SkyMall files for Chapter 11 Bankruptcy Protection | January 23, 2015
SkyMall filed for protection under Chapter 11 of the United States Bankruptcy Code on January 23, 2015 in the United States Bankruptcy Court for the District of Arizona under Case No. 15-00679-BKM.
The Debtors in the proceedings are SkyMall, LLC (“SkyMall”); Xhibit Corp. (“Xhibit”); Xhibit Interactive, LLC; FlyReply Corp.; SHC Parent Corp.; SpyFire Interactive, LLC; Stacked Digital, LLC; and SkyMall Interests, LLC.
Scott Wiley is the Chief Financial Officer (“CFO”) and Acting Chief Executive Officer (“Acting CEO”) of Xhibit Corp. (“Xhibit”). He has been the CFO of Xhibit, Xhibit Interactive, LLC, FlyReply Corp., SpyFire Interactive, LLC, and Stacked Digital, LLC since September 11, 2013. He has been the CFO of SkyMall, LLC (“SkyMall”), SkyMall Interests, LLC, and SHC Parent Corp. (collectively, the “SkyMall Companies”) since October 5, 2009.
He became the Acting CEO of Xhibit and SkyMall on November 16, 2014, after the resignation of Kevin Weiss, the former Chief Executive Officer.
Xhibit Interactive, LLC is managed by its Manager, Xhibit. SpyFire Interactive, LLC is managed by its Manager, Xhibit Interactive, LLC. Stacked Digital, LLC is managed by its Manager, Xhibit Interactive, LLC.
Scott Wiley discusses the filing:
“Xhibit, f/k/a NB Manufacturing, Inc., was incorporated on September 19, 2001 in the State of Nevada. In November 2012, Xhibit changed its name from NB Manufacturing, Inc. to Xhibit Corp. Xhibit is a publicly traded company whose common shares are registered under Section 12(g) of the Securities Exchange Act of 1934, as amended. Xhibit has outstanding approximately 108,232,000 shares of common stock, par value $0.0001 per share, its only outstanding class of equity, held by approximately 176 shareholders of record. Each of the other Debtors is a 100%-owned direct or indirect subsidiary of Xhibit.
“As a public company, Xhibit files regular reports with, and as required by, the Securities and Exchange Commission (collectively, the “SEC Filings”). Xhibit’s SEC Filings are public records and they contain discussions of the history, organization, and business and financial background of Xhibit and the other Debtors.
“Xhibit is the sole equity holder of each of Xhibit Interactive, LLC (“Interactive”), a Nevada limited liability company, FlyReply Corp. (“FlyReply”), a Nevada corporation, and SHC Parent Corp. (“SHC”), a Delaware corporation.
“Interactive is the sole equity holder of each of SpyFire Interactive, LLC (“SpyFire”), a Nevada limited liability company, Stacked Digital, LLC (“Stacked”), a Washington limited liability company, and Xhibit d.o.o. (“Bosnian Sub”), a Bosnian entity that is currently being liquidated through Bosnian insolvency proceedings.
“SHC is the sole equity holder of SkyMall Interests, LLC (“Interests”), a Delaware limited liability company. Interests is the sole equity holder of SkyMall, a Delaware limited liability company.
The SkyMall Business
“During 2014, substantially all of the Debtors’ consolidated revenues were generated by SkyMall and its wholly-owned subsidiary, SkyMall Ventures, LLC (“Ventures”). Since its founding in 1989, SkyMall has developed a retail business as a multi-channel, direct marketer offering a wide array of merchandise from numerous direct marketers and manufacturers through the SkyMall catalog and its website, SkyMall.com (the “SkyMall Business”). SkyMall’s retail operations were conducted through two primary channels, (a) through the SkyMall in-flight shopping catalog carried in the seat-back pocket on the aircraft of large U.S.-based airlines, and (b) through direct mail catalogs and the SkyMall website (“SkyMall.com”). SkyMall does not maintain substantial amounts of product inventory, but, instead, principally serves as a distribution channel for manufacturers, distributors and other product aggregators that want to reach SkyMall’s large audience. The SkyMall Business, excluding SkyMall Ventures, LLC, generated revenue of approximately $33.7 million in 2013 and $15.8 million for the nine months ended September 28, 2014.
Sale Of Ownership Interests In SkyMall Ventures; Continuing Transition Support Services
“Ventures was a wholly-owned subsidiary of SkyMall, and operated a loyalty business as a provider of merchandise, gift cards and rewards programs for program members in various corporate and other loyalty programs throughout the United States. On September 9, 2014, SkyMall sold 100% of the outstanding membership interests of Ventures to Connexions Loyalty, Inc. (“Connexions”), pursuant to a Membership Interest Purchase Agreement dated as of the same date (the “MIPA”) (the “Ventures Sale”).
