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, 2007

o  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 o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes x           No o

As of April 13, 2007, the Company had 37,302,636 shares of common stock issued and outstanding.

 
Spongetech Delivery Systems, Inc.
Form 10-QSB
For the Quarterly period ended
February 28, 2007

TABLE OF CONTENTS

 
 
Page
PART I - FINANCIAL INFORMATION
 
Item 1.
Consolidated Financial Statements.
 
 
Balance Sheets as of February 28, 2007 (Unaudited) and May 31, 2006
3
 
Statements of Operations for the Nine and Three Months ended
February 28, 2007 and 2006 (Unaudited) 
4
 
Statements of Changes in Stockholders’ Equity for the Years ended May 31, 2001 through 2006 and the Nine Months ended February 28, 2007 (Unaudited) 
5
 
Statements of Cash Flows for the Six Months ended February 28, 2007 and 2006 (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 SHEETS

   
February 28,
  
May 31,
  
   
2007
  
2006
  
   
(Unaudited)
      
ASSETS
          
Current Assets
          
Cash
  
$
3,477
  
$
2,805
  
Accounts receivable
    
13,257
    
9,885
  
Inventories
    
0
    
1,659
  
               
Total current assets
    
16,704
    
14,349
  
               
Property and equipment
    
21,050
    
24,263
  
               
Total assets
  
$
37,754
  
$
38,612
  
               
LIABILITIES, COMMON STOCK SUBJECT TO RESCISSION RIGHTS AND SHAREHOLDERS' (DEFICIENCY)
             
               
Current Liabilities
              
Accounts payable and accrued expenses
  
$
188,333
  
$
112,029
  
Loan payable-officer
    
18,600
    
10,500
  
Loan payable
    
89,354
    
66,000
  
Income taxes payable
    
1,600
    
1,600
  
               
Total current liabilities
    
297,887
    
190,129
  
 
              
Total long-term liabilities
    
0
    
0
  
               
Total liabilities
    
297,887
    
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 200,000,000 shares; issued and outstanding 36,652,626 and 33,853,626 shares as of February 28, 2007 and May 31, 2006, respectively
    
36,653
    
33,854
  
Preferred stock $.001 par value; Authorized 20,000,000 shares; no shares issued and outstanding
    
0
    
0
  
Additional paid-in capital
    
3,163,331
    
2,647,940
  
Deficit
    
(3,460,117
)
  
(2,835,501
)
               
Total shareholders' (deficiency)
    
(260,133
)
  
(153,707
)
               
Total liabilities, common stock subject to rescission rights and stockholders’ (deficiency)
  
$
37,754
  
$
38,612
  
 
See notes to financial statements.

3
 
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
   
For the nine
  
For the three
  
   
months ended
  
months ended
  
   
February 28,
  
February 28,
  
   
2007
  
2006
  
2007
  
2006
  
                   
Sales
  
$
25,799
  
$
12,859
  
$
14,483
  
$
9,885
  
                           
Cost of goods sold
    
6,298
    
4,320
    
1,642
    
3,162
  
Gross profit
    
19,501
    
8,539
    
12,841
    
6,723
  
                           
Operating expenses
                          
General and
                          
Administrative expenses
    
640,904
    
89,910
    
546,644
    
62,806
  
Depreciation expense
    
3,213
    
3,213
    
1,071
    
1,071
  
                           
Total operating expenses
    
644,117
    
93,123
    
547,715
    
63,877
  
                           
Net loss
  
$
(624,616
)
$
(84,584
)
$
(534,874
)
$
(57,154
)
                           
Basic and diluted (loss) per common stock
                          
                           
Net loss per share - basic and diluted
  
$
(.02
)
$
(.00
)
$
(.02
)
$
(.00
)
                           
Weighted average common shares outstanding
    
34,286,293
    
33,952,626
    
34,932,626
    
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 Nine Months
Ended February 28, 2007 (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 Nine Months
 Ended February 28, 2007 (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
  
                                       
Issuance of shares as consulting fees
    
2,580,000
    
2,580
    
513,420
                
516,000
  
                                       
Net loss for the nine months ended February 28, 2007
                            
(624,616
)
  
(624,616
)
                                       
Balance-February 28, 2007 (Unaudited)
    
36,652,626
  
$
36,653
  
$
3,163,331
  
$
0
  
$
(3,460,117
)
$
(260,133
)
 
See notes to financial statements.

6
 
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)

   
For the nine
  
   
months ended February 28,
  
   
2007
  
2006
  
Operating Activities:
          
Net loss
  
$
(624,616
)
$
(84,584
)
Adjustments to reconcile net loss to net cash provided by (used in)
              
Operating activities:
              
Depreciation
    
3,213
    
3,213
  
Issuance of shares of common stock in consideration for consulting fees
    
516,000
    
0
  
Changes in operating assets and Liabilities:
              
Inventory
    
1,659
    
0
  
Accounts receivable
    
(3,371
)
  
(9,094
)
Accounts payable and accrued expenses
    
76,304
    
56,774
  
               
Net cash used in operating activities
    
(30,811
)
  
(33,691
)
               
Investing Activities:
              
               
Net cash used in investing activities
    
0
    
0
  
               
Financing Activities:
              
Officer loans
    
8,100
    
0
  
Loan payable
    
23,353
    
37,000
  
               
Net cash provided by financing activities
    
31,453
    
37,000
  
               
Net increase in cash
    
642
    
3,309
  
               
Cash - beginning
    
2,805
    
1,477
  
Cash - end
  
$
3,447
  
$
4,786
  
               
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 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 February 28, 2007 the Company had an accumulated deficit of $3,510,117 and a working capital deficiency of $281,183. 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 February 28, 2007 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.

