it really feels like just the beginning. ashtae products have a new look, a new feel, a new purpose, a new direction, and this thing is going to be wildly profitable. ♪.. rachel: this is our snickerdoodle. lemonis: these are actually pretty spectacular. ...an l.a. mom set out to conquer the cookie market, taking a famous family recipe... -rachel: this is my mom, yeah. -lemonis: we got to meet mom. so, this is originally your idea. jackie: yeah. lemonis: ...and building a multimillion-dollar manufacturing facility. wow. but the money never followed. the business has lost $2.9 million. owner rachel galant was influenced to borrow big and invest big by her optimistic salesman and boyfriend, david. david: my getting $10 million, $20 million, $50 million a year of revenue is not a problem. lemonis: now the lenders are banging down the door. rachel: "i'm going to go afterbrace for the worst.nally.

get ready for the worst moments of your life." [ sighs ] lemonis: and the company still doesn't understand just how much trouble they're in. the reason we're going through this process is because you're being accused of fraud. if i can't help them face reality and find a way out of their jam... you sort of just make up numbers. david: i'm not making up a number, so let's go back to -- lemonis: you've made up numbers the whole time since i met you. ...this cookie company will crumble. rachel: [ voice breaking ] this is too much pressure. lemonis: my name is marcus lemonis, and i risk my own money to save struggling businesses. we're not gonna wake up every morning wondering if we have a job. we're gonna wake up every morning wondering how many jobs we have to do. it's not always pretty. everything's gonna change. everything. but i do it to save jobs, and i do it to make money. this... let's go to work. ...is "the profit." ♪ i'm headed to compton, california,

to the manufacturing facility. and after watching her video application... rachel: hi. i'm rachel galant, and i'm the owner and c.e.o. of jackie's cookie connection. lemonis: ...finding out how successful jackie's cookies have been in the past... rachel: my mom, who's jackie, opened up cookie stores. these were her original recipes. she was voted family circle best cookie. lemonis: ...i'm excited to taste the cookies. ♪ hi. how are you? michael: hey. how you doing? michael: good. how are you? lemonis: i'm marcus. michael: marcus, i'm mike. nice to meet you. lemonis: mike? nice to meet you. what do you do here? michael: i'm just helping my cousin rachel out. lemonis: oh, very cool. michael: just giving her some advice on some financial stuff. lemonis: how you doing, sir? i'm marcus. david: hello. nice to meet you. lemonis: nice to meet you. what do you do here? david: i handle the sales and marketing for the company. lemonis: okay. how many different varieties are there? david: we've got nine traditional varieties and five gluten-free, vegan varieties. lemonis: okay. rachel: hi. lemonis: how are you? i'm marcus. rachel: good! i'm so happy to see you. lemonis: nice to meet you. now, is this the assortment? rachel: yes. our top seller is chocolate chip.

have you tried the cookies? lemonis: i haven't. rachel: oh. lemonis: i love that they're crunchy. rachel: yeah, it's a crunchy -- so it's a six-month shelf life. lemonis: okay. rachel: but this is our snickerdoodle. lemonis: that one's good. rachel: yeah. do you like double chocolate? do you like peppermint? lemonis: yes. ♪ that's my favorite. rachel: isn't that amazing? lemonis: these are actually pretty spectacular. michael: boysenberry chocolate chip. rachel: which is not a -- it's a seasonal. lemonis: this actually just moved up into number two. is everything mini? david: everything is approximately that size. lemonis: everything? david: well, we do still have our little bakery in santa monica, where we still make the original cookies that rachel's mom, jackie, made. lemonis: okay. and what is this? rachel: that's my bakery. that's the one i opened up in santa monica. lemonis: you mean a storefront? rachel: storefront with a kitchen. lemonis: oh, so this is what the first step was. rachel: this was the first step. david -- we had been old friends. he was working for another project in marketing. i said, "do you want to help me market it?" and so, as we were growing this business, we decided to sell to stores.

