Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
| x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
for
the
quarterly period ended August 31, 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)
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Delaware
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54-2077231
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(State
of incorporation)
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(I.R.S.
Employer Identification Number)
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43
West
33 rd
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 large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
| |
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company þ
|
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
October 14, 2008, 2008, the Company had 809,885,873 shares of common stock
issued and outstanding.
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Page
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2
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6
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6
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6
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6
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9
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10
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10
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10
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10
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12
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FINANCIAL
INFORMATION
INDEX
TO FINANCIAL STATEMENTS
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Page
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F-1
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F-2
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F-3
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F-4
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F-5-
F-10
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SPONGETECH
DELIVERY SYSTEMS, INC.
| |
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August
31, 2008
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May
31, 2008
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ASSETS
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Unaudited
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CURRENT
ASSETS
|
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Cash
and cash equivalents
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$
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165,919
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$
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208,709
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Accounts
receivable
|
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3,560,049
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3,974,810
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Inventory
|
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539,588
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387,531
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Deposits
on inventory production
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2,512,871
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0
|
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Prepaid
advertising and commissions
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3,156,240
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637,875
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Total
current assets
|
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9,934,667
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5,208,925
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PROPERTY
AND EQUIPMENT, net
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33,186
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32,554
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OTHER
ASSETS
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Intangible
assets, net
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341,075
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369,243
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Security
deposit
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8,000
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8,000
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Total
other assets
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349,075
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377,243
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TOTAL
ASSETS
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$
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10,316,928
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$
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5,618,722
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
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CURRENT
LIABILITIES
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Accounts
payable
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$
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418,338
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$
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202,562
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Accrued
expenses
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78,975
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78,975
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Loan
payable-related party
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133,870
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7,021
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Income
taxes payable
|
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1,000
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|
1,000
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Total
current liabilities
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632,183
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289,558
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LONG-TERM
LIABILITIES
|
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0
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0
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STOCKHOLDERS’
EQUITY
|
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Preferred
stock, $0.001 par value, 50,000,000 shares authorized,
|
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0
shares issued and outstanding
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0
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0
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Common
stock, $0.001 par value, 750,000,000 shares authorized,
|
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533,085,873
and 46,842,406 shares issued and outstanding at
|
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August
31, 2008 and May 31, 2008
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533,086
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365,473
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Additional
paid-in-capital
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10,483,869
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7,371,954
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Deficit
|
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(1,332,210
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)
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(2,408,263
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)
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Total
stockholders’ equity
|
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9,684,745
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5,329,164
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TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
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$
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10,316,928
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$
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5,618,722
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The
accompanying notes are an integral part of these statements.
SPONGETECH
DELIVERY SYSTEMS, INC.
Unaudited
| |
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For
the three months ended
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August
31, 2008
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August
31, 2007
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Revenue
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$
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5,544,619
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$
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64,076
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Cost
of goods sold
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1,668,552
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13,566
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Gross
profit
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3,876,067
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50,510
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Operating
Expenses
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Advertising
and promotion
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2,325,042
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34,145
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Selling,
general and administrative
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299,354
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22,641
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Research
and development
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142,502
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0
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Depreciation
and amortization
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33,118
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3,985
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Total
operating expenses
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2,800,016
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60,771
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Net
income (loss) from operations
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1,076,051
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(10,261
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)
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Other
expenses-interest
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2
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0
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Net
income (loss)
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$
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1,076,053
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$
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(10,261
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)
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Net
income (loss) per share from continuing operations:
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Basic
and diluted
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$
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.00
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$
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(.00
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)
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Weighted
average number of shares outstanding:
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Basic
and diluted
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481,415,845
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46,842,406
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The
accompanying notes are an integral part of these statements
SPONGETECH
DELIVERY SYSTEMS, INC.
Unaudited
| |
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For
the three
|
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For
the three
|
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months
ended
|
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months
ended
|
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|
August
31, 2008
|
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August
31, 2007
|
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OPERATING
ACTIVITIES
|
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|
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Net
income (loss)
|
|
$
|
1,076,053
|
|
$
|
(10,261
|
)
|
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Adjustments
for noncash and nonoperating items:
|
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Depreciation
and amortization
|
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33,118
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3,985
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Issuance
of common stock for consulting fees, loan payments,
|
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advertising,
and other
|
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3,279,528
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0
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Changes
in operating assets and liabilities:
|
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Receivables
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414,761
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(59,304
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)
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Inventory
|
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(152,057
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)
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0
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Deposits
on inventory production
|
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|
(2,512,871
|
)
|
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0
|
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Prepaid
adverting and commissions
|
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(2,518,365
|
)
|
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0
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Accounts
payable and accrued expenses
|
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215,776
|
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6,895
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Loans
payable
|
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126,849
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87,424
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Cash
provided (used) by operating activities
|
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(37,208
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)
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28,739
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INVESTING
ACTIVITIES
|
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Capital
expenditures
|
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|
(2,132
|
)
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|
0
|
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Intangible
assets
|
|
|
(3,450
|
)
|
|
(26,577
|
)
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Cash
(used) by investing activities
|
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|
(5,582
|
)
|
|
(26,577
|
)
|
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|
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FINANCING
ACTIVITIES
|
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0
|
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|
0
|
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| |
|
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|
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NET
INCREASE (DECREASE) IN CASH
|
|
|
(42,790
|
)
|
|
2,162
|
|
| |
|
|
|
|
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CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
208,709
|
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|
387
|
|
| |
|
|
|
|
|
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|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
165,919
|
|
$
|
2,549
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
Disclosures:
|
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|
|
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|
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|
|
Interest
|
|
$
|
0
|
|
$
|
0
|
|
|
Taxes
|
|
$
|
0
|
|
$
|
0
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements
SPONGETECH
DELIVERY SYSTEMS, INC.
August
31, 2008
NOTE
A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
| 1. |
Nature
of Operations/ Basis of
Presentation
|
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-like cleaning and waxing products.
Basis
of
Presentation
The
accompanying interim unaudited condensed financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission (the “SEC”) for interim financial statements and in the opinion of
management contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of August
31,
2008, and the results of operations for the three months ended August 31, 2008
and 2007, and cash flows for the three months ended August 31, 2008 and 2007.
These results have been determined on the basis of accounting principles
generally accepted in the United States and applied consistently as those used
in the preparation of the Company's 2008 Annual Report on Form
10-K.
