Spongetech Delivery Systems Inc (fka SPNGQ)

[scion]

3. Inventory.

Spongetech has advised the Trustee that they have approximately $1,000,000 (One Million Dollars) of inventory located in three separate locations. The Trustee has not verified this valuation and despite repeated requests has not been provided with a complete inventory by the Debtor. However, the Trustee has been in discussions with Spongetech as to how to sell this inventory to generate cash to fund operations over the short term. The Trustee has been told that there are several potential inventory sales which would take place late last week or early this week, but no funds have been received as of the date of this letter. Potential purchase orders have been provided to the Trustee to date and the total of those orders is less than $100,000 (One
Hundred Thousand Dollars). In addition, there are several issues related to selling the inventory including the following:

a. Termination Of Nickelodeon License Agreement.

A great deal of the inventory held by the Debtor consists of sponges produced under licenses granted by the cable network Nickelodeon. Spongetech provided the Trustee with a letter from Nickelodeon which was sent to and received by Spongetech on May 7, 2010 wherein Nickelodeon purported to terminate the license agreement pursuant to which these sponges were manufactured. The letter further states that the Debtor can no longer manufacture or sell any product manufactured pursuant to a Nickelodeon license. The Trustee’s attorneys are currently reviewing the license agreement to determine whether the termination was valid and to determine whether the Bankruptcy Estate can sell the inventory with the consent of Nickelodeon. Nickelodeon has advised that the Debtor can sell inventory over the next 30 days but continues to assert that it properly terminated the license agreement prior to the filing of the bankruptcy petition. In fact, Nickelodeon asserts that Spongetech never responded to the May 7 termination letter and, more importantly, that Spongetech never paid past due royalties owed pursuant to the license agreement. The Trustee will fully investigate whether the license agreement was validly terminated and to maximize any value this contract may have; however, there is, at a minimum, substantial uncertainty about Spongetech’s rights under this agreement. In addition, even if the contract is valid, it is scheduled to expire in December of 2010 and any manufacturing activities must cease in September. There are no apparent renewal rights for this contract.

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