so i came up with the babies and -- lemonis: babies being -- rachel: the babies. these. i'm sorry. this is the baby. lemonis: not your kid-- not your babies. rachel: not my babies. the babies. lemonis: okay. okay. rachel: and that was the pivotal turn i made. lemonis: i love the size. love the size. i think the packaging's very clever, 'cause i can see the product, and i know what it is, so... i think the cookies are amazing. rachel: thank you. lemonis: can we see the factory? probably need to put a hair net or something. rachel: yeah, and i'll give you a coat. lemonis: okay, listen, if i learned anything throughout my entire time with jackie's cookies, it's how not to wear a hair net. okay? so that it doesn't look like the pillsbury doughboy wore a hair net, and all of a sudden, it was a poof on my head. i'm cool, too. so, i've kind of figured out you got to roll it back, and then you got to pull it down. push back, pull down. say it with me now. should we make that a song? push back, pull down. push back, pull down. so, if i ever go into a food manufacturing facility,

i'm gonna sing this song. push back, pull down. remember that next time you go into a kitchen. ♪ rachel: so, it's a 20,000-square-foot facility. lemonis: wow. as i enter the manufacturing space, i'm shocked by how big it is. but what's odd for me is i look at where the raw materials are, and it looks like the store's out of food. like, there's literally nothing to make any product. rachel: so, this flour. lemonis: like, i do have to ask -- like, there's no inventory here. rachel: no. it's horrible. i'm telling you, every day, i go to costco and buy my ingredients, and i have him deliver it, and i had him drive his car to arizona to pick up butter to bring it back here. lemonis: well, why do you have to buy it there? why can't you buy it here? rachel: 'cause you got to find it on sale. lemonis: wait, you mean at the grocery store? david: right. lemonis: come on. david: i'm going in the car tomorrow. you can take a ride with me.

lemonis: no. rachel: so, it's like, nuts. lemonis: but what about from a distributor? rachel: if i want to get my butter from the distributor for a lower price, then i have to buy 5,000 pounds of it at a time, which is -- lemonis: you have the space for it, not the money for it. rachel: right. lemonis: okay. ♪ as i go through the factory, i'm really starting to get nervous about what the actual overhead could be. i mean, how does all this get paid for? so, how much is your total revenue? michael: so, if you look at last year, we did $700,000 in revenue. and that's through supply chain restraint. lemonis: and people waiting for their orders. michael: waiting for orders, canceling orders. lemonis: and so, when i see all of this, i'm like, "the revenue sounds like it should be infinitely bigger." david: we absolutely could have done $2 million. lemonis: could it have done $2 million? michael: no. this year, we've already lost over $1 million, and it'll likely lose another couple hundred thousand in the next few weeks. lemonis: what do you think the break-even is right now? what does it need to do to break even?

michael: somewhere around $400,000 to $500,000 a month in revenue. lemonis: why is that number so high? michael: running the operations here without her taking salary or anything like that is over $100,000 a month. lemonis: that's rent, the employees, not including cogs. michael: not including cogs. it's including the equipment, right, which is all leased, the rent. lemonis: the company is bleeding money because the overhead established for the revenue, you can't outrun it. what i would've expected rachel to do through the process is start out, probably, making cookies at home and then go commercial kitchen, where other people can actually share the expense. if she outgrew the commercial kitchen, she would start making phone calls to co-packers. it's a way to increase production and not have to take on the burden of expense. the next thing i would expect her to do is start to research the idea of manufacturing herself. and then at some point, when she's $20 million or $25 million, she would build her own factory. here's the problem -- the middle steps, she just leapfrogged over

