📦Nerds Lament: Subscription Box Company Goes BK📦

Loot Crate Files for Chapter 11 Bankruptcy

We’re old enough to remember when subscription boxes were all the rage. The e-commerce trend became so explosive that the Washington Post estimated in 2014 that there were anywhere between 400 and 600 different subscription box services out there. We reckon that — given the the arguably-successful-because-it-got-to-an-IPO-but-then-atrocious-public-foray by Blue Apron Inc. ($APRN) — the number today is on the lower end of the range (if not even lower) as many businesses failed to prove out the business model and manage shipping expense.

And so it was only a matter of time before one of them declared bankruptcy.

Earlier this morning, Loot Crate Inc., a Los Angeles-based subscription service which provides monthly boxes of geek- and gaming-related merchandise (“Comic-con in a box,” including toys, clothing, books and comics tied to big pop culture and geek franchises) filed for bankruptcy in the District of Delaware.* According to a press release, the company intends to use the chapter 11 process to effectuate a 363 sale of substantially all of its assets to a newly-formed buyer, Loot Crate Acquisition LLC. The company secured a $10mm DIP credit facility to fund the cases from Money Chest LLC, an investor in the business. The company started in 2012.

Speaking of investors in the business, this one got a $18.5mm round of venture financing from the likes of Upfront Ventures, Sterling.VC (the venture arm of Sterling Equities, the owner of the New York Mets), and Downey Ventures, the venture arm of none other than Iron Man himself, Robert Downey Jr. At one point, this investment appeared to be a smashing success: the company reportedly had over 600k subscribers and more than $100mm in annualized revenue. It delivered to 35 countries. Inc Magazine ranked it #1 on its “Fastest Growing Private Companies” list. Deloitte had it listed first in its 2016 Technology Fast 500 Winners list. Loot Crate must have had one kicka$$ PR person!

But life comes at you fast.

By 2018, the wheels were already coming off. Mark Suster, a well-known and prolific VC from Upfront Ventures, stepped off the board along with two other directors. The company hired Dendera Advisory LLC, a boutique merchant bank, for a capital raise.** As we pointed out in early ‘18, apparently nobody was willing to put a new equity check into this thing, despite all of the accolades. Of course, allegations of sexual harassment don’t exactly help. Ultimately, the company had no choice but to go the debt route: in August 2018, it secured $23mm in new financing from Atalaya Capital Management LP. Per the company announcement:

This financing, led by Atalaya Capital Management LP ("Atalaya") and supported by several new investors (including longstanding commercial partners, NECA and Bioworld Merchandising), will enable Loot Crate to bolster its existing subscription lines and improve the overall customer experience, while also enabling new product launches, growth in new product lines and the establishment of new distribution channels.

Shortly thereafter, it began selling its boxes on Amazon Inc. ($AMZN). When a DTC e-commerce business suddenly starts relying on Amazon for distribution and relinquishes control of the customer relationship, one has to start to wonder. 🤔

And, so, now it is basically being sold for parts. Per the company announcement:

"During the sale process we will have the financial resources to purchase the goods and services necessary to fulfill our Looters' needs and continue the high-quality service and support they have come to expect from the Loot Crate team," Mr. Davis said.

That’s a pretty curious statement considering the Better Business Bureau opened an investigation into the company back in late 2018. Per the BBB website:

According to BBB files, consumers allege not receiving the purchases they paid for. Furthermore consumers allege not being able to get a response with the details of their orders or refunds. On September 4, 2018 the BBB contacted the company in regards to our concerns about the amount and pattern of complaints we have received. On October 30, 2018 the company responded stating "Loot Crate implemented a Shipping Status page to resolve any issues with delays here: http://loot.cr/shippingstatus[.]

In fact, go on Twitter and you’ll see a lot of recent complaints:

High quality service, huh? Riiiiiiight. These angry customers are likely to learn the definition of “unsecured creditor.”

Good luck getting those refunds, folks. The purchase price obviously won’t clear the $23mm in debt which means that general unsecured creditors (i.e., customers, among other groups) and equity investors will be wiped out.***

Sadly, this is another tale about a once-high-flying startup that apparently got too close to the sun. And, unfortunately, a number of people will lose their jobs as a result.

Market froth has helped a number of these companies survive. When things do eventually turn, we will, unfortunately, see a lot more companies that once featured prominently in rankings and magazine covers fall by the wayside.

*We previously wrote about Loot Crate here, back in February 2018.
**Dendera, while not a well-known firm in restructuring circles, has been making its presence known in recent chapter 11 filings; it apparently had a role in Eastern Mountain Sports and Energy XXI.
***The full details of the bankruptcy filing aren’t out yet but this seems like a pretty obvious result.