Inventories
are stated at the lower of cost (first-in, first-out) or market (net realizable
value). They consist mainly of sponges and packing supplies.
Investments
having an original maturity of 90 days or less that are readily convertible
into
cash are considered cash equivalents. The Company has no cash equivalents as
of
August 31, 2008 and May 31, 2008.
|
4.
|
Property
and Equipment
|
Property
and equipment are stated at cost and are depreciated principally on methods
and
at rates designed to amortize their costs over their estimated useful lives.
Property
and equipment is summarized as follows:
| |
|
Estimated
Useful Lives
Years
|
|
August
31,
2008
|
|
May
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and office equipment
|
|
|
5
- 10
|
|
$
|
21,469
|
|
$
|
19,337
|
|
|
Machinery
and equipment
|
|
|
5
- 10
|
|
|
17,828
|
|
|
17,828
|
|
|
Molds
|
|
|
3
- 5
|
|
|
38,312
|
|
|
38,312
|
|
|
|
|
|
|
|
|
77,609
|
|
|
75,477
|
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
44,423
|
|
|
42,925
|
|
|
|
|
|
|
|
$
|
33,186
|
|
$
|
32,554
|
|
Depreciation
expense for the three months ended August 31, 2008 and 2007 was $1,500 and
$1,071, respectively.
Accounts
receivable have been adjusted for all known uncollectible accounts. As of August
31, 2008 and May 31, 2008 there were no doubtful accounts.
As
of
August 31, 2008 and May 31, 2008, the Company had approximately $1,332,210
and
$2,408,263 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, 2008 and May 31, 2008 is as
follows:
| |
|
August
31,
|
|
May
31,
|
|
|
|
|
2008
|
|
2008
|
|
|
Non-Current
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
1,332,210
|
|
$
|
2,408,263
|
|
|
Valuation
allowance for deferred tax asset
|
|
|
(1,332,210
|
)
|
|
(2,408,263
|
)
|
| |
|
$
|
0
|
|
$
|
0
|
|
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, 2008 and May 31, 2008, a valuation allowance for the full amount of the
net
deferred tax asset was recorded.
Sales
and
services are recorded when products are delivered to the customers. Provision
for discounts, estimated returns and allowances, and other adjustments are
provided for in the same period the related sales are recorded. In instances
where products are configured to customer requirements, revenue is recorded
upon
the successful completion of the Company’s final test procedures. For the first
quarter ended August 31, 2008, three customers, SA Trading Company, US Asia
Trading and Dubai Export Import Company, accounted for 67.6 percent of sales.
| 8. |
Advertising
and Promotion Cost
|
Advertising
and promotion costs are expensed as incurred. For the three months ended August
31, 2008 and 2007, advertising and promotion costs totaled $2,325,042 and
$34,145, respectively.
Intangible
assets consists of infomercials and trademark cost aggregating $382,867. The
estimated useful life of three to five years is being amortized on a
straight-line basis. Amortization expense for the three months ended August
31,
2008 and 2007 was $31,618 and $ 0, respectively. Intangible assets, net of
accumulated amortization, was $341,075 and $369,243 as of August 31, 2008 and
May 31, 2008.
| 10. |
Recent
Accounting Pronouncements
|
New
accounting statements issued, and adopted by the Company, include the
following:
In
July
2006, the Financial Accounting Standards Board issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement
No. 109”. This interpretation clarifies the accounting for uncertainty in income
taxes recognized in a company’s financial statements and establishes guidelines
for recognition and measurement of a tax position taken or expected to be taken
in a tax return. We have adopted this statement which became effective on
January 1, 2007. The Company has not made any adjustments as a
result of the adoption of this interpretation.
In
September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”).
This Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures
about
fair value measurements. We are currently evaluating the impact on our financial
statements of SFAS 157, which will become effective for us on January 1, 2008
for financial assets and January 1, 2009 for non-financial assets.
In
February 2007, the Financial Accounting Standards Board 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 entities with 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. The Company has not yet determined the
effect of SFAS No. 159 on its financial position, operations or cash flows.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” It
will require an acquirer to recognize, at the acquisition date, the assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at their full fair values as of that date. In a business combination
achieved cost of the acquired entity but will be required to be accounted for
separately in accordance with applicable generally accepted accounting
principles in the U.S. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15,
2008.
In
April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a
recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”
(“SFAS No. 142”) in order to improve the consistency between the useful
life of a recognized intangible asset under SFAS No. 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS
No. 141(R) and other GAAP. FSP FAS 142-3 is effective for financial
statements issued for fiscal years and interim periods beginning after
December 15, 2008 and is to be applied prospectively to intangible assets
acquired after the effective date. Disclosure requirements are to be applied
prospectively to all intangible assets recognized as of, and subsequent to,
the
effective date. Early adoption is not permitted. The Company is currently
evaluating the impact of adopting FSP FAS 142-3 on its Financial Statements.
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the accounting
principles used in preparing financial statements of nongovernmental entities
that are presented in conformity with GAAP. Currently, GAAP hierarchy is
provided in the American Institute of Certified Public Accountants U.S. Auditing
Standards (“AU”) Section 411, “The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles” (“AU Section 411”). SFAS
No. 162 is effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board’s amendments to AU Section 411. The
Company does not expect the adoption of SFAS No. 162 to have an impact on
its Financial Statements.
Preparing
the Company’s financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
| 12. |
Shipping
and Handling Costs
|
Shipping
and handling costs are included in selling expenses. For the three months ended
August 31, 2008 and 2007, shipping and handling costs totaled $24,107 and $0
respectively.
| 13. |
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.
| 14. |
Research
and Development
|
Research
and development costs are expensed in the year incurred. For the three months
ended August 31, 2008 and 2007, these costs aggregated $ 142,502 and $ 0,
respectively.
NOTE
B - LOAN PAYABLE-RELATED PARTY
As
of
August 31, 2008 a related party advanced the Company $133,870 with no interest.
We no longer owe this money.
NOTE
C - 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
1500 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.