and went right to thinking she was betty crocker. so, how much equity do you have today? rachel: i have 90%. lemonis: who has the other 10%? rachel: friends and family gave me $100,000... lemonis: okay. rachel: but i put in most of the money. lemonis: so, you got the facility. rachel: right. that's when i had to -- i needed more money. lemonis: and how much did it cost you to make the place look like this? rachel: $780,000. lemonis: $780,000? where did that money come from? rachel: these guys came to help me with finances. that was the investors. lemonis: you had people come in? rachel: yeah, and they gave me debt. and i said, "i know i'm gonna need more for working capital," so now i have like $1 million in debt. lemonis: in addition to the $780,000? rachel: yeah. lemonis: and is there any other debt in addition to that? rachel: yeah, a little bit -- well, not a little bit. michael: there's some credit card debt of about $100,000, and then on top of all of that, there's some loans from different commercial entities for another $100,000. lemonis: the company has a ton of debt.

i'm stunned by how much debt they have. can i spend a minute with her by myself, guys? david: yes. lemonis: yeah, thanks. what is your relationship with those two? rachel: so, michael is my cousin. lemonis: okay. rachel: he went through my books and my numbers. lemonis: did you pay him? rachel: no. lemonis: okay. rachel: and then, david has worked for me forever, and he's an unbelievable marketing -- lemonis: does he work for free, too? rachel: almost. he's with me, so we're together now, so... lemonis: oh, you guys are dating? okay. rachel: i have so many people that are, like, counting on me to make this -- not to have made a bad decision. lemonis: you feel like you're closer to closing than people realize? rachel: if you look at my books, i am. ♪ lemonis: so, why did you start this business? rachel: you know, i have two children, and my husband worked, and i wanted to do something. and thank god i did, because my husband passed away, so, it was, like, a crazy, out-of-nowhere, so...

lemonis: really? rachel: yeah. lemonis: how old was he? rachel: he was 47 and just dropped dead, so... he was a great dad, and it was a real, real rocky, crazy -- lemonis: how did he end up passing? i mean, what -- rachel: we think it was a heart attack. i had a call on the freeway that -- "pull over. i have something to tell you." i think that first year, i was in a blur. i have two kids. they had to start school in a week. just had to go. lemonis: you just have to go into survival mode, right? "i have to take care of my kids, and i have to, like --" rachel: it's just wild. lemonis: i'm really sorry, by the way. rachel: yeah, thank you. lemonis: i really respect rachel and the fact that she lost her husband, she's raising kids, and she's running a business, and it shows me that she's willing to do whatever it takes. and for me, that's enough to actually dig in. ♪

so, the balance sheet's pretty interesting. when you go to the revenue -- 2016, $230,000. but then you go to cogs... rachel: right, it's a lot. lemonis: ...and $484,000 means it was costing you more to make the product than you generated. rachel: right, yes. lemonis: in 2017, $701,000, and it was costing you more to make the product than you generated, which is why the business loses money. rachel: right. lemonis: you have a really bad cost of goods problem. really bad. like, you don't have any margin. like zero. rachel: right. lemonis: if the margin was 50%, you still would've lost 700 grand. so you have a cogs problem and a revenue problem. since you opened in 2016, the business has lost $3.6 million. rachel: right. right. lemonis: how much money have you put into the business? rachel: $1.6 million. lemonis: and where did that come from? rachel: my husband. when he was around, he had done well, and so we had money. but when he passed, then we really didn't. and that's when we got the investors. lemonis: so, the company -- between credit cards, payables,

po financing, commercial notes, loans for the real-estate deposit, the investor loans -- the company has $2 million of liabilities that are substantial. about $2 million has come in, and it's all considered debt, so i'm not sure why rachel keeps referring to them as "investors." they're lenders. and then when you go on the asset side of things, $112,000 of cash, very little accounts receivable, which is -- why are the accounts receivable so low? rachel: i have all these pos that i can't fill. david: we have a variety of retail partners that are lining up, that are filling the pipeline. my getting more sales in the door is not a problem. turning this into a business that's got $10 million, $20 million, $50 million a year of revenue, that's not a problem. the problem is, is we can't get the plane off the runway. lemonis: have you been out there, trying to raise money? rachel: yes, nonstop. originally, i thought that the people that were my investors were going to help me.