💥⚡️Everything's For Sale💥⚡️

Jack Cooper, Halcon Resources, Barney's, Perkins & iPIC

⚡️Here a Sale. There a Sale. Everywhere a Sale Sale! (Long Bankruptcy Code Section 363)⚡️

In a nutshell, bankruptcy code section 363 allows a debtor to sell assets free and clear of liens and encumbrances.

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In other words, a company can sell itself and the buyer can leave a bunch of bad sh*t behind. It’s a powerful tool and helps the buyer avoid any sort of “fraudulent conveyance” liability down the road. We’re seeing a proliferation of 363-based bankruptcy cases. In the last week, for instance, Barneys New York Inc., iPic-Gold Class Entertainment LLC, and Perkins & Marie Callender’s LLC all filed with the intent of pursuing sales (PETITION Note: see, also, Jack Cooper Ventures Inc. below).

We’re at lean staff this month so let us summarize each of these sparingly:

Barney’s New York. Inc. — Consumers don’t f*cking care about department stores anymore and the rent is too damn high. One rich dude’s (Richard Perry) vanity project didn’t translate into a sustainable business. Vendors balked, demands for cash on delivery increased, and liquidity squeezed and inventory decreased. There may be interested purchasers (Authentic Brands Group LLC?) but time ran out to effectuate any sort of out-of-court solution. Now, though, there’s tons of interest in a skimmed down version of the enterprise (15 locations will close)! For example, B. Riley Financial Inc. ($RILY) and Brigade Capital Management teamed up to best the original $75mm DIP credit facility commitment obtained by the company from Hilco Global and Gordon Brothers Group with a overall facility of $218mm ($75mm drawable on an interim basis). The company intends to use the financing (and the more-lenient timetable attached thereto) to try and find a stalking horse purchaser. Notably, RILY wholly owns Great American Group, a liquidator. To say that Barney’s, therefore, is out of the woods at this juncture would be overstating things.

Meanwhile, about that hearing:

Maybe Kirkland should’ve deployed its army of female partners to service this case given all of the pandering. Oh, wait. Nevermind.

*****

iPic-Gold Class Entertainment LLC — we discussed this company back in July 28th’s Members’-only briefing. We wrote:

Most moviegoers probably think $17 for a movie ticket is expensive enough and so, more likely than not, they go to the nearby AMC or Regal theater to get their latest shot of Disney-fed superhero drivel. For those who REALLY want to make an event out the movies, however, there is another option: iPic Entertainment Inc’s ($IPIC) “upscale” theater experience. This “experience” includes cocktails, plush pleather couches and waitered food service. All of that pampering can cost upwards of $30/ticket — and that’s just for the movie. Add in the food and this chain probably contributes its fair share to the personal bankruptcy market.

It’s a good thing the company didn’t IPO as recently as 18 months ago, therefore bringing retail investors into the muck too.* Oh. Wait. Womp womp.

What have we learned from the filing? Reclining seats are a game changer apparently. Per the company:

As the Debtors were the only theaters in the market that operated both Premium and Premium Plus seats in the markets in which they operated, the Debtors enjoyed double digit same store sale growth before other theaters took notice and began converting their existing theaters or building new locations with reclining seats. Even though the Company’s competitors’ overall experience did not compare to that of the Debtors, the availability of reclining seats used by competitors at a lower consumer price point proved to be a challenge, especially compared to the Premium seats in the Debtors’ theaters, which did not recline or include tableside service. This decline slowed the Company’s anticipated same store sale growth.

When your entire business model is predicated upon a style of seat — which has ABSOLUTELY NO MOAT WHATSOEVER — well, you deserve to be in bankruptcy. The company reported a net loss of $56.7mm in fiscal ‘18.

Interestingly, the company argues that one of its biggest problems is the proportion of "premium” seats to “premium plus” seats, the latter having pillows, blankets, and tableside food and beverage service. They argue that people ARE indeed willing to pay for that more fulsome experience (PETITION Note: these people must have a high bed bug risk tolerance and sh*tty furniture at home.). Any prospective buyer is going to have to literally buy this cockamamy theory in the face of intense pressure in both the movie-going space and restaurant space. Good luck with that.

*The IPO was actually a massive bust. Per the company:
While demand for the shares was strong, the institutional investors were not able to fund their commitment to the offering, and the total capital raised of $17 million from the IPO was not sufficient to fund continuing development. The public equity has also resulted in significantly increased operating costs relating to the Securities and Exchange Commission’s reporting and compliance requirements.