In
July
2008, RM Enterprises International, Inc., a company that is our majority
stockholder and which is controlled by our officers and directors, agreed to
grant the Company the right, exercisable by the Company at any time on or prior
to February 28, 2010, to repurchase all or any portion of the 267,154,132 shares
issued that RM Enterprises International, Inc. had purchased from the Company
since January 1, 2008 at the original price paid by RM Enterprises
International, Inc. to the Company for such shares, or an aggregate of
$4,918,432.46 for all of such shares. Such shares were issued in tranches at
the
time of each of the advances of funds to the Company at a 40% discount from
the
market price on the date of each such advance. The average per share issuance
price for the shares was $0.0184.
On
July
16, 2008, the Company entered into an employment agreement with Steven Moskowitz
pursuant to which Mr. Moskowitz agreed to act as the Chief Operating Officer
and
Chief Financial Officer for a three-year term. In consideration for his agreeing
to act as Chief Operating Officer and Chief Financial Officer and in lieu of
any
salary payable in cash for the three-year term, the Company agreed to issue
an
aggregate of 4,000,000 shares of Class B Stock to Mr. Moskowitz. Such Class
B
Stock is entitled to 100 votes per share on all matters for each share of Class
B Stock owned, and vote together with the holders of common stock on all
matters. Further, each share of Class B Stock is convertible at the option
of
the holder, into one fully paid and nonassessable share of Common
Stock.
On
July
16, 2008, the Company entered into an employment agreement with Michael L.
Metter pursuant
to which Mr. Metter agreed to act as the Chief Executive Officer for a
three-year term. In consideration for his agreeing to act as Chief Executive
Officer and in lieu of any salary payable in cash for the three-year term,
the
Company agreed to issue an aggregate of 4,000,000 shares of Class B Stock to
Mr.
Metter. Such Class B Stock is entitled to 100 votes per share on all matters
for
each share of Class B Stock owned, and vote together with the holders of common
stock on all matters. Further, each share of Class B Stock is convertible at
the
option of the holder, into one fully paid and nonassessable share of Common
Stock.
On
July
16, 2008, the
Company entered into a consulting agreement with Frank Lazauskas pursuant to
which Mr. Lazauskas agreed to act as a consultant to the Company for a
three-year term. In consideration for his agreeing to act as a consultant,
and
in lieu of any compensation payable in cash for the three-year term, the Company
agreed to issue an aggregate of 2,000,000 shares of Class B Stock to Mr.
Lazauskas. Such Class B Stock is entitled to 100 votes per share on all matters
for each share of Class B Stock owned, and vote together with the holders of
common stock on all matters. Further, each share of Class B Stock is convertible
at the option of the holder, into one fully paid and nonassessable share of
Common Stock.
NOTE
D - COMMITMENTS AND CONTINGENCIES
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.
On
June
2, 2008, the Company entered into a consulting agreement with R.F. Lafferty
& Co., Inc. pursuant
to which R.F. Lafferty & Co., Inc. agreed
to
provide certain strategic financial and advisory services to the Company for
a
two-year term. In consideration for their agreeing to act as a consultant,
the
Company agreed to issue an aggregate of 2,000,000 shares of common Stock to
R.F.
Lafferty & Co., Inc.
On
July
16, 2008, the Company issued
an
aggregate of 2,253,436 shares of common stock to Sichenzia Ross Friedman Ference
LLP as compensation for legal services rendered to the Company.
Effective
October 8, 2008, the Board of Directors of the Company amended the Company’s
Certificate of Incorporation to increase its authorized capital to 1,000,000,000
shares consisting of 950,000,000 shares of common stock, par value $0.001,
40,000,000 shares of preferred stock, par value $0.001, and 10,000,000 shares
of
Class B Stock, par value $0.001. The Class B Stock is a newly created
designation.
NOTE
E - COMMITMENTS AND CONTINGENCIES (continued)
Description
of Class B Stock
Holders
of Class B Stock are entitled to vote on all matters submitted to shareholders
of the Company and are entitled to 100 votes for each share of Class B Stock
owned. Holders of Class B Stock vote together with the holders of common stock
on all matters.
Each
share of Class B Stock is convertible at the option of the holder, into one
fully paid and nonassessable share of Common Stock.
Holders
of the Class B Stock shall be entitled to receive such dividends and other
distributions in cash, stock or property of the Company as may be declared
thereon by the Board of Directors from time to time out of assets or funds
of
the Company legally available. In the case of cash dividends, if at any time
a
cash dividend is paid on the Common Stock, a cash dividend will also be paid
on
the Class B Stock in an amount per share Class B Stock equal to 90% of the
amount of the cash dividends paid on each share of the Common Stock (rounded
down, if necessary, to the nearest one-hundredth of a cent).
No
person
holding shares of Class B Stock of record may transfer, and the Company shall
not register the transfer of, such shares of Class B Stock, as Class B Stock,
whether by sale, assignment, gift, bequest, appointment or otherwise, except
to
a permitted transferee (as described in the Certificate of Amendment) and any
attempted transfer of shares not permitted shall be converted into Common Stock
as provided by subsection.
On
July
16, 2008, the Company formed six wholly-owned subsidiaries under the laws of
the
State of Nevada: (1) Spongetech Kitchen & Bath, Inc.; (2) Spongetech Health
& Beauty, Inc.; (3) Spongetech Auto, Inc.; (4) Spongetech Medical, Inc.; (5)
Spongetech Pets, Inc.; and (6) America’s Cleaning Company. The Company plans to
engage in its proposed different lines of business through each of the
subsidiaries and to hold all intellectual property in its America’s Cleaning
Company subsidiary.
Forward-Looking
Statements
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this report. References
in
this section to "Spongetech Delivery Systems, Inc.," the "Company," "we," "us,"
and "our" refer to Spongetech Delivery Systems, Inc. and our direct and indirect
subsidiaries on a consolidated basis unless the context indicates otherwise.
This
report contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These include statements about our
expectations, beliefs, intentions or strategies for the future, which we
indicate by words or phrases such as "anticipate," "expect," "intend," "plan,"
"will," "we believe," "our company believes," "management believes" and similar
language. These forward-looking statements are based on our current expectations
and are subject to certain risks, uncertainties and assumptions, including
those
set forth in the following discussion and under the heading "- Risk Factors"
in
our Form 10-Q for the quarter ended August 31, 2008. Our actual results may
differ materially from results anticipated in these forward-looking statements.
We base our forward-looking statements on information currently available to
us,
and we assume no obligation to update them. In addition, our historical
financial performance is not necessarily indicative of the results that may
be
expected in the future and we believe that such comparisons cannot be relied
upon as indicators of future performance.
