As filed with the Security and Exchange Commission on July 5, 2005
Registration No. 333-123015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
To
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SPONGETECH DELIVERY SYSTEMS, INC.
(Name of small business issuer in its charter)
Delaware 2840 54-2077231
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
The Empire State Building, 350 Fifth Avenue, Suite 2204, New York, New York
10118 (212) 594-4175
(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
(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
Tel: (212) 930-9700
Fax: (212) 930-9725
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
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 8,000,000 $0.25 $2,000,000 $235.40
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
------------------------------------------ --------------------- ---------------------- --------------------- ---------------------
Common Stock which is part of each Unit 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 3,844,969 $0.25 4,314,836 $507.86
========================================== ===================== ====================== ===================== =====================
Total Registration Fee $1,214.06 (3)
========================================== ===================== ====================== ===================== =====================
(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.
(3) Previously paid.
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 JULY 5, 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
3,844,969 Shares of
Common Stock
We are offering units, on a "best-efforts, minimum 2,000,000 Units,
maximum 8,000,000 Units" basis, at an offering price of $.25 per unit. Each unit
consists of one share of common stock and one redeemable class A warrant. The
units are being offered for a period of 90 days, subject to an extension of up
to an additional 90-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.
This prospectus also relates to the resale of 3,844,969 additional shares
by existing shareholders The offering of up to 8,000,000 Units by the Company
and the resale of 3,844,969 shares by existing shareholders will run
concurrently. 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. The existing officers
and directors reserve the right to acquire up to the minimum number of Units in
this offering.
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 4.
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.
------------------------------- ---------------------------- ---------------------------- ----------------------------
Offering Price to Public Underwriting Discounts and Proceeds to Company
Commissions
------------------------------- ---------------------------- ---------------------------- ----------------------------
Per Unit Total (3) $.25 -- $.25
------------------------------- ---------------------------- ---------------------------- ----------------------------
Maximum $500,000 -- $500,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
Minimum $2,000,000 -- $2,000,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
(see footnotes on following page)
The date of this Prospectus is ___________, 2005
(1) No underwriting discount or commission will be paid to any person in
connection with this Offering. Upon completion of this Offering, the
entire proceeds of this Offering will be received by the Company.
(2) Before deducting expenses of the Offering payable by the Company estimated
at $100,000.
(3) The Offering is being conducted by us on a best efforts "minimum
2,000,0000 Units, maximum 8,000,000 Units" basis. In the event that a
minimum of 2,00,000 Units having a gross subscription price of $500,000 is
not sold within 90 days following the effective date of this Prospectus
(unless extended by us for an additional period not to exceed an
additional 90 days), all proceeds raised will be promptly returned to
investors, without paying interest and without deducting any sales
commissions or expenses of the Offering. All proceeds from the sale of
Units will be placed in escrow with Continental Stock Transfer & Trust
Company no later than noon of the next business day following receipt. The
minimum subscription is $25,000. However, the Company, in its sole
discretion, may accept subscriptions for less than $25,000, although no
fractional shares will be sold. Subscribers will not have the use of their
funds, will not earn interest on funds in escrow, and will not be able to
obtain return of funds deposited in escrow unless and until the minimum
Offering period expires. In the event the minimum number of Units is sold
within the Offering period, the Offering will continue until (i) three
months following the date of this Prospectus, (ii) all 8,000,000 Units are
sold, or (iii) the Offering is terminated by the Company, whichever occurs
first. (See "PLAN OF DISTRIBUTION"). Assuming 2,000,000 Units are sold
within the Offering period, all deposited funds and deposited securities
will be held in escrow and investors will not have the use of the
deposited funds or the right to receive and deal in the deposited
securities until released.
TABLE OF CONTENTS
Page
Prospectus Summary 1
Selected Financial Data 3
Risk Factors 4
Use of Proceeds 8
Market for Common Equity and Related Stockholder Matters 9
Dividend Policy 9
Dilution 9
Capitalization 10
Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Business 14
Description of Property 17
Legal Proceedings 17
Management 18
Executive Compensation 19
Certain Relationships and Related Transactions 20
Security Ownership of Certain Beneficial Owners and Management 21
Description of Securities 23
Selling Stockholders 25
Share Eligible for Future Sale 27
Plan of Distribution 27
Indemnification 31
Legal Matters 31
Experts 31
Additional Information 32
Financial Statements F-1
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., a blank check company, 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. At
the time that we entered into the stock purchase agreement with NexGen, we
believed that persons affiliated with NexGen could assist us with the marketing
and development of our business. 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 nine-months ended February 28, 2005, and the fiscal
years ended May 31, 2004 and May 31, 2003, we incurred net losses of $31,080,
$2,056,526 and $265,517, respectively. As of February 28, 2005 we had an
accumulated deficit of $2,706,118 and a working capital deficiency of $85,490.
As a result of the foregoing, our independent auditors, in their report covering
our financial statements for the year ended May 31, 2004, stated that our
financial statements were prepared assuming that we would continue as a going
concern.
1
The Offering
Common stock outstanding before the offering........................ 33,952,636 shares.
Securities offered by Spongetech.................................... A minimum of 2,000,000 and a maximum of
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 and file a prospectus
supplement 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........................ 3,844,969 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 shares offered for
resale by the selling stockholders under this
prospectus
2
SELECTED FINANCIAL DATA
The selected statement of operations data for the two fiscal years ended
May 31, 2004 and 2003 and the nine months ended February 28, 2005 and 2004, 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 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
Nine Months Ended year ended
February 28, May 31,
---------------------------- ----------------------------
2005 2004 2004 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Sales $ 0 $ 2,123 $ 1,858 $ 342,019
Cost of goods sold 0 2,035 1,600 299,617
------------ ------------ ------------ ------------
Gross profit (loss) 0 108 258 42,402
------------ ------------ ------------ ------------
Total operating expenses 31,080 87,698 2,051,772 307,519
------------ ------------ ------------ ------------
Net loss ($ 31,080) $ (92,602) $ (2,056,526) $ (265,517)
============ ============ ============ ============
Net loss per share -
basic and diluted $ (.00) $ (.00) $ (.01) $ (.01)
============ ============ ============ ============
Weighted average common
shares outstanding 21,911,139 18,985,000 18,985,000 18,985,000
============ ============ ============ ============
As of February 28, 2005
Actual As Adjusted
For Minimum
Offering
Balance Sheet Data
Cash and cash equivalents $ 2,626 $402,626
Working capital $(85,490) $314,520
Total Assets $ 32,245 $432,245
Total Liabilities $ 88,116 $ 88,116
Stockholders' Equity (Deficiency) $(55,871) $344,129
3
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 which may continue, and which
may negatively impact our ability to achieve our business objectives.