lemonis: did they tell you they were going to? rachel: yes. michael: some of them are fairly confrontational, and it's -- lemonis: in what sense? give me an example. michael: they've sent these guys letters and e-mails that are... more than just sort of your standard, "you're in default of our loan." lemonis: what's the interest rate that they're charging you? michael: the cheapest is 12%. some of it is, call it 36%, because it was intended to be like a 30-day loan. lemonis: fast-money loan, yeah. as an investor in a business, i don't want to invest into a black hole. ♪ michael: well, she got the e-mail. lemonis: want to read it to me? rachel: "as i told mike, i'm going to go after you and david personally. batten down the hatches. get ready for the worst moments of your life."

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you say to everybody that's got debt in the capital structure, "you're converting to equity, and we're pivoting to a co-packer," because, while you've done an amazing job -- i mean, like wonder woman -- it isn't your core competency. rachel: no. lemonis: so what you to sit down and say to them is, "marcus won't put money in the company unless you convert all of your debt to equity. if not, we don't have a deal with him." michael: right. lemonis: it's literally that simple. okay, guys. rachel: thank you. david: thank you very much. lemonis: thank you. really nice meeting you. michael: yep, absolutely. lemonis: nice meeting you. thank you, guys. rachel: thank you. ♪ lemonis: so, let me tell you why i'm bringing you here first. the young lady that owns the place, her name is athena, and athena really understands the process. all right, let's head in. rachel: all right. great. lemonis: while we're waiting to hear if the lenders are willing to turn the debt into equity, i want to make sure that rachel gets focused

on how to manufacture and how to do it for less. in my opinion, going to a co-packer like this is the perfect solution. rachel: i'm rachel. athena: i'm athena. rachel: nice to meet you. athena: nice to meet you, too. rachel: this is david. david: hi. i'm david. hello. athena: hi, david. lemonis: the goal here was to have athena take rachel through the commercial baking process, for her to see the efficiency and how the cost could be lower. but instead of rachel having an open mind and learning... rachel: i use fresh eggs, so i don't know if you -- athena: eggs come pasteurized in boxes. rachel: oh, oh, no. so, we use the fresh, and we have a machine that cracks them all. lemonis: ...she's arguing about the eggs... rachel: i have tried those eggs, and they don't taste as good. athena: no one will taste the difference. rachel: all right. we'll see. we'll see. lemonis: ...and the butter... rachel: i use salted butter, by the way. athena: you do salted butter? we're gonna get rid of that. rachel: no, it makes it so good, i'm telling you. athena: but you don't want to add that to -- you can control it. rachel: i know! i add it, too. i add salt, too. lemonis: ...which doesn't sound very constructive to me. athena: we're gonna do two versions of this. lemonis: we're gonna do her version

and your version. athena: yes. lemonis: she assumed you wouldn't have bleached flour... athena: no, we don't... lemonis: ...and real eggs. athena: ...'cause then you have to declare bleach on your label. lemonis: oh, did you know that? rachel: yeah. lemonis: do you declare bleach on your label? rachel: yeah. athena: no, they don't. i looked. your label is illegal right now. david: no, no, no, it works in the other direction. rachel: if it's bleached, it's okay. if it's unbleached -- athena: no, the other way. the other way. rachel: that's the way we -- david: when i read the fda rules, it said, "if you are using unbleached flour, you have to list that." athena: i'm surprised that costco allows that. 'cause that's totally illegal. rachel: no, see, we've checked with the fda, so i don't know. athena: sweetie, i'm telling you, it's illegal. david: we will check again. rachel: yes, we will check again. lemonis: the first thing i noticed is that rachel's asking david, who's the salesperson, about labeling and compliance. news flash -- it's not a sales question. david: it says, "when any optional bleaching ingredient is used, the word 'bleached' shall immediately and conspicuously precede or follow such name of product."

