UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-QSB

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended February 29, 2008

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file No. 333-123015

Spongetech Delivery Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware
  
54-2077231
(State of incorporation)
  
(I.R.S. Employer Identification Number)

43 West 33rd Street, Suite 600
New York, New York 10001
(address of principal executive offices) (Zip Code)

(212) 695-7850
(Registrant's telephone number, including area code)

The Empire State Building, 350 Fifth Avenue
Suite 2204, New York, New York 10118
(former address of principal executive offices) (Zip Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x           No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o           No x
 
As of April 11, 2008, the Company had 196,294,078 shares of common stock issued and outstanding.


TABLE OF CONTENTS

   
Page
PART I - FINANCIAL INFORMATION
  
Item 1.
Consolidated Financial Statements.
  
     
 
Balance Sheets as of February 29, 2008 (Unaudited) and May 31, 2007
3
 
Statements of Operations for the Nine Months ended February 29, 2008 and February 28, 2007 (Unaudited)
4
 
Statements of Operations for the Three Months ended February 29, 2008 and February 28, 2007 (Unaudited)
5
 
Statements of Changes in Shareholders’ Equity (Deficiency) for the years ended May 31, 2001 through 2008 and Nine Months ended February 29, 2007 (Unaudited)
6
 
Statement of Cash Flows (Unaudited)
8
 
Notes to Unaudited Financial Statements
9
     
Item 2.
Management’s Discussion and Analysis
13
Item 3.
Controls and Procedures
18
     
PART II - OTHER INFORMATION
  
Item 1.
Legal Proceedings
18
Item 2.
Changes in Securities
18
Item 3.
Defaults Upon Senior Securities
18
Item 4.
Submission of Matters to a Vote of Security Holders
18
Item 5.
Other Information
19
Item 6.
Exhibits
19
 
2
 
SPONGETECH DELIVERY SYSTEMS, INC.
BALANCE SHEET

 
  
February 29,
2008
  
May 31,
2007
  
 
  
(Unaudited)
   
 
  
 
  
 
  
 
   
ASSETS
  
 
  
 
  
Current Assets
  
 
  
 
  
Cash
  
$
19,774
  
$
387
  
Accounts receivable
    
998,319
    
0
  
Inventory
    
266,812
    
0
  
Prepaid advertising
    
846,975
    
0
  
Total current assets
    
2,131,880
    
387
  
 
    
   
 
Property and equipment
    
14,993
    
19,979
  
 
    
   
 
Intangible assets
    
305,443
    
90,000
  
 
    
   
 
Total assets
  
$
2,452,816
  
$
110,366
  
 
    
   
 
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
    
   
 
 
    
   
 
Current Liabilities
    
   
 
Accounts payable
  
$
209,595
  
$
188,333
  
Accrued expenses
    
78,952
    
78,952
  
Income taxes payable
    
1,000
    
1,600
  
Total current liabilities
    
289,947
    
268,885
  
 
    
   
 
Total long-term liabilities
    
0
    
0
  
Total liabilities
    
289,947
    
268,885
  
Shareholders' Equity (Deficiency)
    
   
 
Common stock, $.001 par value; Authorized 400,000,000 shares; issued and outstanding 193,697,126 shares as of February 29, 2008 and 46,842,406 shares as of May 31, 2007
    
193,697
    
46,843
  
Preferred stock $.001 par value; Authorized 20,000,000 shares; no shares issued and outstanding
    
0
    
0
  
Additional paid-in capital
    
5,424,740
    
3,447,356
  
Deficit
    
(3,455,568
)
  
(3,652,718
)
 
    
   
 
Total shareholders' equity (deficiency)
    
2,162,869
    
(158,519
)
Total liabilities and shareholders’ equity (deficiency)
  
$
2,452,816
  
$
110,366
  

See notes to financial statements.
 