We incurred net losses of $31,080 and $2,056,526 during the nine months
ended February 28, 2005 and for the year ended May 31, 2004, respectively. As of
February 28, 2005 we have a working capital deficit of $85,490. 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. If we continue to incur losses, we may be forced to cease our
operations. This could cause investors to lose the entire amount of their
investment.
We have a limited operating history and may not generate enough revenues to stay
in business.
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 and which may force us cease operations.
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.
4
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. If we are unable to continue as a going concern, you may lose your
entire investment.
We have defaulted on our license in the past and if we default again, our
licensor could terminate our license which could cause our business to fail.
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. In
addition, 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.
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 events 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.
We have historically depended on one customer for almost all of our
sales. Specifically, in 2003, our most recent year of active operations, we sold
an aggregate of approximately 153,000 sponges to TurtleWax, which represented
approximately 75% of our orders. These sales to TurtleWax resulted in net sales
5
of approximately $291,000 during the year ended May 31, 2003. Our last sale to
TurtleWax was in May 2003. TurtleWax has not placed any orders with us since
that time. While we remain in contact with TurtleWax and continue to have
discussions with them, we have not pursued sales to TurtleWax due to our lack of
proper funding. This is due to that fact that TurtleWax orders require us to
have product on an in-stock basis so that we can immediately ship to them upon
receiving orders. We are currently exploring ways to market our automobile
cleanser and wax product, children's bath and home cleaning products through
various marketing channels. 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 could 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.
Our cleaning products may be 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 do not believe that we
are currently subject to any other direct federal, state or local regulation
except in connection with 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 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 detrimentally affect our ability to
sell our products and become profitable.
Risks Related to This Offering
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
6
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 hereof.
The sale of large amounts of shares into the market within a short period of
time may have the impact of lowering the value of shares outstanding at the
time.
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 which would negatively affect your ability to profit from
your investment.
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.
Sales by selling security holders may have a depressive effect on the market
price of our securities.
This prospectus relates to the sale by us of Units and to the resale of up to
3,844,969 additional shares that are held by certain selling stockholders
identified in this prospectus. There is currently no public market for our
securities. Sales by the selling shareholders may have a depressive effect on
the market price of our securities and may make it more difficult for us to
complete our Offering. It may also have the effect of reducing the value of your
investment.
Risks Related to Our Common Stock
There is presently no market for our common stock. Any failure to develop or
maintain a trading market could negatively affect the value of our shares and
make it difficult or impossible for you to sell your shares.
Prior to this offering, there has been no public market for our common stock and
a public market for our common stock may not develop upon completion of this
offering. Failure to develop or maintain an active trading market could
negatively affect the value of our shares and make it difficult for you to sell
your shares or recover any part of your investment in us. Even if a market for
our common stock does develop, the market price of our common stock may be
highly volatile. In addition to the uncertainties relating to our future
operating performance and the profitability of our operations, factors such as
variations in our interim financial results, or various, as yet unpredictable
factors, any of which are beyond our control, may have a negative effect on the
market price of our common stock.
7
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, and investors may not have a voice in our
management.
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 76% of the
outstanding shares of our common stock. Following this offering, they will
beneficially own approximately 72% of our outstanding shares assuming completion
of the minimum offering, or approximately 61% 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."
Certain of our officers and directors were previously affiliated with a publicly
traded entity that became delinquent in its filing obligations.
Michael Metter, the Company's President and a director of the Company, Steven
Moskowitz, an officer and director of the Company, and Frank Lauzaskas, a
director of the Company, were previously executive officers and directors of
Azurel Ltd., a publicly traded entity. Azurel is delinquent in its reporting
requirements with the SEC in that it has failed to file any of its required
quarterly and annual reports since the filing of its Annual Report on Form
10-KSB for the year ended December 31, 2002. If the Company were to become
delinquent in its filing obligations under the federal securities laws, the
Securities and Exchange Commission may halt trading in the Company's securities
which would strongly reduce the value of the securities offered hereby.
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 pay 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 offering for the following purposes:
(1)
Minimum 50% 75% Maximum
Product development (2) $ 100,000 $ 300,000 $ 500,000 $ 700,000
Salaries(3) -0- -0- -0- 150,000
Marketing (4) 100,000 300,000 500,000 700,000
Payment of accounts 100,000 100,000 100,000 100,000
payable
Purchase of inventory 25,000 50,000 75,000 100,000
Working capital 75,000 150,000 225,000 150,000
Total $ 400,000 $ 900,000 $1,400,000 $1,900,000
(1) Assumes that all product development, marketing and accounts payable come
from the "best efforts" offering and not from operations.
(2) Consist primarily of updated packaging, artwork and molds for different size
products.
8
(3) In the event the maximum number of Units is sold in the offering, we intend
to start paying salaries to Messrs. Metter and Moskowitz at the annual rate of
$100,000 and $50,000, respectively.
(4) Marketing will include brochures, advertising in automobile magazines, via
the internet and at trade shows.
We believe that the net proceeds from the minimum offering will be
sufficient to continue the development of our proposed business for the next 12
months but not enough to expand our business plan. We believe that net proceeds
from the maximum offering will enable us to increase our marketing efforts .
Pending maximum use of the proceeds form this Offering as set forth above, we
may invest a portion of such proceeds in short-term, interest-bearing
securities, U.S. Government securities, money market investments and short-term,
interest-bearing deposits in major banks. Our ability to continue the
development of our business is dependent on the receipt of the net proceeds of
this Offering.
We will not receive any proceeds from the 3,844,969 additional shares
of common stock that are being offered for sale 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 June 28, 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.
Equity Compensation Plan Information
Currently, we do not have any equity compensation plans in place..
