SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-KSB
(Mark
One)
| [X] |
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE FISCAL YEAR ENDED MAY 31,
2007
|
| [_] |
TRANSITION
REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION
FILE NUMBER
_______________________________
|
SPONGETECH
DELIVERY SYSTEMS, INC.
(Name
of
small business issuer in its charter)
|
Delaware
|
54-2077231
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
The
Empire State Building
350
Fifth Avenue, Suite 2204
New
York, New York 10118
(Address
of principal executive offices) (Zip Code)
Issuer’s
telephone Number: (212)
594-4175
Copies
to:
Richard
A. Friedman, Esq.
Sichenzia
Ross Friedman Ference LLP
61
Broadway, 32nd
Floor
New
York,
New York 10006
Phone:
(212) 930-9700
Fax:
(212) 930-9725
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act: None
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act 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 [_]
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[ ]
No [ X ]
State
issuer’s revenues for its most recent fiscal year. $55,112.
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed by reference to the average bid and asked price of
such
common equity, as of a specified date within the past 60 days. There
is
currently no public trading market for the issuer’s common equity.
As
of
August 28, 2006, the issuer had 34,072,636 outstanding shares of Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE: NONE
Transitional
Small Business Disclosure Format (check one): Yes [_] No [X]
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Page
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PART
I
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| |
|
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| Item 1. |
Description
of Business
|
3
|
| Item 2. |
Description
of Property
|
5
|
| Item 3. |
Legal
Proceedings
|
5
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| Item 4. |
Submission
of Matters to a Vote of Security Holders
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5
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PART
II
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| Item 5. |
Market
for Common Equity and Related Stockholder Matters
|
6
|
| Item 6. |
Management’s
Discussion and Analysis or Plan of Operation
|
6
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| Item 7. |
Financial
Statements
|
14
|
| Item 8. |
Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
|
14
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| Item 8A. |
Controls
and Procedures
|
14
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| Item 8B. |
Other
Information
|
14
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PART
III
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|
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| Item 9. |
Directors,
Executive Officers, Promoters and Control Persons;
|
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Compliance
With Section 16(a) of the Exchange Act
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14
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| Item 10. |
Executive
Compensation
|
15
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| Item 11. |
Security
Ownership of Certain Beneficial Owners and Management
|
16
|
| Item 12. |
Certain
Relationship and Related Transactions
|
18
|
| Item 13. |
Exhibits
|
19
|
| Item 14. |
Principal
Accountant Fees and Services
|
21
|
| |
|
|
| SIGNATURES |
21
|
Item
1. Description of Business.
We
design, produce, market and distribute cleaning products for vehicular use
utilizing patented technology relating to sponges containing hydrophilic, which
are liquid absorbing, foam polyurethane matrices. Our products can be pre-loaded
with detergents and waxes which are absorbed in the core of the sponge then
gradually released during use. We have designed is conducting research and
development for products using hydrophilic technology for bath, pet and home
use
which we intend to market and sell as part of our product offering. There is
no
assurance that we will successfully be able to market and sell products for
bath, pet and/or home use.
Since
our
inception, we have had sales of $342,019 for the fiscal years ended May 31,
2003. Since then we have had minimal sales. For the fiscal years ended May
31,
2007 and 2006, we have sales of $55,112 and $12,859 respectively. We have
incurred losses since inception and we expect to incur losses for the
foreseeable future. For the fiscal years ended May 31, 2007, 2006 and, 2005,
we
incurred net losses of $817,217, $101,764 and $58,699, respectively. As a result
of the foregoing, our independent auditors, in their report covering our
financial statements for the year ended May 31, 2007, stated that our financial
statements were prepared assuming that we would continue as a going
concern.
Corporate
Background
We
were
formed on June 18, 1999, under the name Romantic Scents, Inc. On June 12, 2001,
Romantic Scents, Inc. changed its name to RSI Enterprises, Inc., and, on October
2, 2002, changed its name to Spongetech International Ltd. On July 15, 2002,
we
entered into a stock purchase agreement with Nexgen Acquisitions VIII, Inc.,
a
blank check company, pursuant to which our sole stockholder, RM Enterprises
International, Inc. received 12,000,000 shares of Nexgen Acquisitions VIII,
Inc.
and thereby became its majority stockholder. The transaction was accounted
for
as a reverse acquisition using the purchase method of accounting, whereby RM
Enterprises International, Inc., our sole shareholder, retained approximately
63% of the outstanding common stock. Thereafter, on October 9, 2002, Nexgen
Acquisitions VIII, Inc. changed its name to Spongetech Delivery Systems, Inc.
On
December 16, 2002, we changed our domicile to Delaware. Spongetech Delivery
Systems, Inc. (formerly Nexgen Acquisitions VIII, Inc.) merged with and into
us
so that we became the surviving company. Immediately subsequent to the merger,
we changed our name to Spongetech Delivery Systems, Inc.
On
March
1, 2004, our Certificate of Incorporation was voided by the State of Delaware
for non-payment of franchise taxes in the amount of $114.40, including interest,
fees and penalties for 2002 and $164.49, including taxes, fees and penalties
for
2003, which outstanding amounts were paid on June 27, 2005.On June 27, 2005,
a
Certificate for Renewal and Revival of our Certificate of Incorporation (the
"Certificate") was filed with the State of Delaware, which restored, renewed
and
revived our Certificate of Incorporation commencing February 29, 2004. In
accordance with Delaware Corporation law, upon the filing of the Certificate,
our Certificate of Incorporation was renewed and revived with the same force
and
effect as if it had not been voided. Such reinstatement validated all contracts,
acts, and matters, done and performed by our officers and agents within the
scope of our Certificate of Incorporation during the time the Certificate of
Incorporation was voided.
We
have
designed specially configured sponges containing an outer contact layer and
an
inner matrix. Our manufacturer H.H. Brown Shoe Technologies, Inc. (d/b/b Dicon
Technologies), loads the inner matrix of the sponge with specially formulated
soaps and, in our licensed automotive cleaning and polishing product, soap
and
wax. When the sponge is applied to a surface with minimal pressure, the soap
or
soap and wax are simultaneously applied to the surface. When the sponge is
not
in use, the hydrophilic matrix holds the soap so that it does not leech out
of
the sponge.
We
can
choose any variety of cleansers, including anti-bacterial and abrasive soaps
in
our sponges. Thus, we may fine-tune our products for use on different kinds
of
vehicles. New vehicles or those prepared for classic car shows require a gentle
cleaner, whereas older cars which have developed a film over the paint or where
the paint has faded may require a cleanser containing a compounding substance,
a
gentle abrasive. Depending on the use of our vehicular sponge, we may include
wax, or may only include the cleanser.
We
have
developed a children's bath foam sponge, with a "safe mesh" coating which
prevents tearing, in the shape of animals in various colors. The sponges, which
float, are infused with a gentle no-tear, non-irritating anti-bacterial soap.
The bath foam sponge does not lose its soap while it is floating in the bath
tub
as the inner hydrophilic matrix retains the soap until the child squeezes the
sponge in use. We are exploring retail outlets to sell this product, ranging
from pharmacies to department stores. We also intend to market this product
directly. Dicon has orally agreed to manufacture this product for us. We have
not yet made sales and cannot offer any assurances that sales will result from
our proposed marketing campaign.
We
have
developed prototypes of household cleaning sponges infused with anti-bacterial
bath and kitchen soaps. The products are being testing by a national detergent
manufacturer for possible use under its logo and brand. We cannot predict
whether or not the manufacturer will purchase our sponges and, if it does,
whether the product will succeed in the marketplace.
Sales
and Marketing
We
have
historically depended on one customer for almost all of our sales. Specifically,
in 2003, our most recent year of active operations, we sold an aggregate of
183,000 sponges to TurtleWax, which represented approximately 75% of our orders.
These sales to TurtleWax resulted in net sales of approximately $291,000 during
the year ended May 31, 2003. Our last sale to TurtleWax was in May 2003.
TurtleWax has not placed any orders with us since that time. While we remain
in
contact with TurtleWax and continue to have discussions with them, we have
not
pursued sales to TurtleWax due to our lack of proper funding. This is due to
that fact that TurtleWax orders require us to have product on an in-stock basis
so that we can immediately ship to them upon receiving orders.
In
February 2004, we inaugurated a website, www.spongetech.com, to sell our
vehicular cleaning kit directly to the public. Since inception, we have sold
approximately 1448 kits for aggregate sales price of approximately $22,845.
We
pay the website hosting company, Harbor Enterprises, an average of 20% royalty
from the sales price on all Internet sales. We have not entered into a contract
with Harbor Enterprises. Either party may terminate the relationship at any
time. We ship directly to customers.
On
July
18, 2005, we entered into an oral agreement with Lidel Fitzmaurice, Inc., a
sales group that targets sales from Virginia to Vermont with eleven sales
representatives. The sales representatives will receive seven (7%) of net sales
which they generate and will be paid on the tenth day of the month following
the
month in which the sales are made.
On
January 27, 2006 we entered into an oral agreement with Bill Perry &
Associates, a sales group with 9 sales representatives that will target their
sales efforts to Georgia, Tennessee, Alabama, Mississippi, Florida, North
Carolina, South Carolina and Virginia. The sales representatives will receive
commissions in the range of six (6%) percent to eight (8%) percent of net sales
which they generate and will be paid on the tenth day of the month following
the
month in which the sales are made.
On
February 22, 2006, we entered into an oral agreement with Creative Marketing,
a
sales group with 5 sales representatives who will target their sales efforts
to
Arizona, California and Nevada. The sales representatives will receive
commissions in the range of five (5%) percent to seven (7%) percent of net
sales
which they generate and will be paid on the tenth day of the month following
the
month in which the sales are made.
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.