“The cash purchase price of the SkyMall Ventures Sale was $24,000,000. Of this amount, $1,800,000 was placed into an escrow to secure payment of potential indemnity claims of Connexions that may arise against SkyMall. Xhibit also entered into a Limited Guarantee in favor of Connexions guaranteeing potential indemnity obligations of SkyMall under the MIPA. Approximately $15.2 million of the sale proceeds was used to repay the outstanding balance of Xhibit’s secured credit facility, which was subsequently terminated. The balance of the sales price was used for other general corporate purposes, including payment of transaction expenses and outstanding payables. Under the MIPA, and in addition to the escrow funds, SkyMall has a right to receive a potential future payment of up to $3,900,000 in cash based upon a formula related to the operating profit of Ventures during the 12 months following the closing of the SkyMall Ventures Sale. The actual amount, if any, that may eventually be payable to SkyMall under this provision is not currently determinable.
“The MIPA contains customary representations, warranties and indemnities. In connection with the Ventures Sale, SkyMall also entered into a Transition Services Agreement with Connexions, dated September 8, 2014 (the “TSA”), pursuant to which SkyMall provides a broad range of services to Connexions to support Connexions’ operation of the acquired Ventures business. The services provided by SkyMall under the TSA include gift card fulfillment, contact center support, telecommunications, information technology, marketing and catalog creation, facilities and accounting and finance (the portion of SkyMall’s business devoted to compliance with the TSA will be referred to herein as, the “TSA Support Operations”). The term of the TSA is up to 18 months. Connexions pays a fee to SkyMall under the TSA.
“Prior to January 16, 2014, SkyMall employed approximately 150 employees, 148 of which were based at SkyMall’s headquarters and office and operations complex in Phoenix, Arizona and two of whom were buyers who worked from their home offices in Chicago, Illinois.
The Other Businesses Owned By Xhibit
“The Xhibit subsidiaries other than the SkyMall Companies (Interactive and its subsidiaries and FlyReply) operated various online and e-commerce related advertising, lead generation, and marketing networks which were designed to support advertising campaigns and programs for a broad base of advertisers and advertising agency customers. These businesses were not successful, and between June 2013 and June 2014, Xhibit terminated or suspended the business operations of all of its subsidiary companies other than the SkyMall Companies. None of the Xhibit subsidiaries other than the SkyMall Companies had any employees, and none was conducting business operations, as of the Petition Date.
Events Leading To Bankruptcy Filing
“As discussed above, all of the operations of the Xhibit subsidiaries other than those of the SkyMall Companies had been terminated or suspended by June 2014.
“In recent years, SkyMall’s business operations have faced increasing pressure. Many factors contributed to the financial and operational difficulties confronting SkyMall, including the following:
Rapidly Evolving and Highly Competitive Retail Industry.
“The direct marketing retail industry is crowded, rapidly evolving and intensely competitive. Because SkyMall historically did not narrowly tailor its product offerings, SkyMall faced well-established competitors in every market vertical, as well as competition from significant, broad-based ecommerce providers, such as Amazon.com and eBay.com. Barriers to entry to the market are minimal, and current and new competitors can launch new websites quickly and at a relatively low cost. Many of SkyMall’s competitors have greater, or vastly greater, resources, longer histories, more customers, and higher brand recognition. These competitors have often secured better terms from vendors, adopted more aggressive pricing, and devoted more resources to technology, infrastructure, fulfillment, and marketing.
Technology And Business Changes Affecting In-Flight Catalog Operations.
“Historically, the SkyMall catalog was the sole in-flight option for potential purchasers of products to review while traveling. With the increased use of electronic devices on planes, fewer people browsed the SkyMall in-flight catalog. The substantial increase in the number of air carriers which provide internet access, and the U.S. Federal Aviation Administration’s recent decision to allow the use of electronic devices during take-off and landing, resulted in additional competition from e-commerce retailers and additional competition for the attention of passengers, all of which further negatively impacted SkyMall’s catalog sales. These technology changes, and the costs incurred by airlines in carrying a printed SkyMall catalog, have also made the traditional in-flight SkyMall catalog increasingly unattractive to the airlines. On August 29, 2014, Delta Air Lines, Inc. terminated its contract with SkyMall effective November 30, 2014, and on December 10, 2014, Southwest Airlines Co. notified SkyMall that it would no longer carry the SkyMall catalog effective April 1, 2015.
“Demand for products offered in SkyMall’s catalog is generally highly sensitive to price. SkyMall’s pricing strategies have had a significant impact on its net sales and net income. SkyMall often offered discounted prices as a means of attracting customers and encouraging repeat purchases. Such offers and discounts reduced SkyMall’s margins and operating income.
Discretionary Spending Decreases.
“A substantial portion of the products and services SkyMall offers are products or services that consumers may view as discretionary items rather than necessities. The difficult macro-economic conditions, particularly high levels of unemployment, which have impacted SkyMall customers’ ability to obtain consumer credit, have negatively impacted sales.
Third Party Vendors and Suppliers.
“SkyMall depends on various third-party vendors to supply products. As a result of, among other things, Xhibit financial statements filed with the SEC, an increasing number of SkyMall vendors have reduced SkyMall’s credit limits and/or refused to ship product without prepayment of the merchandise cost. These factors have negatively impacted sales and increased SkyMall’s need for working capital.