rachel: all right, well -- athena: thank you! rachel: so now we need to put that on there. lemonis: and second, david gave her incorrect information, and rachel just blindly accepted it. ♪ you can turn around. ♪ okay. ♪ rachel: mm-hmm. ♪ lemonis: both good? rachel: yeah. the second one seems maybe more mine. lemonis: that last cookie was not yours. rachel: but it's not a huge difference. lemonis: you couldn't tell. rachel: no. lemonis: i like the fact that you've been open-minded to go through this process. in this environment, with the business being under attack, if you had to change things, you could,

and i think you demonstrated for me that you were open to it. did this process at least make you feel more comfortable that it's possible? rachel: yes. completely. lemonis: thank you so much! we're excited to start. rachel: i appreciate it. david: appreciate it. thank you. ♪ lemonis: so, i asked rachel to meet me over at her bakery in santa monica. part of my goal of visiting this location was primarily to check in with rachel on the response from the lenders. oh, wow. this is nice. rachel: hi. how are you? david: hi. how are you? lemonis: good to see you again. rachel: hi. lemonis: how are you? rachel: ah, not great. lemonis: what are those giant things? rachel: that's very large. jackie: hi. lemonis: is that your mom? rachel: this is my mom, yeah. lemonis: we got to meet mom. i'm marcus. jackie: hi, marcus. jackie. lemonis: nice to meet you. you're jackie. jackie: i am. lemonis: so, this is originally your idea, right? jackie: it was my idea. lemonis: your daughter's changed the business quite a bit. jackie: it's amazing, yes. lemonis: maybe we can talk in the back. rachel: okay. lemonis: this is awesome.

michael: good morning. lemonis: good morning. how are you? michael: good to see you. lemonis: so, do you guys want to fill me in on what's happening? michael: sure. well, she got the e-mail. lemonis: okay, you want to read it to me? rachel: sure. "rachel, i will make this very simple and clear. i have nothing more to say to you. i have no reason to meet with you unless you have a cashier's check for the money due me in full. i just don't have time for this bull[bleep] any longer. i've thrown away enough of my money and time on you and your company. as i told mike, i'm going to go after you and david personally. batten down the hatches. brace for the worst, because when i'm pissed, i don't give up, and i don't back down until i accomplish my goal. get ready for the worst moments of your life." [ sighs ] [ crying ] i don't do business like this. all i've done is put money in and put money in so that they don't lose their money. ♪ [ crying ] i just -- this is too much pressure.

lemonis: based on this e-mail, it's clear to me that these lenders are pissed. why they're pissed? well, i'm gonna get to the bottom of it. but right now, what i need rachel to do is clear her brain and stick with the facts, not emotion. when we think about the scenarios, right now, they have three choices, actually, three choices. and you guys should probably write them down, 'cause i want you to have a bit of a script. choice one is everybody converts to equity, and more money comes in, and we go to a co-packer, and we go the right way. michael: at least one debtor has basically said he's not interested in number one. lemonis: okay, scenario two is you do a deed in lieu of foreclosure, which means you sign over the assets to them in lieu of them foreclosing. and so, you could almost call them and say, "you guys want the company, you can have it. here." and you start over. you can't start over as jackie's cookie connection. that's their asset. you'd have to modify your recipe a little bit.

that's their asset. the logo, the brand, the babies on board, the jackie's -- all of that would belong to them. and number three... is bankruptcy. you put the company into bankruptcy, and they all lose their money... including you, unfortunately. ♪ rachel: a lender wrote back and said, "you have committed fraud." lemonis: ever play hot potato? david: yes. lemonis: the potato's on fire right now.