We
also
market our products at trade shows. In the next twelve months our management
intends to attend the following shows: the Los Angeles Auto Show, the North
American International Auto Show, the South Carolina International Auto Show,
the West Virginia Auto Show, the Pennsylvania Auto and Boat Show, the Northeast
Auto Show, the Motor Trend International Auto Show, the Chicago Auto Show,
the
Virginia International Auto Show, the New York International Auto Show, the
Tampa Bay International Auto Show, the Charlotte International Auto Show and
the
National Hardware Show.
On
June
13, 2007 we entered into a Short Form Spot Production Agreement with Immediate
Capital Group, Inc. (“ICG”). Pursuant to the terms of the Agreement ICG has
agreed to write, produce, and manage an infomercial to promote our wash and
wax
system. In addition to producing the infomercial, ICG has agreed to set up
a
dedicated website for our product. The Agreement will remain in effect for
a
period of 24 months from the date of the last airing of the infomercial in
the
US. We paid a one time production fee of $25,000 upon execution of the
Agreement. We will also be responsible for all media costs, tape duplication
and
customization expenses associated with the airing of the infomercial. Further,
we will be responsible for certain call center costs and for fulfillment and
merchant processing fees. We have agreed to pay ICG royalties of 5% of gross
worldwide sales (less any returns or uncollectible accounts) from orders
obtained through the infomercial, the dedicated website or any other electronic
media sales made as a result of the ICG’s efforts. In addition, we agreed to pay
royalties of 5% on all retail sales (less any returns or uncollectible accounts)
for a period of twenty-four months after the infomercial ceases to air in the
US.
New
Product Development
Our
new
product development program consists principally of devising or testing new
products, improving the efficiency of existing ones, evaluating the
environmental compatibility of products and market testing. We estimate that
our
management devotes 2,000 hours to developing a product, its packaging and its
marketing campaign. We have never paid nor do we expect to ever have to pay
cash
compensation for any product development activities. We are considering the
expansion of our product lines to include household cleaning products and
personal hygiene products. Dicon produced samples for us of our children's
bath
foam sponge and household cleaning sponge. We have not yet signed an agreement
with Dicon in connection with the children's bath or household cleaning sponges,
these sponges are still in the research and development stage.
New
Marketing
The
Company will focus on its efforts on increasing its sales through the hiring
of
various sales groups and its attendance at various trade shows. The Company
also
intends to continue to promote its products through its website.
Competition
The
market for consumer products is highly competitive. We compete with
international, national and local manufacturers and distributors of soaps,
detergents, waxes, sponges, cloths and other automotive, household and bath
products. Indirectly, in the automotive product area, we compete with
drive-through car washes. Our competition, for the most part, has brand
recognition and large marketing and advertising budgets. We face major
multinational competition in our proposed household and children's bath sponges.
Although our product is unique and patented, we cannot predict its acceptance
in
any of the marketplaces for which it is designed.
We
compete on the basis of the uniqueness of our sponge, which combines efficiency
and effectiveness compared to other vehicular cleaning products. Our product
avoids the preparation and clean-up of using sponges, liquid soaps and pails
of
water. It also avoids the mess and limited storage life of traditional liquid
and paste waxes. In addition, our cleaning and wax product is much easier to
apply and does not have to be buffed. Our sponge which combines soap and wax
is
considerable cheaper than the purchase of the individual cleaning and
application products, and our cleaning product is less expensive than the cost
of a sponge and liquid detergent.
We
have
in the past sold and intend to again explore retail markets, to sell and provide
greater public exposure to our vehicular sponge product.
Government
Regulations
Our
cleaning products may be regulated by the Consumer Product Safety Commission
under authority of the Hazardous Substances Act. The Consumer Product Safety
Commission's jurisdiction covers most non-cosmetic, non-drug substances used
in
the home. The Federal agency develops voluntary standards with industry and
issues and enforces mandatory standards or bans consumer products if no feasible
standard would adequately protect the public. It conducts research on potential
product hazards and obtains the recall of products that it believes pose
potential risk for serious injury or death, or arranges for their repair.
Additionally, the Consumer Product Safety Commission informs and educates
consumers through the media, state and local governments, private organizations
and by responding to consumer inquiries on, among other things, what safety
features to look for in products. We do not believe that we are currently
subject to any other direct federal, state or local regulation except in
connection with regulations applicable to businesses generally or directly
applicable to retailing or electronic commerce.
Employees
We
currently employ five people on a part-time basis of whom three are members
of
the business and sales management team and two are staff.
Item
2. Description of Property.
Since
December 8, 2004, we have been occupying our principal offices, which consist
of
800 square feet of office space located at The Empire State Building, 350 Fifth
Avenue, Suite 2204, New York, New York 10118. The premises are leased by members
of the family of Steven Moskowitz, our Secretary and Chief Financial Officer.
Pursuant to a sublease agreement, we paid 60,000 shares of our common stock
as
consideration for the term of sublease. The sublease which covers 800 square
feet of the subleased property expires on January 31, 2008. We pay directly
for
telephone, utilities and other expenses.
Item
3. Legal Proceedings.
Except
as
described below, we are not currently a party to, nor is any of our property
currently the subject of, any pending legal proceeding. None of our directors,
officers or affiliates is involved in a proceeding adverse to our business
or
has a material interest adverse to our business.
A
lawsuit
was commenced by Westgate Financial Corporation ("Westgate") in the Superior
Court of New Jersey, Law Division, Hudson County on December 23, 2004 against
Spongetech International, Ltd, Romantic Scents, Inc, Steven Moskowitz (our
Secretary), RM Enterprises International, Ltd, and Flo Weinberg, Inc., a
wholly-owned subsidiary of RM Enterprises International. On January 6, 2003,
the
Company and Westgate entered into a factoring agreement wherein the Company
assigned to Westgate its accounts receivable arising out of its sale of goods
or
rendition of services to customers (the "Contract"). Westgate asserted a breach
of that contract against the Company and sought damages of $11,049.82 with
interest accrued thereon, costs and reasonable attorney's fees. The Company
counterclaimed alleging breach of contract and sought damages in an amount
not
less than $13,006.0. On July 25, 2006 the parties entered into a Consent Order
pursuant to which the Plaintiffs agreed to pay the sum of $20,000 to Westgate
in
full satisfaction of all claims against the Defendants.
Item
4. Submission of Matters to a Vote of Security Holders.
On
February 27, 2007, the shareholders owning 2/3 of the issued and outstanding
stock of the Company approved by written consent: (A) the filing of Amended
and
Restated Certificate of Incorporation of the Company, (B) the appointment of
Drakeford & Drakeford, LLC as the Company’s independent registered public
accountants for the year ended March 31, 2007 and (D) the adoption of the
Spongetech Delivery Systems, Inc. 2007 Incentive Stock Plan.
Item
5. Market for Common Equity and Related Stockholder
Matters.
Beginning
in December 2006, our common stock is quoted on the OTC Bulletin Board under
the
symbol “SPNG.” For the periods indicated, the following table sets forth the
high and low bid prices per share of common stock. These prices represent
inter-dealer quotations without retail markup, markdown, or commission and
may
not necessarily represent actual transactions.
| |
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Fiscal
2008
|
|
Fiscal
2007
|
|
|
Quarter
Ended
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
August
31(1)
|
|
$
|
0.17
|
|
$
|
0.035
|
|
|
-
|
|
|
-
|
|
|
November
30
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
February
28
|
|
|
-
|
|
|
-
|
|
$
|
0.25
|
|
$
|
0.10
|
|
|
May
31
|
|
|
-
|
|
|
-
|
|
$
|
0.25
|
|
$
|
0.10
|
|
(i)
Through August 28, 2007
Holders
As
of
August 28, 2007, there were 46,842,406 shares of our common stock issued and
outstanding and approximately 193 stockholders of record of our common
stock.
Dividends
Historically,
we have not declared or paid any cash dividends on our common stock. Any future
determination to pay dividends on our common stock will depend upon our results
of operations, financial condition and capital requirements, applicable
restrictions under any contractual arrangements and such other factors deemed
relevant by the our Board of Directors. There are no restrictions in our
articles of incorporation or bylaws that restrict us from declaring dividends.
The Nevada Revised Statutes, however, do prohibit us from declaring dividends
where, after giving effect to the distribution of the dividend:
(1)
we
would not be able to pay our debts as they become due in the usual course of
business; or
(2)
our
total assets would be less that the sum of our total liabilities.
Recent
Sales of Unregistered Securities
In
May
2007, we issued 93,000 shares to our Chief Financial Officer in consideration
for advances made in the aggregate amount of $18,600.
In
May
2007, we issued an aggregate of 9,539,770 shares of our common stock in
consideration for advances of an aggregate of $989,354 by RM Enterprises
International, Inc.
The
foregoing were issued in reliance on an exemption from Registration under
Section 4(2) of The Securities Act of 1933, as amended.
Item
6. Management's Discussion and Analysis or Plan of
Operation.
Forward-Looking
Statements
This
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, 2007. 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 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 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, pet and home cleaning use.
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. In addition, Dicon has closed its
manufacturing operations. Dicon has advised us that it may continue to
manufacture our products by outsourcing the production to its partners in the
US
and China. Currently, Dicon’s partners are manufacturing our products. However,
we have not entered into an agreement with Dicon or its partners for the
manufacture of 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.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The critical accounting policies that affect our more significant
estimates and assumptions used in the preparation of our financial statements
are reviewed and any required adjustments are recorded on a monthly
basis.
Results
of Operations
Fiscal
Years Ended May 31, 2006 and 2005
We
had
sales of $55,112 for the fiscal year ended May 31, 2007 as compared to $12,859
for the fiscal year ended May 31, 2006, an increase of $42,253. Management
attributes this increase to the Company’s improved marketing campaign, including
sales from its website.
