The objection, filed in court Friday by Hercules Technology Growth Capital Inc.—the Palo Alto lender to venture-backed firms that supplied pre-petition financing to the Los Angeles e-tailer—is crying wolf at the picture painted by the company to support its request to tap a $20 million loan to continue operating the business.
Lawyers for Hercules allege in the motion that Nasty Gal rejected additional liquidity proposals that would have helped it avoid a bankruptcy and “instead chose to rush headlong into an ill-advised and unfocused Chapter 11 proceeding that will kill its brand, destroy its already damaged vendor relationship, burn valuable cash collateral without adequately replacing it, and result in a liquidation at much more depressed values for all constituents….”
The motion went on to express disbelief at the idea of continuing a sale process into the bankruptcy, “the timing of which is highly curious and perhaps unprecedented for a retailer—leading into the height of the holiday selling season, after declaring war with its senior secured creditor and with no ability to purchase sufficient replacement inventory.”
A spokesman for Nasty Gal could not immediately be reached for comment.
WWD reported in September the company had been shopping for a buyer, with Revolve Clothing rumored to have looked at the business, but a suitor could not be found.
Nasty Gal asked a judge to rush approval to tap its loan to at least handle immediate expenses such as the looming Nov. 25 payroll expense of $512,000 across its 189 employees, along with about $400,000 it spends weekly on merchandise to stock its online shop and physical doors sitting on Melrose Avenue and Third Street Promenade.
The business has been challenged in more recent years, with president and chief restructuring officer Joe Scirocco saying in his declaration filed Thursday that the company had trouble scaling in line with its rapid growth and also more recently saw the compression of international sales.
Executives have apparently come and gone from the board with Hercules casting it as “a revolving door of resignations as equity holders and even the company’s founder have abandoned it following years of losses….”
Founder Sophia Amoruso is reportedly expected to step down as executive chairman of the board. She left the chief executive officer position in early 2015 when the company tapped former Lululemon executive Sheree Waterson to the top spot.
Results for the 12 months through Jan. 31, 2015 included revenue of $85 million and an earnings before interest, taxes, depreciation and amortization loss of $6.3 million, according to court documents. The following year ended Jan. 30, 2016 saw net revenue fall to $77.1 million and negative EBITDA of $15.4 million.
However, Scirocco said projections for the current fiscal year ending Jan. 27 would see the EBITDA loss narrow to $1.4 million on net revenue of $77 million.
He also estimated the company’s going concern value at about $25 million, which Hercules called out as being “based on some multiple of speculative future EBITDA” and goes on to allege Nasty Gal was never profitable.
The lender also seemed skeptical of the company’s ability to successfully emerge from a restructuring saying in its motion, “The [company] is already in liquidation mode and Chapter 11 filing with standard first day motions do not mean that a real reorganization is under way or achievable under these circumstances.”
The firm requested a judge set the final hearing on the matter for Nov. 28.