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 February 28, 2005, our net tangible book value was $(55,871) or
$(.00) 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. 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 $.01, without taking into account any change in our net tangible book value
after February 28, 2005 and after deducting estimated offering expenses. This
represents an immediate increase in the net tangible book value of $.01 per
share to existing shareholders and an immediate dilution of $.24 per share to
new investors. The following table illustrates this per share dilution:
9
ASSUMING ASSUMING
MINIMUM 50% of 75% of MAXIMUM
OFFERING OFFERING OFFERING OFFERING
-------- -------- ------- -------
Public offering price per share (1) $0.25 $0.25 $0.25 $0.25
Net tangible book value per share as of
February 28, 2005 (.00)
Increase per share attributable to this offering .01 .02 .03 .04
Pro forma net tangible book value per share
after this offering .01 .02 .03 .04
Dilution to new investors .24 .23 .22 .21
Percentage of Dilution 96% 92% 88% 84%
(1) Prior to this offering, there is no current trading market for our stock.
Accordingly, we are assuming an offering price of $0.25 for all
calculations.
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 February 28, 2005.
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Assuming Minimum Offering:
Existing Shareholders 33,952,636 94.4% $2,650,247 84.13% $0.07
New Investors 2,000,000 5.6% $ 500,000 15.87% $0.25
Total 35,952,636 100% $3,150,247 100% $0.09
CAPITALIZATION
The following table summarizes our long-term obligations and
capitalization as of February 28, 2005, 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
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.
February 28, 2005
Actual Adjusted
----------- -----------
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 33,953 35,952
Preferred stock, $.001 par value;
authorized 5,000,000 shares;
no shares issued and outstanding 0 0
Additional paid in capital 2,616,294 3,014,294
Deficit (2,706,118) (2,706,118)
Net Stockholders' equity (deficiency) (55,871) 344,129
----------- -----------
Total capitalization (deficiency) $ (55,871) $ 344,129
=========== ===========
10
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., a blank check company, 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.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The critical accounting policies that affect our more significant
estimates and assumptions used in the preparation of our financial statements
are reviewed and any required adjustments are recorded on a monthly basis.
Results of Operations
Nine Months Ended February 28, 2005 and 2004
Net sales for the nine months ended February 28, 2005 were $0 as
compared to $2,143 for the nine months ended February 28, 2004, a decrease of
$2,143. Management attributes this decrease to its inability to promote, market,
and sell its automotive product due to lack of capital.
11
We have no open purchase orders at this time. We have historically
depended on one customer for almost all of our sales. Specifically, in 2003, our
most recent year of active operations, we sold an aggregate of 183,000 sponges
to TurtleWax, which represented approximately 75% of our orders. These sales to
TurtleWax resulted in net sales of approximately $291,000 during the year ended
May 31, 2003. Our last sale to TurtleWax was in May 2003. TurtleWax has not
placed any orders with us since that time. While we remain in contact with
TurtleWax and continue to have discussions with them, we have not pursued sales
to TurtleWax due to our lack of proper funding. This is due to that fact that
TurtleWax orders require us to have product on an in-stock basis so that we can
immediately ship to them upon receiving orders.
Our gross profit for the nine months ended February 28, 2005 was $0 as
compared to $108 for the nine months ended February 28, 2004. Management
attributes this decrease in gross profit to no sales during this period. We have
no open purchase orders at this time. If we are not able to sign up new orders
in the future, our operations will not be profitable and we will not be able to
continue in business.
Operating expenses for the nine months ended February 28, 2005 were
$31,080 as compared to $87,698 for the period ended February 28, 2004. The
decrease of $56,618 is the result of a decrease of sales expenses for the
period. Included in total operating expenses for the period February 28, 2004
were selling expenses of $39,535, general and administrative expenses of $44,951
and depreciation expense of $3,212.
Net loss for the nine months ended February 28, 2005 was ($31,080) or
($.00) per share as compared to a net loss of ($92,602) or ($.00) per share for
the nine months ended February 28, 2004. The decrease in net losses were the
result of less selling expenses for the nine months ended February 28, 2005
compared to the nine months ended February 28, 2004.
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. In
connection with the $1,953,631 indicated for officers' services and consulting
expenses, we note that since we started to have sales in the prior year, a
majority of the consulting and officers' services were commenced in the fiscal
year ending May 31, 2004. Of this $1,953,631, an aggregate of 10,030,000 shares
of common stock at $.15 per share were issued to our officers and directors for
an aggregate value of $1,513,500, and 2,000,000 shares of common stock at $.15
per share were issued to Robert Rubin for consulting services valued at
$300,000. This compensation was provided to management and our affiliates for
their efforts in managing the day-to-day operations of the Company, introducing
the Company to business, sales and contractual and fundraising opportunities,
for their efforts in evaluating potential acquisition candidates on the
Company's behalf. The $.15 amount reflects the contemporaneous price utilized by
us in negotiating the conversion of debt into our common stock held by third
parties.
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.
12
Plan of Operations
We had sales of $342,019 during the year ended May 31, 2003. Since that
time, we have had minimal or no sales. Specifically, during the year ended May
31, 2004, we had sales of $1,858, and during the year ended May 31, 2005, we did
not have any sales. The main reason for this was that.we were reorganizing and
redesigning our products and did not have adequate funding to meet our supply
commitments. We have recently been setting up the groundwork for new sales with
advance marketing but we require additional funding in order to reenter the
market and make the correct impression with buyers.
During the next year we expect to increase our marketing and sales
efforts. According to Cleanlink, a trade association for the cleaning industry,
as of the end of 2003, the wholesale market for chemical cleaning products was
in excess of $7.6 billion. Accordingly, we believe there is a substantial market
for easy to use, multi-use cleaning products. Over the next year, management
intends to take a number of actions that it believes will enable our business to
successfully participate in this growing segment of the cleaning market.
Specifically, management intends to:
o attend the auto show in Las Vegas, Nevada in October 2005;
o engage sales representatives between the date hereof and October
2005; and
o pursue licensing arrangements between the date hereof and October
2005.
Management estimates that these actions can be completed at minimal cost to the
Company, all of which has been, and if necessary will continue to be, funded by
officers, directors and affiliates of the Company until such time as the Company
is able to complete this offering.
In addition to the foregoing, we plan to formally launch a new
marketing campaign upon completion of this Offering. The marketing elements will
include third party marketing agreements and direct Internet marketing,
including working with former customers and agents to rebuild former sales.
