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December 2, 2022 – The Debtors requested Court authority to: (i) access $5.0mn in new money, debtor-in-possession (“DIP”) financing, including $2.0mn on an interim basis, to be provided by Project Crush Acquisition Corp LLC (the “DIP Lender,” which appears to be an acquisition entity created by Digital Brands Group,* NASDAQ: DBGI; "DBGI") and (ii) use cash collateral [Docket No. 14, with the DIP Facility Term Sheet attached to the motion at Exhibit B]. DBGI which had been in discussions to purchase the Debtors on an out-of-Court basis before withdrawing an existing letter of intent in favor of a replacement LOI premised on an in-Court sale at the end of November, is also set to play a stalking horse role ($10.0mn cash bid less amounts outstanding under the DIP).
Refused further financing by their senior prepetition lenders and with only DBGI in position to make an actionable bid after what was a nine-month marketing process, that shift effectively compelled the Debtors to seek Chapter 11 shelter. That shift also came after disappointing Q3 results released mid-November which had DTC revenue down by 22% from Q3 of the previous year. This DTC drop followed what was for a while a heady period for the Debtors, who drove their online presence during the COVID-19 pandemic only to see it drop as consumers returned to their pre-pandemic, retail-based purchasing patterns.
* Digital Brands group describes itself as a "modern retail ecosystem; a collective reshaping the shopping experience by personalizing styled looks based on consumer preferences. We streamline brand discovery, craft unique personal style experiences and build a sustainable closet that delivers value and confidence with every wear.
What will the existing prepetition senior lenders (owed $3.5mn, see debt table below) make of the DIP as proposed? We shall see. The Debtors insist that they are sitting on an equity cushion, even after the $10.0mn cash bid is reduced by whatever is borrowed on the up to $5.0mn DIP.
The Debtors' declaration in support of first day motions [Docket No. 15] motion attaches a letter of intent signed by Mark Lynn on behalf of the DIP Lender. Mark Lynn is described in a recent DBGI SEC filing as "a director of our company since inception and served as our Co-Chief Executive Officer from September 2013 to the October 2018. Prior to joining us, until September 2011 he was Co-Founder of WINC, a direct-to-consumer e-commerce company which was then the fastest growing winery in the world, backed by Bessemer Venture Partners."
On November 30, 2022, Winc, Inc. and two affiliated debtors (NYSE American: WBEV; together “Winc“ or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case no. 22-11238. At filing, the Debtors, who “develop, produce, and sell alcoholic beverages through wholesale and direct to consumer business channels in conjunction with winemakers, vineyards, distillers, and manufacturers” noted estimated assets of $50.3mn and estimated liabilities between $37.8mn (these are drawn from their 10-Q and are as of September 30, 2022*).
* The Debtors’ Q3 10-Q included a going concern warning. NB: The Debtors IPO-ed in November 2021.
The DIP Motion
The motion [Docket No. 14] states, “Prior to the filing of the Chapter 11 Cases, the Debtors engaged in extensive goodfaith arms’-length negotiations with the DIP Lender over the terms of the DIP Facility, which will permit the Debtors to continue business operations, fund the Chapter 11 Cases and pursue value maximizing sale process (the ‘Sale Process’) for the benefit of all stakeholders…
The Debtors have minimal cash on hand and require immediate access to additional liquidity to fund business operations, fund the Chapter 11 Cases and complete a value-maximizing Sale Process. It is also critically important that the Debtors communicate to the market that they had sufficient liquidity to continue operations following the commencement of the Chapter 11 Cases to address any concerns that may be raised by customers, employees, and vendors as the Debtors transition into chapter 11. Thus, immediate access to the interim funding provided under the DIP Facility and the continued use of Cash Collateral is necessary to avoid immediate and irreparable harm to the Debtors and critical to the Debtors’ efforts to maximize value for their stakeholders through the Chapter 11 Cases and the Sale Process.
…given the realities of the Debtors’ prepetition finances and business operations, the Debtors could not have obtained financing on more favorable terms than those offered by the DIP Lender. For these reasons and those set forth below, the Debtors submit that the DIP Facility is the best available financing under the circumstances, reasonable and appropriate, and in the best interests their estates and stakeholders.”
Key Terms of the DIP Financing:
- Borrowers: Winc, Inc., a Delaware corporation (“Winc”), BWSC, LLC, a California limited liability company (“BWSC”), and Winc Lost Poet LLC, a Delaware limited liability company (“Lost Poet” together with Winc, each a “Borrower” and together the “Borrowers”).
- DIP Lender: Project Crush Acquisition Corp LLC
- Amount and Facility: $5.0mn ($2.0mn on an interim basis)
- New Money: $5.0mn
- Roll-Up: N/A
- Interest Rate: 14.0%
- Default Interest: 2.00%
- Fees: A closing fee equal to 2.0% (the “Closing Fee”) on the entire DIP Commitments, which shall be earned upon entry of the Interim Order. The Closing Fee shall be payable in kind, including any accrued interest and fees, to the DIP Lender upon the earlier of (i) the DIP Termination Date, or (ii) the closing of a sale following entry of a Sale Order (as defined in the Term Sheet).