We
have
an open purchase orders in the amount of $5,472,180 which will be shipped in
June 2008. We have historically depended on one customer for almost all of
our
sales. Specifically, in 2003, our most recent year of active operations, we
sold
an aggregate of 183,000 sponges to TurtleWax, which represented approximately
75% of our orders. These sales to TurtleWax resulted in net sales of
approximately $291,000 during the year ended May 31, 2003. Our last sale to
TurtleWax was in May 2003. While we remain in contact with TurtleWax and
continue to have discussions with them, we have not pursued sales to TurtleWax
due to our lack of proper funding. Without sufficient funds, we are unable
to
satisfy TurtleWax's requirement to have product on an in-stock basis so that
we
can immediately ship to them upon receiving orders.
Cost
of
goods sold was $38,898 or 70% of sales for the fiscal year ended May 31, 2007
as
compared to $4,320 or 34% of net sales for the fiscal year ended May 31,
2006.
Operating
expenses for the fiscal year ended May 31, 2007 increased to $833,431 from
$110,303 for the fiscal year ended May 31, 2006. This increase of $723,128
was a
result of an increase in general and administrative expenses. Selling expenses
for the fiscal year ended May 31, 2007 was $829,147.
Net
loss
for the fiscal year ended May 31, 2007 was $817,217 as compared to net loss
of
$101,764 for the fiscal year ended May 31, 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, 2007 and
2006, we had sales of $55,112 and $12,859 respectively. The main reason for
the
increase is our improved marketing campaign, including sales from our website.
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. Dicon has advised us that it may continue to
manufacture our products by outsourcing the production to its partners in the
US
and China. Currently, Dicon’s partners have been manufacturing our products.
However, we have not entered into an agreement with Dicon or its partners for
the manufacture of 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 Cleanlink1,
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.
______________________
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
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 Storage
Post
in Long Island City, New York. Our current monthly payment is $267. This
facility has the capacity to store up to 10,000,000 kits.
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 May
31, 2007, we had cash of $387 as compared to $2,805 at May 31, 2006. Our current
cash balance as of August 28, 2007 is approximately $2,510. As of May 31, 2007,
net cash used by operating activities aggregated $59,225. Based upon our current
cash reserves and forecasted operations, we believe that we will need to obtain
at least $500,000 in outside funding to implement our plan of operation over
the
next twelve months. Based on our current cash balance, management believes
that
we can satisfy our cash requirements for the next three months. Our officers,
directors and affiliates have indicated their preparedness to fund our business
until we are able to generate sufficient sales to fund our operations. However,
there are no formal or written agreements with respect to the advance of funds
to the Company by our officers, directors and affiliates for payment of said
costs. Accordingly, our officers, directors and other affiliates are not legally
bound to provide funding to us. Because of our limited operations, if our
officers and directors do not pay for our expenses, we will be forced to obtain
funding. We currently do not have any arrangements to obtain additional
financing from other sources. In view of our limited operating history, our
ability to obtain additional funds is limited. Additional financing may only
be
available, if at all, upon terms which may not be commercially advantageous
to
us.
The
working capital (deficiency) at May 31, 2007 was $268,498 as compared to a
working capital (deficiency) of $153,707 at May 31, 2006. These factors create
substantial doubt about our ability to continue as a going concern. The recovery
of assets and the continuation of future operations are dependent upon our
ability to obtain additional debt or equity financing and our ability to
generate revenues sufficient to continue pursuing our business
purpose.
RISK
FACTORS
Our
business involves a high degree of risk. Any of the following risks could
materially and adversely affect our business, financial condition, and results
of operations. This could cause the trading price of our common stock to
decline, with the loss of part or all of an investment in our common
stock.
Risks
relating to our Business
WE
HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION WHICH MAY CONTINUE. IF WE CONTINUE
TO EXPERIENCE LOSSES, WE WILL BE UNABLE TO FUND ANY OF OUR SALES AND MARKETING
AND RESEARCH AND DEVELOPMENT ACTIVITIES. AS A RESULT WE MAY BE FORCED TO CEASE
OUR OPERATIONS WHICH WOULD CAUSE INVESTORS TO LOSE THEIR ENTIRE
INVESTMENT.
We
incurred net losses of $817,217 and $101,764 for the years ended May 31, 2006
and 2007, respectively. As of May 31, 2007 we have a working capital deficit
of
$268,498. Because of these conditions, we will require additional working
capital to develop our business operations. We have not achieved profitability
and we can give no assurances that we will achieve profitability within the
foreseeable future, as we fund operating and capital expenditures, in such
areas
as sales and marketing and research and development. We cannot assure investors
that we will ever achieve or sustain profitability or that our operating losses
will not increase in the future. If we continue to incur losses, we will not
be
able to fund any of our sales and marketing and research and development
activities, and we may be forced to cease our operations. If we are forced
to
cease operations, investors will lose the entire amount of their
investment.
WE
HAVE A LIMITED OPERATING HISTORY AND MAY NOT GENERATE ENOUGH REVENUES TO STAY
IN
BUSINESS.
We
were
organized in July 1999 and have had limited operations since our inception
from
which to evaluate our business and prospects. There can be no assurance that
our
future proposed operations will be implemented successfully or that we will
ever
have profits. Our limited financial resources are significantly less than those
of other companies, which can develop alternatives to our current and pending
product lines in the U.S. If we are unable to sustain our operations, you may
lose your entire investment. We face all the risks inherent in a new business,
including the expenses, difficulties, complications and delays frequently
encountered in connection with conducting operations, including capital
requirements and management's potential underestimation of initial and ongoing
costs. In evaluating our business and prospects, these difficulties should
be
considered. If we are unable to achieve profitability we will be forced to
curtail our operations and go out of business.
WE
NEED SIGNIFICANT INFUSIONS OF ADDITIONAL CAPITAL, WHICH MAY RESULT IN DILUTION
TO YOUR OWNERSHIP AND VOTING RIGHTS IN US.
Based
upon our current cash reserves and forecasted operations, we believe that we
will need to obtain at least $500,000 in outside funding to implement our plan
of operation over the next twelve months. Our need for additional capital to
finance our business strategy, operations, and growth will be greater should,
among other things, revenue or expense estimates prove to be incorrect. If
we
fail to arrange for sufficient capital in the future, we may be required to
reduce the scope of our business activities in the areas of marketing and
research and development until we can obtain adequate financing. We may not
be
able to obtain additional financing in sufficient amounts or on acceptable
terms
when needed, which could adversely affect our operating results and prospects
and force us to curtail our business operations. Debt financing must be repaid
regardless of whether or not we generate profits or cash flows from our business
activities. Equity financing may result in dilution to existing stockholders
and
may involve securities that have rights, preferences, or privileges that are
senior to our common stock. If we do not receive funding at lower prices, this
will have a dilutive effect on the value of our securities issued at higher
prices. Further, the sale, or potential sale of large amounts of our securities
will, in all likelihood, have a depressive effect on the price of our securities
which will affect the value of your investment.
OUR
INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE
FINANCING AND WHICH MAY FORCE US TO CEASE OPERATIONS.
In
their
report dated August 28, 2007, our independent auditors stated that our financial
statements for the year ended May 31, 2007 were prepared assuming that we would
continue as a going concern. Our ability to continue as a going concern is
an
issue raised as a result of recurring losses from operations and cash flow
deficiencies since our inception. We continue to experience net losses. Our
ability to continue as a going concern is subject to our ability to generate
revenues sufficient to continue pursuing our business purposes and obtain
additional debt or equity financing from outside sources, including obtaining
additional funding from the sale of our securities, increasing sales or
obtaining loans and grants from various financial institutions where possible.
If we are unable to continue as a going concern, you may lose your entire
investment.
WE
DEPEND ON PRODUCTS MADE USING ONE TECHNOLOGY; AND PRODUCTS USING DIFFERENT
TECHNOLOGIES MAY ATTRACT CUSTOMERS JEOPARDIZING OUR BUSINESS
PROSPECTS.
Our
cleaning products depend on the use of licensed technology relating to sponges
incorporating a hydrophilic (liquid absorbing) polyurethane matrix. A number
of
factors could limit our sales of these products, or the profitability of such
sales, including competitive efforts by other manufacturers of similar products,
shifts in consumer preferences or the introduction and acceptance of alternative
product offerings. We have not developed products using other technologies;
and,
thus, if our existing products or others based on the same technology fail
in
the marketplace, we may be forced to cease all operations.
THROUGHOUT
OUR SALES HISTORY, WE HAVE DEPENDED ON ONE CUSTOMER FOR ALMOST ALL OF OUR SALES.
IF THAT CUSTOMER DOES NOT GIVE US REPEAT ORDERS, WE WILL NOT BE ABLE TO CONTINUE
IN BUSINESS.
We
have
historically depended on one customer for almost all of our sales. Specifically,
in 2003, our most recent year of active operations, we sold an aggregate of
approximately 153,000 sponges to TurtleWax, which represented approximately
75%
of our orders. These sales to TurtleWax resulted in net sales of approximately
$291,000 during the year ended May 31, 2003. Our last sale to TurtleWax was
in
May 2003. TurtleWax has not placed any orders with us since that time. While
we
remain in contact with TurtleWax and continue to have discussions with them,
we
have not pursued sales to TurtleWax due to our lack of proper funding. This
is
due to that fact that TurtleWax orders require us to have product on an in-stock
basis so that we can immediately ship to them upon receiving orders. We are
currently exploring ways to market our automobile cleanser and wax product,
children's bath and home cleaning products through various marketing channels.
If we are unable to expand our client and sales base, we may have no existing
business or prospects for new business and our business could fail.
WE
DEPEND ON THE EFFORTS OF INDEPENDENT SALES PERSONS TO GENERATE SALES OF OUR
PRODUCTS.
