Sugarfina, Inc.
CASE SUMMARY: ‘Candy Store for Grownups’ Sugarfina to Sell Assets With Candy Cube as Stalking Horse
Mon 09/09/2019 12:06 PM
Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
Sugarfina, an El Segundo, Calif.-based innovative candy and confectionery brand with 33 “Candy Boutique” stores and 11 “shop in shops” within Nordstrom’s department stores, a wholesale channel and an e-commerce platform, filed for chapter 11 protection on Friday in the Bankruptcy Court for the District of Delaware, along with two affiliates. The company filed the case to complete a process that began more than two months ago for the sale of substantially all of Sugarfina’s assets and business lines, with Candy Cube Holdings, LLC as the stalking horse for a purchase price of $13 million plus membership units in Candy Cube (the emerging company) accounting for senior preferred membership units with a $2 million liquidation preference and 20% of the common membership units.
Candy Cube would purchase certain assets, including the company’s brand and intellectual property, inventory and certain retail stores, and has negotiated for the opportunity to maintain all or a portion of Sugarfina’s channels and operations and to offer employment to Sugarfina’s employees. The stalking horse has also agreed to pay for retention bonuses for rank-and-file employees.
The debtors seek approval of $4 million in DIP financing from prepetition first lien lender SFCC Loan Investors, LLC d/b/a Serene Capital and Candy Cube Holdings, LLC. The debtors say that the DIP facility was “negotiated at arms’ length with the Company, and also with Goldman Sachs, as the second-lien creditor and fulcrum security under the Stalking Horse APA.”
According to the debtors, Sugarfina experienced “explosive growth and success” and established a strong international footprint by 2018, with operations in multiple countries and strong revenue projections. Notwithstanding the company's growth, however, the business struggled to become profitable, as headwinds impacting the broader retail sector and uncertainty regarding international partnerships weighed against the company’s performance. The debtors say that they also struggled to right-size their operations and control margins while also keeping up with growth and increasing demand. As a result, Sugarfina’s success depended on its ability to tap new financing sources, the efforts of which were successful “for most of Sugarfina’s tenure” but have recently fallen short.
The first day hearing has been scheduled for today, Sept. 9, at 3 p.m. ET.
The company’s prepetition capital structure includes:
SFCC, prepetition and proposed DIP lender, prefunded $600,000 a week prior to the petition date, and the debtors are seeking to roll that amount into the DIP facility, which if approved would reduced SFCC’s unpaid principal balance to $4.4 million.
Sugarfina is also party to a premium finance agreement with AFCO Acceptance Corporation in the principal amount of $235,169 secured by the proceeds of the debtors’ D&O insurance.
The debtors have approximately $1.2 million of cash on hand, and expect to need approximately $3.5 million in cash during the first 13 weeks of the case.
The company ran a process for an equity-based transaction in early 2018, supported by a loan from founder Resnick and Goldman Sachs agreeing to provide a term loan (as opposed to its initial term sheet to lead a new offering for series C preferred stock) to provide runway for the company to run a new process for long-term needs. To that end, Sugarfina retained Michel Dyens & Co. as investment banker. Sugarfina retained Force 10 in May 2019, at which time the debtors were pursuing growth capital through the solicitation of a series C preferred stock equity raise, but when that appeared to be unsuccessful, Force 10 switched to looking for DIP financing and/or a stalking horse bid. The company also expanded the scope of work for Michel Dyens & Co. Running short on cash, on July 8, the debtors’ board formed a special committee of independent directors for a potential bankruptcy filing. Sugarfina ultimately chose Candy Cube as stalking horse, over a competing bid from an unidentified party, which proposed a $7 million DIP loan (with the debtors’ needs deemed to be “substantially less”) to prime existing secured debt and an “undefined purchase price that would be ‘set upon review of further diligence.’”
The debtors are represented by Morris James and Shulman, Hodges & Bastian as counsel and Force 10 Partners as financial advisors. Lance Miller is the debtors’ CRO. BMC Group is the claims agent. The case has been assigned to Judge Mary F. Walrath (case no. 19-11973).
Background
In the first day declaration, the debtors describe Sugarfina as “luxury confectionary brand disrupting the multi-billion dollar confectionary industry” with a “uniquely fresh, fashionable, and experiential approach to gourmet confections.” The business has attracted a series of co-branding opportunities with brands such as Casamigos, Disney, the Honest Company, Barbie, Nintendo and Tito’s Vodka. In 2018, the Sugarfina generated more than $47 million in net sales. The company’s trademark portfolio includes more than 140 design patents and trademarks in 22 international jurisdictions.