3
 
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)

 
  
For the nine
months ended
  
 
  
February 29, 2008 and
February 28, 2007
  
 
  
2008
  
2007
  
 
  
 
  
 
  
Sales
  
$
1,560,680
  
$
25,799
  
 
    
   
 
Cost of goods sold
    
209,132
    
6,298
  
Gross profit
    
1,351,548
    
19,501
  
 
    
   
 
Operating expenses
    
   
 
General and Administrative expenses
    
1,141,741
    
640,904
  
Depreciation and amortization expense
    
12,657
    
3,213
  
 
    
   
 
Total operating expenses
    
1,154,398
    
644,117
  
 
    
   
 
Net income (loss)
  
$
197,150
  
$
(624,616
)
 
    
   
 
Basic and diluted (loss) per common stock
    
   
 
 
    
   
 
Net income (loss) per share - basic and diluted
  
$
.00
  
$
(.00
)
 
    
   
 
Weighted average common shares outstanding
    
123,793,979
    
34,286,293
  

See notes to financial statements.
 
4
 
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)

 
  
For the three
months ended
  
 
  
February 29, 2008 and
February 28, 2007
  
 
  
2008
  
2007
  
 
  
 
  
 
  
Sales
  
$
1,281,704
  
$
12,859
  
 
          
Cost of goods sold
    
174,022
    
1,642
  
Gross profit
    
1,107,682
    
12,841
  
 
          
Operating expenses
          
General and Administrative expenses
    
914,864
    
546,644
  
Depreciation and amortization expense
    
4,336
    
1,071
  
 
          
Total operating expenses
    
919,200
    
547,715
  
 
          
Net income (loss)
  
$
188,482
  
$
(534,874
)
 
          
Basic and diluted income (loss) per common stock
          
 
          
Net income (loss) per share - basic and diluted
  
$
.00
  
$
(.00
)
 
          
Weighted average common shares outstanding
    
115,056,086
    
34,932,626
  
 
See notes to financial statements.
 
5

SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
For The Years Ended May 31, 2001 through 2008 and Nine Months
Ended February 29, 2008 (Unaudited)
 
                      
 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
  
 
6
 
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
For The Years Ended May 31, 2001 through 2008 and Nine Months
Ended February 29, 2008 (Unaudited)
 
  
 
 
  
 
  
 
  
 
  
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 infomercial 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
)
 
    
   
   
   
   
   
 
Issuance of shares for debt
    
146,854,720
    
146,854
    
1,977,384
    
   
   
2,124,238
  
 
    
   
   
   
   
   
 
Net profit for the nine months ended February 29, 2008
    
 
    
 
    
 
    
 
    
197,150
    
197,150
  
Balance-Unaudited February 29, 2008
    
193,697,126
 
$
193,697
  
$
5,424,740
  
$
0
  
$
(3,455,568
)
$
2,162,869
  
 
See notes to financial statements.
 
7
 
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)

 
  
For the nine
months ended February 29,
  
 
  
2008
  
2007
  
 
  
 
  
 
  
Operating Activities:
          
Net loss
  
$
197,150
  
$
(89,742
)
Adjustments to reconcile net loss to net cash provided by (used in)
          
Operating activities:
          
Depreciation and amortization
    
12,657
    
2,142
  
Issuance of stock for debt
   
2,124,238
    
0
  
Changes in operating assets and liabilities
          
Accounts receivable
    
(998,319
)
  
(1,410
)
Inventory
    
(266,812
)
  
17
  
Prepaid advertising
    
(846,975
)
  
0
  
Accounts payable and accrued expenses
    
20,561
    
77,199
  
 
          
Net cash provided (used) in operating activities
    
242,500
    
(11,794
)
Investing Activities:
          
 
          
Net cash (used) in investing activities
          
Purchase intangible assets
    
(223,500
)
  
0
  
 
          
Financing Activities:
          
 
          
Net cash provided by financing activities-loans
    
0
    
9,354
  
 
          
Net increase (decrease) in cash
    
19,000
    
(2,440
)
 
          
Cash - beginning
    
387
    
2,805
  
Cash - end
  
$
19,387
  
$
365
  
 
          
Supplemental Information
          
 
$
0
  
$
0
  
Income taxes paid
  
$
0
  
$
0
  

See notes to financial statement.
 