To
the
extent that statements in the report is not strictly historical, including
statements as to revenue projections, business strategy, outlook, objectives,
future milestones, plans, intentions, goals, future financial conditions, future
collaboration agreements, the success of the Company's development, events
conditioned on stockholder or other approval, or otherwise as to future events,
such statements are forward-looking, All forward-looking statements, whether
written or oral, and whether made by or on behalf of the company, are expressly
qualified by the cautionary statements and any other cautionary statements
which
may accompany the forward-looking statements, and are made pursuant to the
safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
The
forward-looking statements contained in this annual report are subject to
certain risks and uncertainties that could cause actual results to differ
materially from the statements made. Other important factors that could cause
actual results to differ materially include the following: business conditions
and the amount of growth in the Company's industry and general economy;
competitive factors; ability to attract and retain personnel; the price of
the
Company's stock; and the risk factors set forth from time to time in the
Company's SEC reports, including but not limited to its annual report on Form
10-KSB; its quarterly reports on Forms 10-QSB; and any reports on Form 8-K.
In
addition, the company disclaims any obligation to update or correct any
forward-looking statements in all the Company's annual reports and SEC filings
to reflect events or circumstances after the date hereof.
Overview
We
design, produce, market, and distribute cleaning products for vehicular and
pet
cleaning, utilizing patented technology relating to sponges containing
hydrophilic, or liquid absorbing, foam polyurethane matrices and other
technologies. Our products can be pre-loaded with detergents and waxes, which
are absorbed in their core then gradually released during use. We have designed
and are conducting additional research and development for products and
applications using hydrophilic technology and other technologies for kitchen
and
bath, health and beauty, auto, and medical use, which we intend to market and
sell as part of our product offering. There is no assurance that we will
successfully be able to market and sell products for kitchen and bath, health
and beauty, auto, and/o medical use.
Events
and Uncertainties that are critical to our business
From
our
inception through the fiscal year ended May 31, 2006 we had limited operations,
and, like all new businesses, faced 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. Specifically, from our inception
in 1999 through the fiscal year ended May 31, 2003, we had sales of $342,019.
Between June 1, 2004 and the fiscal year ended May 31, 2006, we had minimal
sales (an aggregate of $15,768) and instead focused on product development.
For
the fiscal year ended May 31, 2007 we had sales of $55,112 and incurred net
losses of $817,217.
For
the
fiscal year ending May 31, 2008 we had sales of $5,633,084 and net income of
$1,244,455. During the three months ended August 31, 2008, we had sales of
$5,544,619 and net income of $1,096,130. For the three months ended August
31,
2007, we had sales of $64,076 and incurred net losses of $10,261. While it
is
management’s expectation that the significant increase in sales experienced
during the fiscal year ended May 31, 2007, and the related development of our
business and operations will continue into second, third, and fourth quarters
of
the current fiscal year, no assurance can be given that this will continue
or
that we would not incur any setbacks, delays or other interruptions of our
business or operations.
Additionally,
prior to the last fiscal year, we had historically depended on one customer
for
almost all of our sales. Specifically, 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. Accordingly, during the fiscal year ended May 31,
2007,
and the three months ended August 31, 2008, we significantly developed our
business and sales, reduced our dependence on one large customer, and
diversified our sales by adding other accounts.
We
have
also historically depended primarily on one manufacturer for the production
of
our products. Such manufacturer was H.H. Brown Shoe Technologies, Inc. (d/b/a
Dicon Technologies), and closed its manufacturing operations in 2007. In 2007,
an investment company bought Dicon Technologies from H.H .Brown Shoe
Technologies, Inc.. From that time until recently some products were
manufactured in China by partners of our manufacturer under an oral agreement
using encapsulation technology instead of technology relating to hydrophilic
sponges. In June 2008, Dicon began manufacturing at a temporary plant in the
United States. Dicon is constructing a new facility in the United State that
is
planned to be completed around the end of calendar year 2008 and will
manufacture products for us.
There
is
significant lead time required on products manufactured abroad. As a result,
to
the extent that we are unable to obtain products manufactured locally or in
the
United States, there is no assurance that we will be able to maintain sufficient
inventory on hand to fulfill orders which require delivery in short time frames.
If we are unable to deliver products to customers timely, we may lose these
customers.
We
have
not entered into any agreement with Dicon or its partners for the manufacture
of
our products. We may still use China facilities for Pacific Rim distribution
(South Korea, Japan, China, Thailand, Vietnam, etc). 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 we have
previously obtained from Dicon.
During
the last two fiscal years, we received some essential services at no charge
due
to certain business relationships established by our management. Had we been
charged for all these services, these costs would be reflected as expenses
in
our financial statements. Some of the areas where these services were provided
include, but are not limited to, art work, packaging, design and consulting.
We
anticipate that this arrangement will continue at least through the current
fiscal year if and when this arrangement ceases, we expect that our costs of
doing business will increase.
Our
business model is to outsource our operations when possible. We look to hire
to
outsource our 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 this outsourced sales team,
our
businesses will be profitable.
Subsequent
Events
We
introduced the Gold Bar Tub & Tile Cleaning System™ on The Balancing Act TV
show on October 6, 2008. This is the initial announcement for the Kitchen &
Bath Care wholly owned subsidiary of Spongetech. Three SKUs are available on
the
Spongetech website.
The
new
website www.spongetech.comwas
launched on October 10, 2008. Also on October 11, 2008, we moved the content
from the old website to www.sponget.com.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The critical accounting policies that affect our more significant
estimates and assumptions used in the preparation of our financial statements
are reviewed and any required adjustments are recorded on a monthly
basis.
Results
of Operations
Three
Months Ended August 31, 2008 Compared to Three Months Ended August 31,
2007
Revenues
During
the three months ended August 31, 2008 we had sales of $5,544,619 as compared
to
sales of $64,076 the same period in 2007, an
increase
of $5,480,543. Shipments were begun to retail outlets and distributors to
domestic companies. Some of the domestic shipments were to Bashas’, Kroger and
Price Chopper. The 3 Pack Car Sponge Kit is available in these stores.
Management attributes this increase to the Company’s expanded and improved
marketing campaign, including sales from our website, www.spongetech.com.