*****

Speaking of the restaurant space…

Perkins & Marie Callender’s LLC — we’ve said time and time again that the casual dining space was in for a reckoning and, alas, here is another example of a chain that couldn’t make it work. This one paragraph sums up so much of what’s happening in the restaurant space these days:

In 2017 and 2018, the Debtors’ financial performance was affected by: (i) a decline in sales across the family-dining and casual-dining industries due to decreased guesttraffic; (ii) the compounding impact of negative Perkins and Marie Callender’s sales in 2017 and 2018 on Foxtail—a captive and material vendor to the restaurants; (iii) an elevated commodity environment; (iv) statutory increases in labor costs; (v) an increasingly tight labor market; (vi) lower overhead absorption at Foxtail following the loss of a large customer in 2017; and (vii) operational inefficiencies at Foxtail due to initial onboarding costs for new third-party customers in 2018.

Of course, it doesn’t help that the company is over-levered, with hundreds of millions in debt-related obligations.

The company has a stalking horse purchaser for its Perkins assets and certain Foxtail assets; it is working on a purchaser for its Marie Callender assets. Generally speaking, there has been M&A in the restaurant space so maybe there’s hope…?


⚡️Update: Halcón Resources Corporation⚡️

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It filed for bankruptcy early this morning (August 7, 2019) in the Southern District of Texas (Houston). We discussed the structure of the filing on Sunday in our Members’-only briefing.


🚚Trucking Bucking (Short Conventional Narratives): New Chapter 11 Filing - Jack Cooper Ventures Inc.🚚

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Surveys are surveys which mean that surveys are just opinions which really just means that they’re bullsh*t. Much like 2018 was supposed to be the year of large scale healthcare distress, 2019 was the year that automotive distress was supposed to blow up. So far? Not so much. The oil and gas industry be like, “do you want some of this?”

Sure, sure, there’s been activity: Syncreon Automotive (UK) Ltd. filed a petition pursuant to Chapter 15 of the Bankruptcy Code to recognize a foreign proceeding in the UK; Horizon Global Corporation ($HZN) teetered but then kicked the can down the road with amendments to its existing debt and a new second lien term loan; American Tire Distributors went through a swift restructuring late last year; and Vari-Form Corporation went through a hush hush out of court process. There’s been enough to keep people busy, we suppose, but all of those prognostications in — say, the AlixPartners survey — are not playing out as expected (PETITION Note: those surveys make for great marketing though, see, e.g., “How I Built This” with Guy Raz and Barbara Corcoran where Ms. Corcoran admits to using statistical surveys to her marketing benefit, jumpstarting her brokerage business. These restructuring surveys are no different.).

Which is not to say the distress ain’t coming. Headwinds persist and tariffs may only help accelerate them.

Which gets us to trucking.

It wasn’t long ago that one public company after another lamented the rising cost of trucking. Amazon, it seems, had catalyzed such high demand for e-commerce fulfillment, that trucking supply couldn’t possibly meet demand. Despite long-term threats of autonomous trucking on the horizon, in the short term, at least, truckers were in demand. And reaping the economic benefits. 

Nothing lasts forever.

ACT research reflects two straight quarters of negative sector growth and DAT reported a 50% decline in spot market loads, with no category immune to the declining trend. Van load-to-truck is down 50%, flatbed load down 74.5% and reefer load down 55.5%. Some fear this may be a leading indicator of recession. Alternatively, it may just be the short-term effects of tariffs and the acceleration of orders into earlier months to avoid them. 

Still, the trucking industry is worried. 

Van spot rates were down 18.5%, flatbed spot rates down 18.4%% and reefer spot rates down 16.8%. The word “bloodbath” is now being bandied about. Per Business Insider:

“There has been a spate of trucking companies declaring bankruptcy this year, too. The largest was New England Motor Freight, which was No. 19 in its trucking segment. Falcon Transport also shut down this year, abruptly laying off some 550 employees in April.

"We have become increasingly convinced that freight is likely to remain weak through 2019 followed by falling truckload and intermodal contract rates in 2020," the UBS analyst Thomas Wadewitz wrote to investors in a June 18 note.

Trucking's biggest companies have been slashing their outlooks. Knight-Swift and Schneider both cut their annual outlooks earlier this year.”

Will this trend continue as manufacturing numbers continue to slip?

*****

But let’s get back to AlixPartners and auto distress, generally. Yesterday evening (August 6, 2019), Jack Cooper Ventures Inc. and 18 affiliates filed for bankruptcy in the Northern District of Georgia and a corresponding CCAA in Canada.* This filing is the culmination of a slow burn that sparked years ago: the company temporarily avoided a prior chapter 11 bankruptcy filing with a 2017 out-of-court transaction that, at the time, reportedly eliminated $429.2mm of debt and reduced interest expense by roughly $9.8mm a year. AlixPartners is the company’s financial advisor. Paul Weiss Rifkind Wharton & Garrison LLP and King & Spalding LLP are legal counsel in the US. Houlihan Lokey Inc. ($HLI) is the company’s banker in the US. Osler, Hoskin & Harcourt LLP is the company’s representative in Canada.

