) (265,517)
----------- ----------- ----------- --------- ----------- -----------
Balance -
May 31, 2003 18,985,000 $ 18,985 $ 248,948 -- $ (618,512) $ (350,579)
Common stock subscribed 526,814 526,814
Net loss for the
year ended
May 31, 2004 (2,056,526) (2,056,526)
----------- ----------- ----------- --------- ----------- -----------
Balance -
May 31, 2004 18,985,000 $ 18,985 $ 248,948 $ 526,814 $(2,675,038) $(1,880,291)
Unaudited
Net loss for
The six
Months ended
November 30, 2004 (17,172) (17,172)
----------- ----------- ----------- --------- ----------- -----------
Balance-Unaudited
November 30, 2004 18,985,000 $ 18,985 $ 248,948 $ 526,814 $(2,692,210) $ 1,897,463)
=========== =========== =========== ========= =========== ===========
See Independent Auditors' Report and notes to financial statements.
F-5
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the six
Months Ended For the
November 30, Year Ended May 31,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Operating Activities:
Net loss $ (17,172) $ (56,277) $(2,056,526) $ (265,517)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities
Value of contributed officer
compensation 0 0 0 39,000
Bad debts 0 0 0 13,909
Depreciation 2,142 2,750 4,284 10,830
Common stock subscribed in release
of company debt 0 0 526,814 0
Changes in operating assets and
liabilities
Accounts receivable 0 0 15,003 (1,395)
Inventories 0 852 852 48,061
Prepaid expense and other
current assets 0 0 0 118
Accounts payable and accrued
expenses 0 (1,836) (121,404) 94,383
Accrued compensation 15,000 0 1,789,500 0
Income taxes payable 0 0 0 400
Due to related parties 0 15,871 (159,578) 30,949
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities (30) (38,640) (1,055) (29,262)
----------- ----------- ----------- -----------
Investing Activities:
Acquisition of property and
equipment 0 (728) 0 (7,700)
----------- ----------- ----------- -----------
Net cash used in investing
activities 0 (728) 0 (7,700)
----------- ----------- ----------- -----------
Financing Activities:
Proceeds from factor, net 0 13,608 0 (13,608)
Proceeds of note payable - related
party 0 25,000 0 51,500
----------- ----------- ----------- -----------
Net cash provided by
financing activities 0 38,608 0 37,892
----------- ----------- ----------- -----------
Net increase (decrease) in cash (30) (760) (1,055) 930
Cash - beginning 50 1,105 1,105 175
----------- ----------- ----------- -----------
Cash - end $ 20 $ 345 $ 50 $ 1,105
=========== =========== =========== ===========
Supplemental Information
Interest paid $ 0 $ 500 $ 110 $ 110
Income taxes paid $ 0 $ 0 $ 0 $ 0
Noncash Transactions:
Parent company debt contributed
to additional paid-in capital $ 0 $ 0 $ 10,000 $ 0
Issuance of common stock $ 0 $ 5,390 $ 0 $ 0
Common stock subscribed $ 0 $ 0 $ 526,814 $ 0
See Independent Auditors' Report and notes to financial statement.
F-6
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1 - Summary of Significant Accounting Policies
Nature of Operations
Spongetech Delivery Systems, Inc. (the "Company") was formed on June 18,
1999, as Romantic Scents, Inc. On June 12, 2001, the Company changed its name to
RSI Enterprises, Inc., and, on October 2, 2002, changed its name to Spongetech
International Ltd. ("SIL"). On July 15, 2002, the Company was acquired by
Spongetech Delivery Systems, Inc. ("SDS") (formerly Nexgen Acquisitions VIII,
Inc.). The transaction was accounted for as a reverse acquisition using the
purchase method of accounting, whereby the shareholder of SIL retained
approximately 63% of the Company's outstanding common stock. On December 16,
2002, SIL changed its domicile to Delaware by merging with and into Spongetech
Sub, Inc. ("SUB"). SUB's parent, Spongetech Delivery Systems, Inc. then merged
with and into SUB so that SUB became the surviving corporation, and changed its
name to Spongetech Delivery Systems, Inc.
