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 November 30, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file No. 333-100925
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 [X] No [ ]
As of January 12, 2007, 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
August 31, 2006
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
Balance Sheets as of November 30,2006 (Unaudited) and May 31, 2006 3
Statements of Operations for the Six Months ended November 30, 2006 and 2005 (Unaudited) 4
Statements of Changes in Stockholders' Equity for the Years ended May 31, 2001 through 2006 and the Six Months
ended November 30, 2006 (Unaudited) 5
Statements of Cash Flows for the Six Months ended November 30, 2006 and 2005 (Unaudited) 7
Notes to Unaudited Financial Statements 8
Item 2. Management's Discussion and Analysis 13
Item 3. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 18
2
Item 1. Financial Statements
SPONGETECH DELIVERY SYSTEMS, INC.
BALANCE SHEET
November 30, May 31,
2006 2006
(Unaudited)
ASSETS
Current Assets
Cash $ 365 $ 2,805
Accounts receivable 11,295 9,885
Inventories 1,642 1,659
----------- -----------
Total current assets 13,302 14,349
Property and equipment 22,121 24,263
----------- -----------
Total assets $ 35,423 $ 38,612
=========== ===========
LIABILITIES, COMMON STOCK SUBJECT TO RESCISSION RIGHTS AND SHAREHOLDERS' (DEFICIENCY)
Current Liabilities
Accounts payable and
accrued expenses $ 189,228 $ 112,029
Loan payable-officer 15,500 10,500
Loan payable 70,354 66,000
Income taxes payable 1,600 1,600
----------- -----------
Total current liabilities 276,682 190,129
Total long-term liabilities 0 0
----------- -----------
Total liabilities 276,682 190,129
Common stock subject to rescission rights:
Issued and outstanding:219,000 shares in 2002 0 2,190
----------- -----------
Shareholders' Equity (Deficiency)
Common stock, $.001 par value;
Authorized 50,000,000 shares;
issued and outstanding 34,072,626
and 33,853,626 shares as of November 30,
2006 and May 31, 2006, respectively 34,073 33,854
Preferred stock $.001 par value;
Authorized 5,000,000 shares;
no shares issued and outstanding 0 0
Additional paid-in capital 2,649,911 2,647,940
Deficit (2,925,243) (2,835,501)
----------- -----------
Total shareholders' (deficiency) (241,259) (153,707)
----------- -----------
Total liabilities, common stock subject to rescission
rights and stockholders' (deficiency) $ 35,423 $ 38,612
=========== ===========
See notes to financial statements.
3
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the six For the three
months ended months ended
November 30, November 30,
----------------------------- -----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Sales $ 11,316 $ 2,974 $ 27 $ 68
Cost of goods sold 4,656 1,158 17 58
------------ ------------ ------------ ------------
Gross profit 6,660 1,816 10 10
------------ ------------
Operating expenses
General and
Administrative
expenses 91,260 27,104 86,002 1,006
Depreciation expense 2,142 2,142 1,072 1,071
------------ ------------ ------------ ------------
Total operating expenses 93,402 29,246 87,074 2,077
------------ ------------ ------------ ------------
Net loss $ (89,742) $ (27,430) $ (87,064) $ (2,067)
============ ============ ============ ============
Basic and diluted (loss) per
common stock
Net loss per share -
basic and diluted $ (.00) $ (.00) $ (.00) $ (.00)
Weighted average common
shares outstanding 34,072,626 33,952,626 34,072,626 33,952,626
See notes to financial statements.
4
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
For The Years Ended May 31, 2001 through 2006 and Six Months
Ended November 30, 2006 (Unuaudited)
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
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
5
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
For The Years Ended May 31, 2001 through 2006 and Six Months
Ended November 30, 2006 (Unuaudited)
Total
Additional Common Shareholders'
Number of Capital Paid-In Stock Equity
Shares Stock Capital Subscribed Deficit (Deficiency)
----------- ----------- ----------- ----------- ----------- -----------
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)
Issuance of common
stock for services 120,000 120 33,617 -- -- 33,737
Net loss for the
year ended
May 31, 2006 -- -- -- -- (101,764) (101,764)
----------- ----------- ----------- ----------- ----------- -----------
Balance-
May 31, 2006 33,853,626 $ 33,854 $ 2,647,940 $ 0 $(2,835,501) $ (153,707)
Rescission offer
Rejected 219,000 219 1,971 -- -- 2,190
Net loss for the
six months ended
November 30, 2006 -- -- -- -- (89,742) (89,742)
----------- ----------- ----------- ----------- ----------- -----------
Balance-
November 30, 2006 34,072,626 $ 34,073 $ 2,649,911 $ 0 $(2,925,243) $ (241,259)
(Unaudited) =========== =========== =========== =========== =========== ===========
See notes to financial statements.