The debtors own and operate 33 retail “Candy Boutiques” in 14 U.S. states and two Canadian provinces, along with 11 “shop in shops” located within Nordstrom’s department stores in the U.S. and Canada. The retail business employs approximately 241 people, including approximately three employees located at the company’s headquarters in El Segundo, Calif. In 2018, the retail business generated net sales totaling approximately $23.6 million. Sugarfina points to Lolli & Pops, which filed its own chapter 11 case in August due in part to falling shopping mall traffic, as one of its primary competitors. Some other retail competitors of Sugarfina are Godiva, See’s Candies and Vosges.
Sugarfina’s online stores ship to customers in the U.S. and Canada, with the e-commerce business generating net sales totaling approximately $5.7 million. The wholesale business markets and sells to third-party retailers, and Sugarfina is a “leading” confectionery brand in the wholesale industry, the debtors say. In 2018, the wholesale segment generated net sales totaling approximately $12 million. Primary competitors for the wholesale business are Godiva and Compartes Chocolates.
The debtors also operate a corporate segment through which the products are customized for corporate business markets, primarily for gifting and special events. The segment employs six people and generated net sales totaling $4.1 million in 2018. Sugarfina’s international franchise and travel retail business markets and negotiates new franchise deals “for airports and the world.” It also supports existing relationships in domestic airports, Hong Kong and Mexico. The international franchise and travel retail business generated net sales totaling approximately $1.8 million in 2018.
The debtors' largest unsecured creditors are listed below:
The case representatives are as follows:
DIP Financing Motion
The debtors seek approval of $4 million in DIP financing ($2.5 million on an interim basis) from SFCC Loan Investors, LLC d/b/a Serene Capital and Candy Cube Holdings, LLC. Serene would fund 75% of the DIP facility and Candy Cube would fund 25%. Of the DIP proceeds, $600,000 would be used to rollup SFCC’s prepetition obligations. The debtors say that substantially all their assets are encumbered.
The DIP financing bears interest at 8%, with 4% added for the default rate, and matures on the earlier of six months from the petition date or other customary events.
To secure the DIP financing, the debtors propose to grant a first priority lien on unencumbered assets, a second priority lien on on encumbered assets and “a valid, perfected priming Lien (junior only the Lien of the SFCC Prepetition Debt [as defined in the DIP Agreement] and otherwise senior) in the Collateral and all existing Liens, rights, and interests granted to or for the benefit of Goldman and any other creditors of the Debtors with Liens granted on Collateral on account of funded debt.” The DIP financing would also have superpriority administrative expense status.
The facility includes various fees, including:
In support of the proposed DIP financing, the debtors filed the declaration of Adam Meislik, a member Force 10 Partners.
Adequate Protection
Second lienholder Goldman Sachs has consented to the motion, and both the holder of the third priority lien (Joshua Resnick) and holder of the fourth priority lien (GHP Sugarfina Holdings, LLC, as collateral agent), have affirmatively waived their rights to seek adequate protection, according to the motion.
The company proposes replacement liens as adequate protection to SFCC and Goldman.
In addition, subject to the final order, 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).
The carveout for professional fees is $50,000.
DIP Budget
The proposed budget for the use of the DIP facility is HERE.
DIP Milestones
The DIP financing is subject to the following milestones:
The lien challenge deadline is 60 days from formation for an official unsecured creditors’ committee or 75 days after entry of the interim order. The UCC investigation budget is $25,000.
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
| Summary |
| Sugarfina is a luxury confectionary brand with 33 “Candy Boutique” retail stores and 11 “shop in shops” inside Nordstrom’s department stores, along with wholesale and e-commerce channels |
| Attributes bankruptcy to struggles achieving profitability despite “explosive growth and success” amid broader retail industry headwinds and inability to secure new funding |
| Seeks to run sale process with Candy Cube Holdings, LLC as stalking horse |
| Requests $4 million in DIP financing from prepetition first lien lender SFCC Loan Investors, LLC d/b/a Serene Capital and Candy Cube Holdings, LLC |
Sugarfina, an El Segundo, Calif.-based innovative candy and confectionery brand with 33 “Candy Boutique” stores and 11 “shop in shops” within Nordstrom’s department stores, a wholesale channel and an e-commerce platform, filed for chapter 11 protection on Friday in the Bankruptcy Court for the District of Delaware, along with two affiliates. The company filed the case to complete a process that began more than two months ago for the sale of substantially all of Sugarfina’s assets and business lines, with Candy Cube Holdings, LLC as the stalking horse for a purchase price of $13 million plus membership units in Candy Cube (the emerging company) accounting for senior preferred membership units with a $2 million liquidation preference and 20% of the common membership units.