8
 
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 February 29, 2008 the Company had an accumulated deficit of $3,455,568. These factors raise substantial doubt about the Company's ability to continue as a going concern. The recovery of assets and continuation of future operations are dependent upon the Company's ability to obtain additional debt or equity financing and its ability to generate revenues sufficient to continue pursuing its business purposes. The Company is actively pursuing financing to fund future operations.
 
1 - Summary of Significant Accounting Policies (Continued)

Accounts Receivable

Accounts receivable have been adjusted for all known uncollectible accounts. As of February 29, 2008 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.
 
9
 
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 nine months ended February 29, 2008 and 2007, advertising costs totaled $931,300 and $0, respectively.
 
Shipping and Handling Costs

Shipping and handling costs are included in selling expenses. For the nine months ended February 29, 2008 and 2007, shipping and handling costs totaled $4,346 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-for-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.
 
10
 
2 - Property and Equipment

Property and equipment is summarized as follows:

 
  
Estimated
Useful Lives
Years
  
February 29,
2008
  
May 31,
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
    
   
41,908
    
36,922
  
 
    
   
   
 
 
    
 
$
14,993
  
$
19,979
  
 
Depreciation expense for the nine months ended February 29, 2008 and 2007 was $4,986 and $2,142, respectively.
 
3 - Accounts payable consist of the following:
   
  
February 29,
2008
  
May 31,
2007
  
   
          
Product development (Packaging & mold Development)
  
$
179,612
  
$
175,967
  
None Related Party  
              
Other  
    
108,834
    
12,366
  
   
              
Total  
  
$
288,446
  
$
188,333
  
 
4 - Related Party Transactions
 
 On December 3, 2007, the Company entered into a lease for an office located at 43W 33rd Street, Suite 600, New York, New York 10001 (the “Premises”). The Premises consist of 1,500 square feet of office space. The lease term commences on February 1, 2008 and expires January 30, 2011. However, the Company has an option to renew the lease for an additional 3 years at an increased rent of 5% for each additional year. Rent on the Premises is $4,000 per month plus 35% of the cost of electricity for the entire floor.

For the nine months ended February 29, 2008, RM Enterprises, a related party, loaned the Company an aggregate of $2,119,238 for operating expenses, for the purchase of the additional infomercial, and the prepayment of inventory aggregating $266,812 and prepaid advertising expenses aggregating $846,975. (See note-7 for details)
 
11
 
As of February 29, 2008, the Company issued RM Enterprises an aggregate of 146,854,720 shares of common stock in consideration for the conversion of an aggregate of $2,119,238 in debt or $0.014 per share.
 
5 - Deferred Income Taxes
 
At February 29, 2008 and May 31, 2007, the Company had approximately $3,455,568 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 February 29, 2008 and May 31, 2007 is as follows:
 
 
  
February 29,
2008
  
May 31,
2007
  
Non-Current
    
   
 
Net operating loss carryforwards
  
$
3,455,568
  
$
3,652,718
  
 
    
   
 
Valuation allowance for deferred tax asset
    
(3,455,568
)
  
(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 February 29, 2008 and May 31, 2007, a valuation allowance for the full amount of the net deferred tax asset was recorded.
 
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.

On January 30, 2008, the Company entered into a production agreement with an unrelated party (“Marketer”) to produce and manage a television campaign of a broadcast quality commercial for various broadcast lengths in consideration for the payment of royalties aggregating 5% on all worldwide retail sales less loss on any returns or uncollectible accounts from orders obtained through the Marketer’s efforts.
 
7 - Intangible assets

Intangible assets consists of infomercials at a cost of $305,443. The estimated useful life of five to ten years is being amortized on a straight-line basis. Amortization expense for the nine months ended February 29, 2008 was $8,325.