We
do not
have a sales staff devoted to generating sales of our products. Instead, we
rely
on the efforts of independent sales groups, who are retained on a non-exclusive
basis. These independent sales persons may not devote a significant amount
of
time to promoting our products or may focus their efforts on other products
which may result in them receiving a bigger sales commission. We have no control
over these sales persons. If these sales persons are not able to generate
significant sales for our products, we will be forced to curtail our operations
and go out of business.
THE
MARKETPLACE MAY BE INDIFFERENT TO OUR PRODUCTS; IN WHICH CASE OUR BUSINESS
WILL
FAIL.
Our
hydrophilic sponges, and products based on them, feature an internal structure
which holds detergents and waxes which are released only when squeezed. However,
potential users may be satisfied with the cleaners, waxes and applicators they
are presently using. Thus, we may expend our financial and personnel resources
on design, marketing and advertising without generating concomitant revenues.
If
we cannot generate sufficient revenues to cover our overhead, manufacturing
and
operating costs, our business will fail.
COMPLIANCE
WITH GOVERNMENTAL REGULATIONS AND IMPLEMENTATION OF ANY LAW OR CONSTRUCTION
OF
ANY CURRENT LAW WHICH HAS THE EFFECT OF MAKING IT MORE COSTLY TO PRODUCE OUR
PRODUCTS MAY DETRIMENTALLY AFFECT OUR ABILITY TO PRODUCE AND SELL OUR PRODUCTS
WHICH WILL CAUSE US TO CURTAIL OUR OPERATIONS AND CEASE OUR
BUSINESS.
Our
cleaning products may be regulated by the Consumer Product Safety Commission
under authority of the Hazardous Substances Act. The Consumer Product Safety
Commission's jurisdiction covers most non-cosmetic, non-drug substances used
in
the home. The Federal agency develops voluntary standards with industry and
issues and enforces mandatory standards or bans consumer products if no feasible
standard would adequately protect the public. It conducts research on potential
product hazards and obtains the recall of products that it believes pose
potential risk for serious injury or death, or arranges for their repair.
Additionally, the Consumer Product Safety Commission informs and educates
consumers through the media, state and local governments, private organizations
and by responding to consumer inquiries on, among other things, what safety
features to look for in products. We do not believe that we are currently
subject to any other direct federal, state or local regulation except in
connection with regulations applicable to businesses generally or directly
applicable to retailing or electronic commerce. However, from time to time
in
the future, Congress, the FDA or any other federal, state, local or foreign
legislative and regulatory authorities may impose additional laws or regulations
that apply to us, repeal laws or regulations that we consider favorable to
us or
impose more stringent interpretations of current laws or regulations. If these
agencies determine to implement any law, or construe any current law in such
a
way which will make it more costly to produce our products, we may be forced
to
reduce our business and cease operations. In addition, if any of these agencies
determine that there is no feasible way to adequately protect the public from
any of our products, we will immediately be forced to curtail our business.
Any
such developments could detrimentally affect our ability to sell our products
and become profitable and cause our business to fail.
IF
WE FAIL TO PAY OUR FRANCHISE TAXES AND TO TIMELY FILE A RENEWAL AND REVIVAL
AND
ANOTHER CORPORATION SHALL ADOPT A NAME THAT IS SIMILAR AND/OR INDISTINGUISHABLE
FROM OUR NAME, WE COULD LOSE THE RIGHT TO USE OUR NAME AND WILL BE REQUIRED
TO
SEEK A RENEWAL AND REVIVAL OF OUR CERTIFICATE OF INCORPORATION UNDER ANOTHER
NAME.
On
March
1, 2004, our Certificate of Incorporation was voided by the State of Delaware
for non-payment of franchise taxes in the amount of $114.40, including interest,
fees and penalties for 2002 and $164.49, including taxes, fees and penalties
for
2003, which outstanding amounts were paid on June 27, 2005. Our Certificate
of
Incorporation was renewed and revived, effective February 29 2004. The revival
has the effect of validating all actions taken by our officers and directors
pursuant to the Certificate of Incorporation during the period when we were
voided. If we fail to pay our franchise taxes and to timely file a renewal
and
revival and another corporation shall adopt a name that is similar and/or
indistinguishable from our name, we could lose the right to use our name and
will be required to seek a renewal and revival of our Certificate of
Incorporation under another name. This could result in the loss of any good
will
and recognition which has been established with respect to our
name.
OUR
OFFICERS AND DIRECTORS ARE INVOLVED IN OTHER BUSINESSES WHICH MAY CAUSE THEM
TO
DEVOTE LESS TIME TO OUR BUSINESS.
Michael
Metter, our President and Chief Executive Officer, serves a director and officer
for other companies. In addition to serving as our President and Chief Executive
Officer, Mr. Metter also serves as the President and Chief Executive Officer
of
BusinessTalk Radio.net, Chairman of Tiburon Capital Group, a privately held
holding corporation and Vice-President of ERC Corp., a privately-held marketing
consultant. Mr. Metter devotes 10 hours each week, constituting 20% of his
time,
to our business. Mr. Moskowitz, our Chief Financial Officer and Secretary,
also
serves as a director and officer for other companies. Mr. Moskowitz also serves
as the CEO and President of Azuel, Ltd, a publicly traded entity and Vice
President of ERC Corp., a privately-held marketing consultant. Mr. Moskowitz
devotes 40 hours each week, constituting 75% of his time, to our business.
Mr.
Lazaukas, one of our directors, serves also as President of FJL Enterprises,
Inc. and TNJ Enterprises, Inc., which own and operate eight Dominos Pizza
Stores. Our officers' and directors' involvement with other businesses may
cause
them to allocate their time and services between us and other entities.
Consequently, they may give priority to other matters over our needs which
may
materially cause us to lose their services temporarily which could affect our
operations and profitability.
OUR
CHIEF FINANCIAL OFFICER AND SECRETARY, STEVEN MOSKOWITZ, SERVES AS PRESIDENT
AND
CEO OF AZUREL, LTD. A PUBLICLY TRADED ENTITY THAT BECAME DELINQUENT IN ITS
FILING OBLIGATIONS. IN ADDITION, CERTAIN OF OUR OTHER OFFICERS AND DIRECTORS
WERE PREVIOUSLY AFFILIATED WITH AZUREL, LTD.
Michael
Metter, our President and a director and Frank Lauzaskas, one of our directors,
were previously executive officers and directors of Azurel Ltd., a publicly
traded entity. Steven Moskowitz, our Chief Financial Officer, Secretary and
director serves also as President and CEO of Azurel. Azurel is delinquent in
its
reporting requirements with the SEC in that it has failed to file any of its
required quarterly and annual reports since the filing of its Annual Report
on
Form 10-KSB for the year ended December 31, 2002. On January 31, 2006, Azurel
terminated its obligation to file reports by filing a Form 15 with the
Securities and Exchange Commission. If we were to become delinquent in our
filing obligations under the federal securities laws, the Securities and
Exchange Commission may halt trading in the Company's securities which would
strongly reduce the value of the securities offered hereby.
Risks
Related to Our Common Stock
THERE
IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK. FAILURE TO DEVELOP OR MAINTAIN
A TRADING MARKET COULD NEGATIVELY AFFECT THE VALUE OF OUR SHARES AND MAKE IT
DIFFICULT OR IMPOSSIBLE FOR SHAREHOLDERS TO SELL THEIR SHARES.
In
December, 2006, our common stock was approved for quotation on the OTC Bulletin
Board under the symbol "SPNG." To date there is a limited trading market in
our
common stock on the OTC Bulletin Board. Failure to develop or maintain an active
trading market could negatively affect the value of our shares and make it
difficult for our shareholders to sell their shares or recover any part of
their
investment in us. The market price of our common stock may be highly volatile.
In addition to the uncertainties relating to our future operating performance
and the profitability of our operations, factors such as variations in our
interim financial results, or various, as yet unpredictable factors, many of
which are beyond our control, may have a negative effect on the market price
of
our common stock.
OUR
CONTROLLING SHAREHOLDERS MAY EXERCISE SIGNIFICANT CONTROL OVER US DEPRIVING
OTHER STOCKHOLDERS OF THE ABILITY TO ELECT DIRECTORS OR EFFECT OTHER CORPORATE
ACTIONS, AND INVESTORS MAY NOT HAVE A VOICE IN OUR
MANAGEMENT.
Our
directors, executive officers and principal shareholders beneficially owned
approximately 52.34%
of the
outstanding shares of our common stock. Our shareholders do not have cumulative
voting rights with respect to the election of directors. If our principal
shareholders vote together, they could effectively elect all of our
directors.
OUR
COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE TRADING
MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR COMMON
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The
Securities and Exchange Commission has adopted Rule 3a51-1 which establishes
the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions.
For
any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:
-
that a
broker or dealer approve a person's account for transactions in penny stocks;
and
-
the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be
purchased.
In
order
to approve a person's account for transactions in penny stocks, the broker
or
dealer must:
-
obtain
financial information and investment experience objectives of the person; and
-
make a
reasonable determination that the transactions in penny stocks are suitable
for
that person and the person has sufficient knowledge and experience in financial
matters to be capable of evaluating the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
-
sets
forth the basis on which the broker or dealer made the suitability
determination; and
-
that
the broker or dealer received a signed, written agreement from the investor
prior to the transaction.
Generally,
brokers may be less willing to execute transactions in securities subject to
the
"penny stock" rules. This may make it more difficult for investors to dispose
of
our common stock and cause a decline in the market value of our stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both
the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account
and
information on the limited market in penny stocks.
Item
7. Financial Statements.
All
financial information required by this Item is attached hereto at the end of
this report.
Item
8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure.
Item
8A. Controls and Procedures.
a)
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As of the date of this report,
the Company's management carried out an evaluation, under the supervision of
the
Company's Chief Executive Officer and the Chief Financial Officer of the
effectiveness of our disclosure controls and procedures pursuant to the
Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange
Act). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer 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 were no changes in internal controls or
in
other factors that could affect these controls during the period covered by
this
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Item
8B. Other Information.