Candy Cube would purchase certain assets, including the company’s brand and intellectual property, inventory and certain retail stores, and has negotiated for the opportunity to maintain all or a portion of Sugarfina’s channels and operations and to offer employment to Sugarfina’s employees. The stalking horse has also agreed to pay for retention bonuses for rank-and-file employees.
The debtors seek approval of $4 million in DIP financing from prepetition first lien lender SFCC Loan Investors, LLC d/b/a Serene Capital and Candy Cube Holdings, LLC. The debtors say that the DIP facility was “negotiated at arms’ length with the Company, and also with Goldman Sachs, as the second-lien creditor and fulcrum security under the Stalking Horse APA.”
According to the debtors, Sugarfina experienced “explosive growth and success” and established a strong international footprint by 2018, with operations in multiple countries and strong revenue projections. Notwithstanding the company's growth, however, the business struggled to become profitable, as headwinds impacting the broader retail sector and uncertainty regarding international partnerships weighed against the company’s performance. The debtors say that they also struggled to right-size their operations and control margins while also keeping up with growth and increasing demand. As a result, Sugarfina’s success depended on its ability to tap new financing sources, the efforts of which were successful “for most of Sugarfina’s tenure” but have recently fallen short.
The first day hearing has been scheduled for today, Sept. 9, at 3 p.m. ET.
The company’s prepetition capital structure includes:
- Secured debt:
- First Lien:
- SFCC Loan Investors d/b/a Serene Capital: $5 million
- Second Lien:
- Goldman Sachs Specialty Lending Holdings: $10 million
- Third Lien Subordinated Debt:
- Josh Resnick (founder): $8 million
- Fourth Lien Subordinated Debt:
- Secured Convertible Notes: $2.15 million
- Secured Convertible Notes: $2.15 million
- First Lien:
- Unsecured debt:
- Convertible Promissory Notes: $2.1 million
- Equity: SGRI is privately owned, with eight classes of stock. The preferred stock is separated into seven classes – Series A, AA, A-1, B, BB, B-2, and BB-2. Each class of preferred stock has a 1.0x liquidation preference. The preferred stock’s liquidation preferences have priority over SGRI’s common stock.
SFCC, prepetition and proposed DIP lender, prefunded $600,000 a week prior to the petition date, and the debtors are seeking to roll that amount into the DIP facility, which if approved would reduced SFCC’s unpaid principal balance to $4.4 million.
Sugarfina is also party to a premium finance agreement with AFCO Acceptance Corporation in the principal amount of $235,169 secured by the proceeds of the debtors’ D&O insurance.
The debtors have approximately $1.2 million of cash on hand, and expect to need approximately $3.5 million in cash during the first 13 weeks of the case.
The company ran a process for an equity-based transaction in early 2018, supported by a loan from founder Resnick and Goldman Sachs agreeing to provide a term loan (as opposed to its initial term sheet to lead a new offering for series C preferred stock) to provide runway for the company to run a new process for long-term needs. To that end, Sugarfina retained Michel Dyens & Co. as investment banker. Sugarfina retained Force 10 in May 2019, at which time the debtors were pursuing growth capital through the solicitation of a series C preferred stock equity raise, but when that appeared to be unsuccessful, Force 10 switched to looking for DIP financing and/or a stalking horse bid. The company also expanded the scope of work for Michel Dyens & Co. Running short on cash, on July 8, the debtors’ board formed a special committee of independent directors for a potential bankruptcy filing. Sugarfina ultimately chose Candy Cube as stalking horse, over a competing bid from an unidentified party, which proposed a $7 million DIP loan (with the debtors’ needs deemed to be “substantially less”) to prime existing secured debt and an “undefined purchase price that would be ‘set upon review of further diligence.’”
The debtors are represented by Morris James and Shulman, Hodges & Bastian as counsel and Force 10 Partners as financial advisors. Lance Miller is the debtors’ CRO. BMC Group is the claims agent. The case has been assigned to Judge Mary F. Walrath (case no. 19-11973).
