UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended August 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission file No. 333-123015
Spongetech Delivery Systems, Inc.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 54-2077231
---------------------------- ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
The Empire State Building, 350 Fifth Avenue
Suite 2204, New York, New York 10118
------------------------------------
(address of principal executive offices) (Zip Code)
(212) 594-4175
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of October 12, 2007, the Company had 58,842,406 shares of common stock issued
and outstanding.
1
Spongetech Delivery Systems, Inc.
Form 10-QSB
For the Quarterly period ended
August 31, 2007
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
Balance Sheets as of August 31, 2007 (Unaudited) and May 31, 2007 3
Statements of Operations for the Three Months ended August 31, 2007 and 2006 (Unaudited) 4
Statements of Changes in Stockholders' Deficiency for the years ended May 31, 2001
through 2007 and for the three months ended August 31, 2007 (Unaudited) 5
Statements of Cash Flows for the three months ended August 31, 2007 and 2006
(Unaudited)
7
Notes to Unaudited Financial Statements 8
Item 2. Management's Discussion and Analysis 12
Item 3. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 17
2
Item 1. Financial Statements
SPONGETECH DELIVERY SYSTEMS, INC.
BALANCE SHEET
August 31, May 31,
2007 2007
(Unaudited)
ASSETS
Current Assets
Cash $ 2,549 $ 387
Accounts receivable 59,304 0
------- --------
Total current assets 61,853 387
------- --------
Property and equipment 18,908 19,979
------- --------
Intangible assets 113,663 90,000
------- --------
------- --------
Total assets $ 194,424 $ 110,366
======= =========
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY)
Current Liabilities
Accounts payable $ 192,728 $ 188,333
Accrued expenses 81,452 78,952
Loan payable 87,424 0
Income taxes payable 1,600 1,600
-------- ---------
Total current liabilities 363,204 268,885
Total long-term liabilities 0 0
-------- ---------
Total liabilities 363,204 268,885
-------- --------
Shareholders' Equity (Deficiency)
Common stock, $.001 par value;
Authorized 200,000,000 shares;
issued and outstanding 46,842,406
shares as of August 31, 2007 and
May 31, 2007, respectively 46,843 46,843
Preferred stock $.001 par value;
Authorized 20,000,000 shares;
no shares issued and outstanding 0 0
Additional paid-in capital 3,447,356 3,447,356
Deficit (3,662,979) (3,652,718)
--------- ----------
Total shareholders' (deficiency) (168,780) (158,519)
--------- ----------
Total liabilities and shareholders' (deficiency) $ 194,424 $ 110,366
========== ==========
See notes to financial statements.
3
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the three
months ended
August 31,
--------------------
2007 2006
----- -----
Sales $ 64,076 $ 11,295
Cost of goods sold 13,566 4,639
-------- ---------
Gross profit 50,510 6,656
-------- ---------
Operating expenses
General and
Administrative
expenses 56,786 8,263
Depreciation and amortization expense 3,985 1,071
-------- ----------
Total operating expenses 60,771 9,334
-------- ---------
Net loss $ (10,261) $ ( 2,678)
========= ========
Basic and diluted (loss) per
common stock
Net loss per share -
basic and diluted $ (.00) $ (.00)
Weighted average common
shares outstanding 46,842,406 34,072,626
See notes to financial statements.
