UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended February 28, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 333-123015
SPONGETECH DELIVERY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-2077231
------------------------ ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
The Empire State Building, 350 Fifth Avenue
Suite 2204, New York, New York 10118
(address of principal executive offices) (Zip Code)
(212) 594-4175
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 26, 2005 the Company had 34,072,636 shares of common stock issued and
outstanding.
SPONGETECH DELIVERY SYSTEMS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED
FEBRUARY 28, 2006
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
Balance Sheets as of February 28,2006 and May 31, 2005 1
Statements of Operations for the Nine Months ended
February 28, 2006 and 2005 (Unaudited) 2
Statements of Operations for the Three Months
ended February 28, 2006 and 2005 (Unaudited) 3
Statements of Stockholders' Equity for the Nine Months
ended February 28, 2006 (Unaudited) 4
Statements of Cash Flows for the Nine Months ended
February 28, 2006 and 2005 (Unaudited) 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis 9
Item 3. Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 16
ITEM 1. FINANCIAL STATEMENTS
SPONGETECH DELIVERY SYSTEMS, INC.
BALANCE SHEET
RESTATED
February 28, May 31,
2006 2005
Unaudited
----------- -----------
ASSETS
Current Assets
Cash $ 4,786 $ 1,477
Accounts receivable 9,885 791
Inventories 1,458 1,458
----------- -----------
Total current assets 16,129 3,726
Property and equipment 25,334 28,547
----------- -----------
Total assets $ 41,463 $ 32,273
=========== ===========
LIABILITIES, COMMON STOCK SUBJECT TO RESCISSION
RIGHTS AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Accounts payable and
accrued expenses $ 156,437 $ 99,663
Loan payable-officer 10,500 6,000
Loan payable 41,000 8,500
Income taxes payable 1,600 1,600
----------- -----------
Total current liabilities 209,537 115,763
Total long-term liabilities 0 0
----------- -----------
Total liabilities 209,537 115,763
----------- -----------
Common stock subject to rescission rights:
Issued and outstanding:219,000 shares in 2002 2,190 2,190
----------- -----------
Stockholders' Equity (Deficiency)
Common stock, $.001 par value;
Authorized 50,000,000 shares;
issued and outstanding 33,733,626
shares as of February 28, 2006 and
May 31, 2005 33,734 33,734
Preferred stock $.001 par value;
Authorized 5,000,000 shares;
no shares issued and outstanding 0 0
Additional paid-in capital 2,614,323 2,614,323
Deficit (2,818,321) (2,733,737)
----------- -----------
Total stockholders' equity (deficiency) (170,264) (85,680)
----------- -----------
Total liabilities, common stock subject to rescission
rights and stockholders' equity (deficiency) $ 41,463 $ 32,273
=========== ===========
See Independent Auditor's Report and notes to financial statements
1
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the
Nine months ended
February 28,
2006 2005
Unaudited
----------------------------
Sales $ 12,859 $ -0-
Cost of goods sold $ 4,320 $ -0-
------------ ------------
Gross profit 8,539 -0-
------------ ------------
Operating expenses
Selling
General and
Administrative
expenses 89,910 27,868
Depreciation expense 3,213 3,212
------------ ------------
Total operating expenses 93,123 31,080
------------ ------------
Loss before provision
for income taxes (84,584) (31,080)
Other income and expenses
Interest expense
Total other income and
expense
Net loss $ (84,584) $ (31,080)
============ ============
Basic and diluted (loss) per
common stock
Net loss per share -
basic and diluted $ (.00) $ (.00)
============ ============
Weighted average common
shares outstanding 33,733,626 21,911,139
============ ============
2
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the
Three months ended
February 28,
2006 2005
Unaudited
----------------------------
Sales $ 9,885 $ -0-
Cost of goods sold $ 3,162 $ -0-
------------ ------------
Gross profit 6,723 -0-
------------ ------------
Operating expenses
Selling
General and
Administrative
expenses 62,806 27,868
Depreciation expense 1,071 3,212
------------ ------------
Total operating expenses 63,877 31,080
------------ ------------
Loss before provision
for income taxes (57,154) (31,080)
Net loss $ (57,154) $ (31,080)
============ ============
Basic and diluted (loss) per
common stock
Net loss per share -
basic and diluted $ (.00) $ (.00)
============ ============
Weighted average common
shares outstanding 33,733,626 21,911,139
============ ============
3
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY)
For The Years Ended May 31, 2005 and 2004
Total
Additional Common Stockholders'
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
Reclassification of common
stock subject to rescission
rights (219,000) (219) (1,971) (2,190)
Net loss for year
ended May 31, 2002 -- -- -- (102,477) (102,477)
----------- ----------- ----------- ----------- ----------- -----------
