March 14, 2023 – The Debtors filed a motion seeking a sale procedures order which would: (i) approve proposed procedures in relation to a $26.25mn private sale of their Spresso business (the “Spresso Business*”) to "a designee of the Debtors’ First Lien Lenders" (owed $41.5mn at filing) and (ii) authorize the Debtors to enter into an asset purchase agreement (the “APA”) with those credit bidding lenders [Docket No. 17, with the APA attached at Exhibit B].
*The Debtors’ businesses are separated into two distinct segments: (1) the retail segment (the “Retail Segment”), pursuant to which the Debtors provide bulk pantry consumables to businesses and household customers through orders that customers place on the Boxed website or the Boxed app; and (2) the Spresso (the “Spresso Business”), an advanced software, services and SaaS engineering product that the Debtors license to their customers in order to drive their e-commerce businesses.
Case Status
On April 2, 2023, Boxed, Inc. and four affiliated Debtors (NYSE: BOXD; "Boxed" or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. At filing, the Debtors, "an e-commerce technology company that provides bulk pantry consumables to business and household customers," cited a "combination of rising interest rates, persistent inflationary pressures which have depressed customers’ retail spending, ongoing increases in costs of goods sold, ongoing disruption and challenges across industry supply chains, and competing solutions for online retailing" as precipitating their need to seek bankruptcy shelter.
As discussed below, an extensive prepetition sales effort came up empty, with the Debtors' "receiv[ing] no offers to purchase their e-commerce retail service" (ie the Retail Business) and that part of their business now set to "be wound down to support maximization of remaining liquidity."
The Debtors, who reached out to 170 potentially interested parties and had significant discussions with 14 of them, did get a single indication of interest…for the Debtors’ Spresso Business…[which] was neither binding nor actionable."
The Sale Procedures Motion
The motion [Docket No. 17] states, “…despite successful efforts to drive meaningful gross margin improvement over time, [the Debtors] have never been able to reach the scale and requisite cost structure to support operating income and cash flow profitability. Thus, the Debtors have incurred significant losses and net cash outflows from operating activities since their inception, and have relied on outside capital, in the form of equity and debt, to fund their substantial liquidity needs.
Recently, the combination of rising interest rates, persistent inflationary pressures which have depressed customers’ retail spending, ongoing increases in costs of goods sold, ongoing disruption and challenges across industry supply chains, and competing solutions for online retailing, have materially and adversely affected the Debtors’ liquidity, operations, prospects, and financial results. This was unanticipated.
As a result, prior to entering Chapter 11, the Debtors were in vital need of liquidity. Furthermore, they were in breach of certain covenants in their secured credit agreements that, absent forbearances, would have allowed the Debtors’ lenders to declare an event of default and, inter alia, sweep substantially all of the Debtors’ cash from the Debtors’ bank accounts, thereby severely disrupting the Debtors’ ability to conduct business.”
Prepetition Sale and Marketing Process
The motion continues, “In light of ongoing liquidity challenges and limited traction on discussions to raise incremental capital through ongoing capital markets exploration, by mid-December 2022, the Debtors and their advisors began actively marketing the Debtors’ assets and business lines for sale in an organized prepetition bidding process. Since that time, the Debtors and their advisors have contacted 170 potential buyers, entered into 35 confidentiality agreements, and engaged in many management presentations and fireside chats with 14 different counterparties, including with major international and U.S. retailers. Despite these four months of concerted sales efforts, the Debtors received no offers to purchase their e-commerce retail service and only a single indication of interest, which indication of interest was only for the Debtors’ Spresso Business. Ultimately, that indication of interest was neither binding nor actionable.
Consequently, the Debtors’ commercial retail service will be wound down to support maximization of remaining liquidity. With respect to the Spresso Business, the Debtors are requesting approval of a private sale of the Spresso Business to a designee of the Debtors’ First Lien Lenders to minimize further operational losses and deterioration of value of the Debtors’ estates, as well as to preserve at least 25 full time employment positions within the Spresso Business.
In addition to searching for potential buyers, the Debtors have worked closely with their major stakeholders, including the First Lien Lenders, to seek support of the Debtors’ Chapter 11 Cases. To that end, the First Lien Lenders have agreed to the consensual use of their cash collateral, which will be done in accordance with a budget and terms approved by the First Lien Lenders. The contemplated use of cash collateral in these Chapter 11 Cases is expected to provide the Debtors with sufficient funding to implement their sale strategy in an orderly and value maximizing manner.
While the Debtors have access to funds through cash collateral usage, it cannot be emphasized strongly enough that time is of the essence. Given the significant costs associated with continued operations and the administrative costs of these Chapter 11 Cases, the sale must be accomplished in an expeditious manner, if it is to happen at all.
