As filed with the Security and Exchange Commission on March 8, 2006
Registration No. 333-123015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 7
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
incorporation or organization) Classification Code Number) Identification No.)
The Empire State Building, 350 Fifth Avenue,
Suite 2204, New York, New York 10118
(212) 594-4175
(Address and telephone number of principal executive offices)
Michael L. Metter, President
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 Price Registration Fee
========================================== ===================== ====================== ===================== =====================
Units consisting of one share of Common 8,000,000 $0.25 (1) $ 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
Class A Warrants 8,000,000 $0.50 (1) $ 4,000,000 $ 470.80
========================================== ===================== ====================== ===================== =====================
Common Stock, $.001 par value per share 3,625,969 $0.25 (1) $ 906,492.25 $ 106.69
========================================== ===================== ====================== ===================== =====================
Common Stock, $.001 par value per share 219,000 $0.01 (4) $ 2,190 $ 0.26
(3)
========================================== ===================== ====================== ===================== =====================
Total Registration Fee $ 813.15 (5)
========================================== ===================== ====================== ===================== =====================
(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) We are offering to repurchase such shares from our stockholders.
(4) Price at which shares subject to rescission were sold.
(5) 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 MARCH 8,
2006 Spongetech Delivery Systems, Inc.
Up to 8,000,000 Units Consisting Of
One Share Of Common Stock
and
One Redeemable Class A Warrant
and
3,625,969 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 3,625,969 additional shares by
existing shareholders. The offering of up to 8,000,000 Units by the Company and
the resale of 3,625,969 shares by existing shareholders will run concurrently.
There is currently no public market for our 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 Underwriting Discounts Proceeds to
Public and Commissions (1) Company (2)
----------------------------------------------------------------------------------------
Per Unit Total (3) $ .25 -- $ .25
Minimum Offering Amount $ 500,000 -- $ 500,000
Maximum Offering Amount $2,000,000 -- $2,000,000
(1) No underwriting discount or commission will be paid to any person in
connection with this Offering. Upon completion of this Offering, the Company
will receive the entire proceeds of the Offering of up to 8,000,000 Units. The
Company will not receive any proceeds from the sale of the shares of common
stock by the selling stockholders.
(2) Before deducting expenses of the Offering payable by the Company estimated
at approximately $120,000.
(3) The minimum subscription which will be accepted from each investor is
$5,000, with no exceptions. 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.
In addition, this prospectus also relates to a rescission offer being conducted
by the Company.
o We are offering to repurchase 219,000 shares of our common stock
from persons who are or were residents of Colorado and Texas. These
persons are shareholders who purchased those shares in a private
placement conducted by Nexgen VIII, our predecessor.
o The repurchase price for the shares of our common stock subject to
the rescission offer is $.01 per share, and is equal to the price
paid by those persons who purchased these shares. If you accept our
rescission offer and surrender your shares, you will receive
interest, based on the repurchase price $.01 and calculated from the
date you purchased the shares through the date that the rescission
offer expires at the interest rate based on your state of residence
as set forth below.
o Federal law does not provide a specific interest rate to be used in
the calculation of the consideration to be received in connection
with the repurchases of securities by an issuer in a rescission
offer. We intend to use the legal rates of interest for the
repurchase of shares based on the state of residence of the
stockholder. These interest rates are as follows:
------------------------------------------------
State Interest Rate
------------------------------------------------
Colorado 8%
------------------------------------------------
Texas 6%
------------------------------------------------
The rescission offer will expire on , 2006 (30 days after the date hereof).
When the rescission offer expires, any person who did not accept the rescission
offer will have freely tradable stock.
The rescission offer is merely an offer to repurchase shares. No shareholder is
required to accept our rescission offer.
The date of this Prospectus is ___________, 2006
TABLE OF CONTENTS
Page
----
Prospectus Summary 1
Questions and Answers about the Rescission Offer 3
Selected Financial Data 6
Risk Factors 7
Use of Proceeds 12
Market for Common Equity and Related Stockholder Matters 13
Dividend Policy 13
Dilution 13
Capitalization 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations 16
Business 21
Description of Property 25
Legal Proceedings 25
Management 25
Executive Compensation 26
Certain Relationships and Related Transactions 28
Security Ownership of Certain Beneficial Owners and Management 30
Description of Securities 31
Selling Stockholders 33
Rescission Offer 34
Share Eligible for Future Sale 36
Plan of Distribution 37
Indemnification 40
Legal Matters 40
Experts 40
Additional Information 40
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 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 have
designed and Dicon Technologies is conducting research and development for
products using the same hydrophilic technology for bath and home use which we
intend to market and sell as part of our product offering. There is no assurance
that we will successfully be able to market and sell products for bath and home
use.
Since our inception, we have had sales of $342,019, $1,858 and $1,051 for the
fiscal years ended May 31, 2003, 2004 and 2005 respectively. For the six months
ended November 30, 2005, we had sales of $2,974. We have incurred losses since
inception and we expect to incur losses for the foreseeable future. For the
fiscal years ended May 31, 2005, 2004 and, 2003, we incurred net losses of
$58,699, $2,056,526 and $265,517, respectively. As a result of the foregoing,
our independent auditors, in their report covering our financial statements for
the year ended May 31, 2005, stated that our financial statements were prepared
assuming that we would continue as a going concern. For the six months ended
November 30, 2005, we had net loss of $27,430, an accumulated deficit of
$2,761,167 and a working capital deficiency of $137,325.
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.
On March 1, 2004, our Certificate of Incorporation was voided by the State of
Delaware for non-payment of franchise taxes in the amount of $114.40, including
interest, fees and penalties for 2002 and $164.49, including taxes, fees and
penalties for 2003, which outstanding amounts were paid on June 27, 2005.
Simultaneously, on June 27, 2005, a Certificate for Renewal and Revival of our
Certificate of Incorporation (the "Certificate") was filed with the State of
Delaware, which restored, renewed and revived our Certificate of Incorporation
commencing February 29, 2004. In accordance with Delaware Corporation law, upon
the filing of the Certificate, our Certificate of Incorporation was renewed and
revived with the same force and effect as if it had not been voided. Such
reinstatement validated all contracts, acts, and matters, done and performed by
our officers and agents within the scope of our Certificate of Incorporation
during the time the Certificate of Incorporation was voided. We were not
assessed any franchise taxes for the year 2004 because our Certificate of
Incorporation was revoked and voided in 2004. On March 6, 2006, we paid our
franchise taxes for 2005 in the amount of $162.03.
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........ 3,625,969 shares
Common stock subject to rescission offering......... 219,000 shares of common stock.
This number represents 0.65% of
our current outstanding common stock
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 _________, 2006 (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
QUESTIONS AND ANSWERS ABOUT THE RESCISSION OFFER
For those shareholders that are being offered rescission, you should read the
following questions and answers, together with the more detailed information
regarding the rescission offer and the risk factors set forth elsewhere in this
offering circular, before deciding whether to accept or reject the rescission
offer.
General
Q: Why are we making the rescission offer?
A: In March 2002 through May 2002, our predecessor, Nexgen VIII, sold an
aggregate of 219,000 shares pursuant to a private placement offering. Our
current management was not involved in said offering but was advised that the
private placement was made pursuant to Rule 504, promulgated pursuant to
Regulation D of the Securities Act of 1933, as amended(the "Act"). At the time
of the issuances in March through May 2002, Nexgen's plan was to merge with
Spongetech International, Ltd. and therefore Nexgen had a specific plan to
engage in a merger with an identified company, Spongetech International, Ltd.,
as permitted by Rule 504(a)(3). This rule prohibits the use of an offering under
Rule 504 if the issuer intends "to engage in a merger or acquisition with an
unidentified company or companies, or other entity or person." Accordingly
management believed that at the time of the issuances from March through May
2002, Nexgen was not a blank check company and was permitted to avail itself of
the exemption provided by Rule 504. technicalDespite the believe that Nexgen was
not a blank check company at the time of the issuances, Nexgen may have been a
blank check company and as such the reliance on Rule 504 was misplaced and the
transaction was not exempted pursuant to such Rule 504 and the issuances were
made in violation of Section 5 of the Act. In order to cure any violation that
may have occurred or that may have been deemed to have occurred by any
regulatory agency, we have determined to offer rescission to the shareholders
who purchased shares from our predecessor in March through May 2002. The
rescission offer is intended to address any federal and state securities laws
compliance issues by allowing the holders of the shares covered by the
rescission offer to rescind the underlying securities transactions and sell
those securities back to us.
Q: Which shares of common stock are included in the rescission offer?
A: We are offering, upon the terms and conditions described in this prospectus,
to rescind the sale of 219,000 shares of common stock from shareholders who
purchased shares of our common stock pursuant to a private placement conducted
by our predecessor, Nexgen VIII in March 2002 through May 2002. The 219,000
shares of our common stock subject to the rescission offer are held by 30
persons.
Q: Does the rescission offer comply with Delaware corporation law?
A: Yes. Section 160(a)(1) of the Delaware Corporation law provides that "no
corporation shall purchase or redeem its own shares of capital stock for cash or
other property when the capital of the corporation is impaired or when such
purchase or redemption would cause any impairment of the capital of the
corporation, except that a corporation may purchase or redeem out of capital any
of its own shares ... if such shares will be retired upon their acquisition and
the capital of the corporation reduced.." The Company intends to retire all
shares held by the shareholders who accept the rescission offer. Such shares
shall become authorized but unissued shares of the Company. To the best of the
Company's knowledge there is no other applicable minimum capital or reserve
requirement under federal or state law.
Q: When does the rescission offer expire?
A: Our rescission offer will expire on *, 2006 (30 days after the date hereof),
in accordance with the laws of Colorado and Texas which require that a
rescission offer must be accepted within 30 days after the offer.
Q: What will I receive if I accept the rescission offer?
A: If you accept our rescission offer with respect to the common stock you
purchased, we will repurchase the shares you hold that are subject to the
rescission offer at the price per share you paid, plus interest at the current
statutory rate per year, from the date of issuance through the date the
rescission offer expires.
The legal rates of interest for the repurchase of shares will be based on
the state of residence of the stockholder. These interest rates are as follows:
---------------------------------------------------------------
State Interest Rate
---------------------------------------------------------------
Colorado 8%
---------------------------------------------------------------
Texas 6%
---------------------------------------------------------------
Q: Can you give me an example of what I will receive if I accept the rescission
offer?
A: We will repurchase outstanding shares of common stock subject to the
rescission offer at the price per share you paid, plus interest at the current
statutory rate per year, from the date of issuance through the date that the
rescission offer expires. If you are a resident of Texas and hold 1,000 shares
of our common stock that you have held for four years that is subject to the
rescission offer at a per share price of $.01 and you accept our rescission
offer, you would receive:
o The original purchase price = 1,000 x $.01 = $10.
o Plus simple interest at 6% per year for four years =$10 x 6% = $.60
x 4 = $2.40.
o For a total of $12.40.
3
You will not have any right, title or interest to the shares of common
stock you will be surrendering upon the closing of the rescission offer, and you
will only be entitled to receive the proceeds from our repurchase of the common
stock, as the case may be.
Q: Have any officers, directors or 5% stockholders advised Spongetech Delivery
Systems, Inc. whether they will participate in the rescission offer?
A: None of our officers, directors or 5% shareholders purchased shares during
the period from March 2002 through May 2002 and, as a result, none are eligible
to participate in this offer.
Q: If I do not accept the offer now, can I sell my shares?
A: If you do not accept the rescission offer, you can sell the shares of common
stock that were subject to the rescission offer without limitation as to the
number or manner of sale; provided, however, that you will remain subject to any
transfer restrictions entered into with respect to your shares.
Q: What do I need to do now to accept or reject the rescission offer?
A: To accept or reject the rescission offer, you must complete and sign the
accompanying election form and return it in the enclosed return envelope to
Spongetech Delivery Systems, Inc., to the attention of Michael Metter, CEO, The
Empire State Building, 350 Fifth Avenue, SuieSuite 2204, New York, New York
10118, as soon as practical but in no event later than *, 2006.2006 (30 days
after the date hereof). If you are accepting the rescission offer, please also
include in your return envelope (i) a completed and signed election form (see
Appendix A) and (ii) a stock power representing the shares you are surrendering
for repurchase (see Appendix B).
Q: Can I accept the rescission offer in part?
A: If you accept the rescission offer, then you must accept the rescission offer
of all of the shares of common stock that you purchased in the private
placement.
Q: What happens if I do not return my rescission offer election form?
A: If you do not return a properly completed election form before the expiration
date of our rescission offer, you will be deemed to have rejected our offer.
Q: What remedies or rights do I have now that I will not have after the
rescission offer?
A: It is unclear whether or not you will have a right of rescission under
federal securities laws after the rescission offer. Generally, the federal
statute of limitations for noncompliance with the requirement to register
securities under the Securities Act of 1933 is one year from the date of the
violation upon which the action to enforce liability is based.
The state remedies and statutes of limitations vary and depend upon the state in
which you purchased the shares. The following is a summary of the statutes of
limitations and the effect of the rescission offer for the states in which the
shares covered by this rescission offer were sold. This summary is not complete.
For a more detailed description of the various state laws governing rescission
rights in the respective states, see "Rescission Offer--Effect of Rescission
Offer."
Colorado While residents of Colorado that hold shares covered by
the rescission offer may have a right of rescission
under federal securities laws, we believe that the
options and common stock issued by us in the state of
Colorado were issued pursuant to an exemption from
registration or qualification under the Colorado
Securities Act.
Texas While residents of Texas that hold shares covered by
the rescission offer may have a right of rescission
under federal securities laws, we believe that the
options and common stock issued by us in the state of
Texas were issued pursuant to an exemption from
registration or qualification under the Texas
Securities Act.
We believe that your acceptance of the rescission offer will preclude you
from later seeking similar relief. Regardless of whether you accept the
rescission offer, we believe that any remedies you may have after the rescission
offer expires would not be greater than an amount you would receive in the
rescission offer.
Q: How will the rescission offer be funded?