We
initially launched our website, www.spongetech.com,
in
February 2004, to sell our car cleaning kit directly to the public. From
inception through the first quarter 2009 ending August 31, 2008, we sold
approximately 5,100 kits for an aggregate sales price of approximately $68,200.
We pay the website hosting company, Harbor Enterprises, an average of 20%
royalty from the sales price on all Internet sales. We have not entered into
a
contract with Harbor Enterprises. Either party may terminate the relationship
at
any time. We ship directly to customers.
We
launched Uncle Norman’s Pet Sponge for sale on July 11, 2008.
We
had
historically depended on few customers for almost all of our sales. For the
first quarter ended August 31, 2008 , three customers, SA Trading Company,
US
Asia Trading, and Dubai Export Import Company, accounted for 67.6 percent of
our
sales.
Cost
of Goods Sold
Cost
of
goods sold was $1,668,552 or approximately 30 percent of sales, for the three
months ended August 31, 2008 as compared to $13,566 or approximately 21 percent
of sales, for the three months ended August 31, 2007. While the cost of goods
sold increased significantly as a result of our increase in sales, we also
benefitted from greater economies of scale. During the three months ended August
31, 2008, a portion of our cost of goods sold, including costs related to
warehousing, packaging, and shipping of products, were borne by (and not charged
back to the Company) a privately-held company controlled by our Chief Operating
Officer.
Operating
Expenses
Operating
expenses for the three months ended August 31, 2008 increased to $2,800,016
from
$60,711 for the three months ended August 31, 2007. This increase of $2,739,245
was primarily a result of advertising and promotion expenses ($2,325,042)
associated with the Company’s increased presence at trade shows, as well as the
numerous media, advertising and sponsorships projects entered into during the
first quarter ending August 31, 2008, as compared to the media and advertising
expenses from the three months ended August 31, 2007 (which totaled $34,145).
The increase in operating expenses can also be attributed to an increase in
research in development, to $142,502 for the three months ended August 31,
2008,
from $0 for the three months ended August 31, 2007. The increase in research
and
development is attributed to the development of new product developments,
revised and new packaging designs, graphics and marketing costs associated
with
this effort. Depreciation and amortization expense increased to $33,118 for
the
three months ened August 31, 2008, an increae from $3,985 for the three-months
ended August 31, 2007. Selling, general, and administrative expenses for the
three months ended August 31, 2008 were $299,354, an increase from $34,145
for
the three months ended August 31, 2007. Selling, general, and administrative
expenses were much lower in the 2007 fiscal year due to the fact that a portion
of our selling, general and administrative expenses, including costs related
to
product and package design as well as certain consultants, were borne by (and
not charged back to the Company) a privately-held company controlled by the
family of our Chief Operating Officer. In the fiscal year ending May 31, 2008,
this same practice continued. For the first quarter ending August 31, 2008,
some
of these costs are still being borne by (and not charged back to the Company)
a
privately-held company controlled by our Chief Operating Officer.
Net
Income (Loss)
Net
income for the three months ended August 31, 2008 was $1,076,053 as compared
to
a net loss of $10,261 for the three months ended August 31, 2007, an increase
of
$1,086,314.
Liquidity
and Capital Resources
As
of
August 31, 2008, we had cash in the amount of $165,919 as compared to $2,549
at
August 31, 2007. The increase was due primarily to cash generated by operating
activities.
Our
working capital at August 31, 2008 was $9,302,484 as compared to a working
capital (deficiency) of ($425,057) at August 31, 2007.
For
the
three months ended August 31, 2008, cash used by operating activities was
$37,208 primarily attributable to our $1,076,053 net income and increased by
$3,279,528 from issuance of common stock for consulting fees, loan payments
and
advertising, offset by $2,518,365 for prepaid advertising and commissions and
$2,512,871 for deposits on inventory production. For the three months ended
August 31, 2007, cash provided by operating activities was $28,739. This was
primarily because our net loss was $10,261 and no income from the issuance
of
common stock for consulting fees, loan payments, etc.
For
the
three months ended August 31, 2008, net cash used in investing activities was
$5,582. For the three months ended August 31, 2007, net provided (used) by
investing activities was approximately $26,577. Both expenses were primarily
related to equipment purchases and intangible assets.
For
the
three months ended August 31, 2008, the Company issued an aggregate of
14,830,000 shares of common stock to RM Enterprises International, Inc., a
company that is our majority stockholder and which is controlled by our officers
and directors, in consideration of the advance to the Company of an aggregate
of
$2,746,442 by RM Enterprises International, Inc. Such shares were issued in
tranches at the time of each of the advances of funds to the Company at a 40%
discount from the market price on the date of each such advance. The average
per
share issuance price for the shares was $0.0195.
Existing
balances of cash, cash experienced significant revenue growth between the three
months ended August 31, 2007 and the three months ended August 31, 2008. This
trend, if it continues, may result in higher accounts receivable levels and
may
require increased production and/or higher inventory levels. Should
our cash requirements to fund these requirements as well as other operating
or
investing cash requirements over the next twelve months be greater than our
current cash on hand, we may seek to obtain additional financing. We do not
currently have commitments for these funds and no assurance can be given that
additional financing will be available, or if available, will be on acceptable
terms. While we have historically funded our operations primarily through
investments and/or advances made by officer, directors and/or affiliates of
the
Company, there are no formal or written agreements with respect to the advance
of funds to the Company by our officers, directors and affiliates, and there
can
be no assurance that they will continue to do so.
The
Company has no outside debt. The Company is working with vendors to prepay
for
product to assist them in their operations.
Recent
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement
No. 109”. This interpretation clarifies the accounting for uncertainty in income
taxes recognized in a company’s financial statements and establishes guidelines
for recognition and measurement of a tax position taken or expected to be taken
in a tax return. We have adopted this statement which became effective on
January 1, 2007. The Company has not made any adjustments as a
result of the adoption of this interpretation.
In
September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”).
This Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures
about
fair value measurements. We are currently evaluating the impact on our financial
statements of SFAS 157, which will become effective for us on January 1, 2008
for financial assets and January 1, 2009 for non-financial assets.
In
February 2007, the Financial Accounting Standards Board 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 entities with 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. The Company has not yet determined the
effect of SFAS No. 159 on its financial position, operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” It
will require an acquirer to recognize, at the acquisition date, the assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at their full fair values as of that date. In a business combination
achieved cost of the acquired entity but will be required to be accounted for
separately in accordance with applicable generally accepted accounting
principles in the U.S. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15,
2008.
