BHCosmetics

CASE SUMMARY: BHCosmetics to Pursue 36-Day Sale Process In Wake of Covid-19 Reshaping the Cosmetics Industry

Tue 01/18/2022 11:16 AM
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Relevant Documents:
Voluntary Petition
First Day Declaration
Bid Procedures Motion
Cash Collateral Motion
First Day Hearing Agenda

















Summary
BHCosmetics is a beauty brand specializing in clean, vegan and cruelty-free cosmetics sold through ecommerce and wholesale channels
Seeks to run a sale process with RBI Acquisition Holdings LLC as stalking horse for “substantial” portion of debtors’ assets for $4.3 million
Seeks use of cash collateral with consent of prepetition secured lenders

BHCosmetics, a North Hollywood, Calif.-based beauty brand specializing in clean, vegan and cruelty-free cosmetics and other beauty products sold by ecommerce and wholesale, filed for chapter 11 protection on Friday, Jan. 14, in the bankruptcy court for the District of Delaware, along with several affiliates.

The debtors seek to run a sale process with RBI Acquisition Holdings LLC as stalking horse for a substantial portion of the debtors’ assets (certain unexpired contracts, inventory and intellectual property) for $4.3 million. The contact information for RBI Acquisition in the APA refers to Manchester, England-based Zeus Capital Ltd.

“At the outset of these proceedings, the Debtors seek authority to continue the Sale Process, including the Inventory Sales and the IP Sale, with the assistance of SB360 and Hilco Streambank, respectively,” says the first day declaration. The debtors seek to conduct an auction and sale process that would run for approximately 36 days. In addition, the debtors would assign certain accounts receivable under a factoring agreement with SB360. The debtors say they anticipate that the sale process would be completed in the first quarter of 2022.

The case would be funded through the use of cash collateral, with the consent of the debtors’ prepetition secured lenders.

“[T]o avoid incurring any unnecessary administrative expenses,” the debtors have “vacated and unequivocally surrendered” their overflow warehouse and headquarters and seek to reject the related leases as part of the chapter 11 cases.

The first day hearing has been scheduled for today, Tuesday, Jan. 18, at 1 p.m. ET.

The company reports $50 million to $100 million in both assets and liabilities. The company’s prepetition capital structure includes:

  • Secured debt:

    • Fifth Third Bank (as agent):

      • Term loan: 9.6 million

      • Revolver: $13.9 million





  • Unsecured debt: $14.9 million



  • Equity: BHCosmetics Holdings’ equityholders are as follows:



“In the fourth quarter of 2017, the Debtors and/or their predecessors in interest commenced a series of transactions to effectuate the acquisition by MidOcean Partners V-BH, L.P. (‘MidOcean’) of 63% of the equity interests in Holdings from BH Bonfire, Inc.,” and subsequently MidOcean funded capital infusions of $5.5 million and $4.5 million in exchange for preferred Series A units in Holdings. In 2020, MidOcean funded $19 million of preferred Series B units, increasing its ownership interests in Holdings to 74.4%. In 2021, MidOcean funded $3.5 million of preferred Series B units further increasing its ownership interests to a total of 85.85% of the company’s total membership units.

The debtors are represented by Young Conaway Stargatt & Taylor in Wilmington, Del., as counsel, Riveron Management Services as financial advisor, SB360 Capital Partners as sale and liquidation agent with respect to the debtors’ wholesale and ecommerce inventory and Hilco IP Services dba Hilco Streambank as IP sale and liquidation agent. The company is also working with Traverse for the provision of a controller and other accounting personnel. Spencer Ware of Riveron Management Services is the CRO. Epiq is the claims agent. The case has been assigned to Judge Christopher S. Sontchi (case number 22-10050).

Events Leading Up to the Chapter 11 Filing / Prepetition Restructuring Efforts

The debtors have struggled to maintain market share due to increased competition, which has eroded their profitability. The company also points to the launch of ultimately unsuccessful product lines after making a significant capital investment in infrastructure and other overhead.

In early 2019, the company brought in an “industry veteran” as replacement CEO, who in turn recruited two additional executives. This new management team advised the board to use 2020 “as a transition year to redefine the Company’s direct platform towards growth with new product development and unique strategies to obtain and retain direct customers, right size the inventory through connecting and efficiently utilizing the Company’s distribution and sales systems, and develop the infrastructure needed to sell product to various wholesale channels.” With the board’s support, the new management team determined that BHC would need approximately $14 million to support its brand and infrastructure renovation.