Balance May 31, 2002 (RESTATED) 11,781,000 11,781 190,072 -- (352,995) (151,142)
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 (RESTATED) 18,766,000 $ 18,766 $ 246,977 $ -- $ (618,512) $ (352,769)
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 (RESTATED) 18,766,000 $ 18,766 $ 246,977 $ 526,814 $(2,675,038) $(1,882,481)
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 (RESTATED) 33,733,626 $ 33,734 $ 2,614,323 $ 0 $(2,733,737) $ (85,680)
Unaudited Net loss for
The nine months
Ended February 28, 2006 (84,584) (84,584)
----------- ----------- ----------- ----------- ----------- -----------
Balances February 28, 2006 33,733,626 $ 33,734 $ 2,614,323 $ 0 $(2,818,321) $ (170,264)
(RESTATED) =========== ========== =========== =========== =========== ===========
See Independent Auditor's Report and notes to financial statements.
4
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the
Nine months ended
February 28,
2006 2005
Unaudited
-----------------------------
Operating Activities:
Net loss $ (84,584) $ (31,080)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation 3,213 3,212
Common stock subscribed in release
of company debt (526,814)
Common stock issued for debt & ser 2,382,314
Changes in operating assets and
liabilities
Accounts receivable (9,094)
Inventories (1,014)
Accounts payable and accrued
expenses 56,774 (36,000)
Accrued compensation (1,789,500)
----------- -----------
Net cash provided by (used in)
operating activities (33,691) 1,118
Investing Activities:
Net cash used in investing activities 0 0
Financing Activities:
Loans payable-related parties 37,000 0
----------- -----------
Net cash provided by financing activities 37,000 0
----------- -----------
Net increase (decrease) in cash 3,309 1,118
Cash - beginning 1,477 50
----------- -----------
Cash - end $ 4,786 $ 1,168
=========== ===========
5
NOTES TO FINANCIAL STATEMENTS
February 28, 2006
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
1. Financial Information-Basis of Presentation
The accompanying unaudited financial statements of Spongetech Delivery
Systems, Inc. have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation (consisting of normal recurring
accruals) have been included. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Operating results for the nine month period ended February 28, 2006 are not
necessarily indicative of the results that may be expected for the year ending
May 31, 2006. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form SB-2 for the
year ended May 31, 2005.
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 February 28, 2006 the Company had an
accumulated deficit of $85,680 and $170,264 respectively and a working capital
deficiency of $112,037 and $193,408 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 February 28, 2006 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.
Offering Costs
Deferred offering costs incurred by the Company in connection with the proposed
registration statement will be expensed as incurred.
Net Income (Loss) Per Share
6
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.
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.
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 nine months ended February 28, 2006 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 nine months ended February 28, 2006 and
2005, 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.
5 - Deferred Income Taxes
At May 31, 2005 the Company had approximately $2,733,737 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
February 28, 2006 is as follows:
May 31, February 28,
2005 2006
----------- -----------
Non-Current
Net operating loss carryforwards $ 2,733,737 $ 2,818,321
Valuation allowance for
deferred tax asset (2,733,737) (2,818,321)
----------- -----------
$ -- $ --
=========== ===========
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 February 28, 2006, a valuation allowance for the full amount
of the net deferred tax asset was recorded.
7
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. On January 6, 2006, the agreement
was amended and extended until December 31, 2006.
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.
Employment Contracts
The Company is currently negotiating with two executives to establish employment
contracts. No terms of these negotiations have been disclosed.
Common Stock Subject to Rescission Rights:
As of May 31, 2002, the Company re-classified a total of 219,000 shares of
common stock aggregating $2,190 in value or $.01 per share sold through a
private placement, which management has determined have rescission rights,
outside of stockholders' equity (deficit), as the redemption features were not
within the control of the Company. 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.
In March 2002 through May 2002, the Company's predecessor, Nexgen VIII,
sold an aggregate of 219,000 shares pursuant to a private placement offering
aggregating $2,190 or $.01 per share. The Company's 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, there was no written agreement between Nexgen and the Company.