In
April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) in
order to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows
used to measure the fair value of the
asset
under SFAS No. 141(R) and other GAAP. FSP FAS 142-3 is effective for
financial statements issued for fiscal years and interim periods beginning
after
December 15, 2008 and is to be applied prospectively to intangible assets
acquired after the effective date. Disclosure requirements are to be applied
prospectively to all intangible assets recognized as of, and subsequent to,
the
effective date. Early adoption is not permitted. The Company is currently
evaluating the impact of adopting FSP FAS 142-3 on its Financial
Statements.
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the accounting
principles used in preparing financial statements of nongovernmental entities
that are presented in conformity with GAAP. Currently, GAAP hierarchy is
provided in the American Institute of Certified Public Accountants U.S. Auditing
Standards (“AU”) Section 411, “The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles” (“AU Section 411”). SFAS
No. 162 is effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board’s amendments to AU Section 411. The
Company does not expect the adoption of SFAS No. 162 to have an impact on
its Financial Statements.
N/A.
(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
We
are
not currently a party to, nor are 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.
Our
business involves a high degree of risk. Any of the following risks could
materially and adversely affect our business, financial condition, and results
of operations. This could cause the trading price of our common stock to
decline, with the loss of part or all of an investment in our common
stock.
Risks
relating to our Business
We
have a limited history of profitability which may not
continue.
While
we
had net income of $1,244,455 and $1,076,051 for the fiscal year ended May 31,
2007 and the three months ended August 31, 2008, respectively, we incurred
a net
loss of $817,217 for the fiscal year ended May 31, 2006. There can be no
assurance that we will sustain profitability or generate positive cash flow
from
operating activities in the future. If we cannot achieve operating profitability
or positive cash flow from operating activities, we may not be able to meet
our
working capital requirements. If we are unable to meet our working capital
requirements, we may need to reduce or cease all or part of our
operations.
Our
resources may not be sufficient to manage our expected growth; failure to
properly manage our potential growth would be detrimental to our
business.
We
may
fail to adequately manage our anticipated future growth. Any growth in our
operations will place a significant strain on our administrative,
financial and operational resources, and increase demands on our management
and
on our operational and administrative systems, controls and other resources.
We
cannot assure you that our existing personnel, systems, procedures or controls
will be adequate to support our operations in the future or that we will be
able
to successfully implement appropriate measures consistent with our growth
strategy. As part of this growth, we may have to implement new operational
and
financial systems, procedures and controls to expand, train and manage our
employee base, and maintain close coordination among our technical, accounting,
finance, marketing, sales and editorial staff. We cannot guarantee that we
will
be able to do so, or that if we are able to do so, we will be able to
effectively integrate them into our existing staff and systems. To the extent
we
acquire other businesses, we will also need to integrate and assimilate new
operations, technologies and personnel. If we are unable to manage growth
effectively, such as if our sales and marketing efforts exceed our capacity
to
deliver our products or if new employees are unable to achieve performance
levels, our business, operating results and financial condition could be
materially adversely affected.
We
derive a significant portion of our revenues from a limited number of customers,
the loss of which would significantly reduce our revenues.
We
have
derived, and believe that we will continue to derive, a significant portion
of
our revenues from a limited number of customers. To the extent that any
significant customer purchases less of our products or terminates its
relationship with us, our revenues could decline significantly. As a result,
the
loss of any significant customer could seriously harm our business. For the
fiscal year ended May 31, 2008, we had three separate customers which accounted
for 31.6%, 29.3% and 9.7% of our revenues. Other than under existing contractual
obligations, none of our customers is obligated to purchase additional products
from us. As a result, the volume of sales that we make to a specific customer
is
likely to vary from period to period, and a significant customer in one period
may not purchase our products in a subsequent period.
We
have historically been dependent on a single manufacturing source for our
products.
We
have
historically depended primarily on one manufacturer for the production of our
products. If our manufacturer experiences any significant disruption in the
operation of the manufacturing facility or a serious failure of a critical
piece
of equipment, we may be unable to supply products to our customers.
Interruptions in production of our products could be caused by manufacturing
equipment problems, the introduction of new equipment into the manufacturing
process or delays in the delivery of new manufacturing equipment to our
manufacturer.
We
depend on products made using one technology and products using different
technologies may attract customers jeopardizing our business
prospects.
Our
cleaning products depend on the use of licensed technology relating to sponge
like products incorporating a hydrophilic (liquid absorbing) polyurethane
matrix. A number of factors could limit our sales of these products, or the
profitability of such sales, including competitive efforts by other
manufacturers of similar products, shifts in consumer preferences or the
introduction and acceptance of alternative product offerings. We have developed
products using other technologies; and, thus, if our existing products or others
based on the same technology fail in the marketplace, we may be able to sustain
our operations or we may be forced to cease all operations.
We
depend, in part, on the efforts of independent sales persons to generate sales
of our products.
We
do not
have a sales staff devoted to generating sales of our products. Instead, we
rely, in part, on the efforts of independent sales groups, who are retained
on a
non-exclusive basis. These independent sales persons may not devote a
significant amount of time to promoting our products or may focus their efforts
on other products which may result in them receiving a bigger sales commission.
We have no control over these sales persons. If these sales persons are not
able
to generate significant sales for our products and we do not generate sales
from
our other efforts, we may be forced to curtail our operations and go out of
business.
The
marketplace may be indifferent to our products; in which case our business
will
fail.
Our
products, as well as other technologies used, feature an internal structure
which holds detergents and waxes or soap, conditioners and other components
which are released only when squeezed. However, potential users may be satisfied
with the cleaners, waxes and applicators they are presently using. Thus, we
may
expend our financial and personnel resources on design, marketing and
advertising without generating concomitant revenues. If we cannot generate
sufficient revenues to cover our overhead, manufacturing and operating costs,
our business will fail.
Compliance
with governmental regulations and implementation of any law or construction
of
any current law which has the effect of making it more costly to produce our
products may detrimentally affect our ability to produce and sell our products
which will cause us to curtail our operations and cease our
business.