Background
In the first day declaration, the debtors describe Sugarfina as “luxury confectionary brand disrupting the multi-billion dollar confectionary industry” with a “uniquely fresh, fashionable, and experiential approach to gourmet confections.” The business has attracted a series of co-branding opportunities with brands such as Casamigos, Disney, the Honest Company, Barbie, Nintendo and Tito’s Vodka. In 2018, the Sugarfina generated more than $47 million in net sales. The company’s trademark portfolio includes more than 140 design patents and trademarks in 22 international jurisdictions.
The debtors own and operate 33 retail “Candy Boutiques” in 14 U.S. states and two Canadian provinces, along with 11 “shop in shops” located within Nordstrom’s department stores in the U.S. and Canada. The retail business employs approximately 241 people, including approximately three employees located at the company’s headquarters in El Segundo, Calif. In 2018, the retail business generated net sales totaling approximately $23.6 million. Sugarfina points to Lolli & Pops, which filed its own chapter 11 case in August due in part to falling shopping mall traffic, as one of its primary competitors. Some other retail competitors of Sugarfina are Godiva, See’s Candies and Vosges.
Sugarfina’s online stores ship to customers in the U.S. and Canada, with the e-commerce business generating net sales totaling approximately $5.7 million. The wholesale business markets and sells to third-party retailers, and Sugarfina is a “leading” confectionery brand in the wholesale industry, the debtors say. In 2018, the wholesale segment generated net sales totaling approximately $12 million. Primary competitors for the wholesale business are Godiva and Compartes Chocolates.
The debtors also operate a corporate segment through which the products are customized for corporate business markets, primarily for gifting and special events. The segment employs six people and generated net sales totaling $4.1 million in 2018. Sugarfina’s international franchise and travel retail business markets and negotiates new franchise deals “for airports and the world.” It also supports existing relationships in domestic airports, Hong Kong and Mexico. The international franchise and travel retail business generated net sales totaling approximately $1.8 million in 2018.
The debtors' largest unsecured creditors are listed below:
| 10 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Amount |
|---|---|---|---|
| Agman Investments | Chicago | Funded Debt | $ 1,050,959 |
| FedEx | Pasadena, Calif. | Trade | 722,802 |
| Everplus | Newport Beach, Calif. | Funded Debt | 525,479 |
| CSPG | Las Vegas | Funded Debt | 525,479 |
| Marich Confectionary | Hollister, Calif. | Trade | 519,228 |
| Trolli | Furth, Germany | Trade | 432,374 |
| Troutman Sanders LLP | Atlanta | Trade | 428,627 |
| Shantou Jinlida Arts & Crafts Co., Ltd. |
Shantou City, China | Trade | 320,089 |
| Fullsun International | Dongguan City, China | Trade | 253,921 |
| McDermott Will & Emery LLP |
Chicago | Trade | 198,419 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Co-Counsel | Jeffrey R. Waxman | Morris James |
Wilmington, Del. |
| Brya M. Keilson | |||
| Eric J. Monzo | |||
| Debtors' Co-Counsel | Alan J. Friedman | Shulman Hodges & Bastian |
Irvine, Calif. |
| Ryan O’Dea | |||
| Debtors' Financial Advisor |
Adam Meislik | Force 10 Partners |
Newport Beach, Calif. |
| Co-Counsel to SFCC Loan Investors |
Lance N. Jurich | Loeb & Loeb |
Los Angeles |
| Vadim J. Rubinstein | New York | ||
| W. Peter Beardsley | |||
| Co-Counsel to SFCC Loan Investors |
Jeffrey N. Pomerantz | Pachulski Stang Ziehl & Jones |
Wilmington, Del. |
| James E. O’Neill | |||
| Counsel to Goldman Sachs Lending Group |
W. Austin Jowers | King & Spalding |
Atlanta |
| Co-Counsel to Candy Cube Holdings |
Marc J. Carmel | McDonald Hopkins |
Chicago |
| Co-Counsel to Candy Cube Holdings |
M. Blake Cleary | Young Conaway Stargatt & Taylor |
Wilmington, Del. |
| Andrew L. Magaziner | |||
| U.S. Trustee | Timothy J. Fox | Office of the U.S. Trustee |
Wilmington, Del. |
| Debtors' Claims Agent | Tinamarie Feil | BMC Group | Seattle |
DIP Financing Motion
The debtors seek approval of $4 million in DIP financing ($2.5 million on an interim basis) from SFCC Loan Investors, LLC d/b/a Serene Capital and Candy Cube Holdings, LLC. Serene would fund 75% of the DIP facility and Candy Cube would fund 25%. Of the DIP proceeds, $600,000 would be used to rollup SFCC’s prepetition obligations. The debtors say that substantially all their assets are encumbered.
