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Replies to post #339580 on Spongetech Delivery Systems, Inc. (fka SPNGQ)
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.
Doc 69 PDF file
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c. Lack Of Receivables Financing.
Prior to filing bankruptcy, Spongetech had a factoring relationship. The Trustee has been in communication with the factor and they have advised that they ceased factoring invoices for Spongetech on June 30. They further advise that they will not provide any additional financing to Spongetech. They finally advise that they are in the process of winding down their account with Spongetech and anticipate that after they completed collection of outstanding invoices they will have somewhere between $14,000 (Fourteen Thousand Dollars) and $20,000 (Twenty Thousand Dollars) in reserves to return to Spongetech. The Trustee will insure that a proper accounting of any monies which might be due and owing to the Debtor is provided by the Factor; however, since many of Spongetech’s customers, particularly large retailers, insist upon 30 day or greater terms, there may be a substantial delay before Spongetech receives payment from the Factor.
Doc 69 PDF file
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d. Office Space.
Prior to the filing of the bankruptcy case, the Debtor’s New York landlord filed an action terminate the lease of the New York office/showroom and evict Spongetech. The landlord asserts it is owed approximately $150,000 in unpaid rent. The landlord has further asserted that it properly terminated the lease pre-bankruptcy and has requested that the Trustee vacate the premises as soon as possible. If the lease was properly terminated prior to the filing of the Bankruptcy Petition, it will be necessary to vacate this space or reach alternative arrangements with the landlord. However, it is not clear that there are sufficient funds to maintain the New York office. The lack of an office/showroom and the lack of an ability to fund an office/showroom will make any sales effort more difficult. The Trustee is assessing Debtor’s space needs.
Doc 69 PDF file
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6. Dicon Technologies.
Dicon Technologies, Inc., a wholly owned subsidiary of Spongetech, is a debtor in a Chapter 11 Proceeding in the United States Bankruptcy Court for the Southern District of Georgia. Many of the emails received by the Trustee inquire as to when the Dicon case will be moved to New York and consolidated with the Spongetech case. The Trustee has had discussions with the Trustee for Dicon who advises that Dicon and its creditors will oppose any effort to move the Dicon Bankruptcy Case to New York and/or to consolidate the Dicon case with the Spongetech case. The Dicon Trustee advises that there are over $1,000,000 in claims asserted against Dicon which are unique to Dicon and Debtor has approximately $1,160,000 receivable from Dicon. Please note that since the Dicon case was “first filed” in the Bankruptcy Court for the Southern District of Georgia, it cannot be easily transferred to the New York Bankruptcy Court. The Dicon Trustee will also oppose any effort to consolidate Dicon with Spongetech. The Trustee is continuing to review and analyze the situation with Dicon and is in communication with the Dicon Trustee. The Trustee has not reached any conclusions as to whether to forcibly seek the transfer of the Dicon case to New York or to forcibly seek the substantive consolidation of Dicon with Spongetech.
In deciding how to address the Dicon situation, the Trustee’s primary consideration will be how to best maximize the value of Spongetech’s ownership interest in Dicon for the benefit of creditors and shareholders of Spongetech.
Doc 69 PDF file
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7. SEC Filings.
Several emails inquire as to when the Trustee will make required securities filings for Spongetech. At present, the Trustee has asked for copies of any such documents or other financials prepared by Spongetech, but have not yet received them to the extent they exist. The Trustee has not yet determined whether any financials prepared prior to the bankruptcy are accurate and properly prepared. The Trustee will not make any securities filings on behalf of Spongetech unless they have been properly prepared and are based upon audits performed by independent accounting firms. The Trustee will also not file any documents which are based upon information prepared by the management of Spongetech which have not been independently verified. Because there are no financial resources to prepare these documents and because there are other more important matters which need to be addressed immediately, the Trustee does not anticipate that there will be any such filings in the near future.
Doc 69 PDF file
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11. Current Outlook.
The Trustee has reached no conclusion about any matters pertaining to Spongetech. However, the current situation is dire. Based upon information currently available to the Trustee, it appears that the potential assets of Spongetech, (particularly if the Nickelodeon agreement has been validly terminated) are significantly less than unsecured claims which may
be asserted against the Bankruptcy Estate. Pursuant to the priority rules established by the Bankruptcy Code, unsecured creditors must be paid in full before any funds or returns can be received by shareholders. In addition, there does not appear to be any available financing to reorganize or restructure this company.
Doc 69 PDF file
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REPORT
1. Cash Situation.
Spongetech currently has no available cash to fund its business operations. One subsidiary of Spongetech has less than $200 (Two Hundred Dollars) in a checking account. The Trustee has been in communication with the Chapter 11 Bankruptcy Trustee for Dicon Technologies LLC. (“Dicon”), who advises that Dicon is also in a liquidity crisis. Dicon is a wholly owned subsidiary of Spongetech for which an order for relief under Chapter 11 of the Bankruptcy Code was entered prior to the date on which Spongetech filed its Chapter 11 Petition. Obviously, there are substantial questions about the sources and uses of cash prior to the Bankruptcy; however, there is simply no readily available cash to fund business operations at this time.
Doc 69 PDF file
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2. Outstanding Accounts Receivable.
Since the Trustee’s appointment there have been no collections of accounts receivable. The Trustee is in the process of attempting to verify and collect these receivables. Debtor has provided Trustee with a schedule listing approximately $1.5 million in receivables. However, of this amount approximately $1.16 million is a receivable from Dicon, which is itself in bankruptcy, and Debtor has advised the Trustee that approximately $20,000 has been factored and approximately $27,000 is subject to set-off by the purchasers. The Debtor has advised the Trustee of one large receivable of approximately $130,000 (One Hundred Thirty Thousand Dollars) owed by a large retailer. The Trustee has attempted to verify and collect this receivable however the retailer has a “buyers hold” and has referred to this matter to its internal legal department. In addition, Spongetech holds a promissory note from a former insider of Spongetech in the face amount of $6 Million. The Trustee is attempting to collect amounts due under this note but cannot verify, as of the date of this report, whether the note is collectible or not.
Doc 69 PDF file
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