Our
cleaning products may be regulated by the Consumer Product Safety Commission
under authority of the Hazardous Substances Act. The Consumer Product Safety
Commission's jurisdiction covers most non-cosmetic, non-drug substances used
in
the home. The Federal agency develops voluntary standards with industry and
issues and enforces mandatory standards or bans consumer products if no feasible
standard would adequately protect the public. It conducts research on potential
product hazards and obtains the recall of products that it believes pose
potential risk for serious injury or death, or arranges for their repair.
Additionally, the Consumer Product Safety Commission informs and educates
consumers through the media, state and local governments, private organizations
and by responding to consumer inquiries on, among other things, what safety
features to look for in products. We do not believe that we are currently
subject to any other direct federal, state or local regulation except in
connection with regulations applicable to businesses generally or directly
applicable to retailing or electronic commerce. However, from time to time
in
the future, Congress, the FDA or any other federal, state, local or foreign
legislative and regulatory authorities may impose additional laws or regulations
that apply to us, repeal laws or regulations that we consider favorable to
us or
impose more stringent interpretations of current laws or regulations. If these
agencies determine to implement any law, or construe any current law in such
a
way which will make it more costly to produce our products, we may be forced
to
reduce our business and cease operations. In addition, if any of these agencies
determine that there is no feasible way to adequately protect the public from
any of our products, we will immediately be forced to curtail our business.
Any
such developments could detrimentally affect our ability to sell our products
and become profitable and cause our business to fail.
Our
officers and directors are involved in other businesses which may cause them
to
devote less time to our business.
Michael
Metter, our President and Chief Executive Officer, serves a director and officer
for other companies. In addition to serving as our President and Chief Executive
Officer, Mr. Metter also serves as the President and Chief Executive Officer
of
BusinessTalk Radio.net, Chairman of Tiburon Capital Group, a privately held
holding corporation. Mr. Metter devotes approximately 20 hours each week,
constituting 30% of his time, to our business.
Mr.
Moskowitz, our Chief Operating Officer, Chief Financial Officer and Secretary,
also serves as a director and officer for other companies. Mr. Moskowitz is
the
Chief Executive Officer, President and Director of Vanity Events Holdings,
Inc.,
and President, Chief Executive Officer, and Chairman of the Board of Directors
of International Brand Group Management, Inc., both publicly traded companies.
He also serves as Chief Executive Officer, President and Director of MAP VI
Acquisition, Inc, Inc, a public reporting company. Mr. Moskowitz devotes 40
hours each week, constituting approximately 75% of his time, to our
business.
Mr.
Lazauskas, one of our directors, serves also as President of FJL Enterprises,
Inc. and TNJ Enterprises, Inc., which own and operate eight Dominos
Pizza Stores, and serves as a director of Vanity Holdings, Inc. Our officers'
and directors' involvement with other businesses may cause them to allocate
their time and services between us and other entities. Consequently, they may
give priority to other matters over our needs which may materially cause us
to
lose their services temporarily which could affect our operations and
profitability.
Risks
Related to Our Common Stock
Our
controlling shareholders may exercise significant control over us depriving
other stockholders of the ability to elect directors or effect other corporate
actions, and investors may not have a voice in our
management.
Our
directors and executive officers with their ownership of 10 million of the
Class
B shares have over 1,000,000 voting shares that provides a majority of the
shares and therefore control the Company. Our shareholders do not have
cumulative voting rights with respect to the election of directors.
Our
common stock is subject to the "penny stock" rules of the SEC and the trading
market in our securities is limited, which makes transactions in our common
stock cumbersome and may reduce the value of an investment in our
stock.
The
Securities and Exchange Commission has adopted Rule 3a51-1 which establishes
the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions.
For
any transaction involving a penny stock, unless exempt, Rule 15g-9
requires:
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that
a broker or dealer approve a person's account for transactions in
penny
stocks; and
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the
broker or dealer receives from the investor a written agreement to
the
transaction, setting forth the identity and quantity of the penny
stock to
be purchased.
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In
order
to approve a person's account for transactions in penny stocks, the broker
or
dealer must:
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obtain
financial information and investment experience objectives of the
person;
and
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make
a reasonable determination that the transactions in penny stocks
are
suitable for that person and the person has sufficient knowledge
and
experience in financial matters to be capable of evaluating the risks
of
transactions in penny stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
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sets
forth the basis on which the broker or dealer made the suitability
determination; and
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that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to
the
"penny stock" rules. This may make it more difficult for investors to dispose
of
our common stock and cause a decline in the market value of our
stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both
the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account
and
information on the limited market in penny stocks.
For
the
three-month period covered by this report, we issued the following securities
that were not registered under the Securities Act:
In
June
2008, we issued an aggregate of 25,482,659 shares of our common stock to RM
Enterprises International, Inc., a related party, in consideration for an
aggregate of $738,349.56 in debt, or $0.0290 per share. The control persons
of
RM Enterprises International are Michael Metter, Steven Moskowitz and Frank
Lazauskas, all of whom are directors of RM Enterprises
International.
In
June
2008, we issued 2,000,000 shares of our common stock to R.F. Lafferty & Co.
Inc. in consideration for financial, advisory, and consulting services provided
under the Consulting Agreement dated June 2, 2008.
In
July
2008, we issued an aggregate of 2,253,436 shares of our common stock to
Sichenzia Ross Friedman Ference LLP as compensation for legal services rendered
to the Company.
In
July
2008, we issued an aggregate of 61,230,000 shares of our common stock to RM
Enterprises International, Inc. in consideration for advances of an aggregate
of
$1,490,322 in debt or $0.0243 per share.
In
August
2008, we issued an aggregate of 74,900,000 shares of our common stock to RM
Enterprises International, Inc., in consideration for an aggregate of $1,494,175
in debt or $0.0189 per share.
None.
On
October 7, 2008, our shareholders approved a resolution to amend our certificate
of incorporation to increase our authorized capital to 950,000,000 shares of
common stock from 750,000,000. We maintained our current authorized 40,000,000
shares of preferred stock and 10,000,000 shares of Class B stock. Stockholders
Steven Moskowitz, Michael Metter and Frank Lazauskas cast a total of
1,000,000,000 votes in favor of increasing the authorized shares of common
stock. No other matters were addressed at this special meeting.
None.