6
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the six
months ended November 30,
---------------------------
2006 2005
-------- --------
Operating Activities:
Net loss $(89,742) $(27,430)
Adjustments to reconcile net loss to
net cash provided by (used in)
Operating activities:
Depreciation 2,142 2,142
Changes in operating assets and
Liabilities
Inventory 17 0
Accounts receivable (1,410) (2,371)
Accounts payable and accrued
expenses 77,199 19,148
-------- --------
Net cash used in
operating activities (11,794) (8,511)
-------- --------
Investing Activities:
Net cash used in investing
activities
0 0
-------- --------
Financing Activities:
Officer loans 5,000 0
Loan payable 4,354 7,500
-------- --------
Net cash provided by
financing activities 9,354 7,500
-------- --------
Net decrease in cash (2,440) (1,011)
Cash - beginning 2,805 1,477
-------- --------
Cash - end $ 365 $ 466
======== ========
Supplemental Information
Interest paid $ 0 $ 0
Income taxes paid $ 0 $ 0
See notes to financial statements.
7
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 year ended May 31,
2006 the Company incurred net losses of $101,764. As of November 30, 2006 the
Company had an accumulated deficit of $2,925,243 and a working capital
deficiency of $263,380. 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.
1 - Summary of Significant Accounting Policies (Continued)
Accounts Receivable
Accounts receivable have been adjusted for all known uncollectible
accounts. As of November 30, 2006 and May 31, 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.
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.
8
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 six months ended
November 30, 2006 and 2005, advertising costs totaled $0 and $0, respectively.
Shipping and Handling Costs
Shipping and handling costs are included in selling expenses. For the six
months ended November 30, 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.
Recent Accounting Pronouncements
New accounting statements issued, and adopted by the Company, include the
following:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (Revised 2004), Share-Based Payment ("SFAS No. 123R"). This
standard requires expensing of stock options and other share-based payments and
supersedes SFAS No. 123, which had allowed companies to choose between expensing
stock options or showing pro forma disclosure only. SFAS 123R also supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and amends SFAS
No. 95, " Statement of Cash Flows." This standard was adopted by us as of
January 2006 and will apply to all awards granted, modified, cancelled or
repurchased after that date as well as the unvested portion of prior awards.
SFAS No. 123R permits public companies to adopt its requirements using one of
three methods: the "modified prospective" method, the "modified retrospective"
method to January 1, 2005, or the "modified retrospective" method to all prior
years for which SFAS No. 123 was effective. We shall use the modified
prospective method. We adopted the provisions of this standard on January 1,
2006 and will apply to all awards granted, modified, cancelled or repurchased
after that date as well as the unvested portion of prior awards on that date.
As permitted by SFAS No. 123, we currently follow APB Opinion No. 25 which
provides for the accounting for share-based payments to employees and directors
using the intrinsic value method and, as such, we generally recognized no
compensation cost for such stock options.
9
2 - Property and Equipment
Property and equipment is summarized as follows:
Estimated
Useful Lives November 30, May 31,
Years 2006 2006
------- ------- -------
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 34,780 32,638
------- -------
$22,121 $24,263
======= =======
Depreciation expense for the six months ended November 30, 2006 and 2005
was $2,142 and $2,142, respectively.
3 - Accounts payable and accrued expenses consist of the following:
November 30, May 31,
2006 2006
-------- --------
Product development (Packaging & mold
Development) $ 99,663 $ 99,663 No Related Party
Other 89,565 12,366
-------- --------
Total $189,228 $112,029
======== ========
4 - Related Party Transactions
Since December 8, 2004, the Company has been occupying their 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. The premises
are leased by members of the family of Steven Moskowitz, secretary of the
Company. Pursuant to a sublease agreement, the Company issued 60,000 shares of
common stock valued at $.15 per share to A & N Enterprises. The sublease expires
on January 31, 2008. The Company pays directly for telephone, utilities and
other expenses.
