How Underground Cellar disappeared with millions

One of the fastest-growing wine clubs with an innovative model of holding the purchases of its customers in a “Cloud Cellar” until the customer requests that it be shipped has filed for Chapter 7 bankruptcy.

On April 24, Underground Cellar’s parent company, Phoeno Wine Company, Inc., filed for bankruptcy in the state of Delaware. The posting on Underground Cellar’s website, which, as of press time, has been shut down, cited “Recent market headwinds, and an inability to secure follow-on-financing or an acquisition” resulting in the company’s decision to “wind down its operations.”

Rather than a “wind down,” which suggests a more methodical process for ceasing operations, the abrupt shuttering, without notice, has created ripples across the entire wine industry, including among the thousands of customers of the online wine retailer whose wines were in the Cloud Cellar. All that is clear at present is that it is not being shipped.

The revolutionary model of Underground Cellar looked, from the outside at least, like a winner. Yet, according to the bankruptcy filing, nearly $25 million USD is owed. Reporting by Entrepreneur said that amount includes $2.7 million worth of wine that was ordered, but never made it to the seller’s warehouse. Additionally, reporting by the San Francisco Chronicle on the filing says the company owes $328,000 in invoices – likely to many winemakers – and lists actual assets of less than $35,000.

That’s a tough pill to swallow for a company that reported $20 million in revenue last year. And while there is reportedly $11 million in wine inventory… somewhere – that is less than half of what is reportedly owed by the failed enterprise.

In March, customers with wine in the Cloud Cellar were alerted that an “audit” on their overall inventory had been done and some wines that had been purchased were no longer available. Yours truly received such a message that seemed odd given that I assumed that a literal bottle was set aside in their climate-controlled warehouse in Napa with my name on it. I paid for it, after all. Not so. And though the e-mail also made clear that a replacement bottle had been put into the “cellar,” it raised red flags.

Other customers apparently had issues even earlier having wines they had purchased actually shipped. And since the filing, additional issues have come to light, including significant payments to executive staff when issues had become clear internally that the business model was failing.

What will come of the millions of dollars in wine that was supposedly stored in customer’s Cloud Cellars remains unclear. It even remains a matter of speculation if the wine is indeed actually stored somewhere and exists. Regardless, it is highly unlikely that customers will ever see any of what they bought, though there are class action lawsuits being filed against the company.

The entire affair summons back memories of the 2016 collapse of the fraudulent wine retailer, Premier Cru, where oenophiles ended up being owed upward of $45 million. Premier Cru sold advance allocations of high-end, collectible European wines at steep, and in hindsight, impossibly low, bargain prices. As customers came forward to decry follow-through on shipments of wine that had been paid for, the Ponzi-like scheme eventually came catastrophically undone.

In the meantime, Underground Cellar customers who failed to record the contents of their Cloud Cellar are now out of luck in determining its contents given the disappearance of the website. It might also be worth noting, as a closing word, that the message one gets from trying to access the website is: Payment Required.

That might be a colossal understatement.