- Maturity: All DIP Obligations will be due and payable in full in cash unless otherwise agreed to by the DIP Lender in writing on the earliest of (i) January 20, 2023; (ii) if the Final Order has not been entered, twenty-eight (28) calendar days after the Petition Date; (iii) the acceleration of the DIP Facility and the termination of the DIP Commitments upon the occurrence of a termination event; (iv) the effective date of any plan of reorganization; (v) the date the Bankruptcy Court converts any of the Chapter 11 Cases to a case under chapter 7 of the Bankruptcy Code; (vi) the date the Bankruptcy Court dismisses any of the Chapter 11 Cases; (vii) the consummation of the sale of all or substantially all of the Borrowers’ assets; and (viii) the date an order is entered in any Bankruptcy Case appointing a Chapter 11 trustee or examiner with enlarged powers (any such date, the “DIP Termination Date”).
- The Debtors shall have obtained an interim order and filed for the approval a Bid Procedures for a sale of the Debtor’s assets; no later than 3 days following the Petition Date,
- The Debtors shall have filed the asset purchase agreement; no later than 7 days following the Petition Date
- The Debtors shall have obtained a bid order; no later than 14 days following the Petition Date
- The Debtors shall have obtained a final order; no later than 28 days following the Petition Date
- The Bankruptcy Court shall have entered a 363 sale order; no later than 45 days following the Petition Date,
- The 363 Sale approved by the 363 Sale Order shall be effective on January 30, 2023
The Debtors, in consultation with their legal and financial advisors, determined, based on the facts and circumstances, that obtaining sufficient third-party DIP financing (whether on a secured or unsecured basis) was critical to implement the Sale Process and, ultimately, the success of the Chapter 11 Cases. Based on discussions with the Prepetition Lender regarding the Prepetition Credit Facility, including a history of declining to provide any additional financing to the Debtors, and considering the circumstances of the Debtors’ operations, the Debtors determined that the Prepetition Lender was not a viable candidate to provide debtor in possession financing for the Chapter 11 Cases. Specifically, in February 2022, prior to the initial maturity date of the Prepetition Credit Facility, the Debtors approached the Prepetition Lender about securing additional financing, but the Prepetition Lender informed the Debtors that it was unwilling to extend the Debtors additional credit.
Given that the Prepetition Lender was unwilling to extend additional funding, the Debtors commenced a process to solicit funding from various other lenders. After several lenders declined to provide funding, the Debtors entered into advanced discussions with a private lender that specializes in providing working capital for growing business. The parties executed a term sheet for a working capital loan, and the Debtors were hopeful that the negotiations would yield new financing. However, after performing substantial diligence and obtaining an appraisal of the Debtors’ assets, such lender declined to provide funding.
Despite the setback, over a period of months, the Debtors continued to solicit financing proposals and eventually entered into negotiations with a lender regarding the terms of a letter of credit secured by the Debtors’ inventory. As discussed above, in October 2022, the Debtors and the Prepetition Lender entered into a further amendment of the Credit Agreement to provide the Debtors with additional time to pursue a financing transaction. The third, and final, amendment to the Credit Agreement delayed the reduction in borrowing capacity scheduled for November 1, 2022 to December 1, 2022, and also deferred measurement of a minimum liquidity covenant to December 31, 2022.
Thereafter, the Debtors and lender continued negotiations and executed a term sheet for a line of credit. Ultimately, after protracted negotiations, the lender’s insistence on certain punitive fees, covenants, and other terms rendered the financing transaction unfeasible.
Given the Debtors’ liquidity position and inability to secure financing from sources other than the Stalking Horse Bidder, the Debtors focused their efforts on negotiating the best possible DIP financing they could secure from the only party known to the Debtors to be interested in serving as a stalking horse bidder in the Chapter 11 Cases: Project Crush Acquisition Corp LLC (the 'DIP Lender'). Accordingly, with the assistance of their legal and financial advisors, the Debtors engaged in extensive discussions and multiple rounds of good faith and arm’s length negotiations with the DIP Lender prior to the Petition Date to achieve that objective. The terms of the DIP Facility represent the best possible financing that the Debtors could secure from any party.
The Debtors’ outstanding secured debt consists of a first lien revolving credit facility with an outstanding balance of approximately $3.5 million. In addition, the Debtors entered into a revenue sharing agreement, pursuant to which the Debtors obtained an advance of approximately $2.88 million against approximately $3.26 million of future receivables. The Debtors also incur trade payables and operating expenses in connection with the ordinary course operations of their business.
As of the Petition Date, the Debtors’ outstanding obligations in connection with the foregoing are estimated at the following amounts:
Significant Prepetition Shareholders
The Debtors' Petition notes the following as holding 5% or more of their equity:
- Affiliates of Bessemer Venture Partners VIII Institutional L.P. and Bessemer Venture Partners VIII L.P.
- Affiliates of Shining Capital Holdings II L.P. and Shining Capital Management III Limited
- Affiliates of CJF Palate Holdings LLC and Cool Japan Fund Inc.
- Geoffrey McFarlane
- Brian Smith
- Xiangwei Weng
About the Debtors
According to the Debtors: “Winc is a differentiated platform for growing alcoholic beverages brands, fueled by the joint capabilities of a data-driven brand development strategy paired with a true omni-channel distribution network. Winc's mission is to become the leading brand builder within the alcoholic beverages industry through an omni-channel growth platform." Winc's common stock trades under the ticker symbol "WBEV" on the NYSE American.
Corporate Structure Chart
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