The Company distributes a line of hydrophilic polyurethane sponge cleaning
and waxing products.
Basis of Presentation / Going Concern
The financial statements have been prepared for purposes of registration
with the Securities and Exchange Commission ("SEC"), and have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplates continuation of the Company as a going concern.
However, the Company has sustained substantial operating losses in recent years,
current liabilities exceed current assets, and total liabilities exceed total
assets. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The recovery of assets and continuation of future
operations are dependent upon the Company's ability to obtain additional debt or
equity financing and its ability to generate revenues sufficient to continue
pursuing its business purposes. The Company is actively pursuing financing to
fund future operations.
Interim Financial Information (Unaudited)
The interim financial statements of the Company as of November 30, 2004 and
for the six months ended November 30, 2004 and 2003, included herein, have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the SEC. The unaudited interim financial statements include all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation of the results for the interim periods presented. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations relating
to interim financial statements. In the opinion of management, the accompanying
unaudited statements reflect all adjustments necessary to present fairly the
results of its operations and its cash flows for the six months ended November
30, 2004 and 2003.
F-7
1 - Summary of Significant Accounting Policies (Continued)
Accounts Receivable
Accounts receivable have been adjusted for all known uncollectible
accounts. At May 31, 2004 and November 30, 2004, there were no accounts
receivables.
Inventories
Finished products inventories are carried at cost, principally first-in,
first-out, but not in excess of market.
Property and Equipment
Property and equipment are carried at cost. Depreciation has been provided
using straight-line and accelerated methods over the estimated useful lives of
the assets. Repairs and maintenance are expensed as incurred, and renewals and
betterments are capitalized.
Deferred Income Taxes
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences of temporary differences between the
carrying amounts and the income tax bases of assets and liabilities and the
effect of future income tax planning strategies to reduce any deferred income
tax liability.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
Offering Costs
Deferred offering costs incurred by the Company in connection with the
proposed registration statement will be expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred. For the years ended May 31,
2004 and 2003, advertising costs totaled $17,500 and $10,719, respectively.
For the six months ended November 30, 2004 and 2003, advertising costs
totaled $0 and $17,500, respectively.
1 - Summary of Significant Accounting Policies (Continued)
Shipping and Handling Costs
Shipping and handling costs are included in selling expenses. For the years
ended May 31, 2004 and 2003, shipping and handling costs totaled $0 and $21,333
respectively. For the six months ended November 30, 2004 and 2003, shipping and
handling costs totaled $ -0- and $ 0, respectively.
Net Income (Loss) Per Share
Per share data has been computed and presented pursuant to the provisions
of SFAS No. 128, earnings per share. Net income (loss) per common share - basic
is calculated by dividing net income (loss) by the weighted average number of
common shares outstanding during the period. Net income (loss) per common share
- diluted is calculated by dividing net income (loss) by the weighted average
number of common shares and common equivalent shares for stock options
outstanding during the period.
Recent Accounting Pronouncements
New accounting statements issued, and adopted by the Company, include the
following:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, "Business Combinations" ("SFAS 141"), which requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting. As a result, use of the pooling-of-interests
F-8
method is prohibited for business combinations initiated thereafter. SFAS 141
also establishes criteria for the separate recognition of intangible assets
acquired in a business combination. The adoption of SFAS 141 did not have a
material impact on the Company's results of operations, financial position or
cash flows
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), which requires that goodwill and certain other
intangible assets having indefinite lives no longer be amortized to earnings,
but instead be subject to periodic testing for impairment. Intangible assets
determined to have definitive lives will continue to be amortized over their
useful lives. This Statement is effective for the Company's 2003 fiscal year.
However, goodwill and intangible assets acquired after June 30, 2001 are subject
immediately to the non-amortization and amortization provisions of this
Statement. The adoption of SFAS 142 did not have an impact on the Company's
results of operations, financial position or cash flows.