We are currently exploring the attractiveness of certain distribution
and marketing arrangements with third parties to enhance distribution of our
products, including licensing arrangement for products that we believe are
complementary to sponges and could enhance our marketability. These efforts have
involved meeting with strategic licensing partners, and having discussions with
them regarding our products and market opportunities. To date, we have not
entered into any agreements with any such parties. There is no guarantee that we
will be able to complete significant licensing agreements with the third parties
that will have a positive effect on our sales, or that we will achieve
successful and profitable results from our distribution and marketing efforts.
We are also currently exploring distribution and marketing
opportunities for our cleaning products for use as a household cleaning sponge.
We have developed a prototype and are currently testing household cleaning
sponges infused with anti-bacterial bath and kitchen soaps with a national
detergent manufacturer for possible use under its logo and brand. There is no
assurance that the manufacturer will purchase our sponges or that we will be
successful in gaining distribution in this channel. We believe, however, that
our products provide significant benefits compared to current competitive
offerings due to the fact that they provide customers with the option of
purchasing an all-in-one, multi-use product.
We have also 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 bathtub as the inner hydrophilic matrix retains the soap until
the child squeezes the sponge in use. We are exploring multiple retail outlets
to sell this product and to market it directly to consumers. Our licensor has
orally agreed to manufacture this product for us but we have not yet made sales
and cannot offer any assurances that sales will result from our proposed
marketing campaign.
We are focused on expanding our marketing potential and intend to
explore the possibility of entering into marketing and distribution arrangements
for our products throughout the world. There is no assurance that we will be
successful in gaining distribution in these markets.
13
Liquidity and Capital Resources
As of February 28, 2005, we had cash of $1,168, as compared to $50 at
May 31, 2004. Our current cash balance is $2,285. During the nine months ended
February 28, 2005, net cash provided by operating activities aggregated $1,118,
primarily attributed by the conversion of debt and services to stock. Net cash
provided by financing activities for the nine months ended February 28, 2005 was
$0.
During the nine months ended February 28, 2005, net cash provided by
operating activities aggregated $1,118 as compared to $37,865 used in the nine
months ended February 28, 2004. Net cash used by operating activities was
primarily attributed to the net loss of $92,602 for the nine months ended
February 28, 2004.
Net cash used in investing activities during the nine months ended
February 28, 2005 aggregated $0, as compared to $728 used in the nine months
ended February 28, 2004. This decrease is attributed to the purchasing of office
equipment in the nine months ended February 28, 2004.
Net cash provided by financing activities for the nine months ended
February 28, 2005 was $0 as compared to $38,608 during the nine months ended
February 28, 2004. This increase is primarily attributed to proceeds from
factoring and related party notes incurred during the nine months ended February
28, 2004.
The decrease in accrued compensation between the fiscal year ended May
31, 2004 and February 28, 2005 was due from the conversion of compensation to
common stock.
The working capital (deficiency) at February 28, 2005 was $85,490 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.
In February 2005, we settled a breach of contract suit brought against
us in the Supreme Court of the State of New York Paradigm Solutions, Inc.
relating to an agreement dated December 31, 2001. In this suit, Paradigm claimed
compensatory damages of $33,962. Although we denied that we had any liability to
Paradigm, in connection with the settlement we issued Paradigm 75,000 shares and
paid $7,500 in cash.
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 did not make any payments to Dicon in 2004. On
February 15, 2005, we entered into a letter agreement with Dicon, pursuant to
which Dicon confirmed that all required payments under the Supply and
Requirements Agreement had been made by us and agreed to extend our license
until June 30, 2006.
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. Our operations to date have been primarily
financed by sales of our equity securities to and loans from our officers and
directors. As of February 28, 2005, we had a working capital deficit of $85,490.
We do not expect positive cash flow from operations in the near term. Our
operations presently are generating negative cash flow, and we do not expect
positive cash flow from operations in the near term. We believe that the
proceeds from the offering will sustain our operations for the next 12 months if
the minimum is raised. However, in order for us to execute our business plan by
expanding our marketing efforts, we will need to raise the maximum. If we fail
to raise the minimum offering, we will need to secure additional working capital
from other sources in order to sustain our operations. Any inability to obtain
sufficient capital to sustain our existing operations, to meet commitments may
14
require us to delay delivery of products, if and when ordered, to default on one
or more agreements, or to significantly reduce or eliminate then existing sales
and marketing, research and development or administrative functions. The
occurrence of any of these, or our inability to raise adequate capital, may have
a material adverse effect on our business, financial condition and results of
operations.
Due to the operating losses that we have suffered from then date of our
organization, in their report on the annual consolidated financial statements
for 2004, our independent auditors included an explanatory paragraph regarding
concerns about our ability to continue as a going concern. Our consolidated
financial statements contain additional note disclosures describing the
circumstances that lead to this disclosure by our independent auditors.
The issuance of additional equity securities by us could result in a significant
dilution in the equity interests of our current stockholders 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 an importer of automotive
aftermarket products to South and Central America for the sale of 500,000 units.
We have recently completed samples of the products with both Spanish and
Portuguese labeling, and have sent them to the importer so that it can present
them to its customers. We are currently waiting for the importer to contact us.
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.
We have historically depended on one customer for almost all of our
sales. Specifically, in 2003, our most recent year of active operations, we sold
an aggregate of 183,000 sponges to TurtleWax, which represented approximately
75% of our orders. These sales to TurtleWax resulted in net sales of
approximately $291,000 during the year ended May 31, 2003. Our last sale to
TurtleWax was in May 2003. TurtleWax has not placed any orders with us since
that time. While we remain in contact with TurtleWax and continue to have
discussions with them, we have not pursued sales to TurtleWax due to our lack of
proper funding. This is due to that fact that TurtleWax orders require us to
have product on an in-stock basis so that we can immediately ship to them upon
receiving orders.
16
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
Each annual period begins on July 1 of the current year and ends on
June 30 of the following year. 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
75,000 sponges in the first year. In the second and third years of the contract
we ordered 229,000 and 0 sponges, respectively. We therefore did not order the
minimum quantity for the term of the agreement and in December 2003, we paid
$1,894.51 to Dicon for any and all missed requirements. We have not paid any
additional fees to Dicon for any missed requirements. Since July 1, 2004 we have
purchased 908 sponges. On February 15, 2005, we entered into a letter agreement
with Dicon, pursuant to which Dicon confirmed that all required payments under
the Supply and Requirements Agreement had been made by us and agreed to extend
our license until June 30, 2006.