The Debtors understand that they are seeking an accelerated timeline for these Chapter 11 Cases. However, the Debtors respectfully submit that, given the severe liquidity constraints within which the Debtors are operating, time is of the essence to maximize recoveries for stakeholders, preserve jobs within the Spresso Business, and keep administrative expenses manageable.
While the Debtors are in a precarious financial state, their tireless prepetition efforts have culminated in a well-supported and value-maximizing approach that will preserve the Spresso Business as a going concern and simultaneously achieve an orderly and efficient wind down and liquidation of the Retail Segment and other remaining assets. If the Debtors are to succeed with these efforts, it is imperative that the sale move quickly to maintain stability and achieve the swift and orderly transition of the Spresso Business.
Following substantial, arms’-length negotiations, the Debtors and the First Lien Lenders have agreed in principle to terms for the purchase of substantially all of the Debtors’ Spresso Business by an entity owned and designated by the First Lien Lenders for a credit bid of $26,250,000, as further described in the APA. The terms of this agreement are set forth in the asset purchase agreement (the ‘APA’) attached as Exhibit B hereto. The APA contemplates the preservation of approximately 25 full time employment positions with the post-sale Spresso business.
General Background
Filing Date Perspective
In a press release announcing the filing, the Debtors advised that: “Boxed, Inc. ('Boxed' or the 'Company'), an e-commerce technology company that provides bulk pantry consumables to business and household customers, announced today that it, and all of its subsidiaries, initiated voluntary proceedings under Chapter 11 of the U.S. Bankruptcy Code to execute a sale of its Spresso software business to its first lien secured lenders while continuing to streamline operations, including an efficient and orderly wind-down of its remaining retail business.
Boxed has been working diligently to improve its financial structure, having entered into a Forbearance Agreement with its first lien secured lenders as a critical, interim solution to protect the business. However, in line with its efforts to counter the challenging business environment, the Company made the difficult yet necessary decision to wind down its retail e-commerce operations over the next several weeks. The Company’s Board of Directors has unanimously determined that seeking Chapter 11 protection is the most appropriate path forward."
Chieh Huang, Co-Founder and Chief Executive Officer of Boxed, commented: “This was an incredibly difficult decision, and one that we reached only after carefully evaluating and exhausting all available options. Although this outcome is not what we worked so hard for, we are thankful to everyone, including our customers, who have supported us along the way. Looking to the future, we are incredibly excited to watch the Spresso business continue under new ownership."
The press release continues, "Boxed intends to fund and protect its near-term operations and cover administrative expenses through access to its cash collateral as the Company winds down during the Chapter 11 process and transitions its Spresso business to a new separate legal entity that will continue as a going concern. The Spresso business customers are not anticipated to see any disruption of service throughout the sale process.”
Goals of the Chapter 11 Filings
According to the press release, the Debtors filed bankruptcy "to execute a sale of its Spresso software business to its first lien secured lenders while continuing to streamline operations, including an efficient and orderly wind-down of its remaining retail business."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Zimowski Declaration”), Mark Zimowski, the Debtors’ chief financial officer, detailed the events leading to Boxed’s Chapter 11 filing. The Zimowski Declaration provides: “The Debtors have operated in the competitive online consumables market, which contains competitors that have substantially greater capital resources, lower costs, larger product portfolios, larger user bases, larger sales forces and a greater geographic presence, and have built strong relationships with retailers and distributors.
As growth-oriented companies, the Debtors emphasized growth over short-term profits to support scaling their businesses with the goal of ultimately achieving long-term profitability. Since inception, the Debtors have consistently been able to improve gross profits and gross margin profitability of the businesses. However, despite successful efforts to drive meaningful gross margin improvement over time, they have never been able to reach the scale and requisite cost structure to support operating income and cash flow profitability.
Thus, the Debtors have incurred significant losses and net cash outflows from operating activities since their inception, and have relied on outside capital, in the form of equity and debt, to fund their substantial liquidity needs. Recently, the combination of rising interest rates, persistent inflationary pressures which have depressed customers’ retail spending, ongoing increases in costs of goods sold, ongoing disruption and challenges across industry supply chains and competing solutions for online retailing, have materially and adversely affected the Debtors’ liquidity, operations, prospects and financial results. This was unanticipated.
As a result, prior to entering Chapter 11, the Debtors were in vital need of liquidity. Furthermore, they were in breach of certain covenants in their secured credit agreements that, absent forbearances, would have allowed the Debtors’ lenders to declare an event of default and, inter alia, sweep substantially all of the Debtors’ cash from the Debtors’ bank accounts, thereby severely disrupting the Debtors’ ability to conduct business. Under the direction of the Debtors’ management team and with the help of their advisors, the Debtors’ developed a strategy to address their severe liquidity pressures by, inter alia, attempting to raise additional financing and marketing the Debtors’ businesses for sale.