Recent Accounting Pronouncements (Continued)
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which provides the accounting requirements
for retirement obligations associated with tangible long-lived assets. This
Statement requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. This Statement is
effective for the Company's 2003 fiscal year, and early adoption is permitted.
The adoption of SFAS 143 did not have a material impact on the Company's results
of operations, financial position or cash flows.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which excludes from
the definition of long-lived assets goodwill and other intangibles that are not
amortized in accordance with SFAS 142. SFAS 144 requires that long-lived assets
to be disposed of by sale be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS 144 also expands the reporting of discontinued
operations to include components of an entity that have been or will be disposed
of rather than limiting such discontinuance to a segment of a business. This
Statement is effective for the Company's 2003 fiscal year, and early adoption is
permitted. The adoption of SFAS 144 did not have a material impact on the
Company's results of operations, financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other provisions, this Statement eliminates the requirement that gains and
losses from extinguishment of debt be classified as extraordinary items. The
Company will adopt SFAS 145 in fiscal 2003, and has determined it will not
impact the Company's financial position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred, rather than when a company commits to an exit plan as was
previously required. SFAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company will adopt SFAS 146 in fiscal
2003, and has determined it will not impact the Company's financial position,
results of operations or cash flows.
Recent Accounting Pronouncements (Continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair-value-based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS 123 and SFAS 148.
F-9
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Others," was issued. This interpretation requires the initial
recognition and initial measurement, on a prospective basis only, to guarantees
issued or modified after December 31, 2002. Additionally, certain disclosures
requirements are effective for financial statements ending after December 15,
2002. There were no disclosures required of the Company in the 2002 financial
statements, and the Company does not believe that the adoption of this
interpretation in 2003 will have any impact on its financial statements.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," ("VIE's") was issued. This interpretation clarifies
situations in which entities shall be subject to consolidation. This
interpretation is effective for all VIE's created after January 31, 2003. The
Company does not believe that the adoption of this interpretation will have any
impact on its financial statements.
2 - Property and Equipment
Property and equipment is summarized as follows:
Estimated
Useful Lives November 30, May 31,
Years 2004 2004
------------ ------------ ---------
(unaudited)
Furniture and fixtures 5 - 7 $ 761 $ 761
Machinery and equipment 5 - 7 17,828 17,828
Molds 5 38,312 38,312
-------- --------
56,901 56,901
Less: Accumulated depreciation 26,212 24,070
-------- --------
$ 30,689 $ 32,831
======== ========
Depreciation expense for the years ended May 31, 2004 and 2003 was $4,284
and $10,830, respectively. Depreciation expense for the six months ended
November 30, 2004 and 2003 was $2,142 and $2,750, respectively.
3 - Stock Purchase Agreement
On July 15, 2002, SDS entered into an agreement with RM Enterprises
International, Inc., a Delaware corporation, to acquire its wholly-owned
subsidiary SIL. On that date, SDS acquired all of the common stock of SIL for
12,000,000 shares of its $.001 par value common stock. The transaction was
structured as a tax free exchange and was accounted for as a reverse
acquisition, using the purchase method of accounting.
4 - Accounts payable and accrued expenses consist of the following:
November 31, May 31,
2004 2004
------------ ----------
(unaudited)
Product development $ 86,516 $ 86,516
Advertising 36,000 36,000
---------- ----------
Total $ 122,516 $ 122,516
========== ==========
Accrued compensation $1,804,500 $1,789,500
========== ==========
See Note- 8 -Subsequent events
F-10
5 - Related Party Transactions
The Company shares its facility with other related businesses. Expenses
incurred in the operations of the facility, including rent, telephone, and other
office expenses, were allocated to the various businesses. The allocations were
based on usage. Management believes these allocations are reasonable. See Note-8
for new location and lease arrangements.