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
17
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.
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 currently in negotiations to sell 500,000 vehicular sponges to
Hebco, Inc., a Caracas, Venezuela based exporter of automotive products to South
America, subject to that entity's approval of both Spanish and Portuguese
language translations of the product's packaging. We are also in talks with
Vanity Events, Inc. an organizer of worldwide touring groups of swimsuit models
, regarding licensing products from that company to market with the sponges In
addition, we are seeking to create a home line for our sponges. 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
18
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 sold and intend to again explore retail markets, to
sell and provide greater public exposure to our vehicular sponge product.
Government Regulations
Our cleaning products may be 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 do not believe that we are currently
subject to any other direct federal, state or local regulation except in
connection with regulations applicable to businesses generally or directly
applicable to retailing or electronic commerce.
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 term of sublease. The sublease which covers 800 square
feet of the subleased property expires on January 31, 2008. We pay directly for
telephone, utilities and other expenses.
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.
On December 23, 2004, Westgate Financial Corporation, our former
factor, sued us claiming fees in the amount of $11,049, plus interest, costs and
fees, relating to certain receivables. We have counterclaimed to recover a
credit balance of $13,006. Notwithstanding plaintiff's improper service, it
obtained a default judgment against us which judgment was subsequently vacated
by the New Jersey Superior Court, the original venue for the lawsuit.. We are
currently in discovery and intend to vigorously pursue this matter.
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:
19
Name Age Position Since
------------------------ --- ------------- ------
Michael Metter* 53 President,
Chief Executive Officer,
Director 5/2001
Steven Moskowitz* 41 Secretary,
Director 6/1999
Frank Lazauskas 45 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. Azurel is .delinquent in its reporting requirements with the SEC due to
the fact that it has failed to file any of its required quarterly and annual
reports since the filing of its Annual Report on Form 10-KSB for the year ended
December 31, 2002. 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 has served since
May 2000 as Vice-President ERC Corp., a privately held marketing consultant. 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.
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 a director and CEO of Azurel, Ltd, (OTCBB
and subsequently Pink Sheets) from October 31, 2002 to October 10, 2003. Azurel
is delinquent in its reporting requirements with the SEC due to the fact that it
has failed to file any of its required quarterly and annual reports since the
filing of its Annual Report on Form 10-KSB for the year ended December 31, 2002.
Since June 2003, he has been director of Tiburon Capital Group, a privately held
holding corporation, and since May 2000, he has served as Vice President of ERC
Corp., a privately-held marketing consultant. 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. Mr. Lazauskas was a director of Azurel,
20
Ltd, (OTCBB and subsequently Pink Sheets) from October 2002 to June 2003. Azurel
is delinquent in its reporting requirements with the SEC due to the fact that it
has failed to file any of its required quarterly and annual reports since the
filing of its Annual Report on Form 10-KSB for the year ended December 31, 2002.
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 $100,000 based on salary and
bonus.
21
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
--------------------------------------------
Annual Compensation Awards Payouts
------------------------------------- ------------------------------ -------------
Restricted Securities All
Other Other
Annual Under-lying Compen-
Name and Compen- Stock Award(s) Options/ LTIP sation
Principal Position Year Salary ($) 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
2002 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.
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. We received advances from RM Enterprises International in
the aggregate amount of $113,414. These advances were paid back to RM
Enterprises International on an interest-free basis through the conversion of
debt into common stock. RM Enterprises International, Inc. may be considered a
22
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 International has received no additional consideration from us
for its activities related to our formation or business.
The control persons and beneficial owners of RM Enterprises
International are Michael Metter, Steven Moskowitz and Frank Lazauskas, all of
whom are directors of RM Enterprises International.
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 then 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 Stock Trust.
In September, 2002, the majority stockholder of Nexgen Acquisitions
VIII transferred 2,000,000 shares to The Rubin Family Irrevocable Stock Trust, a
stockholder 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 12,030,000 shares of our
common stock to our officers, directors and related parties, 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 $114,400 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 $183,414 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.
23
In January 2005, we issued 500,000 shares of our common stock to
Michael Sorrentino, in exchange for $75,000 in debt.
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 June 28,
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, Inc. 12,382,636 36.5%
(3)
1350 Broadway, Suite 210,
New York, New York 10018
------------------------------------ -------------------------- ------------------------- -------------------------------
The Rubin Family Irrevocable 7,377,667 21.7%
Stock Trust (4)
25 Highland Boulevard
Dix Hills, New York 11746
------------------------------------ -------------------------- ------------------------- -------------------------------
Michael Metter (3)(5) President, Chief 12,382,636 36.5%
One Tinker Lane Executive Officer and
Greenwich, CT Director
06830
------------------------------------ -------------------------- ------------------------- -------------------------------
Steven Moskowitz (3) Secretary and Director 15,185,969 44.7%
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) Director 14,712,636 43.3%
51 Niagara Street
Newark, New Jersey 07105
------------------------------------ -------------------------- ------------------------- -------------------------------
Officers and 18,615,969 54.8%
Directors
(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 33,952,636 shares of our
common stock outstanding as of the date of the prospectus.
24
(3) Includes 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 are Michael Metter, Steven Moskowitz and Frank
Lazauskas, all of whom are directors of RM Enterprises International.
(4) Includes 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.
(5) Does not include 1,665,000 shares of our common stock beneficially owned by
Deborah Metter, Michael Metter's wife, through D.L. Investments, Inc. Mr. Metter
disclaims beneficial ownership of these shares .
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 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, 33,952,636 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 33,952,636 shares 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;
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
25
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.
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.
26
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 3,844,969of 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. None of such persons are broker-dealers or affiliates of
broker-dealers.