As the new management team worked toward its goals in early 2020, the onset of the Covid-19 pandemic began to hinder the debtors’ sales and reshape the cosmetics market entirely. In particular, the debtors say, the pandemic changed consumers’ daily routines and the reasons for wearing cosmetics, which impacted the sub-sector of color cosmetics within which the company primarily operates “even more than many other segments of the cosmetics industry.”

In 2020, the company’s revenue dropped to $33.6 million from $55.8 million. “Nonetheless, the Company made strides,” the debtors say, including the establishment of new product distribution systems, investments in creative brand development and strong management personnel to improve merchandising and pricing strategies and investments in infrastructure to implement sales through wholesale channels. The debtors also renegotiated terms with retailers, signed exclusive promotion agreements with influencers for the launch of two new products and developed a natural skin care brand, Itsa, “to leverage cost basis but generate revenue and profitability by developing the ability to easily add brands to the Company’s product line.”

Throughout 2021, the company continued to face an “extremely competitive” cosmetics market. As a result of liquidity constraints, the company delayed the launch of Itsa to conserve cash for the launch of products developed in association with the newly signed celebrity influencers, Doja Cat and Iggy Azalea. The debtors say that both of their two launches of celebrity influencer product lines fell significantly below expectations, leaving the company with “no clear strategy to return business to growth and sustainability.”

By September, the debtors had engaged SSG as investment banker to market the company’s assets and solicit proposals from potential purchasers as a going concern “or otherwise.” With the marketing process underway and facing continued liquidity concerns, the debtors retained SB360 Capital Partners as a consultant to oversee and implement sales of the debtors' physical inventory through their ecommerce platform and alternative wholesale channels.

The board further determined that a sale of the company’s intellectual property assets and related tangible assets “may be necessary” to maximize the value of the debtors’ estates, particularly given the strength of the market for distressed assets of comparable size and type. To that end, the debtors retained Hilco Streambank to serve as consultant and sale agent to market and implement the IP sales.

Background

BH Cosmetics is a beauty brand specializing in clean, vegan and cruelty-free cosmetics and other beauty products. The debtors sell their products on their ecommerce platform directly to consumers and wholesale to various major retailers. BHC’s product line spans an array of color cosmetics and applicators. The company has two key sales channels: (i) its digital marketplace, which utilizes a variety of social influencer, celebrity collaborations and brand partnerships to promote and market its products and (ii) wholesale sales channels, primarily to Ulta Beauty and similar beauty stores. Ulta was one of the two primary sales channels for last week’s cosmetics filer, CFX US, which pinned its chapter 11 filing in part on the loss of Ulta as one of its two primary sales partners (alongside Sephora).

BHC’s target market includes “Generation Z” and “Millennial” consumers, the debtors say, noting that they retain approximately 3.6 million Instagram followers and 1.8 million Facebook followers. The debtors have 28 full-time employees.

Over the January 2021 through November 2021 period, the debtors generated approximately $18.6 million in net sales and had negative adjusted EBITDA of approximately $14.4 million.

The debtors order and distribute their merchandise from both domestic and foreign vendors through a worldwide logistics network of common carriers, freight forwarder, customs agents and other logistics service providers, with a centralized distribution system, through which all merchandise is received, sorted and repacked at the debtors’ distribution center. The debtors then distribute merchandise from their distribution center either directly to consumers or wholesale to stores. Historically, the debtors also shipped merchandise to their German non-debtor affiliate for resale and distribution throughout Germany. Shortly before the petition date, the debtors closed their overflow warehouse, which was utilized to hold excess inventory, and transitioned any remaining inventory to the distribution center.

BHC’s corporate organizational structure is shown below:

The debtors' largest unsecured creditors are listed below:




 










































































10 Largest Unsecured Creditors
Creditor Location Claim Type Amount
Dongguan Fay Cosmetic
Brushes Co. Ltd.		 Dongguan, China Trade $    2,423,966
Beauty Beyond Industry
Limited		 Lianyungang, China Trade 1,080,607
Shenzhen Colorl
Cosmetic Products Co.
Ltd.		 Shenzhen City, China Trade 1,078,544
Sheen Color Biotech
Co. Ltd.		 Guangdong, China Trade 872,516
KDC/One (Taiwan) Co.
Ltd.		 Tainan, Taiwan Trade 674,171
Flexport International
LLC		 San Francisco Trade 557,880
Dongguan Ouqian
Cosmetics Co. Ltd.		 Dongguan, China Trade 409,521
SAS Touche SAS Paris Trade 373.567
Grand Metro Cosmetics
LLC		 Tainan, Taiwan Trade 368,638
Signal Sciences Corp. Culver City, Calif. Trade 363,257