Item
9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With
Section 16(a) of the Exchange Act.
The
following table sets forth certain information regarding our current Executive
Officers, Directors and Key Employees:
|
Name
|
Age
|
Position
|
Since
|
|
Michael
Metter*
|
55
|
President,
|
|
| |
|
Chief
Executive Officer,
|
|
| |
|
Director
|
5/2001
|
| |
|
|
|
|
Steven
Moskowitz*
|
43
|
Secretary,
Treasurer
|
|
| |
|
Chief
Financial Officer
|
|
| |
|
|
6/1999
|
| |
|
|
|
|
Frank
Lazauskas
|
47
|
Director
|
7/2001
|
*
Michael
Metter and Steven Moskowitz are promoters of Spongetech. In addition, RM
Enterprises International, Jerome Schlanger and Michael Sorrentino were our
promoters.
Background
of Officers and Directors
Michael
Metter
has been
President, Chief Executive Officer and a Director since May 2001. Mr. Metter
has
served as President of RM Enterprises International, Inc., our majority
stockholder, since April, 2001, and as its Chief Executive Officer since March
2, 2004. He has been a director of Western Power and Equipment Corp. (OTCBB)
since February 2003. Since June 2002, Mr. Metter has served as President and
Chief Executive Officer of BusinessTalkRadio.net, a syndicated radio network
based in Greenwich, Connecticut. Since June 2003, he has been chairman of the
board of Tiburon Capital Group and DL Investments, Inc. both of which are
privately held holding investment corporations. He has served since May 2000
as
Vice-President ERC Corp., a privately held marketing consultant. He was
compliance director of Security Capital Trading, Inc., a securities
broker-dealer, from October 1998 to February 2001. Mr Metter was also a
principal at Madison Capital from September 1997 to October 1998. On April
19,
2001, Mr. Metter filed a petition in personal bankruptcy in the District of
Connecticut, Bridgeport Division, and was discharged on December 14, 2001.
Mr.
Metter received his MBA in Finance in 1975 and his B.A. in Marketing and
Accounting in 1973 from Adelphi University.
Steven
Moskowitz
has been
Secretary, Treasurer and a Director since June 1999. In February 2006, Mr.
Moskowitz was appointed to serve as our Chief Financial Officer. Mr. Moskowitz
has served as a director of RM Enterprises International, Inc. since April
2001,
and as its Secretary since March 2, 2004. He has been a director of Western
Power and Equipment Corp. (OTCBB) since February 11, 2003. Since June 2003,
he
has been director of Tiburon Capital Group, a privately held holding
corporation, and since May 2000, he has served as Vice President of ERC Corp.,
a
privately-held marketing consultant. He served as Vice President, Marketing
and
Business Development for H. W. Carter & Sons, a distributor of children's
clothing, from 1987 to 2002. He was President of the H. W. Carter & Sons
division of Evolutions, Inc. from 1996 to 1997. Mr. Moskowitz served in various
capacities at Smart Style Industries, a manufacturer and distributor of
children's apparel, from 1986 to 1987 from sales assistant to Vice President
Sales and Marketing. Mr. Moskowitz also serves as a Director of National Stem
Cell, Inc. (NHGI.PK) since January 2007. He received his B.S. in Management
from
Touro College in 1986.
Frank
Lazauskas
has been
a Director since July 2001. Mr. Lazauskas is the founder and President of FJL
Enterprises, Inc. and TNJ Enterprises, Inc., formed in 1999 and 1997,
respectively, which own and operate eight Dominos Pizza Stores. He was elected
a
director of RM Enterprises International, Inc., our majority stockholder, in
March 2004. He received his B.A. in Mathematics from Central Connecticut State
University in 1983.
Pursuant
to our bylaws, our directors are elected at our annual meeting of stockholders
and each director holds office until his successor is elected and qualified.
Officers are elected by our Board of Directors and hold office until an
officer's successor has been duly appointed and qualified unless an officer
sooner dies, resigns or is removed by the Board. There are no family
relationships among any of our directors and executive officers.
Director
Compensation
Our
directors do not receive cash compensation for their services as directors
but
are reimbursed for their reasonable expenses for attending board and board
committee meetings.
Committee
of the Board of Directors
We
have
an audit committee composed of Frank Lazauskas.
Code
of Ethics
We
have
adopted our Code of Ethics and Business Conduct for Officers, Directors and
Employees that applies to all of our executive officers and directors. Upon
request, we will provide to any person without charge a copy of our Code of
Ethics. Any such request should be made to the Company, The Empire State
Building, 350 Fifth Avenue, Suite 2204, New York, New York 10118, Attention:
Steven Moskowitz. A copy of our Code of Ethics is also attached to this
Item
10. Executive Compensation.
The
following table sets forth information concerning the total compensation that
we
have paid or that has accrued on behalf of our chief executive officer and
other
executive officers with annual compensation exceeding $100,000 during the years
ended May 31, 2007 and 2006.
|
Name
and
Principal
Position
|
|
Year
|
|
Salary
($) (1)
|
|
Bonus
($)
|
|
Stock
Awards ($)
|
|
Option
Awards ($)
|
|
Non-Equity
Incentive Plan Compensation ($)
|
|
Change
in Pension Value and Non-Qualified Deferred Compensation Earnings
($)
|
|
All
Other Compensation ($)
|
|
Total
($)
|
|
|
Michael
Metter
|
|
|
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Chief
Executive Officer
|
|
|
2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
and
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
Moskowitz
|
|
|
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Chief
Financial Officer
|
|
|
2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
Equity Awards at Fiscal Year-End Table.
No
options awards or stock awards were made to the named executive officers during
fiscal year ended May 31, 2007.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table shows information with respect to each equity compensation
plan
under which our common stock is authorized for issuance as of the fiscal year
ended May 31, 2007.
EQUITY
COMPENSATION PLAN INFORMATION
|
Plan
category
|
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
|
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for future issuance under equity compensation plans (excluding
securities reflected in column (a)
|
| |
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
-0-
|
-0-
|
7,500,000
|
| |
|
|
|
|
Equity
compensation plans not approved by security
holders
|
-0-
|
-0-
|
-0-
|
| |
|
|
|
|
Total
|
-0-
|
-0-
|
7,500,000
|
Item
11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
following table sets forth certain information, as of May 31, 2007, with respect
to the beneficial ownership of the outstanding common stock by (i) any holder
of
more than five (5%) percent; (ii) each of our executive officers and directors;
and (iii) our directors and executive officers as a group. Except as otherwise
indicated, each of the stockholders listed below has sole voting and investment
power over the shares beneficially owned.
|
Name
of Beneficial Owners
|
|
Common
Stock
Beneficially
Owned (1)(2)
|
|
Percentage
of
Common
Stock (1)(2)
|
|
|
RM
Enterprises International, Inc. (3)
|
|
|
908,000
|
|
|
1.94
|
%
|
|
c/o
Spongetech Delivery Systems
|
|
|
|
|
|
|
|
|
The
Empire State Building
|
|
|
|
|
|
|
|
|
New
York, New York 10118
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
The
Rubin Family Irrevocable Stock Trust
(4)
|
|
|
|
|
|
|
|
|
25
Highland Boulevard
|
|
|
|
|
|
|
|
|
Dix
Hills, New York 11746
|
|
|
7,377,667
|
|
|
15.75
|
%
|
| |
|
|
|
|
|
|
|
|
Michael
Metter (3)(5)
|
|
|
|
|
|
|
|
|
One
Tinker Lane
|
|
|
|
|
|
|
|
|
Greenwich,
CT 05830
|
|
|
7,311,000
|
|
|
15.61
|
%
|
| |
|
|
|
|
|
|
|
|
Steven
Moskowitz (3)(6)
|
|
|
|
|
|
|
|
|
c/o
Spongetech Delivery Systems
|
|
|
|
|
|
|
|
|
The
Empire State Building
|
|
|
|
|
|
|
|
|
New
York, New York 10118
|
|
|
6,134,333
|
|
|
13.09
|
%
|
| |
|
|
|
|
|
|
|
|
Frank
Lazaukas (3)
|
|
|
|
|
|
|
|
|
51
Niagara Street
|
|
|
|
|
|
|
|
|
Newark,
New Jersey 07105
|
|
|
5,576,002
|
|
|
11.90
|
%
|
| |
|
|
|
|
|
|
|
|
All
named executive officers and
directors as a group (3
persons )
|
|
|
6,931,660
|
|
|
7.9
|
%
|
| |
|
|
17,205,335
|
|
|
36.73
|
%
|
(1)
Beneficial ownership is determined in accordance with the rules of the SEC
and
generally includes voting or investment power with respect to securities. Unless
otherwise indicated below, the persons and entity named in the table have sole
voting and sole investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. Under rules adopted by
the
SEC, shares of common stock issuable pursuant to warrants or options or upon
conversion of convertible securities, to the extent such warrants or options
or
convertible securities are currently exercisable or convertible within 60 days
of the date of August 28, 2007, are treated as outstanding for computing the
percentage of the person holding such securities but are not treated as
outstanding for computing the percentage of any other person.
(2)
The
percentage of beneficial ownership is based on 46,842,406 shares of our common
stock outstanding as of the date of the prospectus.
(3)
Includes 640,000 shares of our common stock owned by Flo Weinberg, Inc., a
wholly-owned subsidiary of RM Enterprises International. The control persons
of
RM Enterprises International are Michael Metter, Steven Moskowitz and Frank
Lazauskas, all of whom are directors of RM Enterprises
International.