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3.1
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Certificate
of Incorporation of Nexgen VIII, Inc. (Previously filed as an exhibit
to
registration statement on Form SB-2 filed November 1,
2002)
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3.2
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Certificate
of Amendment of Nexgen VIII, Inc. changing name to Spongetech Delivery
Systems, Inc. (Previously filed as an exhibit to registration statement
on
Form SB-2 filed November 1, 2002)
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3.3
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By-Laws
of Spongetech Delivery Systems, Inc. (Previously filed as an exhibit
to
registration statement on Form SB-2 filed November 1,
2002)
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3.4
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Certificate
of Incorporation of Romantic Scents, Inc. (filed as an exhibit to
first
amendment to registration statement on Form SB-2 filed January 13,
2003)
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3.5
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Certificate
of Amendment changing name of Romantic Scents, Inc. to RSI Enterprises,
Inc. (filed as an exhibit to first amendment to registration statement
on
Form SB-2 filed January 13, 2003)
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3.6
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Certificate
of Amendment changing name of RSI Enterprises, Inc. to Spongetech
Enterprises International, Inc. (filed as an exhibit to first amendment
to
registration statement on Form SB-2 filed January 13,
2003)
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3.7
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Certificate
of Incorporation of Merger Sub, Inc. (filed as an exhibit to first
amendment to registration statement on Form SB-2 filed January 13,
2003)
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3.8
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Merger
Certificate between Spongetech Delivery Systems and Merger Sub, Inc.
(filed as an exhibit to first amendment to registration statement
on Form
SB-2 filed January 13, 2003)
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3.9
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Merger
Certificate between Spongetech Enterprises International, Inc. and
Merger
Sub, Inc. (Previously filed as an exhibit to first amendment to
registration statement on Form SB-2 filed January 13,
2003)
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3.10
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Certificate
of Amendment changing name of Merger Sub, Inc. to Spongetech Delivery
Systems, Inc. (Previously filed as an exhibit to first amendment
to
registration statement on Form SB-2 filed January 13,
2003)
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3.11
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Amended
and Restated Certificate of Incorporation of Spongetech Delivery
Systems,
Inc. (Previously filed as an exhibit to the Company’s 10-QSB filed on
April 16, 2007)
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3.12
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Certificate
of Amendment increasing authorized capital (filed as an exhibit to
Form
10QSB filed April 15. 2007).
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3.13
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Certificate
of Amendment increasing authorized capital (filed as an exhibit to
Form 8K
filed July 28, 2008)
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Certificate
of Amendment increasing authorized capital.*
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4.1
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Specimen
Certificate of Common Stock (Previously filed as an exhibit to
registration statement on Form SB-2 filed November 1,
2002)
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4.2
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Warrant
Certificate (Previously filed as an exhibit to second amendment to
registration statement on Form SB-2 filed April 11,
2003)
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4.3
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Warrant
Agreement with Colebrook, Inc. and Olde Monmouth Stock Transfer Co.,
Inc.
(Previously filed as an exhibit to second amendment to registration
statement on Form SB-2 filed April 11, 2003)
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4.4
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Oral
Understanding with Dicon (Previously filed as an exhibit to fourth
amendment to registration statement on Form SB-2 filed January 12,
2004)
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4.5
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The
Spongetech Delivery Systems, Inc. 2007 Incentive Stock Plan (Previously
filed as an exhibit to Form 10KSB filed on August 29,
2007.
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10.1
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Stock
Purchase Agreement by and among Nexgen Acquisitions VIII, Inc., RM
Enterprises International, Inc. and RSI Enterprises,
Inc.
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10.2
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Stock
Purchase Agreement by and between Spongetech Delivery Systems, Inc.
and
Colebrook, Inc. (Previously filed as an exhibit to first amendment
to
registration statement on Form SB-2 filed January 13,
2003)
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10.3
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Extension
of debt letter by Romantic Moments, Inc. dated August 15, 2002 (Previously
filed as an exhibit to third amendment to registration statement
on Form
SB-2 filed July 8, 2003)
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10.4
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Factoring
Agreement with Westgate (Previously filed as an exhibit to third
amendment
to registration statement on Form SB-2 filed July 8,
2003)
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10.5
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Agreement
with Paradigm (Previously filed as an exhibit to fifth amendment
to
registration statement on Form SB-2 filed March 15,
2004)
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10.6
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Short
Form Spot Production Agreement dated June 13, 2007 (previously filed
as an
exhibit to the 10KSB filed August 29, 2007)
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10.7
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Sublease
dated December 3, 2007 (previously filed as an exhibit to the 8-K
filed on
January 1, 2008.
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10.8
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Agreement
dated March 25, 2008 between New York Yankees Partnership and Spongetech
Delivery Systems (filed as an exhibit to the Form 10QSB filed on
April 15,
2008).
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10.9
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Consulting
Agreement dated March 31, 2008 by and among Spongetech Delivery Systems,
Inc., Straw Marketing and Darryl Strawberry (filed as an exhibit
to the
Form 10QSB filed on April 15, 2008).
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10.10
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Letter
Agreement between Spongetech Delivery Systems, Inc., and Sterling
Mets,
L.P. dated April 11, 2008 (filed as an exhibit to the Form 10QSB
on April
15, 2008).
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10.11
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Employment
Agreement between Spongetech Delivery Systems, Inc. and Michael L.
Metter
dated July 16, 2008 (filed as an exhibit to Form 8K filed July 28,
2008).
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10.12
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Employment
Agreement between Spongetech Delivery Systems, Inc. and Steven Moskowitz,
dated July 16, 2008 ((filed as an exhibit to Form 8K filed July 28,
2008).
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10.13
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Consulting
Agreement between Spongetech Delivery Systems, Inc. and Frank Lazauskas
dated July 16, 2008 (filed as an exhibit to Form 8K filed July 28,
2008).
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10.14
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Consulting
Agreement between Spongetech Delivery Systems, Inc. and R.F Lafferty,
dated June 2, 2008 (filed as an exhibit to Form 8K filed July 28,
2008).
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10.15
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Letter
Agreement between Spongetech Delivery Systems, Inc. and R.M, Enterprises
International, Inc. dated July 24, 2008 (filed as an exhibit to Form
8K
filed July 28, 2008).
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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.*
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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.*
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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.*
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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.*
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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 14, 2008
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Spongetech
Delivery Systems, Inc.
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By:
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/s/
Michael L. Metter
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Michael
L. Metter
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Chief
Executive Officer
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By:
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/s/
Steven Moskowitz
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Steven
Moskowitz
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Chief
Financial Officer and Chief
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Operating
Officer
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