In the fall of 2022, the Debtors began negotiations with their Prepetition First Lien Secured Lenders concerning an amendment to the terms of the First Lien Credit Agreement. In addition, during that time, the Debtors engaged Oppenheimer as their investment banking and debt capital advisor to support the ongoing negotiations with the Prepetition First Lien Secured Lenders, and to explore opportunities to raise incremental capital from other potential third-party lenders, including both existing unsecured lenders and new potential lenders, to help fund ongoing operating costs and working capital obligations. Ultimately, these efforts were not successful.
In light of ongoing liquidity challenges and limited traction on discussions to raise incremental capital through ongoing capital markets exploration, by mid-December 2022, the Debtors and their advisors began actively marketing the Debtors’ assets and business lines for sale in an organized prepetition bidding process. Since that time, the Debtors and their advisors have contacted 170 potential buyers, entered into 35 confidentiality agreements, and engaged in many management presentations and fireside chats with 14 different counterparties, including with major international and U.S. retailers. Despite these four months of concerted sales efforts, the Debtors received no offers to purchase their e-commerce retail service and only a single indication of interest, which indication of interest was only for the Debtors’ Spresso business. Ultimately, that indication of interest was neither binding nor actionable.
Consequently, the Debtors’ commercial retail service will be wound down to support maximization of remaining liquidity. With respect to the Spresso business, the Debtors are filing contemporaneously herewith a motion requesting approval of a private sale of the Spresso business (the 'Spresso Sale') to a designee of the Debtors’ Prepetition First Lien Secured Lenders to minimize further operational losses and deterioration of value of the Debtors’ estates, as well as to preserve at least 25 full time employment positions within the Spresso business. The Spresso Sale remains subject to Court approval and, if there is any other interested purchaser, such party can object to the proposed sale and submit a higher binding offer.
In addition to searching for potential buyers, the Debtors have worked closely with their major stakeholders, including the Prepetition First Lien Secured Lenders, to seek support of the Debtors’ Chapter 11 Cases. To that end, the Prepetition First Lien Secured Lenders have agreed to the consensual use of their cash collateral, which will be done in accordance with a budget and terms approved by the Prepetition First Lien Secured Lenders. The contemplated use of cash collateral in these Chapter 11 Cases is expected to provide the Debtors with sufficient funding to implement their sale strategy in an orderly and value maximizing manner.
While the Debtors have access to funds through cash collateral usage, it cannot be emphasized strongly enough that time is of the essence. Given the significant costs associated with continued operations and the administrative costs of these Chapter 11 Cases, the sale must be accomplished in an expeditious manner, if it is to happen at all. The Debtors understand that they are seeking an accelerated timeline for these Chapter 11 Cases. However, the Debtors respectfully submit that, given the severe liquidity constraints within which the Debtors are operating, time is of the essence to maximize recoveries for stakeholders, preserve jobs within the Spresso business, and keep administrative expenses manageable.
While the Debtors are in a precarious financial state, their tireless prepetition efforts have culminated in a well-supported and value-maximizing approach that will preserve the Spresso business as a going concern and simultaneously achieve an orderly and efficient wind down and liquidation of the Retail Segment and other remaining assets. If the Debtors are to succeed with these efforts, it is imperative that the Spresso Sale move quickly to maintain stability and achieve the swift and orderly transition of the Spresso business.”
Prepetition Indebtedness
As of the Petition Date, the Debtors have approximately $147 million of funded debt obligations, consisting of obligations under the First Lien Term Loan (approximately $41.5mn outstanding at filing), Second Lien Term Loan and the Convertible Notes.
Significant Shareholders
Hamilton Lane Incorporated owns 3,736,804.75 (5.427%) of the Boxed's common shares, and The Vanguard Group, Inc. owns 3,524,728.86 (5.119%)
About the Debtors
According to the Debtors: “Boxed is an e-commerce retailer and an e-commerce enabler. The Company operates an e-commerce retail service that provides bulk pantry consumables to businesses and household customers, without the requirement of a 'big-box' store membership. This service is powered by Spresso, the Company’s own Software & Service business. From solving challenges with data using machine-learning modules to re-platforming with end-to-end technology, Spresso’s purpose-built storefront, marketplace, analytics, fulfillment, advertising, and robotics technologies enable better business outcomes for e-commerce customers. The Company aspires to make a positive social impact with an emphasis on good Environmental, Social and Governance practices, and as such, has developed a powerful, unique brand, known for doing right by its customers, employees and society. For more information, please visit investors.boxed.com."
Corporate Structure Chart
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