(4)
Includes 466,667 shares of common stock owned by American United Global, Inc.,
of which The Rubin Family Irrevocable Stock is a majority stockholder. The
trustees of The Rubin Family Irrevocable Stock Trust are Majorie Rubin and
Robert Shulman, CPA. The beneficiaries of The Rubin Family Irrevocable Stock
Trust are Linda Rubin, Andrew Rubin and Lisa Rubin.
(5)
Includes 1,665,000 shares of our common stock beneficially owned by Deborah
Metter, Michael Metter's wife, through D.L. Investments, Inc. Mr. Metter
disclaims beneficial ownership of these shares.
(6)
Includes 4,681,333 shares of our common stock held by the Steven and Mindy
Moskowitz Trust.
Item
12. Certain Relationships and Related Transactions.
We
were
incorporated in New York State on July 18, 1999 as Romantic Scents, Inc. by
RM
Enterprises International, Inc. which was issued 5,000 shares representing
all
our issued and outstanding capital stock in consideration of forming our
company. We received advances from RM Enterprises International in the aggregate
amount of $113,414. These advances were paid back to RM Enterprises
International on an interest-free basis through the conversion of debt into
common stock. RM Enterprises International, Inc. may be considered a promoter.
Michael Metter, our President, and Steven Moskowitz, our Secretary, may also
be
considered our promoters. Jerome Schlanger and Michael Sorrentino were former
presidents of us and may be considered promoters. Aside from the shares of
our
common stock which it received in connection with our formation, RM Enterprises
International has received no additional consideration from us for its
activities related to our formation or business.
The
control persons and beneficial owners of RM Enterprises International are
Michael Metter, Steven Moskowitz and Frank Lazauskas, all of whom are directors
of RM Enterprises International.Jerome Schlanger was Treasurer and a director
of
RM Enterprises until his resignation as of March 3, 2004. On July 15, 2002,
under the name of RSI Enterprises, we entered into a stock exchange agreement
with Nexgen Acquisitions under which we became a wholly-owned subsidiary. Our
then sole stockholder, RM Enterprises, received 12,000,000 shares of the common
stock of Nexgen Acquisitions VIII and became its majority stockholder. Guy
Cohen, as the owner of Nexgen Holdings, Inc., the parent of Nexgen Acquisitions
was the promoter of Nexgen Acquisitions; and he received no additional
consideration from us for his activities. Mr. Cohen, on November 22, 2004,
transferred his interest in Nexgen Holdings to The Rubin Family Irrevocable
Stock Trust.
In
September, 2002, the majority stockholder of Nexgen Acquisitions VIII
transferred 2,000,000 shares to The Rubin Family Irrevocable Stock Trust, a
stockholder but not a control person of RM Enterprises, 300,000 shares to Eugene
Dworkis, 200,000 shares to Maurice Harroch and 500,000 shares to Falcon Crest
Capital, Inc.
Michael
Sorrentino, a former employee, loaned us $25,000 on February 21, 2001 payable
on
demand. We had been accruing interest at the rate of 10% per annum. Between
June
1, 2000 to May 31, 2001, RM Enterprises International, Inc., our majority
stockholder, loaned us during the fiscal year ended May 31, 2001, an aggregate
of $51,930. The loan did not bear interest, and the maturity date was extended
to December 31, 2004. From November, 2002 through November 30, 2003, RM
Enterprises International loaned us an aggregate of $73,600, payable on demand.
The loan which was now due December 31, 2004 did not bear interest. We used
these funds to pay rent in the amount of $15,000, telephone costs in the amount
of $7,500 and other administrative expenses relating to our occupancy of our
headquarters premises of $51,100. All of these loans were converted into shares
of our common stock.
In
January 2003, we paid $24,500 to a company owned by Deborah Metter, the wife
of
Michael Metter, our President, for marketing and promotional services in
connection with the preparation of an infomercial for the vehicular sponge,
including the use of her home. In 2003 and the first half of 2004, we marketed
our products on a radio talk show aired by BusinessTalkRadio.net, a syndicated
radio network of which Mr. Metter is President and CEO. BusinessTalkRadio.net
received a $1.00 commission on each item sold. We paid BusinessTalkRadio.net
an
aggregate of $300 during that time but currently do not advertise on the
program.
From
our
inception in July 1999 until March 2, 2004, we occupied office and warehouse
space in premises in an industrial building leased by RM Enterprises
International. We paid RM Enterprises International an aggregate of $15,000
for
rent, $7,500 for telephone costs and $51,600 for administrative costs. From
March 3, 2004 through December 15, 2004, we occupied office space rent-free
in
an office tower that was leased by the family of Steven Moskowitz. We currently
sublease office space from A&N Enterprises LLC, which is leased by the
family of Steven Moskowitz. We issued 60,000 shares of common stock to A&N
Enterprises as consideration for our use of the premises.
In
January 2005, we issued 3,330,000 shares of our common stock to Michael. L.
Metter, our President and Chief Executive Officer, as compensation for managing
our day-to-day operations, introducing us to business, sales, contractual and
fundraising opportunities and evaluating potential acquisition candidates on
our
behalf valued at $499,500.
In
January 2005, we issued 3,270,000 shares of our common stock, valued at to
Steven Moskowitz, our Secretary, as compensation for managing our day-to-day
operations, introducing us to business, sales, contractual and fundraising
opportunities and evaluating potential acquisition candidates on our behalf
valued at $490,500.
In
January 2005, we issued 100,000 shares of our common stock to Thomas Monahan,
our former Chief Financial Officer, as compensation for managing our financial
operations valued at $15,000.
In
January 2005, we issued 3,330,000 shares of our common stock to Frank Lazauskas,
a director of the Company, as compensation for managing our day-to-day
operations, introducing us to business, sales, contractual and fundraising
opportunities and evaluating potential acquisition candidates on our behalf
at
$499,500.
In
January 2005, we issued 2,000,000 shares of our common stock to the Rubin Family
Irrevocable Stock Trust as directed by Robert Rubin, as compensation for
introducing us to business, sales and contractual opportunities and assisting
us
with the review and evaluation of fundraising activities and potential
acquisition candidates, valued at $300,000.
In
January 2005, we issued 533,333 shares of our common stock to Steven Moskowitz,
our Secretary and Director, in exchange for $114,400 in debt.
In
January 2005, we issued 466,667 shares of our common stock to RM Enterprise
International and 215,969 shares of our common stock to Flo Weinberg, Inc.,
its
wholly-owned subsidiary, in exchange for an aggregate of $183,414 in
debt.
In
January 2005, we issued 466,667 shares of our common stock to American United
Global, Inc., which is majority-owned by The Rubin Family Irrevocable Stock
Trust, in exchange for $70,000 in debt.
In
January 2005, we issued 500,000 shares of our common stock to Michael
Sorrentino, in exchange for $75,000 in debt.
We
believe that these transactions were on terms as favorable as could have been
obtained from unaffiliated third parties. All future transactions we enter
into
with our directors, executive officers and other affiliated persons will be
on
terms no less favorable to us than can be obtained from an unaffiliated party
and will be approved by a majority of the independent, disinterested members
of
our board of directors, and who had access, at our expense, to our or
independent legal counsel.
Item
27. Exhibits
|
3.1
|
Certificate
of Incorporation of Nexgen VIII, Inc. (Previously filed as an exhibit
to
registration statement on Form SB-2 filed November 1, 2002)
|
|
3.2
|
Certificate
of Amendment of Nexgen VIII, Inc. changing name to Spongetech Delivery
Systems, Inc. (Previously filed as an exhibit to registration statement
on
Form SB-2 filed November 1, 2002)
|
|
3.3
|
By-Laws
of Spongetech Delivery Systems, Inc. (Previously filed as an exhibit
to
registration statement on Form SB-2 filed November 1, 2002)
|
|
3.4
|
Certificate
of Incorporation of Romantic Scents, Inc. (filed as an exhibit to
first
amendment to registration statement on Form SB-2 filed January 13,
2003)
|
|
3.5
|
Certificate
of Amendment changing name of Romantic Scents, Inc. to RSI Enterprises,
Inc. (filed as an exhibit to first amendment to registration statement
on
Form SB-2 filed January 13, 2003)
|
|
3.7
|
Certificate
of Amendment changing name of RSI Enterprises, Inc. to Spongetech
Enterprises International, Inc. (filed as an exhibit to first amendment
to
registration statement on Form SB-2 filed January 13, 2003)
|
|
3.7
|
Certificate
of Incorporation of Merger Sub, Inc. (filed as an exhibit to first
amendment to registration statement on Form SB-2 filed January 13,
2003)
|
|
3.8
|
Merger
Certificate between Spongetech Delivery Systems and Merger Sub, Inc.
(filed as an exhibit to first amendment to registration statement
on Form
SB-2 filed January 13, 2003)
|
|
3.9
|
Merger
Certificate between Spongetech Enterprises International, Inc. and
Merger
Sub, Inc. (Previously filed as an exhibit to first amendment to
registration statement on Form SB-2 filed January 13,
2003)
|
|
3.10
|
Certificate
of Amendment changing name of Merger Sub, Inc. to Spongetech Delivery
Systems, Inc. (Previously filed as an exhibit to first amendment
to
registration statement on Form SB-2 filed January 13,
2003)
|
|
3.11
|
Amended
and Restated Certificate of Incorporation of Spongetech Delivery
Systems,
Inc. (Previously filed as an exhibit to the Company’s 10-QSB filed on
April 16, 2007)
|
|
4.1
|
Specimen
Certificate of Common Stock (Previously filed as an exhibit to
registration statement on Form SB-2 filed November 1,
2002)
|
| 4.2 |
Warrant
Certificate (Previously filed as an exhibit to second amendment to
registration statement on Form SB-2 filed April 11,
2003)
|
|
4.3
|
Warrant
Agreement with Colebrook, Inc. and Olde Monmouth Stock Transfer Co.,
Inc.