4
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
For The Years Ended May 31, 2001 through 2007 and Three Months
Ended August 31, 2007 (Unuaudited)
Total
Additional Common Shareholders'
Number of Capital Paid-In Stock Equity
Shares Stock Capital Subscribed Deficit (Deficiency)
--------- ------- ---------- ----------- ----------- -----------
Balance -
June 1,2000 12,000,000 $12,000 $ - $ - $ (52,200) $ (40,200)
Net loss for year
ended May 31, 2001
- - - (198,318) (198,318)
---------- -------- ------- --------- ---------- ---------
12,000,000 12,000 - - (250,518) (238,518)
Contributions - - 105,100 - 105,100
---------- -------- ------- ------- -------- ---------
Balance -
May 31, 2001 12,000,000 12,000 105,100 - (250,518) (133,418)
Contributions - - 86,943 - 86,943
Reclassification of
common stock subject
to rescission rights (219,000) (219) (1,971) (2,190)
Net loss for year ended
May 31, 2002 - - - (102,477) (102,477)
---------- ------- ------- -------- --------- ----------
Balance-
May 31, 2002(restated)11,781,000 11,781 190,072 - (352,995) (151,142)
Issuance of
common stock 6,985,000 6,985 (1,595) - 5,390
Value of services
contributed by
officers - - 58,500 - 58,500
Net loss for the
year ended
May 31, 2003 (265,517) (265,517)
---------- -------- --------- -------- ---------- ----------
Balance -
May 31, 2003(restated)18,766,000 $ 18,766 $ 246,977 - $(618,512) $(352,769)
Common stock subscribed 526,814 526,814
Net loss for the
year ended
May 31, 2004 (2,056,526)(2,056,526)
----------- -------- --------- --------- ----------- ----------
Balance -
May 31, 2004(restated)18,766,000 $ 18,766 $246,977 $526,814 $(2,675,038)$(1,882,481)
Issuance of stock
for debt & service 14,967,626 14,968 2,367,346 (526,814) 1,855,500
5
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
For The Years Ended May 31, 2001 through 2007 and Three Months
Ended August 31, 2007 (Unuaudited)
Total
Additional Common Shareholders'
Number of Capital Paid-In Stock Equity
Shares Stock Capital Subscribed Deficit (Deficiency)
--------- ------- ---------- ----------- ----------- -----------
Net loss for
The year ended
May 31, 2005 (58,699) (58,699)
---------- -------- --------- -------- ----------- ----------
Balance-
May 31, 2005(restated)33,733,626 $ 33,734 $2,614,323 $ 0 $(2,733,737) $( 85,680)
Issuance of common
stock for services 120,000 120 33,617 33,737
Net loss for the
year ended
May 31, 2006 (101,764)
(101,764)
----------- -------- --------- -------- ----------- ---------
Balance-
May 31, 2006 33,853,626 $ 33,854 $2,647,940 $ 0 $(2,835,501) $(153,707)
Rescission offer
Rejected 219,000 219 1,971 2,190
Issuance of shares
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)
Net loss for the three
months ended August
31, 2007 (10,261) (10,261)
----------- -------- --------- -------- ----------- ---------
Balance-
August 31, 2007 46,842,406 $ 46,843 $3,447,356 $ 0 $(3,662,979) $(168,780)
=========== ======== ========= ======== =========== =========
See notes to financial statements.
6
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the three
months ended August 31,
----------------------
2007 2006
---------- ---------
Operating Activities:
Net loss $( 10,261) $( 2,678)
Adjustments to reconcile net loss to
net cash provided by (used in)
Operating activities:
Depreciation and amortization 3,985
1,071
Changes in operating assets and
liabilities
Accounts receivable (59,304)
(1,410)
Accounts payable and accrued
expenses 6,895 ( 112)
Due to notes and related parties 87,424 854
-------- --------
Net cash provided (used) in
operating activities 28,739 (2,275)
-------- ---------
Investing Activities:
Net cash used in investing
activities
Purchase intangible assets (26,577) 0
-------- --------
Financing
Activities:
Net cash provided by
financing activities 0 0
-------- --------
Net decrease in cash 2,162 (2,275)
Cash - beginning 387 2,805
------- -------
Cash - end $ 2,549 $ 530
======= =======
Supplemental Information
Interest paid $ 0 $ 0
Income taxes paid $ 0 $ 0
See notes to financial statement.
7
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1 - Summary of Significant Accounting Policies
Nature of Operations
Spongetech Delivery Systems, Inc. (the "Company") was formed on June 18,
1999, as Romantic Scents, Inc. On June 12, 2001, the Company changed its name to
RSI Enterprises, Inc., and, on October 2, 2002, changed its name to Spongetech
International Ltd. ("SIL"). On July 15, 2002, the Company was acquired by
Spongetech Delivery Systems, Inc. ("SDS") (formerly Nexgen Acquisitions VIII,
Inc.). The transaction was accounted for as a reverse acquisition using the
purchase method of accounting, whereby the shareholder of SIL retained
approximately 63% of the Company's outstanding common stock. On December 16,
2002, SIL changed its domicile to Delaware by merging with and into Spongetech
Sub, Inc. ("SUB"). SUB's parent, Spongetech Delivery Systems, Inc. then merged
with and into SUB so that SUB became the surviving corporation, and changed its
name to Spongetech Delivery Systems, Inc.