The company is approximately 90 years old; it is a provider of finished vehicle logistics in North America for both new and used vehicles (in addition to providing logistical services in certain non-auto markets). Through its “Transport Segment,” the company delivers finished vehicles from manufacturing plants, distribution centers, seaports and railheads to new vehicle dealerships. These dudes are pervasive: they operate 1600 active rigs and a network of 39 terminals across the US and Canada; they work with all of the major domestic OEMS (and some foreign), including General Motors Inc. ($GM) and Ford Motor Company ($F) — who each account for over 10% of revenue. Operating revenue for the segment was $540.7mm in 2018.**

Interestingly, the business operates in a highly competitive market where contracts are awarded pursuant to a competitive bidding process. The company generally operates pursuant to one-year or multi-year contracts, and while the contracts establish fixed rates per vehicle transported (and a variable rate for each mile transported), they do not require volume commitments.

Which is where those manufacturing headwinds really come in to play. In the “headwinds persist” link above, we discussed how nearly every OEM is cutting back on car manufacturing. The company validates this movement:

The Company’s overall viability is also linked to that of the automobile industry generally, which has experienced flat to declining demand for new automobiles. For example, U.S. light vehicle sales are expected to decrease by approximately 7.5%, from 17.3 million in 2018 to approximately 16 million in 2021, and to remain at this level through 2024. Light vehicle sales fell 2.3% year-over-year in the first quarter of 2019 alone, due, in part, to reduced consumer affordability from higher borrowing costs and lower tax-return amounts.

Ok, great. So, there’s uncertainty, variability and unpredictability on the asset/revenue side. How about the liability side? This is where the company really struggles. In contrast to much of its competition, the company is party to pension plans and collective bargaining agreements “that are not sustainable given the Company’s performance and the competitive landscape.” Indeed, many of the competitors don’t have unions and therefore have a leaner cost structure: Toyota and GM have transferred business to these competitors as a result. The company lists the Central States, Southeast and Southwest Areas Pension Plan as its top creditor. The company “contributed $29.5 million and $30.6 million to the CSPF for the years ended December 31, 2018 and 2017, respectively,” figures it says it simply cannot continue doing to remain viable.***

And then there’s the debt:

  • $49.8mm ‘23 RCF (Wells Fargo NA);

  • $188.7mm ‘23 Term Loan (Cerberus Business Finance Agency LLC);

  • $45.5mm 1.5 ‘24 Term Loan (Wilmington Trust NA); and

  • $291.4mm ‘24 2L Term Loan (Wilmington Trust NA).****

Remember: this is what remains AFTER the 2017 exchange transaction. On account of this cap stack, the company was STILL on the hook for ~$50mm of interest expense in 2018.

But wait, there’s more. Like covenants. Remember those? The company sure does. It blew through its first lien leverage ratio in Q1 and has been in default of its first lien term loan ever since. A parade of horribles has transpired since (e.g., notice of default and reservation of rights from Cerberus, a going concern qualification, default under the RCF, a waiver from Wells Fargo, a forbearance from Cerberus, and diminished liquidity and a resulting cash sweep by Wells Fargo). The company dipped below $8.5mm of liquidity. Clearly there was no way it could meet debt service obligations going forward. Hence, bankruptcy.

The filing is “prenegotiated” with the purpose of consummating a sale within 65 days to Solus Alternative Asset Management LP, as stalking horse bidder (subject to higher or better offers). As consideration, Solus will credit bid its debt and its committed $15mm DIP credit facility (Wells will provide an additional $85mm DIP). The upshot? The company will de-lever by more than $300mm. The company will otherwise use the chapter 11 process to implement modifications to its pension obligations and obtain ratification of changes to its CBAs. We’re guessing there’s some favorable law in the 11th Circuit (Georgia) with respect to bankruptcy code section 1113, which governs the rejection of CBAs in bankruptcy (a powerful negotiating hammer, for sure). Ah, venue.

*It appears the Jack Cooper Ventures Inc. entity was formed in June 2018 and is the only entity of all of the debtors to have any ties to Georgia. In case you’re wondering about venue. 🤔
**The company’s Logistics Segment — which provides “asset-light” services to the previously-owned vehicle market (e.g., inspections, title services etc.) — generated $55.9mm in 2018.
***The company is also party to three other multi-employer pension plans that required approximately $1.5mm in contributions in 2018.
****The junior term lenders are represented by Kirkland & Ellis LLP and PJT Partners Inc. ($PJT).

📚Resources📚

We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. We’ve recently added the latest Ben Mezrich book, “Bitcoin Billionaires: a True Story of Genius, Betrayal, and Redemption” and the new Mark Manson book, “Everything Is F*cked: A Book About Hope.” 


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