In January 2005, the Company issued an aggregate of 12,030,000 shares of
common stock in consideration for services at an average of $.15 per share as
follows:
Shares Value
Robert Rubin 2,000,000 $ 300,000 Related
Frank Lazauskas 3,330,000 499,500 Related
Steven Moskowitz 3,270,000 499,500 Related
Michael L.Metter 3,330,000 499,500 Related
Thomas Monahan 100,000 15,000
----------- ----------
Total 12,030,000 $1,813,500
=========== ==========
10
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
=========== ==========
5 - Deferred Income Taxes
At November 30, 2006 and May 31, 2005, the Company had approximately
$2,925,243 and $2,835,501 respectively, of net operating loss carryforwards
available, which expire in various years through May 31, 2022. The significant
component of the Company's deferred tax asset as of November 30,2006 and May 31,
2006 is as follows:
November 30, May 31,
2006 2006
----------- -----------
Non-Current
Net operating loss carryforwards $ 2,925,243 $ 2,835,501
Valuation allowance for
deferred tax asset (2,925,243) (2,835,501)
----------- -----------
$ -- $ --
=========== ===========
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax asset will not be realized.
At November 30, 2006 and May 31, 2006, 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. 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.
Litigation
The Company settled 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"). On July 25, 2006 the
parties entered into a Consent Order pursuant to which the Companies agreed to
pay the sum of $20,000 to Westgate.
11
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
On April 27, 2006 the Company issued 120,000 shares of common stock for
legal services at a value of $.28 per share.
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.
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.
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.
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.
As of November 2006, all of the shareholders of Colorado and Texas have
elected to reject the rescission offer and desired to retain their respective
shares.
12
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 and under the
heading "- Risk Factors" in our Form 10-KSB for the fiscal year ended May 31,
2006. 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.
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. We had
minimal sales 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.
Our License Agreement with H.H. Brown Shoe Technologies, Inc.(d/b/a Dicon
Technologies), a majority-owned subsidiary of Berkshire Hathaway, Inc., pursuant
to which we license the right to use the technology related to hydrophilic
sponges expired in December 2006. Further, Dicon has advised us that it intends
to sell its machinery and curtail its US current operations as of January 31,
2007. However, Dicon has advised us that they can continue to manufacture our
products by outsourcing the production to its partners in China. We have not
discussed this possibility with Dicon and we currently do not have any
arrangements with Dicon to have its Chinese partners manufacture our products.
We have also been contacted by the third parties that have purchased Dicon's
equipment, however, we have not entered into any agreements with these parties
for the manufacture of our products. There can also be no assurance that we will
be able to enter into agreements with these parties on the same terms and
conditions as our prior agreement with Dicon. We have entered into an oral
agreement with Zanora Corp. of China to produce our products using encapsulation
technology instead of technology relating to hydrophilic sponges. The lead time
on products manufactured by Zanora Corp. is approximately 3-4 months. There is
no assurance that we will be able to maintain sufficient inventory on hand to
fulfill orders which require delivery in less than 3-4 months. If we are unable
to delivery products to customers timely, we may lose these customers. Due to
our limited operations, the loss of any one customer will have a significant
effect on our business.
13
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.
Results of Operations
Three Months ended November 30, 2006 and 2005
During the three months ended November 30, 2006, we had sales of $27 as
compared to sales of $68 for the same period in 2005. There were no changes in
gross profit for the three months ended November 30, 2006 compared to the three
months ended November 30, 2005.
Operating expenses for the three months ended November 30, 2006 were
$87,074 as compared to $2,067 for the three months ended November 30, 2005. The
increase of $85,007 is the result of an increase in selling general and
administrative expenses for the period.
Net loss for the three months ended November 30, 2006 was ($87,064) or
($.00) per share as compared to a net loss of ($2,067) or ($.00) per share for
the three months ended November 30, 2005. The increase in net loss was the
result of a significant increase in selling expenses for the three months ended
November 30, 2006 compared to the three months ended November 30, 2005.
Six Months ended November 30, 2006 and 2005
During the six months ended November 30, 2006, we had sales of $11,316 as
compared to sales of $2,974 for the same period in 2005. Our gross profit for
the six months ended November 30, 2006 was $6,660 as compared to $1,816 for the
six months ended November 30, 2005. Management attributes this increase to sales
from the various independent sales groups which we have retained.
Operating expenses for the six months ended November 30, 2006 were $93,402
as compared to $29,246 for the six months ended November 30, 2005. The increase
of $64,156 is the result of an increase in selling general and administrative
expenses for the period.
Net loss for the six months ended November 30, 2006 was ($89,742) or
($.00) per share as compared to a net loss of ($27,430) or ($.00) per share for
the six months ended November 30, 2005. The increase in net loss was the result
of a significant increase in selling expenses for the six months ended November
30, 2006 as compared to the six months ended November 30, 2005.