The Company distributes a line of hydrophilic polyurethane sponge cleaning
and waxing products.
Basis of Presentation / Going Concern
The financial statements have been prepared for purposes of registration
with the Securities and Exchange Commission ("SEC"), and have been prepared in
in accordance with auditing standards of the Public Company Accounting Oversight
Board (United States) which contemplates continuation of the Company as a going
concern. However, the Company has sustained substantial operating losses in
recent years, current liabilities exceed current assets, and total liabilities
exceed total
assets.The Company has incurred losses since inception and expect to incur
losses for the foreseeable future. For the fiscal year ended May 31,2007 the
Company incurred net losses of $817,217. As of August 31, 2007 the Company had
an accumulated deficit of $3,662,979 and a working capital deficiency of
$301,351. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The recovery of assets and continuation of future
operations are dependent upon the Company's ability to obtain additional debt or
equity financing and its ability to generate revenues sufficient to continue
pursuing its business purposes. The Company is actively pursuing financing to
fund future operations.
1 - Summary of Significant Accounting Policies (Continued)
Accounts Receivable
Accounts receivable have been adjusted for all known uncollectible
accounts. As of August 31, 2007 and May 31, 2007 there were no doubtful
accounts.
Inventories
Finished products inventories are carried at cost, principally first-in,
first-out, but not in excess of market. As of August 31, 2007 and May 31, 2007,
there were no inventories.
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.
8
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 three months ended
August 31, 2007 and 2006, advertising costs totaled $34,145 and $0,
respectively.
Shipping and Handling Costs
Shipping and handling costs are included in selling expenses. For the three
months ended August 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 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 August 31, May 31,
Years 2007 2007
------------ ----------- ---------
Furniture and fixtures 5 - 10 $ 761 $ 761
Machinery and equipment 5 - 10 17,828 17,828
Molds 5 - 10 38,312 38,312
-------- -------
56,901 56,901
Less: Accumulated depreciation 37,993 36,922
-------- -------
$ 18,908 $ 19,979
======== ========
Depreciation expense for the three months ended August 31, 2007 and 2006
was $1,071 and $1,071, respectively.
9
3 - Accounts payable and accrued expenses consist of the following:
August 31, May 31,
2007 2007
------------ ------------
Product development (Packaging
& mold Development) $ 180,362 $ 175,967 No Related Party
Other 12,366 12,366
--------- ---------
Total $ 192,728 $ 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.
For the three months ended August 31, 2007, RM Enterprises, a related
party, loaned the Company $87,424 for operating expenses and for the purchase of
the additional infomercial. (See note-7 for details)
5 - Deferred Income Taxes
At August 31, 2007 and May 31, 2007, the Company had approximately
$3,662,979 and $3,652,718 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 August 31,2007 and May 31,
2007 is as follows:
August 31, May 31,
2007 2007
------------ -----------
Non-Current
Net operating loss carryforwards $3,662,979 $3,652,718
Valuation allowance for
deferred tax asset (3,662,979) (3,652,718)
--------- ---------
$ - $ -
========= =========
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 August 31, 2007 and May 31, 2007, a valuation allowance for the full amount
of the net deferred tax asset was recorded.
10
6 - Commitments and Contingencies
Employment Contracts
The Company is currently negotiating with two executives to establish
employment contracts. No terms of these negotiations have been disclosed.
7 - Intangible assets
Intangible assets consists of infomercials at a cost of $ 116,577. The
estimated useful life of five to ten years is being amortized on a
straight-line basis. Amortization expense for the three months ended August 31,
2007 was $2,914.