8 – Subsequent Event
 
Subsequent to the date of the financial statements, the Company filed a Certificate of Amendment to its Certificate of incorporation, increasing the number of authorized shares of common stock to an aggregate of 420,000,000; $.001 par value per share with 400,000,000 being shares of common stock and 20,000,000 of preferred stock.

12
 
Item 2. Management's Discussion and Analysis
 
This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "our company believes," "management believes" and similar language. These forward-looking statements are based on our current expectations and are subject to certain risks, uncertainties and assumptions, including those set forth in the following discussion and under the heading "- Risk Factors" in our Form 10-KSB for the fiscal year ended May 31, 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 are 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, pet and bath uses, 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. To date, we have sold but not yet delivered, sponges for bath and pet use. We have also designed and have started to test market, but have not yet produced or sold, products using the same hydrophilic technology and other technologies for home cleaning use. We are looking for more opportunities to broaden our existing product lines.

Marketing

We are in the process of updating the company’s web site. Our newly enhanced web site will incorporate new product information, an updated online ordering section for consumers to place product orders, a new investor relations section with recent company news, stock quotes, and IR contact information and will also incorporate newly updated web site graphics.

We have also expanded the sales and marketing of our existing product lines and began airing a new commercial for the Auto Wash & Wax system in mid February 2008. The commercial is running on a variety of cable and satellite channels and is expected to run through February 2010. We have also entered into an agreement to produce a new commercial, at a cost of $35,000, for the Pet Sponge Care Kit. Upon completion of the commercial we anticipate the commercial will run on a variety of cable and satellite channels through June 2010.
 
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We have entered into the following arrangements or activities to promote our products:
 
·
We have committed to donate a percentage of our children’s bath sponge, Puddle Pals, revenue to The Darryl Strawberry Foundation, an organization that is dedicated to bringing global awareness to autism and other developmental disorders.

·
We entered into an agreement with the New York Yankees on March 25, 2008 pursuant to which we were granted a license to display certain advertising in Yankee stadium and make certain other commercial arrangements for the 2008 baseball season. We will hold a promotional day at Yankee Stadium on July 28, 2008 and will distribute a keychain to commemorate the final season at the old Yankee Stadium to the first 18,000 fans under 14 in attendance or 21 and over. Preceding the game, we will be mentioned on radio and television. Our name will be spotlighted in each of the ten games played preceding Promotional Day, and we will also have a Diamond Vision video spot in the Stadium. An on-field ceremony will be held to express thanks to SpongeTech®. Our sponsorship will be published in Yankees Magazine. For the 2008 season sponsorship, we have a Diorama advertisement and two Highway Marquee Clock advertisements on the Major Deegan Highway. The term of the agreement commenced on March 31, 2008 and will continue through November 1, 2008. The New York Yankees has the right to terminate and/or amend the Agreement upon 30 days prior written notice if: (a) the Yankees desires to change, alter or demolish the stadium, (b) relocate the Club from the stadium, (c) sell naming rights or Premier Partner rights, or (d) determines the association with the Company will be injurious to the goodwill and reputation of the Yankees. In the event the Yankees choose to terminate or amendment the agreement because of any of the foregoing events, the Company will be entitled to a proarata portion of the sponsorship fee paid calculated as set forth in the agreement. The agreement also contains other standard default provisions.

·
On March 31, 2008, we entered into a consulting agreement with Straw Marketing and Darryl Strawberry. Pursuant to the terms of the agreement, Darryl Strawberry agreed to make promotional appearances on behalf of the Company, coordinate promotional appearances with the New York Yankees and New York Mets, and introduce the Company to promotional opportunities with MLB. The Agreement provides for a term of one year, unless earlier terminated by the Company.

·
On April 8, 2008, our Auto Care products, including our "Smart Sponge," with wash and wax imbedded inside, as well as the Detail Sponge and Chamois, were featured during QVC’s “Keep It Clean” broadcast.