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what's in your wallet? has been excellent. they really appreciate the military family and it really shows. with all that usaa offers why go with anybody else? we know their rates are good, we know that they're always going to take care of us. it was an instant savings and i should have changed a long time ago. it was funny because when we would call another insurance company, hey would say "oh we can't beat usaa" we're the webber family. we're the tenney's we're the hayles, and we're usaa members for life. ♪ get your usaa auto insurance quote today. ♪ you put the company into bankruptcy, and they all lose their money... including you, unfortunately. you could technically not have anything left of jackie's cookie connection. look, there are really three options that are available. the first option is that everybody converts their debt, and new money comes in from me. the second option is that she hands the company over

to the lenders so that they can actually get the collateral that they've already been granted. and the third option is that everybody loses, and the company goes into bankruptcy. david: the whole thing is just somewhat insane to me because -- lemonis: but why is it insane? david: because if everybody were just working together to actually make this work, this could work, you know? i don't feel like we have a ship that's at the bottom of the ocean that we're trying to pull back out of the ocean. i feel like we have a ship with some big holes in it that we can still plug up, and we can get the ship moving again. michael: look, we know there are bills that are due. we don't have capital to pay that. so, i guess in your description, i mean, it feels like we were certainly kind of -- the holes are so big right now, it's turning into a submarine. lemonis: i continue to hear a level of optimism from david as opposed to living in the moment and understanding the crisis that the company's in. and i felt compelled to get to the bottom of who actually arranged for these loans and who actually felt that there was a need to do all this stuff.

who actually raised all the money from the lenders? david: probably me. lemonis: you? okay. and now i'm learning that it was david. you are the eternal optimist, that there's millions of pos ready to just be done, and i think that optimism is what got this business in trouble. the end of the day, if all they want to do is take the company from you, they can. if they do that, they have to actually run the business. and then if you choose to start over, you're permitted to do that. while this is happening, what you guys have to decide is, what's the parallel path? all right? rachel: all right. thank you, marcus. lemonis: okay, thank you, guys. david: thanks. [ sighs ] ♪ lemonis: so, this is a really good rep group. they have really good reach. okay? david: yeah. lemonis: let's go. all right. i appreciate that rachel hired david to lead the sales organization,

but it's clear that that hasn't necessarily worked out. so i'm taking her to a food broker in chicago so she can see exactly how good or big the possibilities could be. rachel: so, yeah, i'd love to know a little bit about what you guys do. al: we're like the go-between between the manufacturer and the retailers. so, manufacturers that don't want to have their own sales force for whatever reason, they hire us, and we take products to market. walgreens and cvs. we do publix. we do myer. we do giant eagle, shopko. we also do target and walmart, as well. we have a pretty national coverage. rachel: a little back story from me, i was just a stay-at-home mom -- not "just." big job. but -- and wanted to start this business. and then, in the interim, my husband passed away, and it was out of nowhere, so we really had a tough road. and i have two little boys -- lemonis: how old were the kids? rachel: one was 11, and the other one was 7. i was kind of left with the idea that i really needed to step this up.

it was really important that i have something for them and for myself. gina: your story's very inspiring, so i'm happy to see the success you've had so far. what have you guys done marketing-wise to -- i mean, is it just -- do you do anything to get people to want to purchase the product? rachel: we've done demos in stores that really, definitely -- i mean, we've spent marketing dollars at the store level. david: now, if you'll take a look, there's a passive demo bowl there. and when we first started, we would provide free demo bulk to the locations. lemonis: from my perspective, they haven't done anything truly innovative on the marketing side. ♪ al: you've got a great product, great-tasting product. and the packaging is great. and we're not only manufacturers' reps/brokers, but, you know, we do investing with some of our vendors and partners, so maybe we can get together, maybe get a little skin in the game and help you out that way, as well. lemonis: thank you so much. rachel: thank you. al: thank you. rachel: i appreciate it. lemonis: now that a relationship has been established between rachel and the food brokers, whether the lenders are on-board are not,