4
A: The rescission offer will be funded from a separate segregated account titled
the "Spongetech Delivery Systems, Inc. Rescission Account", which has been
opened solely for the purpose of funding the rescission offer. The funds in this
account were advanced by our officers, directors and affiliated persons and will
not be used for any other purpose. There are no formal or written agreements
with respect to the advance of funds to us by our officers, directors and
affiliates for funding the rescission offer. Upon expiration of the rescission
offer, any remaining balance will be contributed to our capital. As of the date
of this filing, the amount to be paid pursuant to the rescission offer is
$2,883, including accrued interest of $692.80. If all of the shareholders
entitled to rescission accepts our rescission offer, then the funds which are
being used to fund the rescission offer, which otherwise may have become
available to us to fund our operations, will not be so available. If the
rescission offer is partially accepted then we will not be able to utilize these
funds not accepted in the rescission to fund our operations. In view of our
limited cash position, the acceptance of any part of the rescission offer could
significantly affect our operations.
Q: Can I change my mind after I have mailed my signed election form?
A: Yes. You can change your decision about accepting or rejecting our rescission
offer at any time before the expiration date. You can do this by completing and
submitting a new election form. Any new election forms must be received by us
prior to the expiration date in order to be valid. We will not accept any
election forms after the expiration date.
Q: Who can help answer my questions?
A: You can call Michael Metter, CEO at Spongetech Delivery Systems at
(212) 594-4175, with questions about the rescission offer.
Q: Where can I get more information about Spongetech Delivery Systems?
A: You can obtain more information about Spongetech Delivery Systems by
contacting our Michael Metter, CEO at Spongetech Delivery Systems at (212)
594-4175.
5
SELECTED FINANCIAL DATA
The selected statement of operations data for the two fiscal years ended May 31,
2005 and 2004 and the following selected balance sheet data as of November 30,
2005 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
Six Months Ended year ended
November 30, May 31,
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Sales $ 2,974 $ 0 $ 1,051 $ 1,858
Cost of goods sold 1,158 0 1,012 1,600
------------ ------------ ------------ ------------
Gross profit (loss) 1,816 0 39 258
------------ ------------ ------------ ------------
Total operating expenses 29,246 17,172 58,738 2,051,772
Other Income
and expenses net 5,012
------------ ------------ ------------ ------------
Net loss $ (27,430) $ (17,172) $ (58,699) $ (2,056,526)
============ ============ ============ ============
Net loss per share -
basic and diluted $ (.00) $ (.00) $ (.00) $ (.01)
============ ============ ============ ============
Weighted average common
shares outstanding 33,952,626 18,985,000 18,985,000 18,985,000
============ ============ ============ ============
As of November 30, 2005
Actual As Adjusted
For Minimum Offering
Balance Sheet Data
Cash and cash equivalents $ 466 $ 380,466
Working capital $ (137,325) $ 242,675
Total Assets $ 31,491 $ 411,491
Total Liabilities $ 142,411 $ 142,411
Stockholders' Equity (Deficiency) $ (110,920) $ 269,080
6
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 Related to the Rescission Offer
WE MAY CONTINUE TO HAVE POTENTIAL LIABILITY EVEN AFTER THIS RESCISSION OFFER IS
MADE.
Our predecessor, Nexgen Acquisitions VIII, sold 219,000 shares of common
stock to 30 investors in connection with a private placement during the period
from March 2002 through May 2002 that may be deemed to have not been exempt from
the registration or qualification requirements under the securities laws of
certain states and/or the registration and qualification requirements under the
Securities Act of 1933. In order to address these issues, we are making the
rescission offer to all holders of any shares subject to rescission. However,
the Securities Act of 1933 does not provide that a rescission offer will
extinguish a holder's right to rescind the issuance of shares that were not
registered or exempt from the registration requirements under the Securities Act
of 1933. Consequently, should any recipients of our rescission offer reject the
offer, expressly or impliedly, we may remain liable under the Securities Act of
1933 for the purchase price of the shares that are subject to the rescission
offer. While we believe the shareholders who are residents of Colorado and Texas
may have a right of rescission under federal securities laws, we believe that
the shares issued by us in these states were issued pursuant to an exemption
from registration or qualification available to us under applicable state
securities laws. It is possible shareholders who acquired shares of our common
stock that are subject to the rescission offer, may continue to have rights
under common law or fraud in the state in which the potential securities
violation with respect to your shares occurred. If a court were to impose a
greater remedy, our liability as a result of the potential securities violations
would be higher. In addition, if all our shareholders who are entitled to
rescission accept our rescission offer, based upon calculations as of the date
of this filing, the total amount including interest is $2,833. In view of our
limited cash position, this could have a significant impact on our business
operations. The funds set aside for the rescission is unavailable to us to fund
our overhead, manufacturing and operating costs. If we are unable to fund such
costs, our business will fail.
YOUR FEDERAL RIGHT OF RESCISSION MAY NOT SURVIVE IF YOU AFFIRMATIVELY REJECT OR
FAIL TO ACCEPT THE RESCISSION OFFER.
If you affirmatively reject or fail to accept the rescission offer, it is
unclear whether or not you will have a right of rescission under federal
securities laws after the expiration of the rescission offer.
WE CANNOT PREDICT WHETHER THE AMOUNTS YOU WOULD RECEIVE IN THE RESCISSION OFFER
WOULD BE GREATER THAN THE FAIR MARKET VALUE OF OUR SECURITIES.
The amount you would receive in the rescission offer is fixed and is not
tied to the fair market value of our common stock at the time the rescission
offer closes. As a result, if you accept the rescission offer, you may receive
less than the fair market value of the securities you would be tendering to us.
IF YOU DO NOT ACCEPT THE RESCISSION OFFER, YOUR SHARES, ALTHOUGH FREELY
TRADEABLE, MAY STILL REMAIN SUBJECT TO LIMITATION ON RESALES.
If you affirmatively reject the rescission offer or fail to accept the
rescission offer before the expiration of the rescission offer, your shares will
be registered under the Securities Act of 1933 and will be fully tradeable,
subject to any applicable limitations set forth in Rule 144 or Rule 145 under
the Securities Act of 1933.
Risks relating to our Business
WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION WHICH MAY CONTINUE. IF WE
CONTINUE TO EXPERIENCE LOSSES, WE WILL BE UNABLE TO FUND ANY OF OUR SALES AND
MARKETING AND RESEARCH AND DEVELOPMENT ACTIVITIES. AS A RESULT WE MAY BE FORCED
TO CEASE OUR OPERATIONS WHICH WOULD CAUSE INVESTORS TO LOSE THEIR ENTIRE
INVESTMENT.
We incurred net losses of $58,699 and $2,056,526 for the years ended May 31,
2005 and 2004, respectively. As of November 30, 2005 we have a working capital
deficit of $137,325. Because of these conditions, we will require additional
working capital to develop our 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 will not be able to fund any of our sales and marketing and research
and development activities, and we may be forced to cease our operations. If we
are forced to cease operations, investors will lose the entire amount of their
investment.
WE HAVE A LIMITED OPERATING HISTORY AND MAY NOT GENERATE ENOUGH REVENUES TO STAY
IN BUSINESS.
7
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. If we are unable to achieve profitability we
will be forced to curtail our operations and go out of business.
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 in the areas of marketing and
research and development 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
and force us to curtail our business operations. 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. If we do not receive funding at lower prices, this
will have a dilutive effect on the value of our securities issued at higher
prices. Further, the sale, or potential sale of large amounts of our securities
will, in all likelihood, have a depressive effect on the price of our securities
which will affect the value of your investment.
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 TO CEASE OPERATIONS.
In their report dated September 15, 2005, our independent auditors stated that
our financial statements for the year ended May 31, 2005 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 since our inception. We continue to experience net
losses. Our ability to continue as a going concern is subject to our ability to
generate a profit and/or obtain necessary funding from outside sources,
including obtaining additional funding from the sale of our securities,
increasing sales or obtaining loans and grants from various financial
institutions where possible. 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. The loss of our license and the inability to obtain
alternative arrangements for our currently contemplated products or a different
product line will cause our business to fail. 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, we may be forced to cease all operations.
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.
8
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. We may not have sufficient
capital to pay damages or if we do have sufficient capital, utilizing this
capital to pay damages will divert capital away from our business which is
critically needed to develop our business and products. Any of these events
could have a material adverse effect on our business and profitability and cause
us to curtail operations and cease our business. If we are enjoined from using
our licensed technology we will be forced to cease operations and go out of
business, as a result, investors will lose their entire investment.
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
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 THE EFFORTS OF INDEPENDENT SALES PERSONS TO GENERATE SALES OF OUR
PRODUCTS.
We do not have a sales staff devoted to generating sales of our products.
Instead, we rely on the efforts of independent sales groups, who are retained on
a non-exclusive basis. These independent sales persons may not devote a
significant amount of time to promoting our products or may focus their efforts
on other products which may result in them receiving a bigger sales commission.
We have no control over these sales persons. If these sales persons are not able
to generate significant sales for our products, we will be forced to curtail our
operations and go out of business.
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. The success of our
business will depend on our ability to obtain adequate supplies of hydrophilic
sponges, chemicals, packaging materials, or finished products. Since we are
dependent on Dicon for our all of our products, a failure by Dicon to deliver
products when ordered will prevent us from fulfilling orders and would result in
us being unable to timely fill purchase orders. If we are not able to timely
deliver on purchase orders, we may experience a reduction in the number of
orders, which will negatively affect our business. If delays are persistent,
some of our purchasers may determine not to place future orders with us which
will result in a reduction in our profits and will cause us to cease operations
and go out of 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, our business will fail.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS AND IMPLEMENTATION OF ANY LAW OR
CONSTRUCTION OF ANY CURRENT LAW WHICH HAS THE EFFECT OF MAKING IT MORE COSTLY TO
PRODUCE OUR PRODUCTS MAY DETRIMENTALLY AFFECT OUR ABILITY TO PRODUCE AND SELL
OUR PRODUCTS WHICH WILL CAUSE US TO CURTAIL OUR OPERATIONS AND CEASE OUR
BUSINESS.
9
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. If these
agencies determine to implement any law, or construe any current law in such a
way which will make it more costly to produce our products, we may be forced to
reduce our business and cease operations. In addition, if any of these agencies
determine that there is no feasible way to adequately protect the public from
any of our products, we will immediately be forced to curtail our business. Any
such developments could detrimentally affect our ability to sell our products
and become profitable and cause our business to fail.
IF WE FAIL TO PAY OUR FRANCHISE TAXES AND TO TIMELY FILE A RENEWAL AND REVIVAL
AND ANOTHER CORPORATION SHALL ADOPT A NAME THAT IS SIMILAR AND/OR
INDISTINGUISHABLE FROM OUR NAME, WE COULD LOSE THE RIGHT TO USE OUR NAME AND
WILL BE REQUIRED TO SEEK A RENEWAL AND REVIVAL OF OUR CERTIFICATE OF
INCORPORATION UNDER ANOTHER NAME.
On March 1, 2004, our Certificate of Incorporation was voided by the State of
Delaware for non-payment of franchise taxes in the amount of $114.40, including
interest, fees and penalties for 2002 and $164.49, including taxes, fees and
penalties for 2003, which outstanding amounts were paid on June 27, 2005. Our
Certificate of Incorporation was renewed and revived, effective February 29
2004. The revival has the effect of validating all actions taken by our officers
and directors pursuant to the Certificate of Incorporation during the period
when we were voided. If we fail to pay our franchise taxes and to timely file a
renewal and revival and another corporation shall adopt a name that is similar
and/or indistinguishable from our name, we could lose the right to use our name
and will be required to seek a renewal and revival of our Certificate of
Incorporation under another name. This could result in the loss of any good will
and recognition which has been established with respect to our name.
OUR OFFICERS AND DIRECTORS ARE INVOLVED IN OTHER BUSINESSES WHICH MAY CAUSE THEM
TO DEVOTE LESS TIME TO OUR BUSINESS.
Michael Metter, our President and Chief Executive Officer, serves a director and
officer for other companies. In addition to serving as our President and Chief
Executive Officer, Mr. Metter also serves as the President and Chief Executive
Officer of BusinessTalk Radio.net, Chairman of Tiburon Capital Group, a
privately held holding corporation and Vice-President of ERC Corp., a
privately-held marketing consultant. Mr. Metter devotes 10 hours each week,
constituting 20% of his time, to our business. Mr. Moskowitz, our Chief
Financial Officer and Secretary, also serves as a director and officer for other
companies. Mr. Moskowitz also serves as the CEO and President of Azuel, Ltd, a
publicly traded entity and Vice President of ERC Corp., a privately-held
marketing consultant. Mr. Moskowitz devotes 40 hours each week, constituting 75%
of his time, to our business. Mr. Lazaukas, one of our directors, serves also as
President of FJL Enterprises, Inc. and TNJ Enterprises, Inc., which own and
operate eight Dominos Pizza Stores. Our officers' and directors' involvement
with other businesses may cause them to allocate their time and services between
us and other entities. Consequently, they may give priority to other matters
over our needs which may materially cause us to lose their services temporarily
which could affect our operations and profitability.
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 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. This will cause
our shareholders to experience a decrease in the value of the shares which are
held by them.
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 $.007 per share so that persons purchasing units in
this offering would suffer an immediate dilution of $.243 per share or 97% 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
$.042 per share or dilution to you of $.208 per share or 83% of the public
offering price. See "Dilution."
Redemption of redeemable class A warrants could deprive you of your right to
exercise your warrants or may force you to exercise your warrants at a time when
you may not be able to maximize the return on your investment or result in a
return well below your expectations.
10
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
__________, 2006 (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. This will
cause our shareholders to experience a return on their investment below their
expectations.
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 WHICH MAY REDUCE THE VALUE OF YOUR INVESTMENT.
This prospectus relates to the sale by us of Units and to the resale of up to
3,625,969 additional shares that are held by certain 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. In
addition if our common stock is listed on the OTC Bulletin Board and selling
stockholders can sell at prevailing market prices, this may undercut the price
at which we are offering our shares, which must be sold at a fixed price for the
duration of the Offering.
