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California based snack company, Jackie’s Cookie Connection, was in financial turmoil. Owner Rachel Galant started Jackie’s Cookie Connection in 2016 using her mother’s cookie recipe. The company had lost $3.6 million since there inception and their business lenders were putting significant pressure on Rachel and her staff to recoup their funds. Unsure of how to dig themselves out of the financial hole that they were in, Jackie’s Cookie Connection reached out to Marcus Lemonis for help.

Jackie’s Cookie Connection has a storefront property that was growing successfully when they decided to expand their product reach by altering their recipe to a shelf-stable version and manufacturing on a mass scale to wholesale their product. Marcus was surprised that they made the decision to manufacture on their own. He would have recommended that Rachel start baking cookies at home and when she outgrew that process, move to a commercial kitchen where she could share the expense with others. If she outgrew the commercial kitchen, she could then expand to using a copacker to increase production and not have to take on the burden of extra expenses. If she outgrew that idea, she would then research the idea of manufacturing herself. Because they skipped over all the manufacturing possibilities that would have been financially manageable for their company, they are in significantly deep debt for a small business.

Their manufacturing facility is 20,000 square feet and contains a lot of empty space and very low stock on their raw materials. There are not enough raw materials to make their product. Marcus learned that they are purchasing their own supplies every day from Costco because they can not afford to buy in bulk from a distributor. As they are touring the manufacturing facility, Marcus became nervous about the overhead and how they pay for the facility.

When Rachel and her team sit down to review finances with Marcus, he learns that Rachel owns 90% of the company and the other 10% is owned by family and friends that have invested in it. The manufacturing facility cost Jackie’s Cookie Connection $780,000 from the investors. Rachel also has $1 million in debt in addition to that $780,000 because she needed working capital. Additionally, they also have $100,000 in credit card debt as well as loans from commercial entities for another $100,000. Marcus was stunned by how much debt they have.

Jackie’s Cookie Connection’s revenue is $700,000 through supply chain restraints. Rachel’s boyfriend, David, who is is in charge of sales and marketing, shared with Marcus that they have people waiting for their orders and people canceling their orders because they can’t keep up with the demand. Their breakeven is approximately $400,000-$500,000 per month. The company is bleeding money because the overhead they have established is way too high.

In reviewing the balance sheet, it became clear that the company has a significant cost of goods problem. They have no margin on their products. They aren’t making enough to cover their costs. Since the company was established in 2016, the business has lost $3.6 million. Rachel has personally put $1.6 million into the company. That money came from her late husband. The company currently has $2 million in liabilities which is very substantial and all considered debt. The company has $112,000 in cash assets, but very little in accounts receivable. They have a lot of POs they can’t fill. This means that they have two large financial issues: a cost of goods problem and also a revenue problem.

While it was clear to Marcus that the financial situation of the company was problematic, he didn’t understand how badly the relationships between Jackie’s Cookie Connection and their lenders had become. Rachel and David had begun receiving threatening emails from their lenders. He learned that the interest rate on these loans range from 12% to 36% because they were supposed to be fast money loans. The lender that has vowed to personally come after Rachel and David is now accusing them of fraud for misappropriating funds. Rachel took a short term loan, called a bridge loan, to solve a specific problem. Once the problem is solved, the lender expected Rachel to pay them back.

Marcus asked Rachel and David to go through each loan and look at when it came in and what it was used for. If you take the money and use it in any other way than what it’s intended for–that’s very bad business. In reviewing the loans, they learned that they took the money and instead of using it for filling purchase orders (which is what they told the lenders they had intended to use it for), they used it for things like payroll, rent, materials, and utilities. When the lenders wanted their money back, there was nothing to give back because they didn’t use it for it’s intended purpose. Marcus shares that the lenders have a reason to be mad, but they did not commit fraud.

Marcus was nervous to invest in the company but offered to act as a mediator and negotiator with their lenders in the short term. He wanted to work with the lenders to convert Jackie’s Cookie Connection’s debt into equity in the company. If all the lenders agree, Marcus would invest in the company under the stipulation that they close their manufacturing operation and move to a co-packer. If not, there is no deal.

Rachel agreed to meet with a copacker while they waited to hear if the lenders would turn their debt into equity. The goal of this meeting was to have Rachel see the commercial baking process so she can understand how it operates and could lower their manufacturing costs. While there, the copacker pointed out that right now Jackie’s Cookie Connection’s label is illegal because they don’t declare bleach in the ingredients for the bleached flour. David had given Rachel inaccurate information about the label which she accepted without verifying their compliance. Marcus is frustrated because not only did David give Rachel bad advice, but there isn’t a reason that a salesperson should be involved in compliance with regulations. This is something that Rachel should know and be familiar with.

Marcus also took Rachel to a food broker to show her how big the possibilities could be for Jackie’s Cookie Connection. A food broker is the go-between with the manufacturer and the retailers. They take a product to market, can invest in the companies and also represent them in the wholesale market. Moving to a broker would also help them to have another set of eyes on the product for compliance and gives them peace of mind that everything is ok. Rachel didn’t like the idea of having someone else in control of her sales on a daily basis while David was unhappy about losing the personal connection with their clients. Marcus told them that this is mission critical if they want to keep their business moving forward.

After meeting with the co-packer, it becomes clear that the lenders do not intend to convert their debt into equity and they just want to be repaid. Marcus prepares three paths forward for Jackie’s Cookie Connection:

  1. All lenders convert debt to equity. More money would come into the company as they change to a co-packer and Marcus would also invest which would bring money into the company.
  2. Sign over the assets of the company to the lenders in lieu of them foreclosing. This would essentially give the lender the company to pay back its debt. Rachel would need to start over with a new business, a new name, and a new recipe because the company’s assets also transfer with this option.
  3. Declare bankruptcy and everyone loses their money (the lenders and Rachel).

Marcus felt compelled to get to the bottom of the loans and asked to meet with the lenders. He learned that David arranged the finances from the lender and was overly optimistic about the demand for the product and how many sales were in their pipeline. David had estimated that there were $70,000-$80,000 in orders that needed to be fulfilled. The lenders wanted to meet with Marcus only. While the lenders really like their accountant, Mike, they had a lot of opinions on David. They felt as though David would tell them one thing and do another. Marcus confirmed to them that they haven’t taken money out of the business and asked how they could move forward. They agreed to convert the debt to equity leaving Rachel with 30% equity in the company. Rachel agrees.

With the lenders on board, the next task that Jackie’s Cookie Connection faced was to line up the copackers and look at their inventory. Before they shift to a co-packer, they had to be sure the remaining orders get filled which meant that they would need to keep manufacturing at their current facility open for a little bit longer. Marcus met with the team to decide the most cost-effective way to do that. He found out from David that there are only $5,800 in open POs, not $70,000 like he had originally told them. Marcus felt annoyed and deceived. With Marcus’ trust already severed, he learns that Jackie’s Cookie Connection had been served an eviction notice and they didn’t tell Marcus.

In light of this new information, Marcus changed his opinion on investing with their company and decides not to go into business with them. With losing Marcus as an investor, the deals with the other lenders fell through. Their equity deal was structured as a contingency that Marcus would be an investor. Because there is no path forward with the investors, Jackie’s Cookie Connection crumbled and declared bankruptcy.

Do you agree with Marcus’ decision to back out of his investment with Jackie’s Cookie Connection? Do you believe the lenders have a right to be angry with how their money was used? What would you have done differently if you were Rachel? Discuss in the comments below!

“The Profit” airs Tuesday at 10 p.m. on CNBC.

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