The DIP financing bears interest at 8%, with 4% added for the default rate, and matures on the earlier of six months from the petition date or other customary events.
To secure the DIP financing, the debtors propose to grant a first priority lien on unencumbered assets, a second priority lien on on encumbered assets and “a valid, perfected priming Lien (junior only the Lien of the SFCC Prepetition Debt [as defined in the DIP Agreement] and otherwise senior) in the Collateral and all existing Liens, rights, and interests granted to or for the benefit of Goldman and any other creditors of the Debtors with Liens granted on Collateral on account of funded debt.” The DIP financing would also have superpriority administrative expense status.
The facility includes various fees, including:
- a 2% origination fee;
- a repayment premium of 1.125 times the amount of the DIP loan commitments less the aggregate amount of the origination fee and interest actually paid to the DIP lender by such date;
- upon the occurrence of the maturity date, a success fee of 7% of the greater of (a) the aggregate amount of cash proceeds in excess of $2 million that Goldman Sachs receives on account of obligations arising under the Goldman NPA to the extent such proceeds result from the consummation of a bankruptcy sale and (b) if Candy Cube is the successful purchaser, the sum of (x) the amount of any debt assigned by Goldman Sachs to Candy Cube that is used by Candy Cube to credit bid, plus (y) the amount of cash proceeds in excess of $2 million that Goldman Sachs receives on account of obligations arising under the Goldman Sachs facility, to be paid by Debtors out of distributions that would have otherwise been payable to Goldman Sachs; and
- Payment of lender expenses.
In support of the proposed DIP financing, the debtors filed the declaration of Adam Meislik, a member Force 10 Partners.
Adequate Protection
Second lienholder Goldman Sachs has consented to the motion, and both the holder of the third priority lien (Joshua Resnick) and holder of the fourth priority lien (GHP Sugarfina Holdings, LLC, as collateral agent), have affirmatively waived their rights to seek adequate protection, according to the motion.
The company proposes replacement liens as adequate protection to SFCC and Goldman.
In addition, subject to the final order, 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).
The carveout for professional fees is $50,000.
DIP Budget
The proposed budget for the use of the DIP facility is HERE.
DIP Milestones
The DIP financing is subject to the following milestones:
- Bid procedures motion: Filed within five business days after petition date
- Interim DIP order: Entered within seven business days after petition date
- Bid procedures order: Entered within 21 days after petition date
- Final DIP order: Entered within 28 days after petition date
- Bid deadline: within 50 days after petition date
- Auction: within 55 days after petition date
- Sale hearing: within three business days of closing of auction (or if no bids received, then 56 days after petition date)
- Sale order: Entered within 61 days after petition date
- Sale consummation: within 10 days after entry of sale order
The lien challenge deadline is 60 days from formation for an official unsecured creditors’ committee or 75 days after entry of the interim order. The UCC investigation budget is $25,000.
Other Motions
The debtors also filed various standard first day motions, including the following:
- Motion for Joint Administration
- The cases will be jointly administered under case no. 19-11973.
- Motion to Pay Critical Vendors
- The debtors estimate that they owe critical vendors, consisting of candy and packaging suppliers, approximately $1.7 million, of which $232,538, or approximately 14%, is entitled to priority under section 503(b)(9).
- Motion to Reject Unexpired Property Leases
- The company seeks to reject the unexpired property leases for six store locations.
- Motion to Pay Employee Wages and Benefits
- On an interim basis, the debtors request approval to pay the following amounts with respect to employee obligations:
- Motion to Use Cash Management System
- The company has bank accounts with JPMorgan Chase, Comerica, Bank of America, Central Pacific Bank and Wells Fargo Bank.
- Motion to Pay Taxes and Fees
- The debtors seek to pay up to $175,000 in tax obligations.
- Motion to Continue Customer Programs
- Motion to Provide Utilities with Adequate Assurance
- Motion to File Consolidated Lists of Creditors
- Application to Appoint BMC Group as Claims Agent
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