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.

8
 
Advertising Costs

Advertising costs are expensed as incurred. For the nine months ended February 28, 2007 and 2006, advertising costs totaled $0 and $0, respectively.

Shipping and Handling Costs

Shipping and handling costs are included in selling expenses. For the nine months ended February 28, 2007 and 2006, 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.
 
2 - Property and Equipment

Property and equipment is summarized as follows:

   
Estimated
 
 
 
 
 
 
 
Useful Lives
 
February 28,
 
May 31,
 
 
 
Years
 
2007
 
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
          
35,851
    
32,638
  
         
$
21,050
  
$
24,263
  

Depreciation expense for the nine months ended February 28, 2007 and 2006 was $3,213, respectively.

9
 
3 - Accounts payable and accrued expenses consist of the following:

   
February 28,
  
May 31,
      
   
2007
  
2006
      
Product development (Packaging & mold
              
Development)
  
$
99,663
  
$
99,663
    
No Related Party
  
Other
    
88,670
    
12,366
        
                     
Total
  
$
188,333
  
$
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
        

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
        

10
 
5 - Deferred Income Taxes

At February 28, 2007 and May 31, 2006, the Company had approximately $3,460,117 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 February 28,2007 and May 31, 2006 is as follows:

   
February 28,
 
May 31,
 
 
 
2007
 
2006
  
Non-Current
          
Net operating loss carryforwards
  
$
3,460,117
  
$
2,835,501
  
Valuation allowance for
              
deferred tax asset
    
(3,460,117
)
  
(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 February 28, 2007 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. This agreement was not extended.

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 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 Westgage.

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.

In February, 2007, the Company issued an aggregate of 2,580,000 shares of common Stock valued at $516,000 or $.20 per share in consideration for consulting services.

The Company has amended it's certificate of incorporation to increase the number of  authorized shares of common stock to an aggregate of 220,000,000 $.001 par value per share. This will include 200,000,000 shares of common stock and 20,000,000 shares of preferred stock.

Serial Preferred Stock: The board of directors of the Corporation is authorized, by resolution from time to time adopted, to provide for the issuance of serial preferred stock in series and to fix and state the powers, designation, preferences and relative, participating, optional or other special rights of the shares of each series , and the qualifications, limitations or restrictions.



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.


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 February 28, 2007 and 2006
 
During the three months ended February 28, 2007, we had sales of $14,483 as compared to sales of $9,885 for the same period in 2006. We had gross profit of $12,841for the three months ended February 28, 2007 compared to $6,723 for the three months ended February 28, 2006.
 
Operating expenses for the three months ended February 28, 2007 were $547,715 as compared to $63,877 for the three months ended February 28, 2006. The increase of $533,838 is the result of an increase in selling general and administrative expenses for the period.
 
Net loss for the three months ended February 28, 2007 was $534,874 or ($.02) per share as compared to a net loss of $57,154 or ($.00) per share for the three months ended February 28, 2006. The increase in net loss was the result of a significant increase in general and administrative expenses for the three months ended February 28, 2007 compared to the three months ended February 28, 2006.
 
Nine Months ended February 28, 2007 and 2006
 
During the nine months ended February 28, 2007, we had sales of $25,799 as compared to sales of $12,859 for the same period in 2006. Our gross profit for the nine months ended February 28, 2007 was $19,501 as compared to $8,539 for the nine months ended February 28, 2006. Management attributes this increase to sales from the various independent sales groups which we have retained.
 
Operating expenses for the nine months ended February 28, 2007 were $644,117 as compared to $93,123 for the nine months ended February 28, 2006. The increase of $600,994 is the result of an increase in selling general and administrative expenses for the period.
 
Net loss for the nine months ended February 28, 2007 was $624,616 or $.02 per share as compared to a net loss of $84,584 or $.00 per share for the nine months ended February 28, 2006. The increase in net loss was the result of a significant increase in selling expenses for the nine months ended February 28, 2007 as compared to the nine months ended February 28, 2006.
 
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 nine months period ended February 28, 2007, we had sales of $25,799. To date we have orders of approximately $100,000, which we anticipate will be filled by late summer 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 closed its manufacturing operations in the United States. 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.
 
 
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 $25,000 to attend upcoming trade shows over the next six months, 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 10,000,000 kits.
 
We are reviewing 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 September through December 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



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. 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 February 28, 2007, we had cash of $3,477. Our current cash balance as of April 13, 2007 is $25,782.
 
As of February 28, 2007 net cash used by operating activities aggregated $(30,811). 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 eight 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.


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
 
We issued the following equity securities during the quarter ended February 28, 2007 that were not registered under the Securities Act of 1933, as amended (the "Securities Act").
 
In January 2007, we issued an aggregate of 2,580,000 shares of our common stock as consideration for professional and consulting services.

For each of the above transactions exempt from registration requirements under Rule 506, the individuals and entities to whom we issued securities are unaffiliated with us. For each of such sales, no advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of ours or our executive officers, and transfer was restricted by us in accordance with the requirements of the Securities Act. Each of such persons represented to us that they were accredited or sophisticated investors, that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons had access to our Securities and Exchange Commission filings.
 
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
 
 
3.1
Amended and Restated Certificate of Incorporation filed on March 6, 2007
     
 
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.



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: April 16, 2007
     
  Spongetech Delivery Systems, Inc.
 
 		  
 		  
 
By:   /s/ Michael L. Metter 
 
Michael L. Metter
Chief Executive Officer
   
     
   
  By:   /s/ Steven Moskowitz
 
Steven Moskowitz
Chief Financial Officer