SkyMall's bankruptcy had less to do with its absurd catalog than you think

The SkyMall bankruptcy story is even weirder than the stuff it used to sell

On the surface, the bankruptcy of SkyMall seems to be easily explained and none too surprising.

The publisher of those seat-back catalogs brimming with useless crapola thumbed through by millions of air passengers, SkyMall ostensibly became the victim of changes in air travel and retailing. The more time that passengers aloft could spend on their smartphones and iPads, it's said, the less they needed to while away the hours poring over catalogs filled with Garden Yetis and snow jackets for dogs.

Any product that struck their fancy could be acquired upon landing from Amazon or another online retailer, often for less. Given that almost no one knows anyone who actually bought a product out of the SkyMall catalog -- other than the occasional news writer desperate for cheap clickbait -- bankruptcy loomed as its preordained fate. 

For a brief moment, SkyMall looked like a good idea. The company was founded in 1989 by accountant Robert Worsley, whose brainstorm was to offer air travelers merchandise from creditable retailers that they could order in-flight by AirPhone and pick up at the gate when they landed. That turned out to be a money-loser, so Worsley morphed SkyMall into a retailing middleman. Merchants could buy a page or portion of a page in the catalog and keep all the money they received from orders, or let SkyMall hawk their wares for a small fee per sale. 

Yet that's only the short version of SkyMall's history, which turns out to be much stranger. In some of its pre-bankruptcy incarnations, it was one of the weirdest companies in America -- and one whose principal shareholder seemed to want out. 

Slate.com editor Jeff Friedrich put his finger on some of this in a piece published after the bankruptcy filing. A former Delta flight attendant, Friedrich reported that cabin crews never got any training to help sell items from the SkyMall catalog. The reason, he observed, may be that by last year most of SkyMall's revenue came not from merchandise sales, but from its role helping to run loyalty programs for credit card companies and other firms.

Indeed, financial disclosures by SkyMall's parent, Xhibit Corp., including the bankruptcy filing, state that Xhibit collected two-thirds of its revenue from the loyalty business. Almost  all of that -- 60% of Xhibit's revenue -- came from three big clients: Marriott Rewards, CapitalOne and Caesars Entertainment. When members redeemed their points from those loyalty programs, SkyMall handled the merchandise or gift card transfers. 

Dangerously, the three big clients could walk without cause and "on short notice," according to Xhibit's 2013 annual report. Although the loyalty business brought in about $49 million in 2013, the annual report indicates, Xhibit sold it last year for a mere $24 million in cash. Of that sum, $15.2 million was used to pay off a secured revolving loan, which was retired.

The lender was SMXE Lending, which was controlled by Phoenix investor Jahm Najafi -- who had been the owner of SkyMall. Najafi became an Xhibit director and its controlling shareholder, with a majority stake of 55% of its stock, when he sold SkyMall to the company in 2013. Najafi remained a director until Oct. 29, 2014, but his firms' shareholdings were sold in midyear.

After selling SkyMall to Xhibit, Najafi's firm took over an existing Xhibit loan from JPMorgan and provided further financing. He joined the board in June 2013. 

It doesn't look as though Najafi's companies were dying to maintain their relationship with Xhibit. There are no indications that he pressured Xhibit into selling the loyalty business and extinguishing the loan, but nor are there any signs that he advised the board that either step was a bad idea; a company disclosure says he recused himself from the vote to pay off the debt. In any case, it looks as though Xhibit sold off two-thirds of its business -- which had grown significantly over the years -- to pay off a $15-million revolving line of credit at a time when its credit needs were becoming more dire. (Xhibit didn't respond to our request for comment.)

What about Xhibit itself? Here's where the story gets weirder. Xhibit was born as a public company in 2011, when it did a reverse merger with a public firm named NB Manufacturing. These deals often are maneuvers to confer public status without going through the usual vetting, including professional auditing, required by the Securities and Exchange Commission. The SEC frowns on the practice. "Given the potential risks, investors should be especially careful" with reverse merger companies, the agency said in 2011.  

A few investment mavens looked askance at Xhibit. Isaac Silberman of Seeking Alpha said in 2013 that it seemed to display "numerous red flags" characteristic of penny-stock schemes. Rohin Dhar of Priceonomics wrote in mid-2013 that it "looks to be more a parody of a tech company than a real company at all." 

That was just after SkyMall merged into Xhibit. The latter had been pitching itself as a "cloud based" digital advertising firm with "a recently expanded focus on online and mobile social media." None of these ventures ever seemed to amount to much. A mobile app named "Twityap" came and went, finally being shut down last year. 

For part of 2012 and 2013, a majority of Xhibit's revenue came from sales of "nutriceuticals" -- "a weight loss product, colon cleanser and green coffee supplement." Xhibit's 2013 annual report to the SEC disclosed that its credit card processors were so wary of "the combination of taking credit card numbers over the Internet, selling products subject to more frequent returns, and selling products overseas" that they put holds of up to several months before advancing Xhibit the proceeds, a delay that placed more pressure on Xhibit's finances. By June 2014, the only Xhibit company operating at all was SkyMall.

It's certainly possible that changes in air travel and retailing were the final straws for SkyMall. That's the story Scott Wiley, its acting CEO, tells in Xhibit's bankruptcy filing, and the story hashed out by almost all the media coverage of the case. But it certainly isn't the whole story. 

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