6 - Deferred Income Taxes
At November 30, 2004 and May 31, 2004, the Company had approximately
$2,317,733 and $2,300,561, respectively, of net operating loss carryforwards
available, which expire in various years through May 31, 2022. The significant
component of the Company's deferred tax asset as of November 30, 2004 and May
31, 2004 is as follows:
November 30, May 31,
2004 2004
------------ -----------
(unaudited)
Non-Current
Net operating loss carryforwards $2,317,733 $ 2,300,561
Valuation allowance for
deferred tax asset (2,317,733) (2,300,561)
---------- -----------
$ -- $ --
========== ===========
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax asset will not be realized.
At November 30, 2004 and May 31, 2004, a valuation allowance for the full amount
of the net deferred tax asset was recorded.
7 - Commitments and Contingencies
Supply and License Agreements
In July 2001, the Company entered into a supply and requirement agreement
with Dicon Technologies ("Dicon"), a manufacturing company that has
technological know-how and patented and proprietary information relating to
hydrophilic foam materials (sponges) and their applications. The agreement
requires the Company to purchase all of their requirement from Dicon, and Dicon
grants exclusive worldwide rights to distribute the products. Minimum annual
purchase requirements are set forth in the agreement. The agreement expired June
30, 2004; however, the purchase on an as needed basis continues.
The Company and Dicon have also entered into an exclusive license agreement
for certain molded hydrophilic foam products which the Company helped develop,
with super absorbent polymer and detergent soaps and waxes used for the cleaning
and polishing of land, sea and transportation vehicles. The term of the
agreement is for the full life of any design patent, which may be issued on the
molded sponge design.
F-11
Employment Contracts
The Company is currently negotiating with two executives to establish
employment contracts. No terms of these negotiations have been disclosed.
8 - Subsequent Events
Subsequent to the date of the financial statements, the company issued
an aggregate number of shares totaling $526,814 consisting of officers loans and
trade debt payables. As of May 31, 2004 and November 30, 2004, the common stock
subscribed represents these common shares.
Also in January 2005, the company converted the accrued compensation to
10,330,000 shares of common stock. (see Note-4) The company also agreed to the
exchange of an aggregate of 60,000 shares of common stock of the corporation in
consideration for a sublease from A & N Enterprises, LLC. The new address is The
Empire State Building, 350 5th Avenue, Suite 2204, New York, New York 10118. The
lease shall be for the period December 8, 2004 through January 31, 2008.
F-12
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROSPECTUS. THIS DOCUMENT MAY ONLY BE USED WHERE
IT IS LEGAL TO SELL THE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE
ACCURATE ON THE DATE OF THIS DOCUMENT.
UP TO 8,000,000 UNITS CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE REDEEMABLE CLASS A WARRANT
AND
17,259,344
SHARES OF
COMMON STOCK
OF
SPONGETECH DELIVERY SYSTEMS, INC.
PROSPECTUS
The date of this prospectus is ____________, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification of directors and executive officers and limitation of liability
Section 102(b)(7) of the Delaware General Corporation Law, which we
refer to as the "DGCL," permits a provision in the certificate of incorporation
of each corporation organized under the DGCL eliminating or limiting, with some
exceptions, the personal liability of a director to the corporation or its
stockholders for monetary damages for some breaches of fiduciary duty. Our
Certificate of Incorporation eliminates the personal liability of directors to
the fullest extent permitted by the DGCL.
Section 145 of the DGCL, which we refer to as "Section 145," in
summary, empowers a Delaware corporation to indemnify, within limits, its
officers, directors, employees and agents against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement that they actually and
reasonably incur in connection with any suit or proceeding, other than by or on
behalf of the corporation, if they acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interest of the
corporation and, with respect to a criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.
With respect to any action by or on behalf of the corporation, Section
145 permits a corporation to indemnify its officers, directors, employees and
agents against expenses (including attorneys' fees) they actually and reasonably
incur in connection with the defense or settlement of the action or suit,
provided that person meets the standard of conduct described in the preceding
paragraph. No indemnification is permitted, however, in respect of any claim
where that person has been found liable to the corporation, unless the Court of
Chancery or court in which the action or suit was brought approves the
indemnification and determines that the person is fairly and reasonably entitled
to be indemnified.
