August 12, 2019 − Loot Crate, Inc. and three affiliated Debtors (“Loot Crate” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11791. The Debtors, an e-commerce business retailing "geek" and gamer merchandise, are represented by Jamie L. Edmonson of Robinson & Cole LLP. Further board-authorized engagements include (i) Bryan Cave Leighton Paisner LLP as lead counsel, (ii) FocalPoint Securities, LLC as investment banker, (iii) Portage Point Partners as financial advisor (with Portage Point's Stuart Kaufman to serve as as CRO) and (iv) Stretto as claims agent.
The Debtors’ lead petition notes between 200 and 1,000 creditors; estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $50.0mn and $100.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Something Inked/AIA Corporation ($4.8mn trade debt), (ii) McKinsey & Company, Inc. ($2.4mn fees claim) and (iii) Money Chest LLC ($3.0mn convertible note).
In a press release announcing the Chapter 11 filing, the Debtors stated that they: "had “reached a definitive agreement for the sale of substantially all of its assets to Loot Crate Acquisition LLC ["LCA"]….The Company expects the sale to be completed within 45 days.
The press release adds, "Loot Crate received a commitment for up to $10 million in new financing from Money Chest LLC, an investor in the company. These funds coupled with ongoing revenue from subscriptions will be used to maintain normal operations."
Loot Crate's Chief Executive Officer Chris Davis commented: "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. Daily operations will continue as usual, unique and exciting fan items will be purchased, crates will be shipped, and all aspects of the business will go on as before the Chapter 11 filing. Our employees will continue to be paid as usual during this transaction."
What the press release neglects to note is that "Loot Crate Acquisition" is an affiliate of existing creditor and debtor-in-possession ("DIP)" lender, Money Chest LLC, which will be credit bidding its debt. It also fails to note that employees are to be laid off, that the Debtors have $20.0mn in unfulfilled credit card orders; that their vendors are jumping ship and filing lawsuits; and that they owe almost $6.0mn in sales taxes. So yes, customers will get "the high-quality service and support they have come to expect from the Loot Crate team."
Chapter 11 Objectives
The George Declaration (defined below) states: "This is a company that has succeeded from ground zero – it is not an 'old economy' business, shrinking every year, trying to determine how to remain relevant. Instead, it is the view of the Debtors’ management that once better capitalized and freed from legacy liabilities through the proposed sale of assets in these cases, the Debtors will return to success." George continues, "In short, despite liquidity constraints unlike those I and the Debtors’ other professionals have ever seen, the Debtors have created a path to get through Chapter 11, albeit quickly, to maintain their going concern, reduce the backlog of shipments (and Vantiv’s potential exposure), allow for renewed dealings with valued vendors and licensors, and achieve a result that is the best we could foresee over the last few distressing weeks and months." Honestly.
So what is the path across this map and onto the next level? A money chest, or rather the willingness of creditor, DIP lender and nominal stalking horse Money Chest LLC to credit bid their debt. The George Declaration (again): "The Debtors will be immediately filing a motion to approve a sale and bidding procedures, with LCA as the proposed stalking horse under an asset purchase agreement to be filed in the coming days. Money Chest, LCA’s affiliate, is also providing substantial post-petition financing to the Debtors."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Kaufman Declaration”), Stuart Kaufman, the Debtors' Chief Restructuring Officer, detailed the events leading to Loot Crate's Chapter 11 filing. The Debtors clearly think that they can just start the game over; activate the Chapter 11 escape module and make their "legacy" problems (to the Debtors, "legacy" seems to mean anything that happened before the Chapter 11 filing) go away. Disappointed that their 2018 fundraising left them without enough coins (who knew that the use of proceeds would require the repayment of amounts outstanding to the lender?), unhappy with the requirement that they collect sales taxes (and their unfortunate choice of a "high wage state"), increasingly burdened by the requirement that they actually ship the $20.0mn in merchandise for which they had already received credit card payments, woefully behind on their sales taxes ($5.9mn) and facing a growing pile of lawsuits from vendors (vendor debt at $30.0mn) …the Debtors' "successful from ground-zero" and ever-relevant business just needs another life in order to crank out an epic score.