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, 2006 and 2005, we had sales of $12,859 and $1,051 respectively. The main
reason for the decrease in sales from 2003 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 to execute these plans. We
have seen an increase in sales in our fiscal year ended May 31, 2006, which
management attributes to orders placed after attendance at various trade shows
and the retention of various independent sales groups. For the six months period
ended November 30, 2006, we had sales of $11,316. To date we have orders of
$38,550, which we anticipate will be filled by spring 2007.
Our license agreement with H.H. Brown Shoe Technologies, Inc., (d/b/a
Dicon Technologies), which owns the patent rights to the technology related to
hydrophilic sponges expired in December 2006. In addition, Dicon has advised us
that it intends to sell its machinery and curtail its current US operations on
January 31, 2007. Dicon has advised us that it may continue to manufacture our
products by outsourcing the production to its partners in China. We have not
discussed this possibility with Dicon and we currently do not have any
arrangements with Dicon to have its Chinese partners manufacture our products.
We have also been contacted by the third parties that have purchased Dicon's
equipment. However, we have not entered into any agreements with these parties
for the manufacture of our products. There can also be no assurance that we will
be able to enter into agreements with these parties on the same terms and
conditions as our prior agreement with Dicon. We have entered into an oral
agreement with Zanora Corp. of China, to produce our products using
encapsulation technology instead of technology relating to hydrophilic sponges.
The end-result is a product that is functionally the same as that manufactured
using Dicon's patented hydrophilic technology. The lead time on products
manufactured by Zanora Corp. is 3-4 months. There is no assurance that we will
be able to maintain sufficient inventory on hand to fulfill orders which require
delivery in less than 3-4 months. If we are unable to delivery products to
customers timely, we may lose these customers. Due to our limited operations,
the loss of any one customer will have a significant effect on our business.
14
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 estimates that it will cost us approximately $12,500 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 generate sales to fund our operations or obtain outside funding. 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.
Our officers, directors and affiliates are not legally bound to provide funding
to us. If they do not pay for our expenses, we will be forced to obtain funding.
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 will not be able to obtain funding to increase
our sales and marketing efforts. As a result we may be forced to go out of
business.
We entered into an oral agreement with various independent sales groups
that target sales throughout the United States. The sales representatives will
receive commissions in the range of five (5%) 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.
We intend to continue to retain additional independent sales groups to
market our products. 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. There is no guarantee that we will be able to retain
additional 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.
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. There is no
assurance that management will be able to consummate any agreements with a
production finance company on terms that are acceptable to us or which will not
significantly cut into our profit margin.
We have entered into a month to month lease for warehousing facilities
with Storageasy & Go in Hackensack, NJ. Our monthly payment is $550. This
facility has the capacity to store up to _________kits.
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
January through March 2007. 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.
__________________________
(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
15
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
immediate plans to enter into any such arrangement in the near future. 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.
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.
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.
Liquidity and Capital Resources
As of November 30, 2006, we had cash of $365. Our current cash balance as
of January 12, 2007 is $3,428.
As of November 30, 2006, net cash used by operating activities aggregated
$(11,794). We do not expect positive cash flow from operations in the near term.
Our operations to date have been primarily financed by sales of our equity
securities to and loans from our officers and directors. Based on our current
cash balance, management believes that we can satisfy our cash requirements for
the next six months. Our officers, directors and affiliates have indicated their
preparedness to continue to fund our business until we are able to generate
sufficient revenues from the sale of our products. 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 from third
parties. In addition, 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. 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. Further, the issuance of additional
equity securities by us could result in a significant dilution in the equity
interests of our current stockholders.
Due to the operating losses that we have suffered from the date of our
organization, in their report on the annual consolidated financial statements
for fiscal year ended May 31, 2006, 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.
16
We have purchased the following sponge kits and sponges as of the date of
this report: 27,300 kits, each consisting of a vehicular sponge, detail sponge
and chamois cloths 174,752 vehicular sponges 5,700 detail sponges 2,850 chamois
cloths.
Off-Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements that are
reasonably likely to have a current or future effect on our financial condition,
revenues, results of operations, liquidity or capital expenditures.
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.
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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
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.
Item 2. Unregistered Sales of Equity Securities
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
17
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.
18
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: January 16, 2007
Spongetech Delivery Systems, Inc.
By: /s/ Michael L. Metter
-----------------------------
Michael L. Metter
Chief Executive Officer
By: /s/ Steven Moxkowitz
-----------------------------
Steven Moskowitz
Chief Financial Officer
19