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. In addition, if our Common Stock is quoted on
the OTC Bulletin Board and the Selling Stockholders can sell their shares at the
market price, this may undercut the price at which we are offering our shares
which are required to be sold at a fixed price for the duration of this
Offering.
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.
OUR CHIEF FINANCIAL OFFICER AND SECRETARY, STEVEN MOSKOWITZ, SERVES AS PRESIDENT
AND CEO OF AZUREL, LTD. A PUBLICLY TRADED ENTITY THAT BECAME DELINQUENT IN ITS
FILING OBLIGATIONS. IN ADDITION, CERTAIN OF OUR OTHER OFFICERS AND DIRECTORS
WERE PREVIOUSLY AFFILIATED WITH AZUREL, LTD.
Michael Metter, our President and a director and Frank Lauzaskas, one of our
directors, were previously executive officers and directors of Azurel Ltd., a
publicly traded entity. Steven Moskowitz, our Chief Financial Officer, Secretary
and director serves also as President and CEO of Azurel. 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. On January 31, 2006, Azurel
terminated its obligation to file reports by filing a Form 15 with the
Securities and Exchange Commission. If we were to become delinquent in our
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.
11
USE OF PROCEEDS
If the minimum number of units are sold, we estimate that we will receive net
proceeds of approximately $380,000 ($500,000 of gross proceeds, less offering
expenses of approximately $120,000) 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 $1,880,000 ($2,000,000 of gross proceeds, less
offering expenses of approximately $120,000) from our sale of the 8,000,000
units offered by us. This estimate is based on an initial public offering price
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 currently have no
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 $ 400,000 $ 600,000
Salaries(3) -0- -0- 275,000 350,000
Marketing (4) 100,000 300,000 400,000 600,000
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 (5) 55,000 130,000 130,000 138,000
Total $ 380,000 $ 880,000 $1,380,000 $1,880,000
(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.
(3) In the event the 75 % or the maximum number of Units is sold in the
offering, we intend to start paying salaries to our President, Michael Metter
and our Secretary and Treasurer, Steven Moskowitz. In addition, if we raise the
maximum offering, we intend to hire a National sales representative and a
technology and EDI person. If we raise 75% of the offering we intend to only
hire a technology and EDI person. If we raise the maximum, we estimate that we
will pay an annual salary of $100,000 to Michael Metter, $75,000 to Steve
Moskowitz, $50,000 to our technology person, $50,000 to our EDI person and
$75,000 to our national sales representative. If we raise 75% of the offering,
we estimate that we will pay an annual salary of $100,000 to Michael Metter,
$75,000 to Steve Moskowitz, $50,000 to our technology person, and $50,000 to our
EDI person.
(4) Marketing will include infomercials, brochures, advertising in automobile
magazines, via the internet and at trade shows.
(5) General overhead expenses, including, but not limited to, office supplies,
overnight delivery services, mail, telephones, insurance , legal and accounting
fees. If we raise the minimum amount in this offering, we estimate that we will
use the amount allocated for working capital as follows: $9,000 for insurance,
$19,000 for legal fees, $19,000 for accounting fees and $5,000 for office
supplies, overnight delivery services, mail, telephones and other miscellaneous
expenses and $3,000 to fund the rescission offer outlined in this prospectus. If
we raise the maximum amount in this offering, we estimate that we will use the
amount allocated for working capital as follows: $30,000 for insurance, $50,000
for legal fees, $50,000 for accounting fees and $8,000 for office supplies,
overnight delivery services, mail, telephones and other miscellaneous expenses.
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 from the Units sold by us pursuant to 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 from the Units sold by us pursuant to this Offering.
We will not receive any proceeds from the 3,625,969 additional shares of common
stock that are being offered for sale by the selling stockholders under this
prospectus.
12
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Securities
There is no market for our common stock.
As of February 9, 2006, 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
The difference between the public offering price per share of common stock,
assuming no value is attributed to the warrants included in the units, and the
pro forma net tangible book value per share of our common stock after this
offering constitutes the dilution to investors in this offering. Net tangible
book value per share is determined by dividing our net tangible book value,
which is our total tangible assets less total liabilities (including the value
of common stock which may be converted into cash), by the number of outstanding
shares of our common stock.
At November 30, 2005, our net tangible book value was a deficiency of
($110,920), or approximately ($0.003) per share of common stock. After giving
effect to the sale of the minimum offering of 2,000,000 shares of common stock
included in the units, and the deduction of estimated expenses of this offering,
our pro forma net tangible book value at November 30, 2005, would have been
$269,080 or $0.007 per share, representing an immediate increase in net tangible
book value of $0.004 per share to the initial stockholders and an immediate
dilution of $.243 per share to new investors.
The following table illustrates the dilution to the new investors on a per-share
basis, assuming no value is attributed to the warrants included in the Units:
Public Offering Price $ .25
Net Tangible book value before this
offering $ (0.003)
Increase attributable to new investors $ .004
------------ ------------
Pro forma net tangible book value after $ .007
this offering
------------ ------------
Dilution to new investors $ .243
============
13
The pro forma net tangible book value after the offering is calculated as
follows:
Numerator:
Net tangible book value (deficiency) before this offering $ (110,920)
Proceeds from the offering (minimum) 380,000
------------
269,080
Denominator:
Shares of common stock outstanding prior to this offering 33,952,636
Shares of common stock included in the units offered (minimum) 2,000,000
------------
35,952,636
The following illustrates dilution at varying levels of proceeds from the
Offering
ASSUMING ASSUMING
MINIMUM 50% of 75% of MAXIMUM
OFFERING OFFERING OFFERING OFFERING
-------- -------- ------- -------
Public offering price per share $0.25 $0.25 $0.25 $0.25
Net tangible book value per share as of
November 30, 2005 (.003) (.003) (.003) (.003)
Increase per share attributable to this offering .010 .023 .035 .045
Pro forma net tangible book value per share
after this offering .007 .020 .032 .042
Dilution to new investors .243 .23 .218 .208
Percentage of Dilution 97% 92% 87% 83%
The following table sets forth with respect to the existing shareholders, a
comparison of the number of shares of Common Stock owned by the existing
shareholders, the number of common stock to be purchased from the Company by the
purchasers of the Units offered hereby and the respective aggregate
consideration paid to the Company and the average price per share:
Shares Purchased Total Consideration Average Price
Assuming Minimum Offering: Number Percent Amount Percent Per Share
Existing shareholders(1) 33,952,636 94.4% $5,092,895 91.1% $ .15
New investors 2,000,000 5.6 500,000 8.9 .25
Total 35,952,636 100.0% $5,592,895 100%
Assuming Maximum Offering: Number Percent Amount Percent
Existing shareholders(1) 33,952,636 80.9% $5,092,895 71.8% $ .15
New investors 8,000,000 19.1 2,000,000 28.2 .25
Total 41,952,636 100.0% $7,092,895 100%
(1) Includes 13,365,969 shares of common stock issued to officers, directors and
affiliated persons.
14
CAPITALIZATION
The following table summarizes our capitalization at November 30, 2005, and to
give effect to (i) the sale of the 2,000,000 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 should be read in conjunction
with the more detailed combined financial statements and notes presented
elsewhere in this prospectus.
November 30, 2005
Actual Adjusted
----------- ----------
Long-term obligations [including/less] current portion $ 0 $
Stockholders' equity:
Common stock $.001 par value;
authorized 50,000,000 shares; issued
and outstanding shares 33,952,636 33,953 35,953
Preferred stock $.001 par value;
authorized 5,000,000 shares;
no shares issued and outstanding 0
Additional paid in capital 2,616,294 3,114,294
Deficit (2,761,167) (2,881,167)
----------- ----------
Net Stockholders' equity (deficiency) (110,920) 269,080
----------- ----------
Total capitalization (deficiency) (110,920) 269,080
=========== ==========
15
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.
On March 1, 2004, our Certificate of Incorporation was voided by the State of
Delaware for non-payment of franchise taxes in the amount of $114.40, including
interest, fees and penalties, for 2002 and $164.49, including taxes, fees and
penalties, for 2003, which outstanding amounts were paid on June 27, 2005. On
June 27, 2005, a Certificate for Renewal and Revival of our Certificate of
Incorporation (the "Certificate") was filed with the State of Delaware, which
restored, renewed and revived our Certificate of Incorporation commencing
February 29, 2004. In accordance with Delaware Corporation law, upon the filing
of the Certificate, our Certificate of Incorporation was renewed and revived
with the same force and effect as if it had not been voided. Such reinstatement
validated all contracts, acts, and matters, done and performed by our officers
and agents within the scope of our Certificate of Incorporation during the time
the Certificate of Incorporation was voided. We were not assessed any franchise
taxes for the year 2004 because our Certificate of Incorporation was revoked and
voided in 2004. On March 6, 2006, we paid our franchise taxes for 2005 in the
amount of $162.03.
Events and Uncertainties that are critical to our business
We have had limited operations and like all new businesses face certain
uncertainties, including 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. We have had little or no revenues since fiscal year 2003, our
most recent year of active operations. In 2003, 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. 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. There is
no guarantee that if we were to have sufficient funds that TurtleWax will place
orders with us. Also, there is no guarantee that we may be able to generate any
interest in our product that will result in any sales in the future. While we
have been able to generate sales of $2,974 in our most recent fiscal quarter,
there is no guarantee that we will be able to generate sufficient sales to make
our operations profitable. We may continue to have little or no sales and
continue to sustain losses in the future. If we continue to sustain losses we
will be forced to curtail our operations and go out of business.
16
We license the right to use our technology 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. The License
Agreement expires in December 2006. Although we have been able to negotiate
extensions of the term with Dicon, there is no guarantee that we will be able to
negotiate an extension beyond December 31, 2006. If we lose the exclusive right
to use the technology, we may be forced to compete with other companies, who may
have greater resources. This will affect our ability to successfully penetrate
the market and achieve profitability. As a result, we may be forced to cease
operations. In addition, there is no guarantee that Dicon will continue to
manufacture our products since its core business is the use of the hydrophilic
technology in the manufacture of inner soles for shoes for its parent company,
HH Brown Shoe Technologies, Inc. If Dicon can no longer manufacture our products
there is no guarantee that we will be able to contract with another manufacturer
for our products or that we will be able to use the technology in our products.
In addition, there is no guarantee that upon our receipt of adequate funding to
become fully operational, that Dicon will be able to meet our manufacturing
needs. In addition, we depend on Product Development to manufacture the inserts
and packaging for our sponges. Dicon only commences the manufacture of the
sponge upon receipt of this packaging material. A delay in getting the packaging
to Dicon can cause further delays in the delivery of our products to customers.
A failure to have products delivered timely to our customers will cause delays
for our customer and may prompt them to look for alternate products. Production
delays will affect our profitability and may cause us to go out of business.
In addition, there is no guarantee that Dicon has adequate funds or will be able
to successfully defend the patents on our licensed technology against
infringement. If Dicon is unable to successfully defend any infringement claims
and other products are developed similar to ours using the licensed technology,
we may be forced out of business. Although we are currently exploring the use of
the hydrophilic technology in products for home use there is no guarantee that
the technology can be successfully used for such other uses. If we fail to find
other uses for the technology , our company will have only one product. There
are many risks and uncertainties associated with companies with only one
product. Any failure or dips in the market may significantly affect our
profitability and cause us to go out of business.
Our success depends in a large part on our ability to implement a successful
marketing and sales plan. While we are currently seeking to hire sales groups to
market our products, there is no guarantee that these efforts will result in any
substantial sales. These sales groups are independent contractors who not only
market and sell our products but also the products of other companies.
Therefore, there is no assurance that they will devote substantial time to the
sale of our product. Because of lack of funding, we are unable to hire a
dedicated sales team who will devote their efforts to promoting and selling our
products and fostering relationships with distributors who can assist us with
getting our products on the shelves of large retailers such as Wal-Mart and
Costco. However, there is no guarantee that with a dedicated sales team, our
business will become profitable.
If we are able to obtain funding to become fully operational, there is no
guarantee that we will be able to find personnel who will be able to work
closely with the warehouse to ship orders, including special orders, made via
the internet. In addition, there is no guarantee that we will be able to find
technology personnel who can accept the EDI transmissions from the larger
retailers and coordinate with our logistics and warehouse contacts to ensure
timely delivery of orders.
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
Six Months ended November 30, 2005 and 2004
Net sales for the six months ended November 30, 2005 were $2,974 as compared to
$0 for the six months ended November 30, 2004. Management attributes this
increase to orders placed after attendance at the trade show.
During the six months ended November 30, 2005, we had sales of $2,974. Our gross
profit for the six months ended November 30, 2005 was $1,816 as compared to $0
for the six months ended November 30, 2004. Management attributes this increase
in gross profit to sales during this period.
Operating expenses for the six months ended November 30, 2005 were $29,246 as
compared to $17,172 for the six months ended November 30, 2004. The increase of
$12,074 is the result of an increase in selling general and administrative
expenses for the period.
Net loss for the six months ended November 30, 2005 was ($27,430) or ($.00) per
share as compared to a net loss of ($17,172) or ($.00) per share for the six
months ended November 30, 2004. The increase in net losses were the result of an
increase in selling expenses for the six months ended November 30, 2005 compared
to the six months ended November 30, 2004.
Fiscal Years Ended May 31, 2005 and 2004
Net sales were $1,051 for the fiscal year ended May 31, 2005 as compared to
$1,858 for the fiscal year ended May 31, 2004, a decrease of $807. Management
attributes this decrease to its inability to promote, market, and sell its
automotive product due to a lack of capital for production.
17
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. 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. Without sufficient funds,
we are unable to satisfy TurtleWax's requirement to have product on an in-stock
basis so that we can immediately ship to them upon receiving orders.
Cost of sales was $1,012 or 96 % of net sales for the fiscal year ended May 31,
2005 as compared to $1,600 or 86% of net sales for the fiscal year ended May 31,
2004.
Operating expenses for the fiscal year ended May 31, 2005 decreased to $83,529
from $2,051,772 for the fiscal year ended May 31, 2004. This decrease of
$1,968,243 was a result of a decrease in infrastructure costs to minimal levels
while we reorganize and redesign our products. Selling expenses for the fiscal
year ended May 31, 2005 was $0. General and administrative expenses for the year
ended May 31, 2005 included accounting, $19,000, legal, $30,000, office $583,
SEC fees of $2,452 and consulting fees of $2,469.