11
Item 2. Management's Discussion and Analysis
This quarterly report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These include statements
about our expectations, beliefs, intentions or strategies for the future, which
we indicate by words or phrases such as "anticipate," "expect," "intend,"
"plan," "will," "we believe," "our company believes," "management believes" and
similar language. These forward-looking statements are based on our current
expectations and are subject to certain risks, uncertainties and assumptions,
including those set forth in the following discussion and under the heading "-
Risk Factors" in our Form 10-KSB for the fiscal year ended May 31, 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 quarterly report is not strictly
historical, including statements as to revenue projections, business strategy,
outlook, objectives, future milestones, plans, intentions, goals, future
financial conditions, future collaboration agreements, the success of the
Company's development, events conditioned on stockholder or other approval, or
otherwise as to future events, such statements are forward-looking, All
forward-looking statements, whether written or oral, and whether made by or on
behalf of the company, are expressly qualified by the cautionary statements and
any other cautionary statements which may accompany the forward-looking
statements, and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The forward-looking statements
contained in this quarterly 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. We remain
in contact with TurtleWax and continue to have discussions with them. We
recently received an order for 33,700 kits from TurtleWax which we anticipate
will be filled in December 2007. Also, there is no guarantee that we may be able
to generate any interest in our product that will result in any sales in the
future. While our sales are gradually increasing, 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.
12
Our success depends in a large part on our ability to implement a successful
marketing and sales plan. While we are currently seeking to hire sales groups to
market our products, there is no guarantee that these efforts will result in any
substantial sales. These sales groups are independent contractors who not only
market and sell our products but also the products of other companies.
Therefore, there is no assurance that they will devote substantial time to the
sale of our product. Because of lack of funding, we are unable to hire a
dedicated sales team who will devote their efforts to promoting and selling our
products and fostering relationships with distributors who can assist us with
getting our products on the shelves of large retailers such as Wal-Mart and
Costco. However, there is no guarantee that with a dedicated sales team, our
business will become profitable.
If we are able to obtain funding to become fully operational, there is no
guarantee that we will be able to find personnel who will be able to work
closely with the warehouse to ship orders, including special orders, made via
the internet. In addition, there is no guarantee that we will be able to find
technology personnel who can accept the EDI transmissions from the larger
retailers and coordinate with our logistics and warehouse contacts to ensure
timely delivery of orders.
Results of Operations
Three Months ended August 31, 2007 and 2006
During the three months ended August 31, 2007, we had sales of $64,076 as
compared to sales of $11,295 for the same period in 2006. Management attributes
the increase in sales to our improved marketing campaign, including sales from
our website. We had gross profit of $50,510 for the three months ended August
31, 2007 compared to $6,656 for the three months ended February 28, 2006.
Operating expenses for the three months ended August 31, 2007 were $60,771 as
compared to $9,334 for the three months ended August 31, 2006. The increase of
$51,437 is the result of an increase in selling general and administrative
expenses for the period.
Net loss for the three months ended August 31, 2007 was $10,261 per share as
compared to a net loss of $2,678 per share for the three months ended August 31,
2006. The increase in net loss was the result of a significant increase in
general and administrative expenses for the three months ended August 31, 2007
compared to the three months ended August 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. For the three months ended August 31, 2007, we had sales of $64,076. To
date we have orders of approximately $10,755,250, which we anticipate will be
filled by September 2008.
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 and sold off its equipment. Our products are currently
being manufacture through Dicon who has outsourced the production to its
partners in the US and China on an order per order basis. 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 Cleanlink(1), a trade association for the cleaning industry, the
wholesale market for chemical cleaning products was in excess of $7.6 billion in
2002 and 2004. Accordingly, we believe there is a substantial market for easy to
use, multi-use cleaning products. In the next twelve months, management intends
to take a number of actions that it believes will enable our business to
successfully participate in this growing segment of the cleaning market.
_______________________
(1) Obtained from Cleanklink.com based upon study prepared and conducted by the
Research Department of Trade Press Publishing Corporation, publisher of Sanitary
Maintenance Magazine in conjunction with International Sanitary Supply
Association. The report can be accesses by following this link:
http://www.cleanlink.com/industrystatistics/2004sanitaryreport.asp
13
Management intends to attend trade shows to promote our products. Management
estimates that it will cost us approximately $25,000 to attend upcoming trade
shows over the next six months, all of which has been, and if necessary will
continue to be funded by our officers, directors and affiliates until such time
as we are able to generate sales to fund our operations or obtain outside
funding. In addition, our Secretary, Steven Moskowitz, will utilize his accrued
air miles to cover all travel and hotel costs. There are no formal or written
agreements with respect to the advance of funds to us by our officers, directors
and affiliates. Our officers, directors and affiliates are not legally bound to
provide funding to us. If they do not pay for our expenses, we will be forced to
obtain funding. In view of our limited operating history, our ability to obtain
additional funds is limited. Additional financing may only be available, if at
all, upon terms which may not be commercially advantageous to us. If we are not
able to obtain funding from other sources, we will not be able to obtain funding
to increase our sales and marketing efforts. As a result we may be forced to go
out of business.