“In light of the changing business environment and increasing business difficulties it confronted, SkyMall determined that its traditional in-flight catalog model was no longer viable or sustainable. “Accordingly, beginning in early 2014, SkyMall attempted to implement a strategy to reduce its dependence on its in-flight catalog business and to reposition SkyMall as a direct retailer in the e-commerce space. It is unknown whether full implementation of this strategy would have been successful; SkyMall was unable to implement its new business strategy because of the operational and liquidity challenges discussed below.
“In recent years, SkyMall incurred substantial and increasing operating losses and has faced liquidity issues. In the latter part of 2014, SkyMall faced increasing difficulties staying current on payments owed to airlines, vendors, and other suppliers, further impairing its ability to continue operations. By the end of December 2014, SkyMall confronted a severe liquidity crisis and faced the possibility that it would not be able to continue to pay employees, or otherwise sustain operations with its remaining cash reserves, absent access to additional working capital.
“SkyMall attempted throughout the fourth quarter of 2014 to obtain additional operating capital. SkyMall explored various financing alternatives for both near-term and for longer term financing, including asset-based loans, nontraditional debt financing, and the issuance of new equity or equity-linked debt instruments. SkyMall was unable to attract the necessary working capital on terms or in amounts sufficient to meaningfully address its liquidity needs.
Retention of Investment Bank; Prepetition Termination of Certain Operations
“On January 9, 2015, the Debtors’ retained the investment banking firm of CohnReznick Capital Market Securities, LLC (“CRCMS”) to explore and pursue a possible sale or other strategic options for the Debtors. SkyMall is attempting to sustain its scaled-down business operations and maintain itself as a going concern during the contemplated sale process.
“ As a result of the financial difficulties discussed above, on January 16, 2015, SkyMall suspended its retail catalog business operations, and laid-off 47 of its employees, the majority of whom were employed in SkyMall’s call center.
“In conjunction with these efforts, and to maintain stability in the TSA Support Operations while permanent transition of such operations is pursued, Xhbit/SkyMall and Connexions agreed, among other things, that: (i) an aggregate of $280,000 of the funds held in escrow pursuant to the MIPA (see note 3 above) would be released to SkyMall; (ii) SkyMall would not lay-off or terminate employment of certain of the employees supporting the TSA Support Operations before February 13, 2015; and (iii) with regard to six IT employees (the “Specified IT Employees”) who support both the TSA Support Operations and SkyMall’s other operations, Connexions would have the opportunity to offer employment to these persons and, to the extent the employment offers were accepted, to hire such persons, after which Connexions would make them available to perform certain continuing services for SkyMall at an agreed hourly rate. All six the Specified IT Employees accepted Connexions’ offer of employment prepetition.
Debt Structure .
“Most of the assets held by SkyMall and the other Debtors are unencumbered. Other than the funds held in escrow under the MIPA (see note 3 above), which secure potential indemnity claims of Connexions, certain security deposits that have been provided by SkyMall to various parties, and certain specific equipment, the Debtors do not believe that their cash or other assets are subject to valid security interests or liens. 27. The majority of the Debtors’ creditors consist of suppliers, vendors, contract parties, and employees who assert various unsecured claims. The Debtors estimate that aggregate creditor claims against the Debtors are approximately $12 million.
The Bankruptcy Cases.
“The Debtors have filed these bankruptcy cases in an effort to preserve their assets to the greatest extent possible while the Debtors seek to achieve a sale of their assets and complete an orderly wind-down of their affairs. .
“CRCMS believes that SkyMall’s assets are likely to be substantially more valuable if they can be marketed and sold as a going concern. Accordingly, the Debtors are attempting to sustain their scaled-down business operations as a going concern during the contemplated sale process.
“The sale process proposed by the Debtors contemplates that the marketing of SkyMall’s assets will begin immediately; that an auction will be held on or about March 24, 2015; and that any sale(s) of SkyMall’s assets will close in April of 2015.
“An expeditious sale process is very important. Based on the cash reserves SkyMall has as of the Petition Date and the Debtors’ projection of the likely business and revenue performance of the scaled-down SkyMall business operations, the Debtors believe that they can maintain the SkyMall business operation during the contemplated marketing and sale process. However, because of the substantial risks and uncertainties regarding continued business operations, it is critical that the marketing and sale process is completed within the contemplated timeframe.
“The Debtors will be monitoring SkyMall’s continuing business operations and financial performance closely. If it appears at any point during the marketing and sale process that continued operation of the scaled-down SkyMall business operations is no longer feasible, the Debtors will take the steps necessary to terminate remaining operations.
“ The Debtors propose that the marketing and sale process will go forward even if the Debtors are not able to continue the SkyMall business as a going concern through the scheduled sale.
For more information regarding the case, please call:
Dallas: Richard G. Grant, Practice Chair | Direct: 214-210-2929
New York: Robert W. Dremluk | Direct: 516-883-2759