Net loss for the fiscal year ended May 31, 2005 was $(83,490) or $(.00) per
share as compared to net loss for the fiscal year ended May 31, 2004 of
($2,056,526) or ($.01) per share.
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, 2005
and 2004, we had sales of $1,051 and $1,858 respectively. The main reason for
the decrease 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. For the six months period ended November 30, 2005, we
had sales of $2,974, which management attributes to orders placed after
attendance at the Auto Show in Las Vegas Nevada, on October 31, 2005 through
November 4, 2005.
During the next year we expect to increase our marketing and sales efforts.
According to Cleanlink(1), a trade association for the cleaning industry, the
wholesale market for chemical cleaning products was in excess of $7.6 billion in
2002 and 2004. Accordingly, we believe there is a substantial market for easy to
use, multi-use cleaning products. In the next twelve months, 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.
Management intends to attend trade shows to promote our products. Management
attended the Auto Show in Las Vegas Nevada, on October 31, 2005 through November
4, 2005. Management estimates that it will cost us approximately $18,000 to
attend upcoming trade shows, all of which has been, and if necessary will
continue to be, funded by our officers, directors and affiliates until such time
as we are able to complete this offering. In addition, our Secretary, Steven
Moskowitz, will utilize his accrued air miles to cover all travel and hotel
costs. There are no formal or written agreements with respect to the advance of
funds to us by our officers, directors and affiliates. Such funds will be
disbursed on an as needed basis until this Offering closes. Our officers
directors and affiliates have advanced funds to us to cover the costs associated
with the filing of this Registration Statement, including, attorneys and
accountants fees and SEC filing fees. Our officers, directors and affiliates
have also advanced funds to us to cover the costs associated with the rescission
offer. There are no formal or written agreements with respect to the advance of
funds to us by our officers, directors and affiliates for payment of said costs.
Our officers, directors and other affiliates are not legally bound to provide
funding to us. If they do not pay for these expenses, we will be forced to
obtain funding. We currently do not have any arrangements to obtain additional
financing. In view of our limited operating history, our ability to obtain
additional funds is limited. Additional financing may only be available, if at
all, upon terms which may not be commercially advantageous to us. If we are not
able to obtain funding from other sources, we may not be able to complete this
Offering. If we are unable to complete this offering, we will not be able to
obtain funding to commence sales and marketing of our product. As a result we
may be forced to go out of business.
On February 22, 2006, we entered into an oral agreement with Creative Marketing,
a sales group with 5 sales representatives who will target their sales efforts
to Arizona, California and Nevada. The sales representatives will receive
commissions in the range of five (5%) percent to seven (7%) percent of net sales
which they generate and will be paid on the tenth day of the month following the
month in which the sales are made.
On July 18, 2005, we entered into an oral agreement with Lidel Fitzmaurice,
Inc., a sales group that targets sales from Virginia to Vermont. Lidel
Fitzmaurice has eleven sales representatives. The sales representatives will
receive seven (7%) percent of net sales which they generate and will be paid on
the tenth day of the month following the month in which the sales are made. To
date, we have received orders in the approximate amount of $22,572 from the
efforts of Lidel Fitzmaurice, Inc. The products will be manufactured by Dicon
and shipped directly to our customers by Dicon, with payment remitted to Dicon
upon receipt of payment from the customers. We anticipate that these orders will
be filled late spring. Lidel Fitzmaurice, Inc. has advised us that it intends to
attend the following trade shows in the next twelve months: the Los Angeles Auto
Show, the North American International Auto Show, the South Carolina
International Auto Show, the West Virginia Auto Show, the Pennsylvania Auto and
Boat Show, the Northeast Auto Show, the Motor Trend International Auto Show, the
Chicago Auto Show, the Virginia International Auto Show, the New York
International Auto Show, the Tampa Bay International Auto Show, the Charlotte
International Auto Show and the National Hardware Show.
-----------------------------------
(1) Obtained from Cleanlink.com based upon a study prepared and conducted by the
Research Department of Trade Press Publishing Corporation, publisher of Sanitary
Maintenance Magazine in conjunction with International Sanitary Supply
Association. The report can be accesses by following this link:
http://www.cleanlink.com/industrystatistics/2004sanitaryreport.asp
18
On January 27, 2006 we entered into an oral agreement with Bill Perry &
Associates, a sales group with 9 sales representatives who will target their
sales efforts to Georgia, Tennessee, Alabama, Mississippi, Florida, North
Carolina, South Carolina and Virginia. The sales representatives will receive
commissions in the range of six (6%) percent to eight (8%) percent of net sales
which they generate and will be paid on the tenth day of the month following the
month in which the sales are made. To date we have received orders in the
approximate amount of $3,150 from the efforts of Bill Perry & Associates. The
products will be manufactured by Dicon and shipped directly to our customers by
Dicon, with payment remitted to Dicon upon receipt of payment from the
customers. We anticipate that these orders will be filled late spring.
Typically, sales groups attend trade shows to meet with sellers of various
products which the sales persons believe they can market and sell to their
customers. We are in the process of reviewing the indications of interest we
received from various sales groups at the Auto show which management attended in
November 2005. We intend to hire sales groups, with approximately 3 to 15 sales
persons per group, depending on the geographical area, to market and sell our
product through a gradual and staggered process. In April 2006, we intend to
retain a sales group in the Mid West to commence sales in May 2006. In May 2006,
we intend to hire a sales group in the North West to commence sales in June
2006. In June 2006, we intend to retain a sales group that targets the Canadian
market to commence sales of in July 2006. There is no guarantee that we will be
able to retain the various sales groups or that their efforts will result in
significant sales. We do not anticipate that we will incur any costs in
connection with retaining the various sales groups as the sales groups will be
paid a percentage the net sales they generate only. The sales persons will be
independent contractors retained by us on a non-exclusive basis and may not
devote their efforts solely to selling our products. We do not intend to hire
sales persons on an exclusive basis. If we are successful in raising the maximum
offering, in addition to the various independent sales representatives which we
retain, management intends to hire a national sales representative, who will be
an employee of the Company, working exclusively with the Company to coordinate
and over see all sales efforts. If we raise the maximum offering, we anticipate
that the national sales representative will receive a salary of up to $75,000
plus a 2% override on all commissions earned by the independent sales
representatives. However, there is no guarantee that we will be successful in
completing this offering or of raising the maximum offering. If we are not able
to complete this offering or raising 75% of the maximum offering, we will be
unable to hire a national sales person to coordinate our sales efforts. We
intend to continue to rely on the efforts of independent sales representatives
until at such time as our operations become profitable. If the we are not able
to generate sales utilizing independent sales representatives, we will not be
able to generate significant sales and may be forced to cease and curtail our
business.
We currently have an understanding with Dicon, whereby Dicon has agreed to
manufacture and ship small orders directly to our customers. Following the
receipt of payment to us, we remit payment to Dicon within 60 days of the
shipment date. We have not entered into a written agreement with Dicon for the
manufacture and shipment of products directly to our customers. Dicon does not
charge us a fee for facilitating the shipment of small orders directly to our
customers or for the current payment arrangement. There can be no assurance that
Dicon will continue to manufacture and ship orders directly to our customers or
that they will not charge us a fee in the future for shipment of small orders
directly to our customers. If we are not able to have our products manufactured
and shipped directly to our customers then we will not be able to fill orders
and may be forced to cease and curtail our business.
Upon completion of this offering, management intends to seek a production
finance company to fund our purchase orders. Typically the way this arrangement
works is all orders received by us will be forwarded to the production finance
company which will assess the credit worthiness of the entity or the individual
placing the order. Upon approval, the production finance company will fund the
cost of the product at a cost to us, representing a percentage of the order
placed. Management intends to seek an arrangement where the cost to the Company
will not exceed 5% of each order. If we are not successful in finding a
production finance company to fund our purchase orders, we will seek to have
customers finance the production of their orders. There is no guarantee that our
customers will be able to finance the production of their orders. If our
customers are not able to finance their orders, we will be forced to seek
alternate financing, such as debt and/or equity financing. We currently do not
have any arrangements to obtain additional financing. In view of our limited
operating history, our ability to obtain additional funds is limited. Additional
financing may only be available, if at all, upon terms which may not be
commercially advantageous to us. If our customers are unable to fund the
production of their orders or we are not able to fund the production of our
products, we will be unable to make any sales of products and may be forced to
cease and curtail our business.
Upon completion of this offering, management intends to locate a public
warehouse facility located in New Jersey or New York which is in close proximity
to Dicon's facilities and which will upon receipt of invoices from us and
products from Dicon, will pack and ship the completed orders to our customers at
a cost to us which will not exceed 4% of the orders for such services.
Management anticipates that this facility will also handle small internet
orders. Management has not taken any action to locate a public warehouse
facility. If we are not able to complete this offering we will not be able to
arrange for a public warehouse facility. If we are not successful in finding a
public warehousing facility, we will be unable to warehouse our products. This
may result is us being unable to process large orders. If we are unable to
process large orders, this will hinder our ability to become profitable and we
may be forced to cease and curtail our business.
Further, there is no assurance that management will be able to consummate any
agreements with a production finance company or warehouse on terms that are
acceptable to us or which will not significantly cut into our profit margin.
We have begun to review all indications of interest which we have received from
various infomercial companies as a way to promote our products. The success of
an infomercial featuring our products is dependent on, among other things,
having a compatible script director who understands our products and is able to
highlight the benefits of our products in a short running time and the ability
to get air time placement on channels such as ESPN and the Speed Channel to
reach our target market. In addition, in view of our lack of adequate funding,
we may be forced to give up a bigger profit margin to ensure that the
Infomercial is available for airing. We intend to enter into an agreement for
the production of an infomercial which we anticipate will be aired commencing in
August through December 2006. There is no guarantee that we will be able to find
an infomercial company who can successfully produce an infomercial on our behalf
or that we will generate any sales from the infomercial. Management anticipates
that it will cost a minimum of $50,000 and up to $300,000 to successfully
produce an infomercial. Management anticipates that it will use a portion of the
proceeds raised in the offering to produce an infomercial. If we do not complete
the minimum offering, we will not be able to cover the cost associated with
producing an infomercial.
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. If we are
unable to complete this offering, we will not be able to launch our marketing
campaign.
19
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 which could enhance our marketability. These efforts
have involved meeting with strategic licensing partners, and having discussions
regarding our products and market opportunities. We intend to pursue
arrangements with other companies to use their logos and marks on our product as
way to promote their products and target customers. To do so, we would be
required to enter into license agreements with these companies relating to the
use of their logos and marks. We anticipate that the cost for entering into such
arrangements will entail our attorney's fees for the negotiation of such
agreements and the cost of the mold to manufacture the sponges. Typically, the
cost of the mold is approximately $250, from which approximately 5,000 pieces
can be manufactured. To mass produce up to approximately 5,000,000 pieces, the
cost of the mold is approximately $5,500. The cost of the mold is typically paid
by the other party. To date, we have not entered into any agreements with any
parties for use of their logos and marks on our products and do not have any
plans to enter into any such arrangement until we successfully complete this
offering. Our license agreement with Dicon permits us the right to enter into
arrangements or agreements with third parties to use third parties' logos,
names, slogans and/or marks on our products for advertising, promotion,
manufacture distribution and sale. In addition, our license agreement allows us
to enter into sublicense agreements consistent with the terms of our license
agreement with Dicon. There is no guarantee that we will be able to complete any
agreements with 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. There is also no guarantee that we will be able to
successfully complete this offering. If we are unable to complete this offering,
we may be forced to cease operations and go out of business.
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 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. We have discussed with our
licensor, our plan to have this product manufactured and sold by us. However, we
have not yet entered into a formal agreement. This product is still in its
research and development stage. Upon the completion of research and development,
we intend to negotiate with Dicon the terms and conditions of the manufacture of
this product. We have not made any sales and cannot offer any assurances that
sales will result from our proposed marketing campaign, nor is there any
assurance that we will be able to enter into an agreement with Dicon for the
manufacture of this product. 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.
If we are not successful in raising the minimum offering we will be forced to
curtail or cease our business and operations.
Liquidity and Capital Resources
As of May 31, 2005, we had cash of $1,477, as compared to $50 at May 31, 2004.
Our current cash balance as of March 7, 2006 is $4,327.12 of which $3,000 is
held in a segregated account for the purpose of funding the rescission offer. As
of May 31, 2005, net cash used by operating activities aggregated $(27,073).
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. Based on our current cash
balance, management believes that we can satisfy our cash requirements for the
next five months. Our officers, directors and affiliates have indicated their
preparedness to fund our business until we are able to complete this offering.
However, there are no formal or written agreements with respect to the advance
of funds to the Company by our officers, directors and affiliates for payment of
said costs. Accordingly, our officers, directors and other affiliates are not
legally bound to provide funding to us. Because of our limited operations, if
our officers and directors do not pay for our expenses, we will be forced to
obtain funding. We currently do not have any arrangements to obtain additional
financing from other sources. In view of our limited operating history, our
ability to obtain additional funds is limited. Additional financing may only be
available, if at all, upon terms which may not be commercially advantageous to
us.
The working capital (deficiency) at May 31, 2005 was $112,037 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 by 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 of our
common stock valued at $28,500 or $.38 per 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.
20
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 May 31, 2005, we had a working capital deficit of $112,037. 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 Units sold by
us pursuant to this 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 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 fiscal year ended May 31, 2005, 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.
BUSINESS
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.
On March 1, 2004, our Certificate of Incorporation was voided by the State of
Delaware for non-payment of franchise taxes in the amount of $114.40, including
interest, fees and penalties for 2002 and $164.49, including taxes, fees and
penalties for 2003, which outstanding amounts were paid on June 27, 2005.On June
27, 2005, a Certificate for Renewal and Revival of our Certificate of
Incorporation (the "Certificate") was filed with the State of Delaware, which
restored, renewed and revived our Certificate of Incorporation commencing
February 29, 2004. In accordance with Delaware Corporation law, upon the filing
of the Certificate, our Certificate of Incorporation was renewed and revived
with the same force and effect as if it had not been voided. Such reinstatement
validated all contracts, acts, and matters, done and performed by our officers
and agents within the scope of our Certificate of Incorporation during the time
the Certificate of Incorporation was voided.