27
===================================================================================================================================
Shares Beneficially Owned Shares Beneficially Owned
Prior to the Offering After the Offering (1)
------------------------------- ----------------------------------
Total Percent Percent
Name Number Percent 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 (2) 100,000 * 100,000 -0-% -0-%
Joel Pensley 775,000 2.5% 775,000 -0-% -0-%
Maurice Harroch 200,000 * 200,000 -0-% -0-%
Flo Weinberg, Inc. (3) 215,969 * 215,969 -0-% -0-%
DDK and Company LLC (4) 500,000 1.5% 500,000 -0-% -0-%
Michael Sorrentino 500,000 1.4% 500,000 -0-% -0-%
A&N Enterprises LLC (5) 310,000 * 310,000 -0-% -0-%
Robert J. Miller 100,000 * 100,000 -0-% -0-%
Reed Smith LLC (7) 100,000 * 100,000 -0-% -0-%
Ahava Investments Inc. (8) 500,000 1.4% 500,000 -0-% -0-%
Touchdown Capital Inc. (9) 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-%
------
3,844,969
(1) Applicable percentage ownership is based on 33,952,636 shares of
common stock outstanding as of April 29, 2005, together with securities
exercisable or convertible into shares of common stock within 60 days of
April 29, 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
April 29, 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.
(2) Joel Pensley has voting and investment power over the shares held by
Renegade Consulting, Inc.
28
(3) 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.
(4) Allen Dorkin holds voting and investment power over the shares held by
DDK & Company LLC.
(5) Norman Moskowitz holds voting and investment power over the shares of
our common stock held by A&N Enterprises. Norman Moskowitz is the father
of Steven Moskowitz.
(6) Robert Miller holds voting and investment power over the shares of our
common stock held by Reed Smith.
(7) Beat Kranz holds voting and investment power over the shares of our
common stock held by Ahava Investments, Inc
(8) Steven Klein holds voting and investment power over the shares of our
common stock held by Touchdown Capital
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 339,526 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 units on a "best-efforts, minimum 2,000,000 Units,
maximum 8,000,000 Units" basis, at a price of $0.25 per unit. There is no
commitment on the part of any person to purchase and pay for any shares. The
existing officers and directors reserve the right to acquire up to the minimum
number of Units in this offering. We anticipate that to the extent that any of
our officers and directors purchase Units in the offering, they will do so with
29
investment intent and not with a view toward the distribution of the Units
purchased. None of the Company's officers or directors will participate in the
making of this Offering other than by the delivery of this Prospectus or by
responding to inquiries by prospective purchasers. Such responses shall be
limited to the information contained in the Registration Statement of which this
Prospectus is a part.
No commission will be paid with respect to the sale of Units. The
Company will pay its own legal and accounting fees and other expenses incurred
in connection with the Offering.
This offering is intended to be made solely by the delivery of this
Prospectus and the accompanying subscription application to prospective
investors. Our officers, 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. Neither of these individuals is a registered broker-dealer or
an affiliate of broker-dealers, and in the event that members of our management
sell shares, no commissions or other remuneration based either directly or
indirectly on transactions in securities will be paid to such persons.
Furthermore, such persons shall conduct their selling activity in accordance
with paragraph (a)(4)(ii) of Rule 3a4-1, in that each person primarily performs
substantial duties for the issuer other than in connection with transactions in
securities, each person is not a broker or dealer or affiliated with a broker or
dealer in the last twelve months and each person does not participate in selling
an offering of securities more than once every twelve months other than as
permitted under Rule 3a4-1. None of the officers and directors participating in
this offering are subject to a statutory disqua1ification as that term is
defined in section 3(a)(39) of the Securities Act of 1933. Further, none of of
the officers and directors participating in this offering is an associated
person of a broker or dealer.
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. Other than
our officers, directors and/or employees and, possibly, registered
broker-dealers, no other person has been authorized to offer for sale the
securities included in this prospectus for the account of the Company.
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
30
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 escrow agreement states that the proceeds received under this
Offering will be deposited in a non-interest bearing escrow account with
Continental Stock Transfer & Trust Co. In the event that less than the minimum
gross proceeds from the sale of at least 2,00,000 Units being offered are
received within 90 days from the date hereof (with an allowable additional
90-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 will not have the use of their funds, will not earn
interest on funds in escrow and will not be able to obtain return of funds
deposited in escrow unless and until the minimum Offering period expires. In
addition, subscribers will have a right to a return of their subscription
payments held in the escrow account to the extent that we do not achieve the
minimum offering or upon the termination of the Offering.
Termination of the Offering
The Offering will commence on the date of this Prospectus and will
continue for a period of 90 days from the date hereof, with an allowable 90-day
extension. We have the right to terminate the Offering for any reason at any
time until at least 2,000,000 Units offered herby have been sold. If we
terminate the Offering before the subscription proceeds for the minimum of
2,000,000 Units have been received by the Escrow Agent, all subscription
proceeds will be promptly returned to the subscribers without interest or
deduction.
Shares to be sold by the Selling Stockholders
This prospectus also relates to the resale of up to
3,844,969additional 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. All selling shareholders
who are affiliates will not sell their shares during the public offering period.
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. Sales by the selling shareholders may have a depressive effect on
the market price of our securities and may make it more difficult for us to
complete our Offering.
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. In the event, that the minimum
offering is not sold, we anticipate that our officers, directors and other
affiliates will pay for the expenses incurred in connection with this offering.
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.
31
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.
PENNY 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.
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
32
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.
33
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, , 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.
34
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.
35
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.
Until _______, all dealers that effect transactions in these securities, whether
or not participating in this offering, may be required to deliver a prospectus.
This is in additional to the dealers' obligation to deliver a prospectus when
acting as underwriters with respect to their unsold allotments or subscriptions.
Up to 8,000,000 Units Consisting Of
One Share Of Common Stock
and
One Redeemable Class A Warrant
and
3,844,969
Shares of
Common Stock
of
Spongetech Delivery Systems, Inc.
PROSPECTUS
The date of this prospectus is ___________, 2005
INDEX TO FINANCIAL STATEMENTS
Part 1 - Financial Information
Page
Item 1 - Financial Statements
Report of Independent Auditors
Balance Sheets as of February 28, 2005 (unaudited) and May 31, 2004 F-3
Statements of Operations for the nine months ended February 28, 2005
and 2004 (unaudited) and years ended May 31, 2004 and 2003 F-4
Statements of Changes in Stockholders' Equity for the nine months ended
February 28, 2005 (unaudited) and years ended May 31, 2004
and 2003 F-5
Statements of Cash Flows for the nine months ended February 28, 2005 and
2004 (unaudited) and years ended May 31, 2004 and 2003 F-6
Notes to Financial Statements F-7 - F-12
1
DRAKEFORD & DRAKEFORD, LLC
CERTIFIED PUBLIC ACCOUNTANTS
A LIMITED LIABILITY COMPANY
554 Duncan Road
Royston, Georgia 30662
770-575-0915
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 of the Public
Company Accounting Oversight Board (United States). 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
2
SPONGETECH DELIVERY SYSTEMS, INC.