The Kaufman Declaration states:
"By late 2017, the Debtors were having financial issues.
The subscription and entertainment market has a healthy and sometimes insatiable appetite for marketing dollars. While the Debtors were very popular with their fan base, the need to continue to spend on marketing was hampering the Debtors’ finances.
In addition, the Debtors had a distribution system that was not optimal, operating out of both Vernon, California (a very high wage state) and Pennsylvania. The impact of the Wayfair decision affected the Debtors, requiring them to accrue sales tax charges for goods sold in the past. And the Debtors’ then-current $15 million loan facility with Breakwater Credit Opportunities Fund, L.P. (‘Breakwater’) was insufficient.
While the August 2018 Financing provided the Debtors with a slight liquidity reprieve, the fees and expenses that had to be repaid to Breakwater made this amount far less than expected, resulting in continued difficulty with vendors after the transaction, resulting in turn in difficulty in filling crates due to missing custom items, causing subscriber chargebacks and cancellations, and then resulting in serious concerns by the Debtors’ credit card processor, and its withholding of funds from the Debtors.
All of this caused greater liquidity issues with each passing week and month. In short, the cycle in this unfortunate paragraph never stopped, with each negative event causing other negative events, again and again, and liquidity problems continued into 2019 and until these filing of these Cases.
Another substantial creditor – albeit a contingent one – is the Debtors’ credit card processor, Vantiv, LLC (‘Vantiv’). Vantiv has a contingent claim to the extent the Debtors do not ship goods to their customers for which such customers have already paid via credit card. Such customers could then, depending on their credit card agreements and applicable law, reverse or dispute prior charges, which may then have to be returned to the customers’ credit card issuer (and in turn, the customer) by Vantiv. Due to serious liquidity issues over the past months – including Vantiv’s withholding substantial sums to protect itself against this risk – the Debtors’ have over $20 million in customer orders for which the Debtors have obtained payment, but for which the Debtors have not shipped goods.
Vantiv is holding approximately $1.7 million of collections it made for the Debtors and, as of the Petition Date, continues to reserve 100% of the Debtors’ customer billings thereby guaranteeing a continuation of the vicious cycle that has strangled liquidity. The Debtors are hopeful that these cases and their DIP financing will allow them to ship several million dollars of pre-petition goods, and then of course remain current on new orders and shipments. In addition, the Debtors are working with their buyer on a solution to the balance of the crates that have not been shipped. While there are no guarantees, the Debtors believe that their post-petition operations, and their sale, will greatly reduce Vantiv’s exposure.
In addition to the above, the Debtors have more than $30 million in trade debt outstanding. As the situation became further dire in the past months – with Vantiv withholding funds, the Debtors falling behind on shipments (leading to subscriber loss, and less revenue – an endless cycle of liquidity shortfalls) – vendor payments fell further behind. Many vendors have filed lawsuits against the Debtors.
As briefly alluded to above, the Debtors have also fallen very far behind on their sales tax payments; currently, it is estimated that over $5.87 million in sales taxes are due, for several reasons. Typically, when the Debtors make a “sale,” the Debtors receive payment in advance of fulfilling that sale.”
About the Debtors
Founded in 2012, Loot Crate, Inc. is an eCommerce subscription company that specializes in providing its customers with curated boxes (or “crates”) of “geek and gamer products” each month. These products consist of exclusive figurines, shirts, gear, and gadgets, as well as limited edition collectibles. Loot Crate partners with industry leaders in entertainment, gaming, sports, and pop culture to deliver monthly themed crates, produce interactive experiences and digital content, and films original video productions. Since 2012, Loot Crate has delivered more than 32 million crates to fans in 35 territories across the globe.
Loot Crate is headquartered in Los Angeles, California.
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