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.
21
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 our
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.
On January 31, 2006, our license agreement was amended. Pursuant to the terms of
the amendment, we have the right to (i) enter into arrangements or agreements
with third parties to use third parties' logos, name, slogans and/or marks on
our products for advertising, promotion, manufacture, distribution and sale and
(ii) sublicense our rights pursuant to the license agreement, subject to and
consistent with the terms of the license agreement. In addition, we agreed to
grant to Dicon the exclusive right to manufacture any products ordered as a
result of any agreements with third parties to use third parties' logos, name,
slogans and/or marks on our products for advertising, promotion, manufacture,
distribution and sale.
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
December 31, 2006.
22
Dicon has designed and installed specialized equipment for producing molded foam
products containing this superabsorbent polymer infused with detergents, soaps
and waxes used as an absorbing and cleaning sponge product. The agreement sets
forth minimum purchase requirements and pricing for the basic sponge product.
Using its patented processes, Dicon manufactures products derived from
"Hydrophilic Urethane Chemistry." The hydrophilic system has two parts, a
hydrophilic pre-polymer phase and a water phase. During the water phase, various
water soluble active ingredients are introduced into the products.
Products
We have designed specially configured sponges containing an outer contact layer
and an inner matrix. Dicon, our licensor and manufacturer, loads the inner
matrix of the sponge with specially formulated soaps and, in our licensed
automotive cleaning and polishing product, soap and wax. When the sponge is
applied to a surface with minimal pressure, the soap or soap and wax are
simultaneously applied to the surface. When the sponge is not in use, the
hydrophilic matrix holds the soap so that it does not leech out of the sponge.
We believe that our use of the patent has great marketing potential. We can
choose any variety of cleansers, including anti-bacterial and abrasive soaps.
Thus, we may fine-tune our products for use on different kinds of vehicles. New
vehicles or those prepared for classic car shows require a gentle cleaner,
whereas older cars which have developed a film over the paint or where the paint
has faded may require a cleanser containing a compounding substance, a gentle
abrasive. Depending on the use of our vehicular sponge, we may include wax, or
may only include the cleanser.
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.
Sales and Marketing
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.
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.
On July 18, 2005, we entered into an oral agreement with Lidel Fitzmaurice,
Inc., a sales gorup that targets sales from Virginia to Vermont with eleven
sales representatives. The sales representatives will receive seven (7%) of net
sales which they generate and will be paid on the tenth day of the month
following the month in which the sales are made. To date, we have received
orders in the approximate amount of $14,625 from the efforts of Lidel
Fitzmaurice, Inc. The products will be manufactured by Dicon and shipped by
Dicon, with payment remitted to Dicon upon receipt of payment from the
customers. We anticipate that these orders will be filled late spring. Lidel
Fitzmaurice, Inc. has advised us that it intends to attend the following trade
shows in the next twelve months: the Los Angeles Auto Show, the North American
International Auto Show, the South Carolina International Auto Show, the West
Virginia Auto Show, the Pennsylvania Auto and Boat Show, the Northeast Auto
Show, the Motor Trend International Auto Show, the Chicago Auto Show, the
Virginia International Auto Show, the New York International Auto Show, the
Tampa Bay International Auto Show, the Charlotte International Auto Show and the
National Hardware Show. We do not anticipate that we will incur any costs in
connection with retaining the various sales groups as the sales groups will be
paid a percentage the net sales they generate only.
On January 27, 2006 we entered into an oral agreement with Bill Perry &
Associates, a sales group with 9 sales representatives that will target their
sales efforts to Georgia, Tennessee, Alabama, Mississippi, Florida, North
Carolina, South Carolina and Virginia. The sales representatives will receive
commissions in the range of six (6%) percent to eight (8%) percent of net sales
which they generate and will be paid on the tenth day of the month following the
month in which the sales are made.
On February 22, 2006, we entered into an oral agreement with Creative Marketing,
a sales group with 5 sales representatives who will target their sales efforts
to Arizona, California and Nevada. The sales representatives will receive
commissions in the range of five (5%) percent to seven (7%) percent of net sales
which they generate and will be paid on the tenth day of the month following the
month in which the sales are made.
New Product Development
23
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,
these sponges are still in the research and development stage.
New Marketing
The Company will focus on its efforts on increasing its sales through the hiring
of various sales groups and its attendance at various trade shows. The Company
also intends to continue to promote its products through its website.
Competition
The market for consumer products is highly competitive. We compete with
international, national and local manufacturers and distributors of soaps,
detergents, waxes, sponges, cloths and other automotive, household and bath
products. Indirectly, in the automotive product area, we compete with
drive-through car washes. Our competition, for the most part, has brand
recognition and large marketing and advertising budgets. We face major
multinational competition in our proposed household and children's bath sponges.
Although our product is unique and patented, we cannot predict its acceptance in
any of the marketplaces for which it is designed.
We compete on the basis of the uniqueness of our sponge, which combines
efficiency and effectiveness compared to other vehicular cleaning products. Our
product avoids the preparation and clean-up of using sponges, liquid soaps and
pails of water. It also avoids the mess and limited storage life of traditional
liquid and paste waxes. In addition, our cleaning and wax product is much easier
to apply and does not have to be buffed. Our sponge which combines soap and wax
is considerable cheaper than the purchase of the individual cleaning and
application products, and our cleaning product is less expensive than the cost
of a sponge and liquid detergent.
We have in the past 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.
24
LEGAL PROCEEDINGS
Except as described below, we are not currently a party to, nor is any of our
property currently the subject of, any pending legal proceeding. None of our
directors, officers or affiliates is involved in a proceeding adverse to our
business or has a material interest adverse to our business.
We are aware of a lawsuit commenced by Westgate Financial Corporation
("Westgate") in the Superior Court of New Jersey, Law Division, Hudson County on
December 23, 2004 against Spongetech International, Ltd, Romantic Scents, Inc,
Steven Moskowitz (our Secretary), RM Enterprises International, Ltd, and Flo
Weinberg, Inc., a wholly-owned subsidiary of RM Enterprises International. On
January 6, 2003, the Company and Westgate entered into a factoring agreement
wherein the Company assigned to Westgate its accounts receivable arising out of
its sale of goods or rendition of services to customers (the "Contract").
Westgate asserts a breach of that contract against the Company seeking damages
of $11,049.82 with interest accrued thereon, costs and reasonable attorney's
fees. Specifically, Westgate alleges that the Company defaulted on the Contract
by, allegedly, failing to assign any accounts receivable for sixty (60) days.
The Company has counterclaimed alleging breach of contract and seeks damages in
an amount not less than $13,006.01, which damages are the amount of credits due
the Company at the time Westgate terminated the Contract. Currently, the parties
are conducting discovery. On September 19, 2005, our attorneys filed a Motion to
Compel Discovery as Westgate has failed to respond to our requests for
discovery. Westgate has refused to provide any discovery beyond a token
production. By its conduct, Westgate has violated a Court Order compelling the
production of certain documents. On January 18, 2006, our attorneys filed a
Motion to Enforce Litigant's Rights seeking the dismissal of Westgate's claims
in response to its refusal to produce documents and its violation of the Court
Order. . On February 10, 2006, the Court ordered Westgate to produce certain
responsive documents by February 17, 2006. Westgate has failed to comply with
the Court's Order, and on March 1, 2006, the Company filed its Second Motion to
Enforce Litigants' Rights seeking dismissal of the Complaint.
MANAGEMENT
Executive Officers, Directors, Director Nominees and Key Employees
The following table sets forth certain information regarding our current
Executive Officers, Directors and Key Employees:
Name Age Position Since
------------------------ --- ------------- ------
Michael Metter* 54 President,
Chief Executive Officer,
Director 5/2001
Steven Moskowitz* 41 Secretary, Treasurer
Chief Financial Officer
and Director 6/1999
Frank Lazauskas 45 Director 7/2001
----------------
* 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
25
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.
In February 2006, Mr. Moskowitz was appointed to serve as our Chief Financial
Officer. 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. Mr. Moskowitz rejoined
Azurel from May 1, 2004 through July 26, 2004 as CEO and President. On July 25,
2005, Mr. Moskowitz was elected as CEO and President of Azurel. 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,
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.
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.
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended May 31, 2005 and 2004,
the compensation we paid to our Chief Executive Officer(s) and any other
executive officers who earned in excess of $100,000 based on salary and bonus.
26
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
--------------------------------------------
Annual Compensation Awards Payouts
------------------------------------- ------------------------------ -------------
All
Other Securities Other
Annual Restricted Under-lying Compen-
Name and Compen- Stock Award(s) Options/ LTIP sation
Principal Position Year Salary ($) Bonus ($) sation ($) ($) SARs (#) Payouts ($) ($)
--------------------------- ---------- ------------- ---------- ------------ ----------------- ------------ ------------- ----------
Michael Metter 2005 499,500 (1) 0 0 0 0 0 0
Chief Executive Officer 2004 0 0 0 0 0 0 0
2003 0 0 0 0 0 0 0
Steven Moskowitz 2005 490,500 (2) 0 0 0 0 0 0
Treasurer and Secretary 2004 0 0 0 0 0 0 0
2003 0 0 0 0 0 0 0
Frank Lazaukas 2005 499,500 (3) 0 0 0 0 0 0
Director 2004 0 0 0 0 0 0 0
2003 0 0 0 0 0 0 0
(1) 3,330,000 shares of common stock were issued to Mr. Metter as consideration
for services rendered to us which shares are valued at $499,500.
(2) 3,270,000 shares of common stock were issued to Mr. Moskowiz as
consideration for services rendered to us which shares are valued at $490,500.
(3) 3,330,000 shares of common stock were issued to Mr. Lazaukas as
consideration for services rendered to us, which shares were valued at $499,500.
Option Grants for the fiscal years ended May 31, 2005 and 2004
No options or SARs were granted to the named executive officers during fiscal
year ended May 31, 2005.
Aggregated Option Exercise for the fiscal years Ended May 31, 2005 and 2004 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, 2005.
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-
-----------------------------------------------------------------------------------------------------------------
27
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 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 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 valued at $499,500.
In January 2005, we issued 3,270,000 shares of our common stock, valued at 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
valued at $490,500.
In January 2005, we issued 100,000 shares of our common stock to Thomas Monahan,
our former Chief Financial Officer, as compensation for managing our financial
operations valued at $15,000.
28
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 at $499,500.
In January 2005, we issued 2,000,000 shares of our common stock to the Rubin
Family Irrevocable Stock Trust as directed by Robert Rubin, as compensation for
introducing us to business, sales and contractual opportunities and assisting us
with the review and evaluation of fundraising activities and potential
acquisition candidates, valued at $300,000.
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 an aggregate of $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.
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.
29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of February 9, 2006, 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.(3) 12,382,636 36.5%
c/o Spongetech Delivery Systems, Inc.
The Empire State Building, Suite 2204
New York, New York 10118
--------------------------------------------------------------------------------------------------------------
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 15,712,636 46.3%
One Tinker Lane Executive Officer and
Greenwich, CT 06830 Director
--------------------------------------------------------------------------------------------------------------
Steven Moskowitz (3) Secretary and Director 15,185,969 44.7%
c/o Spongetech Delivery Systems, Inc.
The Empire State Building, Suite 2204
New York, New York 10118
--------------------------------------------------------------------------------------------------------------
Frank Lazauskas (3) Director 15,712,636 46.3%
51 Niagara Street
Newark, New Jersey 07105
--------------------------------------------------------------------------------------------------------------
Officers and 21,845,969 64.3%
Directors (3 persons)(6)
--------------------------------------------------------------------------------------------------------------
(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.
(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) Includes 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.
(6) Includes (i) 1,665,000 shares of our common stock held by Mr. Metter; (ii)
includes 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; (iii) 2,803,333 shares of our
common stock held by Mr. Moskowitz; (iv) 3,330,000 shares of our common stock
held by Mr. Lazauskas; and (v) 12,382,636 shares of our common stock held by RM
Enterprises International, including 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.
30
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:
1. Have equal ratable rights to dividends from funds legally available
therefore, if declared by our board of directors;
2. 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;
3. Do not have preemptive, subscription or conversion rights, or redemption or
sinking fund provisions; and
4. Are entitled to one noncumulative vote per share on all matters on which
stockholders may vote at all meetings of our stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election.
Our certificate of incorporation provides that specified provisions may not be
repealed or amended except upon the affirmative vote of the holders of not less
than 2/3 of the outstanding stock entitled to vote. This provision would enable
the holders of more than 1/3 of our voting stock to prevent amendments to the
certificate of incorporation even if they were favored by the holders of a
majority of the voting stock.
Preferred Stock
We may, subject to limitations prescribed by Delaware law:
1. Provide for the issuance of up to 5,000,000 shares of our preferred stock in
one or more series;
2. Establish from time to time the number of shares to be included in each such
series;
3. Fix the rights, preferences and privileges of the shares of each wholly
unissued series and any qualifications, limitations or restrictions thereon; and
4. 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.
31
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 _________, 2006
(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.
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:
1. 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
2. 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.
32
SELLING STOCKHOLDERS
We are registering 3,625,969 of the shares, which are owned by our stockholders.
We will not receive any of the proceeds from sales of shares offered under this
prospectus by the selling stockholders.
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.
===========================================================================================================
Shares Beneficially Owned Shares Beneficially Owned
Prior to the Offering After the Offering (1)
------------------------- ----------------------------------
Total Percent Percent
Shares Assuming Assuming
Name Number Percent Registered Minimum Offering Maximum Offering
---- ------ ------- ---------- ---------------- ----------------
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 (6) 100,000 * 100,000 -0-% -0-%
Ahava Investments Inc. (7) 500,000 1.4% 500,000 -0-% -0-%
Touchdown Capital Inc. (8) 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-%
---------
3,625,969
(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.