BALANCE SHEETS
February 28, May 31,
2005 2004
------------ --------
(unaudited)
ASSETS
Current Assets
Cash $ 1,168 $ 50
Inventories 1,458 444
--------- ---------
Total current assets 2,626 494
Property and equipment 29,619 32,831
-------- ---------
Total assets $ 32,245 $ 33,325
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Accounts payable and
accrued expenses $ 86,516 $ 122,516
Accrued compensation 0 1,789,500
Income taxes payable 1,600 1,600
---------- ---------
Total current liabilities 88,116 1,913,616
Total long-term liabilities 0 0
---------- ---------
Total liabilities 88,116 1,913,616
---------- ---------
Shareholders' Equity (Deficiency)
Common stock, $.001 par value;
Authorized 50,000,000 shares; issued
and outstanding 33,952,636 and
18,985,000 shares as of
February 28, 2005 and May 31,
2004, respectively 33,953 18,985
Preferred stock $.001 par value;
Authorized 5,000,000 shares;
no shares issued and outstanding 0 0
Additional paid-in capital 2,616,294 248,948
Common stock subscribed 0 526,814
Deficit (2,706,118) (2,675,038)
---------- ----------
Total shareholders' equity (deficiency) (55,871) (1,880,291)
---------- ----------
Total liabilities and shareholders'
equity (deficiency) $ 32,245 $ 33,325
========== ==========
See Independent Auditors' Report and notes to financial statements.
3
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the For the
Nine Months Ended year ended
February 28, May 31,
------------------------ --------------------
2005 2004 2004 2003
---- ---- ---- -----
(unaudited) (unaudited)
Sales $ 0 $ 2,143 $ 1,858 $ 342,019
Cost of goods sold 0 2,035 1,600 299,617
-------- -------- -------- ---------
Gross profit 0 108 258 42,402
-------- -------- -------- ---------
Operating expenses
Selling 0 39,535 39,535 55,261
General and
Administrative
expenses 27,868 44,951 2,007,953 241,428
Depreciation expense 3,212 3,212 4,284 10,830
-------- -------- -------- ---------
Total operating expenses 31,080 87,698 2,051,772 307,519
-------- -------- -------- ---------
Loss before provision
for income taxes (31,080) (87,590) (2,051,514) (265,117)
Other income and expenses
Interest expense 0 5,012 5,012 400
-------- -------- -------- ---------
Total income and
expense 5,012 5,012 400
Net loss $(31,080) $ (92,602) $(2,056,526) $(265,517)
======== ========= =========== =========
Basic and diluted (loss) per
common stock
Net loss per share -
basic and diluted $ (.00) $ (.00) $ (.01) $ (.01)
======== ========= =========== =========
Weighted average common
shares outstanding 21,911,139 18,985,000 18,985,000 18,985,000
========== ========== ========== ==========
See Independent Auditors' Report and notes to financial statements.
4
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
For The Nine Months Ended February 28, 2005 (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)
Issuance of stock
for debt & service 14,967,626 14,968 2,367,346 (526,814) 1,855,500
Unaudited
Net loss for
The nine
Months ended
February 28, 2005 (31,080) (31,080)
----------- ----------- ----------- ----------- ----------- -----------
Balance-Unaudited
February 28, 2005 33,952,626 $ 33,953 $ 2,616,294 $ 0 $(2,706,118) $ (55,871)
=========== =========== =========== =========== =========== ===========
See Independent Auditors' Report and notes to financial statements.
5
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the nine
Months Ended For the
February 28, Year Ended May 31,
---------------------------- ----------------------------
2005 2004 2004 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Operating Activities:
Net loss $ (31,080) $ (92,602) $ (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 3,212 3,212 4,284 10,830
Common stock subscribed in release
of company debt (526,814) 0 526,814 0
Common stock issued for debt & ser 2,382,314 0 0 0
Changes in operating assets and
liabilities
Accounts receivable 0 0 15,003 (1,395)
Inventories (1,014) 852 852 48,061
Prepaid expense and other
current assets 0 0 0 118
Accounts payable and accrued
expenses (36,000) (1,836) (121,404) 94,383
Accrued compensation (1,789,500) 35,038 1,789,500 0
Income taxes payable 0 1,600 0 400
Due to related parties 0 15,871 (159,578) 30,949
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 1,118 (37,865) (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 1,118 15 (1,055) 930
Cash - beginning 50 1,105 1,105 175
------------ ------------ ------------ ------------
Cash - end $ 1,168 $ 1,120 $ 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 $ 2,382,314 $ 5,390 $ 0 $ 0
Common stock subscribed $ 0 $ 0 $ 526,814 $ 0
See Independent Auditors' Report and notes to financial statement.
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
in accordance with auditing standards of the Public Company Accounting Oversight
Board (United States) 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.The Company has incurred losses since inception and expect
to incur losses for the foreseeable future. For the nine months ended February
28, 2005, and the fiscal years ended May 31,2004 and May 31, 2003, the Company
incurred net losses of $31,080, $2,056,526 and $265,517, respectively. As of
February 28, 2005 the Company had an accumulated deficit of $55,871 and a
working capital deficiency of $85,490. 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 February 28, 2005
and for the nine months ended February 28, 2005 and 2004, 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 nine months ended February
28, 2005 and 2004.
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 February 28, 2005, 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 nine months ended February 28, 2005 and 2004, 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 nine months ended February 28, 2005 and 2004,
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
8
the purchase method of accounting. As a result, use of the pooling-of-interests
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
9
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.
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 February 28, May 31,
Years 2005 2004
------------ ------------ ---------
(unaudited)
Furniture and fixtures 5 - 10 $ 761 $ 761
Machinery and equipment 5 - 10 17,828 17,828
Molds 5 - 10 38,312 38,312
-------- --------
56,901 56,901
Less: Accumulated depreciation 27,282 24,070
-------- --------
$ 29,619 $ 32,831
======== ========
Depreciation expense for the years ended May 31, 2004 and 2003 was $4,284
and $10,830, respectively. Depreciation expense for the nine months ended
February 28, 2005 and 2004 was $3,212 and $3,212, respectively.