We entered into an oral agreement with various independent sales groups that
target sales throughout the United States. The sales representatives will
receive commissions in the range of five (5%) percent to eight (8%) percent of
net sales which they generate and will be paid on the tenth day of the month
following the month in which the sales are made.
We intend to continue to retain additional independent sales groups to market
our products. Typically, sales groups attend trade shows to meet with sellers of
various products which the sales persons believe they can market and sell to
their customers. There is no guarantee that we will be able to retain additional
sales groups or that their efforts will result in significant sales. We do not
anticipate that we will incur any costs in connection with retaining the various
sales groups as the sales groups will be paid a percentage the net sales they
generate only. The sales persons will be independent contractors retained by us
on a non-exclusive basis and may not devote their efforts solely to selling our
products. We do not intend to hire sales persons on an exclusive basis.
Management intends to seek a production finance company to fund our purchase
orders. Typically the way this arrangement works is all orders received by us
will be forwarded to the production finance company which will assess the credit
worthiness of the entity or the individual placing the order. Upon approval, the
production finance company will fund the cost of the product at a cost to us,
representing a percentage of the order placed. Management intends to seek an
arrangement where the cost to the Company will not exceed 5% of each order. If
we are not successful in finding a production finance company to fund our
purchase orders, we will seek to have customers finance the production of their
orders. There is no guarantee that our customers will be able to finance the
production of their orders. If our customers are not able to finance their
orders, we will be forced to seek alternate financing, such as debt and/or
equity financing. We currently do not have any arrangements to obtain additional
financing. In view of our limited operating history, our ability to obtain
additional funds is limited. Additional financing may only be available, if at
all, upon terms which may not be commercially advantageous to us. If our
customers are unable to fund the production of their orders or we are not able
to fund the production of our products, we will be unable to make any sales of
products and may be forced to cease and curtail our business. There is no
assurance that management will be able to consummate any agreements with a
production finance company on terms that are acceptable to us or which will not
significantly cut into our profit margin.
We have entered into a month to month lease for warehousing facilities with
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 of our products.
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.
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.
14
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 August 31, 2007, we had cash of $5,549 as compared to $530 at August 31,
2006. Our current cash balance as of October 12, 2007 is approximately $1,700.
As of August 31, 2007, net cash used by operating activities aggregated $28,739.
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 August 31, 2007 was $168,780 as compared to
a working capital (deficiency) of $158,519 at August 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
Off-Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The critical accounting policies that affect our more significant
estimates and assumptions used in the preparation of our financial statements
are reviewed and any required adjustments are recorded on a monthly basis.
15
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, we conducted an evaluation, under the supervision
and with the participation of our chief executive officer and chief financial
officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e)
and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, we have
concluded that our disclosure controls and procedures are effective to ensure
that the information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and forms,
and (ii) is accumulated and communicated to our management, including our chief
executive officer and chief financial officer, to allow timely decisions on
required disclosure.
(b) Changes in internal controls. There was no change in our internal controls
or in other factors that could affect these controls during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently a party to, nor is any of our property currently the
subject of, any pending legal proceeding. None of our directors, officers or
affiliates is involved in a proceeding adverse to our business or has a material
interest adverse to our business.
Item 2. Unregistered Sales of Equity Securities
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended, promulgated pursuant to the Section 302 of
the Sarbanes Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended, as amended, promulgated pursuant to the
Section 302 of the Sarbanes Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 15, 2007
Spongetech Delivery Systems, Inc.
By: /s/ Michael L. Metter
--------------------------------
Michael L. Metter
Chief Executive Officer
By: /s/ Steven Moskowitz
--------------------------------
Steven Moskowitz
Chief Financial Officer
17