However, Nexgen's plan was to merge with the 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
belief 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, management has determined to offer a
rescission to the shareholders who purchased shares from the Company's,
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.
o The Company is 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 in 2002.
o The repurchase price for the shares of the 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 shareholder
accepts the offer of rescission and surrenders the shares, they will
receive interest, based on the repurchase price $.01 and calculated
from the date the shares were purchased through the date that the
rescission offer expires at the interest rate based on your state of
residence.
8
Although the balance sheets and statements of changes in stockholders' equity
(deficiency) have been restated, the correction had no effect on the statements
of operations or on the earnings per share. Also, there is not any future impact
on the financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This quarterly report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These include statements
about our expectations, beliefs, intentions or strategies for the future, which
we indicate by words or phrases such as "anticipate," "expect," "intend,"
"plan," "will," "we believe," "our company believes," "management believes" and
similar language. These forward-looking statements are based on our current
expectations and are subject to certain risks, uncertainties and assumptions,
including those set forth in the following discussion, including under the
heading "- Risk Factors". Our actual results may differ materially from results
anticipated in these forward-looking statements. We base our forward-looking
statements on information currently available to us, and we assume no obligation
to update them. In addition, our historical financial performance is not
necessarily indicative of the results that may be expected in the future and we
believe that such comparisons cannot be relied upon as indicators of future
performance.
To the extent that statements in the quarterly report is not strictly
historical, including statements as to revenue projections, business strategy,
outlook, objectives, future milestones, plans, intentions, goals, future
financial conditions, future collaboration agreements, the success of the
Company's development, events conditioned on stockholder or other approval, or
otherwise as to future events, such statements are forward-looking, All
forward-looking statements, whether written or oral, and whether made by or on
behalf of the company, are expressly qualified by the cautionary statements and
any other cautionary statements which may accompany the forward-looking
statements, and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The forward-looking statements
contained in this annual report are subject to certain risks and uncertainties
that could cause actual results to differ materially from the statements made.
Other important factors that could cause actual results to differ materially
include the following: business conditions and the amount of growth in the
Company's industry and general economy; competitive factors; ability to attract
and retain personnel; the price of the Company's stock; and the risk factors set
forth from time to time in the Company's SEC reports, including but not limited
to its annual report on Form 10-KSB; its quarterly reports on Forms 10-QSB; and
any reports on Form 8-K. In addition, the company disclaims any obligation to
update or correct any forward-looking statements in all the Company's annual
reports and SEC filings to reflect events or circumstances after the date
hereof.
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.
9
RESCISSION OFFER
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, there was no written agreement between Nexgen and us.
However, 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 offered rescission to the shareholders who
purchased shares from our predecessor in March through May 2002. The rescission
offer expired on May 15, 2006. None of the shareholders who purchased shares in
the offering in March through May 2002 accepted the rescission offer.
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.
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.
10
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
THREE MONTHS ENDED FEBRUARY 28, 2006 AND 2005
During the three months ended February 28, 2006, we had sales of $9,885. Our
gross profit for the three months ended February 28, 2006 was $6,723 as compared
to $0 for the three months ended February 28, 2005. Management attributes this
increase to orders placed after attendance at the trade show and sales from the
various independent sales groups which we have retained.
Operating expenses for the three months ended February 28, 2006 were $63,877 as
compared to $31,080 for the three months ended February 28, 2005. The increase
of $32,797 is the result of an increase in selling general and administrative
expenses for the period.
Net loss for the three months ended February 28, 2006 was ($57,154) or ($.00)
per share as compared to a net loss of ($31,080) or ($.00) per share for the
three months ended February 28, 2006. The increase in net losses were the result
of an increase in selling expenses for the three months ended February 28, 2006
compared to the three months ended February 28, 2006.
NINE MONTHS ENDED FEBRUARY 28, 2006 AND 2005
Net sales for the nine months ended February 28, 2006 were $12,859 as compared
to $0 for the nine months ended February 28, 2005. Management attributes this
increase to orders placed after attendance at the trade show and sales from the
various independent sales groups which we have retained.
During the nine months ended February 28, 2006, we had sales of $12,859. Our
gross profit for the nine months ended February 28, 2006 was $8,539 as compared
to $0 for the nine months ended February 28, 2005. Management attributes this
increase in gross profit to increased sales during this period.