The case representatives are as follows:



 



























































































Representatives
Role Name Firm Location
Debtors' Counsel M. Blake Cleary Young Conaway
Stargatt & Taylor		 Wilmington, Del.
Allison S. Mielke
Alexander S. Faris
Debtors' Financial
Advisor and CRO		 Spencer Ware Riveron
Management
Services		 New York
Debtors' Sale and
Liquidation Agent -
Wholesale/Ecommerce
Inventory		 Robert Raskin SB360 Capital
Partners		 Great Neck, N.Y.
Ziggy Schaffer
Debtors' Sale and
Liquidation Agent -
Intellectual Property		 David Peress Hilco
Streambank		 Quincy, Mass.
Jordon Parker New York
Debtors' Controller
and Accounting
Personnel		 NA Traverse NA
Counsel to the
Stalking Horse
Bidder		 M. Scott Aubry Shumaker,
Loop & Kendrick		 Toledo, Ohio
David J. Coyle
Co-Counsel to the
Prepetition Agent		 Lea Pauley Goff Stoll Keenon
Ogden		 Louisville, Ky.
Amelia Martin Adams Lexington, Ky.
Co-Counsel to the
Prepetition Agent		 Joseph H. Huston Jr. Stevens
& Lee		 Wilmington, Del.
David W. Giattino
Debtors' Claims
Agent		 Brian Hunt Epiq New York



Bid Procedures Motion

The debtors seek approval of a sale process designed to sell inventory through their ecommerce and wholesale channels plus an auction process for substantially all of the debtors’ assets or a subset thereof, or a combination of the two.

As part of the prepetition sale process, Hilco Streambank contacted 84 strategic parties and received 32 responses, of which 15 executed confidentiality agreements, resulting in two written indications of interest and three parties expressing an interest in acting as stalking horse for IP and “certain additional assets.” The debtors entered into an asset purchase agreement with RBI Acquisition Holdings as stalking horse for a “substantial portion” of the debtors’ assets, including a “majority of the Debtors’ intellectual property and inventory” for $4.3 million. The stalking horse bid contemplates a sale of certain unexpired contracts, inventory and IP, and the stalking horse is responsible for paying any cure costs related to the assumption and assignment of “Target Contracts.” The acquired assets also include goodwill, trade secrets and social media accounts.

The debtors propose a breakup fee of $172,000 and expense reimbursement of up to $150,000. Initial overbids are $100,000.

The proposed sale timeline follows:

The debtors propose a sale hearing on Feb. 17 at a time TBD, with objections due Feb. 11 at 4 p.m. ET.

Cash Collateral Motion

The debtors say that immediate access to cash collateral subject to the liens of their prepetition lenders is required to continue the operation of the business and effectively/efficiently conduct the proposed sale process, “as the Cash Collateral is a critical source of funding for their operations and the costs of administering these Chapter 11 Cases.” The debtors assert that the proposed cash collateral relief “is absolutely necessary to preserve and maximize value for the benefit of all of the Debtors’ stakeholders.”

The company proposes the following adequate protection to its prepetition lenders: (i) replacement liens, which would attach to the proceeds of avoidance actions upon entry upon of the final cash collateral order, (ii) superpriority claims, (iii) payment of fees and expenses and (iv) exclusive cash management control of the debtors’ accounts. The replacement liens would not be granted on or extend to the debtors’ ​​non-residential real property leases under the proposed interim order, “except as permitted in the applicable lease,” and would extend only to the proceeds realized upon any sale, assignment, termination or other disposition of such lease, books and records related to the foregoing accessions and proceeds of the foregoing wherever located, including insurance proceeds.

In addition, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b), in either instance subject to the final order.

The proposed cash collateral use is subject to a 15% cap on variances with respect to both receipts and disbursements.

The carveout for professional fees is $105,000. The UCC lien investigation budget is $25,000.

With respect to any unsecured creditors committee, the lien challenge deadline would be the earlier of (a) 60 calendar days from the date of the committee’s appointment and (b) 75 calendar days following the entry of the interim cash collateral order. With respect to all other parties, the lien challenge period would be within 75 calendar days after entry of the interim order.

The proposed cash collateral use is subject to the following milestones:

  • Bid procedures order: Jan. 28;

  • Sale order: Feb. 18; and

  • Sale closing: March 11.


Other Motions

The debtors also filed various standard first day motions, including the following:



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