(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
33
RESCISSION OFFER
Background
In March 2002 through May 2002, our predecessor, Nexgen VIII, sold an aggregate
of 219,000 shares pursuant to a private placement offering. Our current
management was not involved in said offering but was advised that the private
placement was made pursuant to Rule 504, promulgated pursuant to Regulation D of
the Securities Act of 1933, as amended (the "Act"). At the time of the issuances
in March through May 2002, Nexgen's plan was to merge with Spongetech
International, Ltd. and therefore Nexgen had a specific plan to engage in a
merger with an identified company, Spongetech International, Ltd., as permitted
by Rule 504(a)(3). This rule prohibits the use of an offering under Rule 504 if
the issuer intends "to engage in a merger or acquisition with an unidentified
company or companies, or other entity or person." Accordingly management
believes that at the time of the issuances from March through May 2002, Nexgen
was not a blank check company and was permitted to avail itself of the exemption
provided by Rule 504. technicalDespite the believe that Nexgen was not a blank
check company at the time of the issuances, Nexgen may have been a blank check
company and as such the reliance on Rule 504 was misplaced and the transaction
was not exempted pursuant to such Rule 504 and the issuances were made in
violation of Section 5 of the Act. In order to cure any violation that may have
occurred or that may have been deemed to have occurred, by any regulatory
agency, we have determined to offer rescission to the shareholders who purchased
shares from our predecessor in March through May 2002. The rescission offer is
intended to address any federal and state securities laws compliance issues by
allowing the holders of the shares covered by the rescission offer to rescind
the underlying securities transactions and sell those securities back to us.
The rescission offer will cover an aggregate of 219,000 shares of common stock
issued and outstanding. We are making the rescission offer to the holders of
these shares. The rescission offer will be kept open for 30 days and will be
registered under the Securities Act of 1933 and qualified in each state where
such qualification is required under applicable state securities laws. The
following is a list of shareholders that are entitled to rescission:
================================================================================================
Shares Beneficially Owned Shares Beneficially Owned
Prior to the Offering After the Rescission (1)
------------------------- ------------------------
Total Percent
Shares Assuming
Name Number Percent Registered Minimum Offering
---- ------ ------- ---------- ----------------
Shinya Araki 5,000 * 5,000 -0-%
Neil Foley 5,000 * 5,000 -0-%
Jean Geyer 10,000 * 10,000 -0-%
Emma Hass 8,000 * 8,000 -0-%
Melvin Koeller 5,000 * 5,000 -0-%
Malcom McGuire 10,000 * 10,000 -0-%
Sue Neil 8,000 * 8,000 -0-%
Kevin O'Hara 8,000 * 8,000 -0-%
Olson Jeweler 5,000 * 5,000 -0-%
Bettye Oustz 8,000 * 8,000 -0-%
Angelo Palmisano 5,000 * 5,000 -0-%
Linda Chadwick 5,000 * 5,000 -0-%
Carol Polevoy 8,000 * 8,000 -0-%
Philip Wong 8,000 * 8,000 -0-%
Neil Cox 8,000 * 8,000 -0-%
Richard Blundell 10,000 * 10,000 -0-%
Ken Heng 10,000 * 10,000 -0-%
Donna Lutsky 5,000 * 5,000 -0-%
Jay Lutsky 5,000 * 5,000 -0-%
Tanna Sessions 5,000 * 5,000 -0-%
Dean Sessions 5,000 * 5,000 -0-%
Patsy Sessions 5,000 * 5,000 -0-%
Michelle Brown 5,000 * 5,000 -0-%
James John 8,000 * 8,000 -0-%
Arden Amos 10,000 * 10,000 -0-%
Robert Sessions 5,000 * 5,000 -0-%
Robert Sonfield 10,000 * 10,000 -0-%
Margot Krimmel 10,000 * 10,000 -0-%
Bonnie Carol 10,000 * 10,000 -0-%
Max Krimmel 10,000 * 10,000 -0-%
(1) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days.
(2) Assumes that all securities registered will be rescinded or sold.
34
Rescission Offer and Price
We are offering to rescind certain stock issuances pursuant to a private
placement conducted by our predecessor, Nexgen VIII. By making this rescission
offer, we are not waiving any applicable statutes of limitations.
More specifically, we are offering to rescind the sale of 219,000 shares of our
common stock, which are held by 30 persons. This offer will be made to current
shareholders who purchased shares of common stock from us between March 2002 and
May 2002 and who are, or were at the time of issuance, residents of Colorado and
Texas, at $.01.
If you accept our rescission offer and you hold shares of our common stock, we
will repurchase the shares you hold that are subject to the rescission offer at
the price per share paid, plus interest at the current statutory rate per year
mandated by your state of residence, from the date of purchase through the date
that the rescission offer expires.
If you accept our rescission offer, you will be entitled to receive interest at
the applicable statutory interest rate per year in accordance with your state of
residence. You will not, however, be entitled to any payments for interest or
otherwise unless you affirmatively elect to participate in the offer. We intend
to use the legal rates of interest for the repurchase of the shares based on the
state of residence of the stockholder. These interest rates are as follows:
-----------------------------------------------------
State Interest Rate
-----------------------------------------------------
Colorado 8%
-----------------------------------------------------
Texas 6%
-----------------------------------------------------
Acceptance
You may accept the rescission offer by completing and signing the enclosed
election form indicating the shares to be repurchased and delivering a stock
power representing the shares you are surrendering for repurchase, on or before
the close of business on *, 2006 (30 days after the date hereof), which date and
time we refer to in this document as the expiration date. All acceptances of the
rescission offer will be deemed to be effective on the expiration date and the
right to accept the rescission offer will terminate on the expiration date.
Acceptances or rejections may be revoked in a written notice to us, to the
attention of Michael Metter, CEO, The Empire State Building, 350 Fifth Avenue,
Suite 2204, New York, New York 10118, which is received prior to the expiration
date. Within fifteen business days after the expiration date, we will pay for
any securities as to which the rescission offer has been validly accepted.
The rescission offer will expire at 5:00 p.m., New York City time, on *, 2006
(30 days after the date hereof). If you submit an election form after the
expiration time, regardless of whether your form is otherwise complete, your
election will not be accepted, and you will be deemed to have rejected our
rescission offer.
Neither we nor our officers and directors make any recommendations to you with
respect to the rescission offer contained herein. You are urged to read the
rescission offer carefully and to make an independent evaluation with respect to
its terms.
IF PERSONS DESIRING TO ACCEPT THE RESCISSION OFFER INTEND TO MAKE USE OF THE
MAIL TO RETURN THEIR STOCK POWERS, INSURED REGISTERED MAIL, RETURN RECEIPT
REQUESTED, IS RECOMMENDED.
Rejection or Failure to Affirmatively Accept
If you fail to accept, or if you affirmatively reject the rescission offer by so
indicating on the enclosed election form, you will retain ownership of the
shares and you will not receive any cash for those securities in connection with
the rescission offer. Your shares will be registered and will be fully tradeable
under the Securities Act of 1933, unless you are an affiliate of Spongetech
Delivery Systems within the meaning of Rule 144 or Rule 145, as the case may be.
Your shares will remain subject to any applicable terms and conditions of the
original agreement under which they were issued and any subsequent agreement
relating to such shares. In addition, you will remain subject to other transfer
restrictions entered into with respect to your shares.
Solicitation
We have not retained, nor do we intend to retain, any person to make
solicitations or recommendations to you in connection with the rescission offer.
Effect of Rescission Offer
35
It is unclear whether the rescission offer will terminate our liability,
if any, for failure to register or qualify the issuance of the securities under
either federal or state securities laws. Accordingly, should the rescission
offer be rejected by any or all offerees, we may continue to be contingently
liable under the Securities Act of 1933 and applicable state securities laws for
the purchase price of these shares up to an aggregate amount of approximately
$2,190. If you are a stockholder who acquired shares of our common stock that
are subject to the rescission offer, it is possible that you may continue to
have rights under common law or fraud in the state in which the potential
securities violation with respect to your shares occurred. If a court were to
impose a greater remedy, our liability as a result of the potential securities
violations would be higher.
Regardless of whether you accept the rescission offer, we believe that any
remedies you may have after the rescission offer expires would not be greater
than an amount you would receive in the rescission offer.
While holders of our shares who are residents of Colorado and Texas may
have a right of rescission under federal securities laws, we believe that the
shares issued by us in these states were issued pursuant to an exemption from
registration or qualification available to us under applicable state securities
laws.
Funding the Rescission Offer
The rescission offer will be funded from a separate segregated account titled
the "Spongetech Delivery Systems, Inc. Rescission Account", which has been
opened solely for the purpose of funding the rescission offer. The funds in this
account were advanced by our officers, directors and affiliates and will not be
used for any other purpose. There are no formal or written agreements with
respect to the advance of funds to us by our officers, directors and affiliates
for funding the rescission offer. Upon expiration of the rescission offer, any
remaining balance will be contributed to our capital. As of the date of this
filing, the amount to be paid pursuant to the rescission offer is $2,883,
including accrued interest of $692.80. If all of the shareholders entitled to
rescission accepts our rescission offer, then the funds which are being used to
fund the rescission offer, which otherwise may have become available to us to
fund our operations, will not be so available. If the rescission offer is
partially accepted then we will not be able to utilize these funds not accepted
in the rescission to fund our operations. In view of our limited cash position,
the acceptance of any part of the rescission offer could significantly affect
our operations.
Directors, Officers and Major Stockholders
None of our officers, directors and 5% shareholders are eligible to participate
in the rescission offering.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
Tax Consequences of the Rescission Offer
The following are the material U.S. federal income tax consequences of the
proposed rescission offer to our stockholders or option holders whose stock are
rescinded pursuant to the rescission offer. However, this discussion does not
address all income tax considerations that may be relevant to you in light of
your individual circumstances, including if you are a foreign person, a person
who is not an individual or a person subject to the alternative minimum tax
provisions of the Internal Revenue Code of 1986, as amended. In addition, we do
not address the tax consequences of the rescission offer to persons holding
shares that are unvested, subject to hedging, conversion or constructive sale
transactions or whose tax year is other than a calendar year. Finally, we do not
address any foreign, state or local tax considerations. ACCORDINGLY, YOU ARE
URGED TO CONSULT YOUR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF
THE RESCISSION OFFER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES TO YOU OF THE RESCISSION OFFER.
Redemption of Shares
For United States federal income tax purposes, the rescission offer with
respect to shares of our common stock is intended to constitute a taxable
redemption of shares for cash, with the redemption price equal to the amount
paid for such shares (and including in the redemption price the interest on the
original purchase price of such shares). However, the law applicable to the
rescission offer is unclear, and we have not received a ruling from the Internal
Revenue Service, or IRS, to that effect. Thus, the IRS is not precluded from
successfully asserting a contrary position or otherwise recharacterizing the
transaction in whole or in part. For example, the IRS may characterize our
rescission offer as the return of the original purchase price, which would be
nontaxable, plus the payment of interest, which would be taxable as ordinary
income.
SHARES ELIGIBLE FOR FUTURE SALE
On the date of the prospectus, 3,625,969 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.
36
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.
The Securities and Exchange Commission has taken the position that promoters or
affiliates of blank check companies and their transferees, both before and after
a business combination, would act as an "underwriter" under the Securities Act
when reselling the securities of a blank check company. Accordingly, the
Securities and Exchange Commission believes that those securities can be resold
only through a registered offering and that Rule 144 would not be able for those
resale transactions despite technical compliance with the requirements of Rule
144. Accordingly, the securities of our predecessor Nexgen Acquisitions VIII,
Inc., a blank check company, which are held by several of our shareholders are
restricted and such securities can only be resold only through registration
under the Securities Act.
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 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. Michael
L. Metter, our President and Chief Executive Officer, and Steven Moskowitz, our
Secretary, will offer the securities in this Offering on behalf of the Company.
Messrs. Metter and Moskowitz 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. Messrs. Metter and Moskowitz will
not receive any commissions or other remuneration based either directly or
indirectly on transactions in our securities for their efforts in making any
such offers or sales. Neither of these individuals is a registered broker-dealer
or an affiliate of broker-dealers. Furthermore, Messrs. Metter and Moskowitz
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.
Neither Mr. Metter or Mr. Moskowitz are subject to a statutory disqua1ification
as that term is defined in section 3(a)(39) of the Securities Act of 1933.
Further, neither Mr. Metter or Mr. Moskowitz 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 after this the effectiveness of this
Registration Statement, we will file a post-effective 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:
1. the relatively early stage of our development compared to others in
similar industries;
2. the limited capital available to us through this offering or through other
sources;
37
3. our ability to expand and develop our operations based upon the capital
provided by this offering;
4. our potential value if we are successful in implementing our business
plan;
5. a multiple of our revenues; and
6. the general market for publicly traded securities.
The exercise price of the redeemable class A warrants was based solely on our
arbitrary assessment of a premium over the offering price of the unit which we
believe will provide some value to the redeemable class A warrant. There can be
no assurance that they will in fact have any value. The offering price of the
units and the exercise price of the class A warrants bears no relationship to
any recognized criteria of value, nor is it necessarily indicative of the market
price for the units, common stock or redeemable class A warrants after this
offering.
After the registration statement of which this prospectus forms a part has been
declared effective, we will provide to each prospective investor a copy of the
final prospectus relating to his offering which includes an agreement to
purchase units. In order to purchase the units, the subscription application in
the form attached to the prospectus and a check made payable to "Continental
Stock Transfer & Trust Company as Escrow Agent for Spongetech Delivery Systems,
Inc." should be completed and forwarded to us. Receipt by us of a subscription
agreement and/or deposit with the escrow agent of payment for the subscribed
units shall not constitute acceptance of a subscription. We reserve the fight to
withdraw, cancel or modify the offering hereby and to reject subscriptions in
whole or in part, for any reason.
The escrow agreement provides that the proceeds received under this Offering
from the sale of the Units by us 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 by the escrow agent within 90 days from the date
hereof (with an allowable additional 90-day extension), the Escrow Agent shall
promptly refund to each purchaser the amount of any payment received from such
purchaser without any interest thereon and shall notify us of such disbursement.