(Previously filed as an exhibit to second amendment to registration
statement on Form SB-2 filed April 11,
2003)
|
|
4.4
|
Oral
Understanding with Dicon (Previously filed as an exhibit to fourth
amendment to registration statement on Form SB-2 filed January 12,
2004)
|
| 4.5 |
The Spongetech Delivery Systems, Inc. 2007 Incentive
Stock Plan* |
|
10.1
|
Stock
Purchase Agreement by and among Nexgen Acquisitions VIII, Inc., RM
Enterprises International, Inc. and RSI Enterprises,
Inc.(1)
|
| 10.2 |
Stock
Purchase Agreement by and between Spongetech Delivery Systems, Inc.
and
Colebrook, Inc. (Previously filed as an exhibit to first amendment
to
registration statement on Form SB-2 filed January 13,
2003)
|
|
10.3
|
Extension
of debt letter by Romantic Moments, Inc. dated August 15, 2002 (Previously
filed as an exhibit to third amendment to registration statement
on Form
SB-2 filed July 8, 2003)
|
|
10.4
|
Factoring
Agreement with Westgate (Previously filed as an exhibit to third
amendment
to registration statement on Form SB-2 filed July 8, 2003)
|
| 10.5 |
Agreement
with Paradigm (Previously filed as an exhibit to fifth amendment
to
registration statement on Form SB-2 filed March 15, 2004)
|
| 10.6 |
Short
Form Spot Production Agreement dated June 13,
2007*
|
| 31.1
|
Certification
by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
of the Exchange Act*
|
| 31.2
|
Certification
by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
of the Exchange Act*
|
| 32.1
|
Certification
by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
the
United States Code*
|
| 32.2
|
Certification
by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
the
United States Code*
|
*
Filed
herewith
Item
14. Principal Accountant Fees and Services.
Audit
Fees
The
aggregate fees billed for professional services rendered by our principal
accountants for the audit of our financial statements, for the reviews of the
financial statements included in our annual report on Form 10-KSB, and for
other
services normally provided in connection with statutory filings were $20,000
and
$18,000 for the years ended May 31, 2007 and May 31, 2006,
respectively.
Audit
Related Fees
We
incurred fees of $0and $0 for the years ended May 31, 2007 and May 31, 2006,
respectively, for professional services rendered by our principal accountants
that are reasonably related to the performance of the audit or review of our
financial statements and not included in "Audit Fees."
All
Other Fees
We
did
not incur any other fees for professional services rendered by our principal
accountants during the years ended May 31, 2007 and May 31, 2006.
Audit
Committee Pre-Approval Policies and Procedures
Not
applicable.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| |
SPONGETECH
DELIVERY SYTEMS, INC.
|
| |
|
| |
|
| |
|
| |
By:
/s/ Michael L.
Metter
|
| |
Michael L. Metter
|
| |
President and Chief Executive Officer
|
| |
|
| |
|
| |
By:
/s/ Steven
Moskowitz
|
| |
Steven
Moskowitz
|
| |
Chief Financial Officer, Principal
|
| |
Accounting Officer and Secretary
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
|
Signature
|
Title
|
Date
|
| |
|
|
| |
President,
Chief Executive Officer
|
|
|
/s/
Michael L.
Metter
|
and
Director
|
August
29, 2007
|
|
Michael
L. Metter
|
|
|
| |
|
|
| |
|
|
|
|
Chief
Financial Officer, Principal Accounting
|
|
|
/s/
Steven
Moskowitz
|
Officer,
Secretary and Director
|
August
29, 2007 |
|
Steven
Moskowitz
|
|
|
| |
|
|
| |
|
|
|
/s/
Frank
Lazauskas
|
Director
|
August
29, 2007
|
|
Frank
Lazauskas
|
|
|
INDEX
TO FINANCIAL STATEMENTS
Part
1
- Financial Information
| |
Page
|
| |
|
|
Item
1 - Financial Statements
|
|
| |
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
| |
|
|
Balance
Sheet as of May 31, 2007
|
F-3
|
| |
|
|
Statements
of Operations for the years ended May 31, 2007 and
2006
|
F-4
|
|
|
|
Statements
of Changes in Shareholders’ Deficiency for the years ended May 31, 2007
and 2006
|
F-5
|
|
|
|
Statements
of Cash Flows for the years ended May 31, 2007 and
2006
|
F-6
|
|
|
|
|
Notes
to Financial Statements
|
F-7-
F-11
|
DRAKEFORD
& DRAKEFORD, LLC
CERTIFIED
PUBLIC ACCOUNTANTS
New
York,
New York
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Shareholders and Directors of
SPONGETECH
DELIVERY SYSTEMS, INC.
We
have
audited the balance sheet of SPONGETECH DELIVERY SYSTEMS, INC. as of May
31,2007, and the related statements of operations, changes in shareholders’
equity (deficiency), and cash flows for the years ended May 31, 2007 and
2006.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based
on our audits.
We
conducted our audits in accordance with auditing standards of the Public
Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of SPONGETECH DELIVERY SYSTEMS,
INC.,
as of May 31, 2007 and the results of its operations and its cash flows for
the
two years then ended, in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that SPONGETECH
DELIVERY SYSTEMS, INC. will continue as a going concern. As more fully described
in Note
1,
the company has incurred operating losses since the date of organization
and requires additional capital to continue operations. These conditions
raise substantial doubt about the company's ability to continue as a
going
concern. Management's plans as to these matters are described in Note 1.
The
financial statements do not include any adjustments to reflect the possible
effects
on the recoverability and classification of assets or the amounts and
classifications
of liabilities that may result from the possible inability of SPONGETECH
DELIVERY SYSTEMS, INC. to continue as a going concern.
/s/
Drakeford & Drakeford, LLC
New
York,
New York
August
28, 2007
SPONGETECH
DELIVERY SYSTEMS, INC.
BALANCE
SHEET
May
31,
2007
ASSETS
|
Current
Assets
|
|
|
|
| |
|
|
|
|
Cash
|
|
$
|
387
|
|
|
Total
current assets
|
|
|
387
|
|
| |
|
|
|
|
|
Property
and equipment
|
|
|
19,979
|
|
| |
|
|
|
|
|
Intangible
assets
|
|
|
90,000
|
|
| |
|
|
|
|
|
Total
assets
|
|
$
|
110,366
|
|
| |
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' (DEFICIENCY)
|
| |
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
| |
|
|
|
|
|
Accounts
payable
|
|
$
|
188,333
|
|
|
Accrued
expenses
|
|
|
78,952
|
|
|
Income
taxes payable
|
|
|
1,600
|
|
|
Total
current liabilities
|
|
|
268,885
|
|
| |
|
|
|
|
|
Total
long-term liabilities
|
|
|
0
|
|
|
Total
liabilities
|
|
|
268,885
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity (Deficiency)
|
|
|
|
|
|
Common
stock, $.001 par value;
|
|
|
|
|
|
Authorized
200,000,000 shares;
|
|
|
|
|
|
issued
and outstanding 46,842,406
|
|
|
|
|
|
shares
as of May 31, 2007
|
|
|
46,843
|
|
|
Preferred
stock $.001 par value;
|
|
|
|
|
|
Authorized
20,000,000 shares;
|
|
|
|
|
|
no
shares issued and outstanding
|
|
|
0
|
|
|
Additional
paid-in capital
|
|
|
3,447,356
|
|
|
Deficit
|
|
|
(3,652,718
|
)
|
| |
|
|
|
|
|
Total
shareholders' (deficiency)
|
|
|
(158,519
|
)
|
|
Total
liabilities and
|
|
|
|
|
|
and
shareholders’ (deficiency)
|
|
$
|
110,366
|
|
See
notes
to financial statements.
SPONGETECH
DELIVERY SYSTEMS, INC.
STATEMENTS
OF OPERATIONS
| |
|
For
the
|
|
|
|
|
years
ended
|
|
|
|
|
May
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
55,112
|
|
$
|
12,859
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
38,898
|
|
|
4,320
|
|
|
Gross
profit
|
|
|
16,214
|
|
|
8,539
|
|
| |
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Selling
|
|
|
0
|
|
|
0
|
|
|
General
and
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
|
|
|
|
|
|
expenses
|
|
|
829,147
|
|
|
106,019
|
|
|
Depreciation
expense
|
|
|
4,284
|
|
|
4,284
|
|
| |
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
833,431
|
|
|
110,303
|
|
| |
|
|
|
|
|
|
|
|
Loss
before provision
|
|
|
|
|
|
|
|
|
for
income taxes
|
|
|
(817,217
|
)
|
|
(101,764
|
)
|
| |
|
|
|
|
|
|
|
|
Other
income and expenses
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
0
|
|
|
0
|
|
|
Total
other income and
|
|
|
|
|
|
|
|
|
expense
|
|
|
0
|
|
|
0
|
|
| |
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(817,217
|
)
|
$
|
(101,764
|
)
|
| |
|
|
|
|
|
|
|
|
Basic
and diluted (loss) per
|
|
|
|
|
|
|
|
|
common
stock
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Net
loss per share -
|
|
|
|
|
|
|
|
|
basic
and diluted
|
|
$
|
(.02
|
)
|
$
|
(.00
|
)
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Weighted
average common
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
40,348,016
|
|
|
33,793,626
|
|
See
notes
to financial statements.
SPONGETECH
DELIVERY SYSTEMS, INC.
STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
For
The
Years Ended May 31, 2007 and 2006
| |
|
|
|
|
|
|
|
Common
|
|
Total
Shareholders'
|
|
|
|
|
Number
of
|
|
Capital
|
|
Paid-In
|
|
Stock
|
|
Equity
|
|
|
|
|
Shares
|
|
Stock
|
|
Capital
|
|
Subscribed
|
|
Deficit
|
|
(Deficiency)
|
|
|
Balance-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
31, 2005
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
consulting fees
|
|
|
2,830,000
|
|
|
2,830
|
|
|
538,170
|
|
|
|
|
|
|
|
|
541,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
legal fees
|
|
|
400,000
|
|
|
400
|
|
|
39,600
|
|
|
|
|
|
|
|
|
40,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
payment of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
informercial
film
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
production
|
|
|
9,000,000
|
|
|
9,000
|
|
|
81,000
|
|
|
|
|
|
|
|
|
90,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan payments
|
|
|
539,780
|
|
|
540
|
|
|
138,675
|
|
|
|
|
|
|
|
|
139,215
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
year
ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(817,217
|
)
|
|
(817,217
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
31, 2007
|
|
|
46,842,406
|
|
$
|
46,843
|
|
$
|
3,447,356
|
|
$
|
0
|
|
$
|
(3,652,718
|
)
|
$
|
(158,519
|
)
|
See
notes
to financial statements.
SPONGETECH
DELIVERY SYSTEMS, INC.
STATEMENTS
OF CASH FLOWS
| |
|
For
the years
|
|
|
|
|
ended
May 28,
|
|
|
|
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(817,217
|
)
|
$
|
(101,764
|
)
|
|
Adjustments
to reconcile net loss to
|
|
|
|
|
|
|
|
|
net
cash provided by (used in)
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,284
|
|
|
4,284
|
|
|
Issuance
of shares of common stock
|
|
|
|
|
|
|
|
|
in
consideration for:
|
|
|
|
|
|
|
|
|
consulting
fees
|
|
|
541,000
|
|
|
33,737
|
|
|
legal
fees
|
|
|
40,000
|
|
|
0
|
|
|
loan
repayments
|
|
|
139,215
|
|
|
0
|
|
|
Changes
in operating assets and
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
1,659
|
|
|
(201
|
)
|
|
Accounts
receivable
|
|
|
9,885
|
|
|
(9,094
|
)
|
|
Accounts
payable and accrued
|
|
|
|
|
|
|
|
|
expenses
|
|
|
155,256
|
|
|
12,366
|
|
|
Due
to notes and related parties
|
|
|
(133,307
|
)
|
|
62,000
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Net
cash provided (used) in
|
|
|
|
|
|
|
|
|
operating
activities
|
|
|
(59,225
|
)
|
|
1,328
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing
|
|
|
|
|
|
|
|
|
activities
|
|
|
|
|
|
|
|
| |
|
|
0
|
|
|
0
|
|
| |
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Officer
loans
|
|
|
10,916
|
|
|
0
|
|
|
Loan
payable
|
|
|
45,891
|
|
|
0
|
|
|
Net
cash provided by
|
|
|
|
|
|
|
|
|
financing
activities
|
|
|
56,807
|
|
|
0
|
|
| |
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
(2,418
|
)
|
|
1,328
|
|
| |
|
|
|
|
|
|
|
|
Cash
- beginning
|
|
|
2,805
|
|
|
1,477
|
|
|
Cash
- end
|
|
$
|
387
|
|
$
|
2,805
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
0
|
|
$
|
0
|
|
|
Income
taxes paid
|
|
$
|
0
|
|
$
|
0
|
|
|
Noncash
Transactions:
|
|
|
|
|
|
|
|
|
Issuance
of common stock-
|
|
|
|
|
|
|
|
|
Intangible
asset
|
|
$
|
90,000
|
|
$
|
0
|
|
See
notes
to financial statements.
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 31,2007 the Company incurred
net losses of $817,217. As of May 31, 2007 the Company had an accumulated
deficit of $3,652,718 and a working capital deficiency of $268,498. 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)
Inventories
Finished
products inventories are carried at cost, principally first-in, first-out,
but not in excess of market.
Property
and Equipment
Property
and equipment are carried at cost. Depreciation has been provided using
straight-line and accelerated methods over the estimated useful lives of
the
assets. Repairs and maintenance are expensed as incurred, and renewals and
betterments
are capitalized.
Deferred
Income Taxes
The
Company recognizes deferred income tax assets and liabilities for the
expected
future income tax consequences of temporary differences between the carrying
amounts and the income tax bases of assets and liabilities and the effect
of
future income tax planning strategies to reduce any deferred income tax
liability.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make estimates and assumptions that affect certain reported amounts
and disclosures. Accordingly, actual results could differ from those
estimates.
Offering
Costs
Deferred
offering costs incurred by the Company in connection with the proposed
registration statement will be expensed as incurred.
Advertising
Costs
Advertising
costs are expensed as incurred. For the years ended May 31, 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 years ended
May
31, 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
July
2006, the Financial Accounting Standards Board issued Interpretation No.
48,
Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement
No. 109. This interpretation clarifies the accounting for uncertainty in
income
taxes recognized in a company’s financial statements and establishes guidelines
for recognition and measurement of a tax position taken or expected to be
taken
in a tax return. We are currently evaluating the impact on our consolidated
financial statements of this standard, which will become effective on June
1,
2007.
In
September 2006, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”).
This Statement defines fair value, establishes a framework for measuring
fair
value in generally accepted accounting principles, and expands disclosures
about
fair value measurements. We are currently evaluating the impact on our
consolidated financial statements of FAS 157, which will become effective
for us
on June 1, 2008.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements
No. 87, 88, 106, and 132R)”, which will require employers to fully recognize the
obligations associated with single-employer defined benefit pension, retiree
healthcare and other postretirement plans in their financial statements.
Under
past accounting standards, the funded status of an employer’s postretirement
benefit plan (i.e., the difference between the plan assets and obligations)
was
not always completely reported in the balance sheet. Past standards only
required an employer to disclose the complete funded status of its plans
in the
notes to the financial statements. SFAS No. 158 applies to plan sponsors
that
are public and private companies and nongovernmental not-for-profit
organizations. The requirement to recognize the funded status of a benefit
plan
and the disclosure requirements are effective as of the end of the fiscal
year
ending after December 15, 2006, for entities with publicly traded equity
securities, and at the end of the fiscal year ending after June 15, 2007,
for
all other entities. The requirement to measure plan assets and benefit
obligations as of the date of the employer’s fiscal year-end statement of
financial position is effective for fiscal years ending after December 15,
2008.
The Company does not expect that the adoption of SFAS No. 158 will have a
significant impact on the consolidated results of operations or financial
position of the Company.
In
February 2007, FASB issued SFAS 159, “The Fair Value Option for Financial Assets
and Financial
Liabilities”. SFAS No. 159 amends SFAS No. 115, “Accounting for Certain
Investments in Debt
and
Equity Securities”. SFAS No. 159 permits entities to choose to measure many
financial instruments
and certain other items at fair value. The objective of SFAS No. 159 is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is expected to expand the use of fair value
measurement, which is consistent with the Board’s long-term measurement
objectives for accounting for
financial instruments. SFAS No. 159 applies to all entities, including
not-fot-profit organizations. Most of the provisions of SFAS No. 159 apply
only
to entities that elect the fair value
option. However, the amendment to SFAS No. 115 applies to all available-for-sale
and trading securities.
Some requirements apply differently to entities that do not report net income.
This statement
is effective as of the beginning of each reporting entity’s first fiscal year
that begins after
November 15, 2007.
2
-
Property and Equipment
Property
and equipment is summarized as follows:
| |
|
Estimated
|
|
|
|
|
|
|
Useful
Lives
|
|
May
31,
|
|
|
|
|
Years
|
|
2007
|
|
| |
|
|
|
|
|
|
Furniture
and fixtures
|
|
|
5
- 10
|
|
$
|
761
|
|
|
Machinery
and equipment
|
|
|
5
- 10
|
|
|
17,828
|
|
|
Molds
|
|
|
5
- 10
|
|
|
38,312
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
56,901
|
|
| |
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
36,922
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
$
|
19,979
|
|
Depreciation
expense for the years ended May 31, 2007 and 2006 was $4,284, respectively.
3
-
Accounts payable consist of the following:
| |
|
|
|
| |
|
May
31,
|
|
|
|
|
2007
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Product
development (Packaging & mold
|
|
|
|
|
Development)
|
|
$
|
175,967
|
|
|
No
Related Party
|
|
|
|
|
|
Other
|
|
|
12,366
|
|
| |
|
|
|
|
|
Total
|
|
$
|
188,333
|
|
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.
5
-
Deferred Income Taxes
At
May
31, 2007 and May 31, 2006, the Company had approximately $3,652,718
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 May 31, 2007 and May 31,
2006
is as follows:
| |
|
May
31,
|
|
May
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Non-Current
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
3,652,718
|
|
$
|
2,835,501
|
|
| |
|
|
|
|
|
|
|
|
Valuation
allowance for
|
|
|
|
|
|
|
|
|
deferred
tax asset
|
|
|
(3,652,718
|
)
|
|
(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
May
31, 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 Westgate.
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
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 intended to retire all shares held by the shareholders
who
accept the rescission offer. AS of August
2006, all of the shareholders have elected to reject the rescission offer
and
desired
To
retain
their respective share.
On
April
27, 2006 the Company issued 120,000 shares of common stock for legal
services
at a value of $.28 per share.
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.
In
the
fourth quarter ended May 31, 2007, the Company issued an aggregate of 400,000
shares
of
common stock valued at $ 40,000 or $.10 per share in consideration of legal
services. Also,
in
the fourth quarter ended May 31, 2007, the Company issued an aggregate of
9,000,000 shares
of
common stock to RM Enterprises, Inc. in consideration for a payment of $90,000
for the production costs of an infomercial valued at $90,000 or $.01 per
share.
The Company issued an aggregate of 539,780 shares of common stock to RM
Enterprises,Inc. and Mr. Steven Moskowitz with a value of $139,215 or $.26
per
share in consideration for the repayment of loans to the Company and expenses
paid on behalf of the Company.
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.