As permitted by the DGCL, our bylaws provide that we are required to
indemnify our directors and officers, consultants and employees to the fullest
extent permitted by the DGCL, Subject to certain very limited exceptions, we are
required to advance expenses, as incurred, in connection with a legal proceeding
to the fullest extent permitted by the DGCL, subject to certain very limited
exceptions. The rights conferred in our bylaws are not exclusive. We have
obtained directors' and officers' liability insurance.
Insofar as indemnification for liabilities under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
provisions described above, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by our
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter as been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemization of all estimated
expenses, all of which we will pay, in connection with the issuance and
distribution of the securities being registered:
II-1
Nature of Expense AMOUNT
----------------- ---------
SEC Registration fee $1,214.06
Accounting fees and expenses $ 30,000*
Legal fees and expenses *60,000
---------
Miscellaneous $ 8,800
---------
TOTAL $100,014.06
===========
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In January 2005, we issued 3,330,000 shares of our common stock to
Michael. L. Metter, our President and Chief Executive Officer, as compensation
for services performed on our behalf.
In January 2005, we issued 3,270,000 shares of our common stock to
Steven Moskowitz, our Secretary, as compensation for services performed on our
behalf.
In January 2005, we issued 100,000 shares of our common stock to Thomas
Monahan, our Chief Financial Officer, as compensation for services performed on
our behalf.
In January 2005, we issued 3,330,000 shares of our common stock to
Frank Lazauskas, a director of the Company, as compensation for services
performed on our behalf.
In January 2005, we issued 2,000,000 shares of our common stock to
Robert Rubin as compensation for services performed on our behalf.
In January 2005, we issued 466,667 shares of our common stock to
American United Global, Inc. in exchange for $70,000 in debt.
In January 2005, we issued 500,000 shares of our common stock to DDK
and Company LLC in exchange for $66,000 of debt.
In January 2005, we issued 215,969 shares of our common stock to Flo
Weinberg, Inc. in exchange for $36,527.25 in debt.
In January 2005, we issued 533,333 shares of our common stock to Steven
Moskowitz in exchange for $80,000 in debt.
In January 2005, we issued 120,000 shares of our common stock to Robert
Rubin in exchange for $18,000 in debt.
In January 2005, we issued 466,667 shares of common stock to RM
Enterprises International, Inc. in exchange for $70,000 in debt.
In January 2005, we issued 500,000 shares of our common stock to
Michael Sorrentino in exchange for $75,000 in debt.
In January 2005, we issued 60,000 shares of our common stock to our
subleasor in consideration for our use of the premises.
In February 2005, we issued 75,000 shares of our common stock to
Paradigm Solutions, Inc. in connection with a Settlement Agreement with
Paradigm, dated February 15, 2005.
All of the foregoing issuances were exempt from registration under
Section 4(2) of the Securities Act and/or Regulation S, promulgated pursuant to
the Securities Act. None of the purchasers who received shares under Regulation
S are U.S. persons as defined in Rule 902(k) of Regulation S, and no sales
II-2
efforts were conducted in the U.S., in accordance with Rule 903(c). Such
purchasers acknowledged that the securities purchased must come to rest outside
the U.S., and the certificates contain a legend restricting the sale of such
securities until the Regulation S holding period is satisfied.