If at least the minimum gross proceeds are received by the escrow agent in the
Offering, the escrow shall advise us and disburse the funds in accordance with
our instructions. The escrow agreement provides that the Escrow Agent can resign
for any reason upon three business days notice to us. In the event of such
resignation if the escrow agent is advised of the appointment of a successor
agent, the escrow agent shall deliver the funds held in escrow to the successor
escrow agent. If the escrow agent is not advised of a successor escrow agent,
then the escrow agent shall disburse the funds to each purchaser without
interest thereon. In the event of such resignation, the escrow agent shall be
entitled to reimbursement for any expenses incurred in connection with its
resignation. For its services rendered pursuant to the escrow agreement, the
escrow agent shall receive a fee of $2,500 payable at the closing of the
offering and a fee of $500 for each additional closing thereafter. In addition,
the escrow agreement provides for the reimbursement of all expenses incurred in
connection with the escrow agreement. The escrow agreement provides for payment
of fees to the escrow agent out of the proceeds of the offering, if we fail to
raise the minimum in the offering and the funds held in escrow are disbursed to
the purchasers, we will be forced to pay any fees assessed by the escrow agent.
In view of our limited cash balance, we may have to force to rely on our
officers, directors and affiliates to pay any such charges assessed by the
escrow agent. Our officers, directors and affiliates have indicated their
preparedness to fund our business until we are able to complete this offering.
However, there are no formal or written agreements with respect to the advance
of funds to the Company by our officers, directors and affiliates for payment of
said costs. Accordingly, our officers, directors and other affiliates are not
legally bound to provide funding to us. If our officers and directors do not pay
for our expenses, we will be forced to obtain funding. We currently do not have
any arrangements to obtain additional financing from other sources. In view of
our limited operating history, our ability to obtain additional funds is
limited. Additional financing may only be available, if at all, upon terms which
may not be commercially advantageous to us.
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 3,625,969 additional shares
that are held by certain selling stockholders identified in this prospectus.
There is currently no public market for our securities. Until such time as a
market price for our common stock is quoted on the OTC Bulletin Board, the
selling stockholders will sell their shares at a price of $0.25 per share. We
will not receive any proceeds from the sale of the shares of common stock by the
selling stockholders. Sales by the selling stockholders may have a depressive
effect on the market price of our securities and may make it more difficult for
us to complete our Offering.
38
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, including
attorneys and accountants fees and SEC filing fees. Our officers, directors and
affiliates have indicated their preparedness to fund our business until we are
able to complete this offering. However, there are no formal or written
agreements with respect to the advance of funds to the Company by our officers,
directors and affiliates for payment of said costs. Accordingly, our officers,
directors and other affiliates are not legally bound to provide funding to us.
If they do not pay for these expenses, we will be forced to obtain funding. We
currently do not have any arrangements to obtain additional financing from other
sources. In view of our limited operating history, our ability to obtain
additional funds is limited. Additional financing may only be available, if at
all, upon terms which may not be commercially advantageous to us. If we are not
able to obtain funding from other sources, we may not be able to complete this
Offering. If we are unable to complete this offering, we will not be able to
obtain funding to commence sales and marketing of our product. As a result we
may be forced to go out of business.
The distribution of the shares by the selling stockholders is not subject to any
underwriting agreement. We expect that the selling stockholders will sell their
shares through customary brokerage channels, in private sales, or in
transactions under Rule 144 under the Securities Act.
The selling stockholders, our placement agent and other brokers and dealers
through whom sales of the shares are made may be deemed to be "underwriters"
within the meaning of the Securities Act, and the commissions or discounts and
other compensation paid to those persons could be regarded as underwriters
compensation.
From time to time, the selling stockholders may engage in short sales, short
sales against the box, puts and calls and other transactions in our common
shares, and will be able to sell and deliver the shares in connection with those
transactions or in settlement of securities loans. In effecting sales, brokers
and dealers engaged by the selling stockholders may arrange for other brokers or
dealers to participate in those sales. Brokers or dealers may receive
commissions or discounts from the selling stockholders (or, if any such broker
dealer acts as agent for the purchaser of those shares, from the purchaser) in
amounts to be negotiated (which are not expected to exceed those customary in
the types of transactions involved). Brokers and dealers may agree with the
selling stockholder to sell a specified number of shares at a stipulated price
per share and, to the extent those brokers and dealers are unable to do so
acting as agent for a selling stockholder, to purchase as principal any unsold
shares at the price required to fulfill the broker dealer commitment to a
selling stockholder.
At the time a particular offer of the shares is made, to the extent it is
required, we will distribute a supplement to this prospectus that will identify
and set forth the aggregate amount of shares being offered and the terms of the
offering. A selling stockholder may sell shares at any price. Sales of the
shares at less than market price may depress the market price of our common
stock. Subject to applicable securities laws, the selling stockholder will
generally not be restricted as to the number of shares that they may sell at any
one time, and it is possible that a significant number of shares could be resold
at the same time.
The selling stockholders and any other person participating in the distribution
of the shares will also be subject to applicable provisions of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated under it, including, without limitation, Regulation M,
which may limit the timing of purchases and sales of the shares by the selling
stockholder and any other person. Furthermore, Regulation M of the Exchange Act
may restrict the ability of any person engaged in the distribution of the shares
to engage in market-making activities with respect to the particular shares
being distributed for a period of up to five business days prior to the
commencement of the distribution. All of the foregoing may affect the
marketability of the shares and the ability of any person or entity to engage in
market-making activities with respect to the shares.
To comply with certain states securities laws, if applicable, the shares may be
sold in those jurisdictions only through registered or licensed brokers or
dealers. In certain states the shares may not be sold unless a selling
stockholder meets the applicable state notice and filing requirements.
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:
1. That a broker or dealer approve a person's account for transactions in penny
stocks; and
2. The broker or dealer receives from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to be
purchased.
39
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must
1. Obtain financial information and investment experience objectives of the
person; and
2. 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:
1. Sets forth the basis on which the broker or dealer made the suitability
determination; and
2. 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 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.
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, 2005 and 2004, included in this prospectus, have been audited by
Drakeford & Drakeford, LLC, independent registered public accountants, as stated
in their report appearing herein and are so included herein in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
40
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, 100 F Street, N.E,
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.
41
INDEX TO FINANCIAL STATEMENTS
Part 1 - Financial Information
Page
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Item 1 - Financial Statements
Report of Independent Auditor F-2
Balance Sheet as of November 30, 2005 F-3
Statements of Operations for the six months ended November 30, 2005 and
2004 And for the years ended May 31, 2005 and 2004 F-4
Statements of Changes in Stockholders' Equity for the years ended May 31, 2005
and 2004 F-5
Statements of Cash Flows for the the six months ended November 30, 2005
And for the years ended May 31, 2005 and 2004 F-6
Notes to Financial Statements F-7 - F-16
42
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
31,2005, and the related statements of operations, changes in stockholders'
equity (deficiency), and cash flows for the years ended May 31, 2005 and
2004.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, 2005 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
September 15, 2005
F-1
SPONGETECH DELIVERY SYSTEMS, INC.
BALANCE SHEET
November 30, May 31,
2005 2005
Unaudited
----------- -----------
ASSETS
Current Assets
Cash $ 466 $ 1,477
Accounts receivable 3,162 791
Inventories 1,458 1,458
----------- -----------
Total current assets 5,086 3,726
Property and equipment 26,405 28,547
----------- -----------
Total assets $ 31,491 $ 32,273
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Accounts payable and
accrued expenses $ 118,811 $ 99,663
Loan payable-officer 6,000 6,000
Loan payable 16,000 8,500
Income taxes payable 1,600 1,600
----------- -----------
Total current liabilities 142,411 115,763
Total long-term liabilities 0 0
----------- -----------
Total liabilities 142,411 115,763
----------- -----------
Shareholders' Equity (Deficiency)
Common stock, $.001 par value;
Authorized 50,000,000 shares;
issued and outstanding 33,952,626
shares as of May 31, 2005 and
November 30, 2005 33,953 33,953
Preferred stock $.001 par value;
Authorized 5,000,000 shares;
no shares issued and outstanding 0 0
Additional paid-in capital 2,616,294 2,616,294
Deficit (2,761,167) (2,733,737)
----------- -----------
Total shareholders' equity (deficiency) (110,920) (83,490)
----------- -----------
Total liabilities and shareholders'
equity (deficiency) $ 31,491 $ 32,273
=========== ===========
See Independent Auditor's Report and notes to financial statements.
F-2
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the For the
Six months ended years ended
November 30, May 31,
2005 2004 2005 2004
Unaudited
---------------------------- ----------------------------
Sales $ 2,974 $ -0- 1,051 $ 1,858
Cost of goods sold $ 1,158 $ -0- 1,012 1,600
------------ ------------ ------------ -----------
Gross profit 1,816 -0- 39 258
------------ ------------ ------------ -----------
Operating expenses
Selling 0 39,535
General and
Administrative
expenses 27,104 15,030 54,454 2,007,953
Depreciation expense 2,142 2,142 4,284 4,284
------------ ------------ ------------ -----------
Total operating expenses 29,246 17,172 58,738 2,051,772
------------ ------------ ------------ -----------
Loss before provision
for income taxes (27,430) (17,172) (58,699) (2,051,514)
Other income and expenses
Interest expense 0 5,012
------------ -----------
Total other income and
expense 0 5,012
Net loss $ (27,430) $ (17,172) $ (58,699) $(2,056,526)
============ ============ ============ ===========
Basic and diluted (loss) per
common stock
Net loss per share -
basic and diluted $ (.00) $ (.00) $ (.00) $ (.11)
============ ============ ============ ===========
Weighted average common
shares outstanding 33,952,626 18,985,000 18,985,000 18,985,000
============ ============ ============ ===========
F-3
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
For The Years Ended May 31, 2005 and 2004
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 18,985,00 $ 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
Net loss for
The year ended May 31, 2005 (58,699) (58,699)
---------- ---------- ----------- ----------- ----------- -----------
Balance - May 31, 2005 33,952,626 $ 33,953 $ 2,616,294 $ 0 $(2,733,737) $ (83,490)
Unaudited Net loss for
The six months
Ended November 30, 2005 (27,430) (27,430)
----------- ---------- ----------- ----------- ----------- -----------
Balances November 30, 2005 33,952,626 $ 33,953 $ 2,616,294 $ 0 $(2,761,167) $ (110,920)
=========== ========== =========== =========== =========== ===========
See Independent Auditor's Report and notes to financial statements.
F-4
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the For the
Six months ended years ended
November 30, May 31,
2005 2004 2005 2004
Unaudited
-------------------------- --------------------------
Operating Activities:
Net loss $ (27,430) $ (17,172) $ (58,699) $(2,056,526)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities
Value of contributed officer
compensation 0 0
Bad debts 0 0
Depreciation 2,142 2,142 4,284 4,284
Common stock subscribed in release
of company debt 0 526,814
Common stock issued for debt & ser 0
Changes in operating assets and
liabilities
Accounts receivable (2,371) (791) 15,003
Inventories (1,014) 852
Prepaid expense and other
current assets 0 0
Accounts payable and accrued
expenses 19,148 (9,353) (121,404)
Accrued compensation 15,000 0 1,789,500
Income taxes payable 0
Due to notes and related parties 14,500 (159,578)
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities (8,511) (30) (27,073) (1,055)
----------- -----------
Investing Activities:
Stock settlement of litigation 28,500 0
----------- -----------
Net cash used in investing activities 28,500 0
----------- -----------
Financing Activities:
Loans payable-related parties 7,500
Net cash provided by financing activities 7,500 0 0
--------- ----------- -----------
Net increase (decrease) in cash (1,011) (30) 1,427 (1,055)
Cash - beginning 1,477 50 50 1,105
----------- ----------- ----------- -----------
Cash - end $ 466 $ 20 $ 1,477 $ 50
=========== =========== =========== ===========
F-5
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the For the
Six months ended years ended
November 30, May 31,
2005 2004 2005 2004
Unaudited
-------------------------- --------------------------
Supplemental Information
Interest paid $ 0 $ 110
Income taxes paid $ 0 $ 0
Noncash Transactions:
Parent company debt contributed
to additional paid-in capital $ -0- $ -0- $ 0 $ 10,000
Issuance of common stock $ -0- $ -0- $ 2,382,314 $ 0
Reduction in accrued expenses $ -0- $ -0- $ 1,789,500 $ 0
Common stock subscribed $ -0- $ -0- $ 0 $ 526,814
See Independent Auditor's Report and notes to financial statements.
F-6
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1 - Summary of Significant Accounting Policies
Nature of Operations
Spongetech Delivery Systems, Inc. (the "Company") was formed on June 18, 1999,
as Romantic Scents, Inc. On June 12, 2001, the Company changed its name to RSI
Enterprises, Inc., and, on October 2, 2002, changed its name to Spongetech
International Ltd. ("SIL"). On July 15, 2002, the Company was acquired by
Spongetech Delivery Systems, Inc. ("SDS") (formerly Nexgen Acquisitions
VIII,Inc.). The transaction was accounted for as a reverse acquisition using the
purchase method of accounting, whereby the shareholder of SIL retained
approximately 63% of the Company's outstanding common stock. On December 16,
2002, SIL changed its domicile to Delaware by merging with and into Spongetech
Sub, Inc. ("SUB"). SUB's parent, Spongetech Delivery Systems, Inc. then merged
with and into SUB so that SUB became the surviving corporation, and changed its
name to Spongetech Delivery Systems, Inc.
The Company distributes a line of hydrophilic polyurethane sponge cleaning and
waxing products.
Basis of Presentation / Going Concern
The financial statements have been prepared for purposes of registration with
the Securities and Exchange Commission ("SEC"), and have been prepared in
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 fiscal years ended May 31,2005 and
May 31, 2004, the Company incurred net losses of $58,699,and $2,056,526
respectively. As of May 31, 2005 and November 30, 2005 the Company had an
accumulated deficit of $83,490 and $110,920 respectively and a working capital
deficiency of $112,037 and $137,325 respectively. 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.