Operating expenses for the nine months ended February 28, 2006 were $93,123 as
compared to $31,080 for the nine months ended February 28, 2006. The increase of
$62,043 is the result of an increase in selling general and administrative
expenses for the period.
Net loss for the nine months ended February 28, 2006 was ($84,584) or ($.00) per
share as compared to a net loss of ($31,080) or ($.00) per share for the nine
months ended February 28, 2005. The increase in net losses were the result of an
increase in selling expenses for the nine months ended February 28, 2006
compared to the nine months ended February 28, 2005.
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.
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.
11
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 three months period ended February 28, 2006, we
had sales of $9,885, which management attributes to orders placed after
attendance at the Auto Show in Las Vegas Nevada, on October 31, 2005 through
November 4, 2005 and the various independent sales groups which we have
retained.
We filed a registration statement on Form SB-2 which became effective on April
13, 2006 and are currently conducting a registered public offering of our
securities (the "Offering"). The Offering is ongoing. We intend to use the
proceeds of the offering for product development, salaries, marketing, payment
of accounts payable, purchase of inventory and working capital. To date we have
not sold any of our securities in the Offering.
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 the 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 the 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 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 the
Offering. If we are unable to complete the 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. To date we have received orders in the
approximate amount of $1,275 from the efforts of Creative Marketing.
12
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 $24,375 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
13
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 $3,750.50 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 by early summer.
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. On May 8, 2006, we entered into
an oral agreement with Mid Group Marketing, a sales group with 4 sales
representatives who will target their sales efforts to Wisconsin, Illinois and
Missouri. 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. In June 2006, we intend to hire a sales group in the North West to
commence sales in July 2006. In July 2006, we intend to retain a sales group
that targets the Canadian market to commence sales of in August 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 the Offering or of raising the maximum
offering. If we are not able to complete the Offering or raising 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 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.
14
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 the 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 the 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 the 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.
15
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 the 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 the Offering, we will not be able to launch our marketing
campaign.
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 the
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 the Offering. If we are unable to complete the Offering,
we may be forced to cease operations and go out of business.
16
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.
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 May 26, 2006 is $5,150.
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 four months. Our officers, directors and affiliates have indicated their
preparedness to fund our business until we are able to complete the 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.
17
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.
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 the Offering will sustain our operations for the next 12 months
if the minimum is raised. However, in order for us to execute our business plan
by expanding our marketing efforts, we will need to raise the maximum. If we
fail to raise the minimum offering, we will need to secure additional working
capital from other sources in order to sustain our operations. Any inability to
obtain sufficient capital to sustain our existing operations, to meet
commitments may 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.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, we conducted an evaluation, under the supervision
and with the participation of our chief executive officer and chief financial
officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e)
and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, we have
concluded that our disclosure controls and procedures are effective to ensure
that the information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and forms,
and (ii) is accumulated and communicated to our management, including our chief
executive officer and chief financial officer, to allow timely decisions on
required disclosure.
(b) Changes in internal controls. There was no change in our internal controls
or in other factors that could affect these controls during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
18
PART II
OTHER INFORMATION
ITEM 1. 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
We filed a Registration Statement on Form SB-2, (file no. 333-123015)
which was declared effective by the Securities and Exchange Commission on
April 13, 2006. 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.
3,625,569 shares are being offered by the selling stockholders. We will
not receive any proceeds from the sale of the shares of common stock by
the selling shareholders. 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 purpose. Offering expenses were paid prior to the
commencement of the Offering. These expenses were paid out of funds
advanced to us by our officers, directors and affiliates. 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. The
registered initial public offering of our common stock is ongoing. To
date, we have not received any proceeds from the offering.
In addition, pursuant to the Registration Statement, we offered rescission
to our shareholders who purchased shares of the Company in March 2002
through May 2002. The rescission offer expired on May 15, 2006. None of
the shareholders accepted the rescission offer.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended, promulgated pursuant to the Section 302 of the Sarbanes
Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended, as amended, promulgated pursuant to the Section 302 of the
Sarbanes Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 30, 2006
Spongetech Delivery Systems, INC.
By: /s/ Michael L. Metter
---------------------------
Michael Metter
Chief Executive Officer
By: /s/ Steven Moskowitz
---------------------------
Steven Moskowitz
Chief Financial Officer