·
On April 11, 2008, we entered into an agreement with the New York Mets for certain advertising rights during the 2008 baseball season. Pursuant to the terms of the Agreement we received the right to have signage appear in left and right field during three full innings of each game. We will also sponsor a promotional day on May 13, 2008 where we will distribute t-shirts to the first 12,000 kids ages 12 and under in attendance. These t-shirts will be emblazoned with the Mets logo commemorating the Mets playing at Shea Stadium from 1964 through the end of the 2008 season. In addition, there will be a children’s clinic on the field prior to the game. During the two weeks before May 13th, there will be promotional announcements during five games on WPIX, SportsNet New York, and WFAN Radio. On the SpongeTech® Promotional Day there will be a scoreboard message and the opportunity to display a banner on each baseline.

·
We will be featured on The Price is Right Game Show during their May TV Sweeps. The feature will include two product game placement airdates tentatively scheduled for either April 30th, May 7th, 14th, or 21st. Our Auto Care Sponge will be featured in two of the games during two of these shows. The live read will briefly describe our sponge and how it is used.

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Results of Operations
 
Three and Nine Months ended February 29, 2008 and 2007
 
During the three and nine months ended February 29, 2008, we had sales of $1,560,680 and $1,281,704, respectively, as compared to sales of $12,859 and $ 25,799 during the three and nine months ended February 28, 2007, respectively. We had gross profit of $1,107,682 and $1,351,548 for the three and nine months ended February 29, 2008 respectively compared to $12,841 and $19,501 for the three and nine months ended February 28, 2007, respectively. Management attributes the increase in sales to our improved marketing campaign, including sales from our website.
 
Operating expenses for the nine months ended February 29, 2008 were $1,154,398 as compared to $644,117 for the nine months ended February 28, 2007. The increase of $510,281 is the result of an increase in general and administrative and primarily advertising expenses aggregating $931,200 for the nine months ended February 29, 2008.
 
For the three months period ended February 29, 2008 and February 28, 2007, we had operating expenses of $919,200 and $547,715 respectively. The increase of $371,485 is the result of an increase in general and administrative expenses and primarily advertising expenses for the quarter aggregating $717,080 for the quarter.
 
We had net income of $188,482 for the three months ended February 29, 2008 as compared to net loss of $534,874 for the three months ended February 28, 2007. For the nine months ended February 29, 2008 and February 28, 2007, we had a net profit of $197,150 and a net loss of $624,616, respectively.
 
Plan of Operations
 
We had sales of $342,019 during the year ended May 31, 2003. Since then there was a significant drop in sales. However, over the last two fiscal years, our sales have been steadily increasing. The main reason for the increase is our improved marketing campaign, including sales from our website. For the three months ended February 29, 2008, we had sales of $1,281,704. To date, we have orders of approximately $18,391,702, which we anticipate will be filled by January 17, 2009.
 
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.
 

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
 
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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. 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.
 
Currently, all orders for our products that we received are financed by our customers. If necessary, management intends to seek a production finance company to fund our purchase orders. 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 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.  

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. The infomercial has been completed and is being tested in areas with warm temperatures at this time, such as Florida and Southern California. In February 2008, this TV spot began airing in most states throughout the USA and anticipate that this spot will continue to air through February 2010. In February 2008, we entered into a Short From Spot Production Agreement with Immediate Capital in connection with our Pet Sponge Care Kit, on terms that are substantially the same as our agreement relating to our wash and wax system. To date, the commercial has not been completed but management anticipates that upon completion the infomercial will air on a variety of cable and satellite channels in the US through June 2010.

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. 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.
 
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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-microbial bath and kitchen soaps with a national detergent manufacturer for possible use under its logo and brand.
 
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 which we have name Puddle Pals.. The sponges, which float, are infused with a gentle soap/shampoo, sulfate free, inhibits bacteria growth in sponge and thorough gentle cleaning 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 intend to commence production of the Puddle Pals to fill orders receive to date.