Accounts Receivable
Accounts receivable have been adjusted for all known uncollectible accounts. At
May 31, 2005 and November 30, 2005 there were no doubtful accounts.
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.
F-7
1 - Summary of Significant Accounting Policies (Continued)
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, 2005 and
2004 and for the six months ended November 30, 2004 and 2005, advertising costs
totaled $0 and $17,500 and $-0- and $-0- , respectively.
Shipping and Handling Costs
Shipping and handling costs are included in selling expenses. For the years
ended May 31, 2005 and 2004 and for the six months ended November 30, 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 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
As of May 31, 2005 property and equipment is summarized as follows:
Estimated
Useful Lives May 31, November 30,
Years 2005 2005
------------ ------- -------
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 28,354 30,496
------- -------
$28,547 $26,405
======= =======
F-8
2 - Property and Equipment (continued)
Depreciation expense for the years ended May 31, 2005 and 2004 was $4,284 and
$4,284 respectively, and for the six months ended November 30, 2005 and 2004
depreciation expense was $2,142 and $2,142 respectively.
3 - Accounts payable and accrued expenses consist of the following:
May 31, November 30,
2005 2005
---------- ----------
Product development (Packaging & mold
Development) $ 99,663 $ 99,663
Accounting and legal accrual 19,148
No Related Party
---------- ----------
Total $ 99,663 $ 118,811
========== ==========
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 3,270,000 490,500 Related
Michael L.Metter 3,330,000 499,500 Related
Thomas Monahan 100,000 15,000
---------- ----------
Total 12,030,000 $1,804,500
========== ==========
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
========= =========
F-9
4 - Related Party Transactions (continued)
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 Norman Moskowitz, the father of Steven
Moskowitz.
5 - Deferred Income Taxes
At May 31, 2005 and May 31, 2004, the Company had approximately $2,733,737 and
$2,675,038, 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 May 31,2005 and May 31, 2004 is as follows:
May 31, November 30,
2005 2005
----------- -----------
Non-Current
Net operating loss carryforwards $ 2,733,737 $ 2,761,167
Valuation allowance for
deferred tax asset (2,733,737) (2,761,167)
----------- -----------
$ -- $ --
=========== ===========
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 May 31, 2005 and November 30, 2005, 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, the Company,
by Westgate Financial Corporation ("Westgate"). On January 6, 2003, the Company
and Westgate entered into a factoring agreement wherein the Company assigned to
Westgate its accounts receivable arising out of its sale of goods or rendition
of services to customers (the "Contract"). Westgate asserts a breach of that
contract against the Company seeking damages of $11,049.82 with interest accrued
thereon, costs and reasonable attorney's fees. Specifically, Westgate alleges
that the Company defaulted on the Contract by, allegedly, failing to assign any
accounts receivable for sixty (60) days. The Company has counterclaimed alleging
breach of contract and seeks damages in an amount not less than $13,006.01,
which damages are the amount of credits due the Company at the time Westgate
terminated the Contract. Currently, the parties are conducting discovery. On
September 19, 2005, the Company's attorneys filed a Motion to Compel Discovery
as Westgate has failed to respond to our requests for discovery.
F-10
6 - Commitments and Contingencies (continued)
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 2,802,636 for an aggregate consideration of $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 aggregating
$1,798,500 or $0.15 per share in to 11,930,000 shares of common stock. (see
Note-4)
The company also issued an aggregate of 60,000 shares of common stock of the
Corporation in consideration valued at $9,000 or $0.15 per share 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.
The Company issued an aggregate of 100,000 shares of common stock to Thomas
Monahan, CFO, in consideration for services aggregating $15,000 or $.015 per
share.
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.
F-11
APPENDIX A
Form of Notice of Election
Spongetech Delivery Systems, Inc.
The Empire State Building,
350 fifth Avenue, Suite 2204,
New York, New York, 10118
Attn: Michael Metter, President
Dear Mr. Metter:
I have received and read the prospectus of Spongetech Delivery Systems, Inc.
("Spongetech") relating to its rescission offer, dated __________ , 2006,
pursuant to which Spongetech has offered to repurchase certain shares of its
common stock that may have or may be deemed to be issued in violation of federal
or state securities laws, or both. I acknowledge that I have had an opportunity
to carefully review the information from Spongetech that I consider important in
making my election. I advise Spongetech as follows by placing an "X" in the
proper spaces provided below (and filling in the appropriate table(s), if
applicable):
Shares of Common Stock
1. I hereby elect to reject the rescission offer and desire to retain the
shares. 2. I hereby elect to accept the rescission offer and rescind the sale of
(fill in number) shares and to receive a full refund for all sums paid therefore
together with interest at the applicable statutory rate per year. My Stock
Power(s) is/are also enclosed with this Notice of Election
Date of Purchase Number of Shares Certificate number
(The date you were issued stock. Purchased (If you do not know,
If you do not know, leave leave blank.)
blank.)
---------------------- ----------------- ---------------------
---------------------- ----------------- ---------------------
---------------------- ----------------- ---------------------
IF PERSONS DESIRING TO ACCEPT THIS RESCISSION OFFER INTEND TO MAKE USE OF THE
MAILS TO RETURN THEIR STOCK POWER(S), INSURED REGISTERED MAIL, RETURN RECEIPT
REQUESTED, IS RECOMMENDED AND SHOULD ALSO PROVIDE THEIR DOCUMENTATION, INCLUDING
THIS NOTICE OF ELECTION, BY FACSIMILE TO MICHAEL METTER AT (212) 594-4172.
TO THE EXTENT I HAVE ACCEPTED THE OFFER, I AGREE I WILL NOT HAVE ANY FURTHER
RIGHT, TITLE OR INTEREST IN THOSE SHARES OF COMMON STOCK.
Dated:_____________________, 2006
Print Name of Stockholder:
---------------------------------------
Authorized Signature:
---------------------------------------
Title of Authorized Signatory, (if applicable):
---------------------------------------
Address of Stockholder:
---------------------------------------
Tel:
-----------------------------------
Fax:
-----------------------------------
A-1
APPENDIX B
SPONGETECH DELIVERY SYSTEMS, INC.
STOCK POWER
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
Spongetech Delivery Systems, Inc., a Delaware corporation, _______________
shares of common stock of Spongetech Delivery Systems, Inc., and does hereby
irrevocably constitute and appoint Steven Moskowitz, the undersigned's
attorney-in-fact to transfer said shares on the books of said corporation with
full power of substitution in the premises.
Dated: _____________, 2006 SELLING STOCKHOLDER
--------------------------------------------
Print Name(s) of Selling Stockholder(s)
--------------------------------------------
Authorized Signature
--------------------------------------------
Title of Authorized Signatory
(if applicable) (1)
--------------------------------------------
Authorized Signature (if shares held in more
than one name)
--------------------------------------------
Title of Authorized Signatory (if applicable)
--------------------------------------------
Address of Selling Stockholder (Line 1)
--------------------------------------------
Address of Selling Stockholder (Line 2)
--------------------------------------------
Phone
--------------------------------------------
Email
--------------------------------------------
Fax
(1)Trustees, officers and other fiduciaries or agents should indicate their
title or capacity and print their names under their signatures.
A-2
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
3,625,969 Shares of Common Stock
of
Spongetech Delivery Systems, Inc.
PROSPECTUS
The date of this prospectus is ___________, 2006
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.
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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:
Nature of Expense Amount
---------------------------- --------
SEC Registration fee $ 1,214
Accounting fees and expenses $ 50,000*
Legal fees and expenses $ 60,000*
Miscellaneous $ 8,786*
--------
TOTAL $120,000*
========
* Estimated
Item 26. Recent Sales of Unregistered Securities
In March 2002 through May 2002, our predecessor, Nexgen VIII, sold an aggregate
of 219,000 shares pursuant to a private placement offering. Our current
management was not involved in said offering but was advised that the private
placement was made pursuant to Rule 504, promulgated pursuant to Regulation D of
the Securities Act of 1933, as amended (the "Act"). At the time of the issuances
in March through May 2002, Nexgen's plan was to merge with Spongetech
International, Ltd. and therefore Nexgen had a specific plan to engage in a
merger with an identified company, Spongetech International, Ltd., as permitted
by Rule 504(a)(3). This rule prohibits the use of an offering under Rule 504 if
the issuer intends "to engage in a merger or acquisition with an unidentified
company or companies, or other entity or person." Accordingly management
believed that at the time of the issuances from March through May 2002, Nexgen
was not a blank check company and was permitted to avail itself of the exemption
provided by Rule 504. Despite the believe that Nexgen was not a blank check
company at the time of the issuances, Nexgen may have been a blank check company
and as such the reliance on Rule 504 was misplaced and the transaction was not
exempted pursuant to such Rule 504 and the issuances were made in violation of
Section 5 of the Act. In order to cure any violation that may have occurred or
that may have been deemed to have occurred by any regulatory agency, we have
determined to offer rescission to the shareholders who purchased shares from our
predecessor in March through May 2002. The rescission offer is intended to
address any federal and state securities laws compliance issues by allowing the
holders of the shares covered by the rescission offer to rescind the underlying
securities transactions and sell those securities back to us.
Except as may be stated otherwise above, all of the below offerings and sales
were deemed to be exempt under Rule 506 of Regulation D and/or 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 below-referenced
persons were provided with access to our Securities and Exchange Commission
filings.
In July 2002 we entered into a Stock Purchase Agreement with RM Enterprises and
RSI Enterprises pursuant to which we issued to RM Enterprises an aggregate of
12,000,000 shares of our common stock.
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 valued at $499,500. *
In January 2005, we issued 3,270,000 shares of our common stock, valued 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
valued at $490,500. *
In January 2005, we issued 100,000 shares of our common stock to Thomas Monahan,
our former Chief Financial Officer, as compensation for managing our financial
operations valued at $15,000. *
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 valued at $499,500. *
In January 2005, we issued 2,000,000 shares of our common stock to the Rubin
Family Irrevocable Stock Trust as directed by Robert Rubin, as compensation for
introducing us to business, sales and contractual opportunities and assisting us
with the review and evaluation of fundraising activities and potential
acquisition candidates, valued at $300,000.*
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.
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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 which is valued at
$.15 per share or an aggregate of $9,000.
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 which is valued at $.38 per share or an aggregate of $28,500.
*Although no revenues were generated by the Company during the period when these
shares were issued, administrative functions and other functions required to
keep the Company active continues. The Company believes that the recipients of
the shares provided bonafide services that entitled them to compensation in the
form of stock.
Item 27. Exhibits
3.1 Certificate of Incorporation of Nexgen VIII, Inc.(1)
3.2 Certificate of Amendment of Nexgen VIII, Inc. changing name to
Spongetech Delivery Systems, Inc.(1)
3.3 By-Laws of Spongetech Delivery Systems, Inc.(1)
3.4 Certificate of Incorporation of Romantic Scents, Inc. (2)
3.5 Certificate of Amendment changing name of Romantic Scents, Inc. to
RSI Enterprises, Inc. (2)
3.7 Certificate of Amendment changing name of RSI Enterprises, Inc. to
Spongetech Enterprises International, Inc. (2)
3.7 Certificate of Incorporation of Merger Sub, Inc. (2)
3.8 Merger Certificate between Spongetech Delivery Systems and Merger
Sub, Inc. (2)
3.9 Merger Certificate between Spongetech Enterprises International,
Inc. and Merger Sub, Inc. (2)
3.10 Certificate of Amendment changing name of Merger Sub, Inc. to
Spongetech Delivery Systems, Inc. (2)
4.1 Specimen Certificate of Common Stock(1)
4.2 Warrant Certificate (3)
4.3 Warrant Agreement with Colebrook, Inc. and Olde Monmouth Stock
Transfer Co., Inc. (3)
4.4 Oral Understanding with Dicon (5)
5.1 Opinion of Counsel(7)
5.2 Revised Opinion of Counsel (2)
5.3 Revised Opinion of Counsel (3)
5.4 Revised Opinion of Counsel (4)
10.1 Stock Purchase Agreement by and among Nexgen Acquisitions VIII,
Inc., RM Enterprises International, Inc. and RSI Enterprises,
Inc.(1)
10.2 Stock Purchase Agreement by and between Spongetech Delivery Systems,
Inc. and Colebrook, Inc. (2)
II-3
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. (7)
10.11 Form of Subscription Agreement (8)
10.12 Form of Warrant Agreement (8)
10.13 Form of Escrow Agreement (9)
10.14 Letter Agreement, dated January 31, 2006, between HH Brown Shoe
Technologies, Inc. (d/b/a Dicon Technologies) and Spongetech
Delivery Systems, Inc. (filed herewith)
10.15 Amendment to Exclusive License Agreement dated January 31, 2006
(filed herewith)
23.1 Consent of Drakeford & Drakeford, LLC. (filed herewith)
(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) Previously filed as an exhibit to registration statement on Form SB-2 filed
May 6, 2005.
(8) Previously filed as an exhibit to registration statement on Form SB-2 filed
October 7, 2005.
(9) Previously filed as an exhibit to registration statement on Form SB-2 filed
November 21 2005.
Item 28. Undertakings
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the 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 a
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act 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
II-4
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned undertakes that in a primary offering of securities of the
undersigned small business issuer pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned small business issuer will
be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small business
issuer relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned small business issuer or used or referred to by the
undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned small business issuer or
its securities provided by or on behalf of the undersigned small business
issuer; and
(iv) Any other communication that is an offer in the offering made by the
undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under 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 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 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.
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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
March 8, 2006.
SPONGETECH DELIVERY SERVICES, INC.
/s/ Michael L. Metter
---------------------
By: Michael L. Metter
President and Chief Executive Officer
/s/ Steven Moskowitz
--------------------
By: Steven Moskowitz
Chief Financial Officer, Principal
Accounting Officer and Secretary
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 March 8, 2006
Michael L. Metter
/s/ Steven Moskowitz Chief Financial Officer, Principal Accounting
------------------------ Officer, Secretary, and Director March 8, 2006
Steven Moskowitz
/s/ Frank Lazauskas
------------------------ Director March 8, 2006
Frank Lazauskas