September 6, 2019
First it was Lolli & Pops and now its Sugarfina Inc. Damn people! Don’t you eat sugar anymore?? What is Sugarfina?
Sugarfina is an iconic candy and confectionary brand with a uniquely fresh, fashionable, and experiential approach to gourmet confections. With the creation of a “candy store for grown ups,” Sugarfina has gained a strong and loyal customer following, through constant creation and innovation focused on distinctive product presentation and invention of fresh new candy offerings that delight and surprise. (emphasis added)
There it is again. The words “iconic” and “loyal customer following” to describe a never-profitable now-bankrupt company that bled cash like a baaaaawse over seven years. Seriously, let’s cut that hyperbolic sh*t out already: Sugarfina raised $60mm from investors — including the likes of Howard Marks, Roger McNamee, David Solomon ($GS) & Bono ($U2) — but ran out of cash by the end of ‘18. That’s enough to give us vertigo.
Those investors will never find what they were looking for: ROI.
Clearly this investment was not the “one” (we can keep going folks).
to address this cash need, the company sought interest in a new debt and/or equity transaction from third-parties. But NOBODY WAS INTERESTED IN THIS ICONIC BRAND WITH THE LOYAL FOLLOWING. NO. ONE. The company was forced to take on $22.4mm in secured debt to raise short-term liquidity. Initiate death spiral.*
The company then hired a banker to raise new liquidity:
The Company’s process was open-ended, expressing a willingness to consider any type of transaction, with any terms (including complete or partial acquisitions, equity investments, or long-term debt transactions).
IN OTHER WORDS, THIS ICONIC BRAND WITH THE LOYAL FOLLOWING WAS DESPERATE AF. Over SIX MONTHS they contacted 170 — ONE HUNDRED AND SEVENTY — potential counter-parties, signed 42 NDAs, and still NO ONE wanted to move forward with an out-of-court deal. Hence, the chapter 11 filing.
You know what DOESN’T scream “iconic”? A measly $13mm purchase price (on $47mm of net sales,** $23.6mm from B&M retail). That’s right $13mm for 44 “Candy Boutiques” (inclusive of 11 shop in shops at Nordstrom’s), a wholesale business ($11.9mm sales), e-commerce ($5.6mm), international franchise ($1.8mm) and a corporate/custom channel ($4.1mm). You know what else doesn’t scream “iconic”? This:
In 2016, the Company incurred EBITDA losses of $4,828,574, which increased to EBTIDA losses of $7,340,000 in 2017, and to EBITDA losses of $17,913,000 in 2018.
SO. EFFING. ICONIC. The retail and international channels proved to be the main drag. The company already seeks approval to reject six leases so the buyer’s plan will clearly be less reliant on a physical footprint (at least in existing locations).
The company has 18.5k and 225k TWTR and Insta followers, respectively. It also has 140 design patents and trademarks in 22 international jurisdictions. Despite these “assets,” the purchase price doesn’t clear the secured debt. And the company “owe[s] material amounts, on an unsecured basis, to vendors critical to their production process, including candy and packaging suppliers.” (See “critical vendor” piece below).
The company — currently helmed by (i) a CRO who was formerly the GC (and before that, the GC of American Apparel Inc.) and (ii) two independent directors including the former CEO of both American Apparel Inc. and True Religion, Chelsea Grayson (pictured above in full-fledged Director power pose) — does have a stalking horse purchaser lined up (Candy Cube a/k/a Terramar Capital — your late night luxury sugar cravings powered by private equity!).*** It also has a $4mm (8%) DIP commitment from Serene Capital (its first lien lender) and Candy Cube.
We suppose we’ll now see how much interest this ICONIC brand draws in auction.
*At the time of filing, the company had $24.5mm of secured debt split amongst a capital structure that would make an E&P company jealous. There’s a $5mm first lien (SFF Loan Advisors LLC d/b/a Serene Capital), $10mm second lien (Goldman Sachs Specialty Lending), $8mm third lien (founder Josh Resnick), and $2.15mm fourth lien. There’s also a $2.1mm unsecured convertible promissory note. What? No appetite for a fifth lien tranche?!
**Revenue doubled each year from ‘13 thru ‘16, and 1.25x from ‘13 thru ‘18 (read: growth, as you might expect when a company matures, slowed meaningfully in the later years). Notably, the purchase price also includes membership interests in the emerging company, Candy Cube, including senior preferred membership interests with a $2.0mm preference and 20% of the common membership interests.
***The buyer has agreed to pay retention bonuses to employees who stay through the sale.
Jurisdiction: D. of Delaware (Judge Walrath)
Legal: Shulman Hodges & Bastian LLP (Alan Friedman, Ryan O’Dea) & Duane Morris LLP (Brya Keilson, Eric Monzo)
Financial Advisor: Force Ten Partners LLC (Adam Meislik)
Claims Agent: BMC Group (*click on the link above for free docket access)
Other Parties in Interest:
Stalking Horse Purchaser: Terramar Capital