Based upon our current cash reserves and forecasted operations, we believe that we may need to obtain additional funding to if there is an opportunity to broaden our sales and implement our plan of operation over the next twelve months. Our need for additional capital to finance our business strategy, operations, and growth will be greater should, among other things, revenue or expense estimates prove to be incorrect. If we fail to arrange for sufficient capital in the future, we may be required to reduce the scope of our business activities in the areas of marketing and research and development until we can obtain adequate financing. We may not be able to obtain additional financing in sufficient amounts or on acceptable terms when needed, which could adversely affect our operating results and prospects and force us to curtail our business operations. Debt financing must be repaid regardless of whether or not we generate profits or cash flows from our business activities. Equity financing may result in dilution to existing stockholders and may involve securities that have rights, preferences, or privileges that are senior to our common stock. If we do not receive funding at lower prices, this will have a dilutive effect on the value of our securities issued at higher prices.
 
Liquidity and Capital Resources
 
As of February 29, 2008, we had cash of $19,774 as compared to $365 at February 28, 2007.
Our current cash balance as of April 11, 2008 is approximately $72,238.28. Based upon our current cash reserves and forecasted operations, we believe that we will need to obtain at least $100,000 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 six months. 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.
 
At February 29, 2008, we had a working capital surplus of $1,842,433.

Our auditors, in their report dated August 28, 2007, have expressed substantial doubt about our ability to continue as going concern. 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.
 
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Off-Balance Sheet Arrangements
 
The Company does not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
 
Critical Accounting Policies
 
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The critical accounting policies that affect our more significant estimates and assumptions used in the preparation of our financial statements are reviewed and any required adjustments are recorded on a monthly basis.
 
Item 3. Controls and Procedures
 
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, we have concluded that our disclosure controls and procedures are effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions on required disclosure.
 
(b) Changes in internal controls. There was no change in our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II
OTHER INFORMATION
 
Item 1. Legal Proceedings.
 
We are not currently a party to, nor is any of our property currently the subject of, any pending legal proceeding. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
 
Item 2. Unregistered Sales of Equity Securities

None
 
Item 3. Defaults Upon Senior Securities.
 
None
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
None
 
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Item 5. Other Information.
 
Effective March 7, 2008, the Company amended its Certificate of Incorporation to increase its authorized capital from 220,000,000 to 420,000,000 consisting of 400,000,000 shares of common stock, par value $0.001 and 20,000,000 shares of preferred stock, par value $0.001.
 
Item 6. Exhibits

3.1
Certificate of Amendment to Certificate of Incorporation of Spongetech Delivery Systems, Inc. filed with the Secretary of State on March 7, 2008.*
10.1
Agreement dated March 25, 2008 between the New York Yankees Partnership and Spongetech Delivery Systems, Inc.*(Confidential treatment has been requested with respect to certain portions of this Exhibit. The omitted portions have been separately filed with the Securities and Exchange Commission)
10.2
Consulting Agreement dated as of March 31, 2008 by and among, Spongetech Delivery Systems, Inc., Straw Marketing and Darryl Strawberry.*
10.3
Letter Agreement between Spongetech Delivery Systems, Inc. and Sterling Mets, L.P. dated April 11, 2008.*(Confidential treatment has been requested with respect to certain portions of this Exhibit. The omitted portions have been separately filed with the Securities and Exchange Commission)
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.*
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.*

* Filed Herewith.
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Dated: April 15, 2008

 
Spongetech Delivery Systems, Inc.
 
 
 
 
By:
/s/ Michael L. Metter
 
 
Michael L. Metter
 
 
Chief Executive Officer
 
 
 
 
 
 
 
By:
/s/ Steven Moskowitz
 
 
Steven Moskowitz
 
 
Chief Financial Officer and Chief
 
 
Operating Officer
 
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