3 - Accounts payable and accrued expenses consist of the following:
February 28, May 31,
2005 2004
------------ ----------
(unaudited)
Product development (Packaging & mold
Development) $ 86,516 $ 86,516
No Related Party
Advertising (see Note-7 ) 0 36,000
--------- ---------
Total $ 86,516 $ 122,516
========= =========
Accrued compensation $ 0 $1,789,500
========= =========
See Note- 7
10
4 - 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-7
for new location and lease arrangements.
In January 2005, the Company issued an aggregate of 12,030,000 shares
of common stock in consideration for services at an average of $.15 per share as
follows:
Shares Value
Robert Rubin 2,000,000 $ 300,000 Related
Frank Lazauskas 3,330,000 499,500 Related
Steven Moskowitz 3,270,000 499,500 Related
Michael L.Metter 3,330,000 499,500 Related
Thomas Monahan,CFO 100,000 15,000
--------- ---------
Total 12,030,000 $1,813,500
========== =========
In January 2005, the Company issued an aggregate of 2,802,636 shares of
common stock valued at $.15 per share in consideration for the forgiveness of
debt aggregating $526,814 as follows:
Shares Value
Flow Weinberg 215,969 $ 70,000 Related
Robert Rubin 120,000 18,000 Related
RM Enterprises 466,667 113,414 Related
Michael Sorrentino 500,000 75,000
Steven Moskowitz 533,333 114,400 Related
DDK Accounting 500,000 66,000
American United Global 466,667 70,000
--------- ---------
Total 2,802,636 $ 526,814
========= =========
In January 2005, Spongetech issued an aggregate of 60,000 shares of common
stock valued at $.15 per share or $9,000 to A & N Enterprises in consideration
for a sub-lease of office space at The Empire State Building, 34th Street, New
York, New York. A & N Enterprises is owned by _________ Moskowitz the father of
Steven Moskowitz.
5 - Deferred Income Taxes
At February 28, 2005 and May 31, 2004, the Company had approximately
$2,331,641 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 February 28, 2005 and May
31, 2004 is as follows:
February 28, May 31,
2005 2004
------------ -----------
(unaudited)
Non-Current
Net operating loss carryforwards $2,331,641 $2,300,561
Valuation allowance for
deferred tax asset (2,331,641) (2,300,561)
--------- ---------
$ - $ -
========== ==========
11
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 February 28, 2005 and May 31, 2004, a valuation allowance for the full amount
of the net deferred tax asset was recorded.
6 - 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.
The Company is 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 the Company seeking damages of $11,049.82 with interest accrued thereon,
costs and reasonable attorney's fees.
Employment Contracts
The Company is currently negotiating with two executives to establish
employment contracts. No terms of these negotiations have been disclosed.
7 - Common Stock Issuances
As of 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, the common stock subscribed represents
these common shares.
In January 2005, the company converted the accrued compensation to
11,990,000 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.
Accrued advertising expense as of May 31, 2004, has been settled with the
following stipulations: Spongetech paid Paradigm Solutions,Inc. $7,500 and
issued 75,000 shares of common stock valued at $.38 for an aggregate of $28,500
of Spongetech.
12
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.
Accounting fees and expenses $30,000*
Legal fees and expenses 60,000*
-------
Miscellaneous $8,800*
-------
TOTAL $100,014.
* 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 managing our day-to-day operations, introducing us to business, sales,
contractual and fundraising opportunities and evaluating potential acquisition
candidates on our behalf.
In January 2005, we issued 3,270,000 shares of our common stock to
Steven Moskowitz, our Secretary, as compensation for managing our day-to-day
operations, introducing us to business, sales, contractual and fundraising
opportunities and evaluating potential acquisition candidates 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 managing our financial
operations.
In January 2005, we issued 3,330,000 shares of our common stock to
Frank Lazauskas, a director of the Company, as compensation for managing our
day-to-day operations, introducing us to business, sales, contractual and
fundraising opportunities and evaluating potential acquisition candidates on our
behalf.
In January 2005, we issued 2,000,000 shares of our common stock to
Robert Rubin as compensation for introducing us to business, sales, contractual
and fundraising opportunities and evaluating potential acquisition candidates 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 $70,000 in debt.
In January 2005, we issued 533,333 shares of our common stock to Steven
Moskowitz in exchange for $114,400 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 $113,414 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 A&N
Enterprises, our subleasor, in consideration for our use of the premises.
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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.
* Except as may be stated otherwise above, all of the above offerings
and sales were deemed to be exempt under Rule 506 of Regulation D and Section
4(2) of the Securities Act of 1933, as amended. No advertising or general
solicitation was employed in offering the securities. The offerings and sales
were made to a limited number of persons, all of whom were accredited investors,
business associates of Spongetech or executive officers of Spongetech, and
transfer was restricted by Spongetech in accordance with the requirements of the
Securities Act of 1933. In addition to representations by the above-referenced
persons, we have made independent determinations that all of the
above-referenced persons were accredited or sophisticated investors, and that
they were capable of analyzing the merits and risks of their investment, and
that they understood the speculative nature of their investment. Furthermore,
all of the above-referenced persons were provided with access to our Securities
and Exchange Commission filings.
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)
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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 (7)
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)
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)
10.10 Letter Agreement, dated February 15, 2005, between HH Brown Shoe
Technologies, Inc. (d/b/a Dicon Technologies) and Spongetech Delivery
Systems, Inc.
10.11 Form of Subscription Agreement (7)
10.12 Form of Warrant Agreement (7)
10.13 Form of Escrow Agreement (7)
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
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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.
(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.
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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
July 5, 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, Chief Executive Officer and Director July 5, 2005
----------------------
Michael L Metter
/s/ Thomas Monahan Chief Financial Officer July 5, 2005
------------------
Tomas Monahan
/s/ Steven Moskowitz Secretary and Director July 5, 2005
---------------------
Steven Moskowitz
/s/ Frank Lazauskas Director July 5, 2005
-------------------
Frank Lazauskas
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