ITEM 27. EXHIBITS
3.1 Certificate of Incorporation of Nexgen VIII, Inc.(1)
3.2 Certificate of Amendment of Nexgen VIII, Inc. changing name to
Spongetech Delivery Systems, Inc.(1)
3.3 By-Laws of Spongetech Delivery Systems, Inc.(1)
3.4 Certificate of Incorporation of Romantic Scents, Inc. (2)
3.5 Certificate of Amendment changing name of Romantic Scents, Inc. to RSI
Enterprises, Inc. (2)
3.7 Certificate of Amendment changing name of RSI Enterprises, Inc. to
Spongetech Enterprises International, Inc. (2)
3.7 Certificate of Incorporation of Merger Sub, Inc. (2)
3.8 Merger Certificate between Spongetech Delivery Systems and Merger Sub,
Inc. (2)
3.9 Merger Certificate between Spongetech Enterprises International, Inc.
and Merger Sub, Inc. (2)
3.10 Certificate of Amendment changing name of Merger Sub, Inc. to
Spongetech Delivery Systems, Inc. (2)
4.1 Specimen Certificate of Common Stock(1)
4.2 Warrant Certificate (3)
4.3 Warrant Agreement with Colebrook, Inc. and Olde Monmouth Stock Transfer
Co., Inc. (3)
4.4 Oral Understanding with Dicon (5)
5.1 Opinion of Counsel(7)
5.2 Revised Opinion of Counsel (2)
5.3 Revised Opinion of Counsel (3)
5.4 Revised Opinion of Counsel (4)
10.1 Stock Purchase Agreement by and among Nexgen Acquisitions VIII, Inc.,
RM Enterprises International, Inc. and RSI Enterprises, Inc.(1)
10.2 Stock Purchase Agreement by and between Spongetech Delivery Systems,
Inc. and Colebrook, Inc. (2)
10.3 License Agreement dated July 1, 2001 with Dicon Technologies (2)
10.4 Supply and Requirements Agreement dated July 1, 2001 with Dicon
Technologies (2)
10.5 Manufacturer's Representative Agreement dated July 1, 2001 with Dicon
Technologies (2)
10.6 Extension of debt letter by Romantic Moments, Inc. dated August 15,
2002 (4)
II-3
10.7 Terms of oral understanding with Dicon Technologies to expand license
(5)
10.8 Factoring Agreement with Westgate (4)
10.9 Agreement with Paradigm (6)
23.1 Accountant's Consent (7)
23.2 Counsel's Consent to Use Opinion (7)
-------------
(1) Previously filed as an exhibit to registration statement on Form SB-2 filed
November 1, 2002
(2) Previously filed as an exhibit to first amendment to registration statement
on Form SB-2 filed January 13, 2003
(3) Previously filed as an exhibit to second amendment to registration
statement on Form SB-2 filed April 11, 2003
(4) Previously filed as an exhibit to third amendment to registration statement
on Form SB-2 filed July 8, 2003
(5) Previously filed as an exhibit to fourth amendment to registration
statement on Form SB-2 filed January 12, 2004
(6) Previously filed as an exhibit to fifth amendment to registration statement
on Form SB-2 filed March 15, 2004
(7) Filed with this amendment
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file a post-effective amendment to this Registration Statement
during any period in which offers or sales are being made:
(i) to include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually, or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) ((S)230.424(b) of this Chapter) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement of
any material change to such information in the Registration Statement.
(2) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
this offering.
(3) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
II-4
(4) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and this
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) That, insofar as indemnification for liabilities arising from the
Securities Act may be permitted to directors, officers, and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(6) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
II-5
SIGNATURES
Pursuant to the requirements of the Act, the Company certifies that it
has reasonable grounds to believe that it meets all of the requirement for
filing on Form SB-2 and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in New York, New
York on February 25, 2005.
SPONGETECH DELIVERY SERVICES, INC.
By: /s/ Michael L. Metter
---------------------
Michael L. Metter
President and Chief Executive
Officer
By: /s/ Thomas Monahan
----------------------
Thomas Monahan
Chief Financial Officer
In accordance with the requirements of the Securities Act, this
Registration Statement has been signed below by the following persons on behalf
of the Company in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Michael L. Metter President and Director February 25, 2005
----------------------
Michael L Metter
/s/ Steven Moskowitz Secretary and Director February 25, 2005
----------------------
Steven Moskowitz
/s/ Frank Lazauskas Director February 25, 2005
----------------------
Frank Lazauskas
II-6