i want to talk to the three of them directly so the of this relationsh. michael: the advantage of getting a group like this is now you get lots of megaphones out there, and there's lots of people that can go tell the story versus the relatively few. rachel: right. just that i'm not in control of it. having somebody outside, where it's not a direct channel, where i'm not able to, you know, kind of control -- i don't know who the rep, you know, and what they're doing on a daily basis -- is probably a negative. lemonis: rachel, the fact that you do want to control that process is essentially why the company's in trouble. really is. the step that you took to try to manufacture yourself, because you wanted to control it, is $1 million of cash that went into a build-out that you'll never see again. my other motivation for having somebody like contemporary involved is that we learn that the unbleached versus bleached was actually a mistake on our label. and what this ultimately

gives me a little bit of schmuck insurance on is that i don't wake up one day and find out that we mislabeled something. they're going to almost act as a set of eyes, because it is their reputation at stake, as well, if they're repping it to somebody. david: let me try to say it a different way. i've gotten to talk to every customer, and now i can't do that anymore, and there's a little bit of discomfort, i guess, in that. and, yeah, letting go a little bit is not all that easy, i guess. lemonis: did you ever play hot potato? david: yes. lemonis: the potato's on fire right now, and the two of you don't recognize that the potato is literally melting. and you stay optimistic about all the good things, but i think that there is a moment where that self-assessment has to be more critical. ♪ [ phone line ringing ] rachel. rachel: hi, marcus. how are you?

lemonis: good. i wanted to get an update, if you have one. i get a random phone call from rachel that she received new information from her lenders. rachel: a lender who we wrote to wrote back and just was very hostile and said, "let's be clear. the loans were tied to specific purchase orders and not repaid as written. you misappropriated those funds. that's a fact. next stop for me is my lawyer and the authorities. i have every e-mail and promise from you and david. you have committed fraud." lemonis: if your business is in trouble and you need my help, log on to... look limu. a civiliane back buying a new car.ug let's go. limu's right. liberty mutual can save you money by customizing your car insurance,

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cool. "you have committed fraud." lemonis: when people say, "you've committed fraud," it's like, i don't -- it's a very dangerous allegation. and so, when they say you took money for pos, and you didn't pay it back, and it was specifically for that, what is that? rachel: a year ago, we had purchase orders, and we asked them to finance them, and he did. and i have paid him some back on that based on when they came in. unfortunately, the money that came in from those purchase orders got taken out from other things that we owed, because i have all these automatic things. but that's not fraud! lemonis: it's not fraud, but it would upset somebody.

it appears that what happened is rachel borrowed short-term money, also known as a bridge loan, to solve a very specific problem. let's say you get an order for $100,000, and you don't have the cash to actually make the goods. once that problem is solved, the lender expects you to actually pay them back. now, i don't know if it would be called fraud if she didn't or bad business, but i'm definitely uncomfortable with the fact that people think she did something wrong. here's what i need, okay? i need to get you and david and michael together so we can understand what the company did wrong and what it did right so we understand the path. ♪ rachel: hi. hi, marcus. good to see you. lemonis: good to see you. the definition of fraud is, "a criminal or wrongful deception intended to result in personal or financial gain." i don't think that that's what rachel's intent was.

but for the lenders to actually make that claim, they must be pissed, and i need to understand why. just for clarity's sake, the reason we're going through this process is because you're being accused of fraud. rachel: right. lemonis: and so, we're gonna go through those loans to understand it. rachel: yes. lemonis: what i have to do is lay out every single loan document that happened between her and the company, every single correspondence, and understand when it came in and what the money was used for. rachel: so, this is everything. lemonis: this is the whole cap table? michael: yeah. rachel: right. lemonis: so, there's po financing of $312,000. michael: yeah. lemonis: a $78,000 payment has been made. you still owe him $234,000. if you take the money, and you use it for other stuff... rachel: right. lemonis: ...it's bigger than any sin. what ultimately happened is the lenders sent the money from their account to her account. and instead of going towards purchase orders, it went towards things like payroll, rent, raw materials, utilities. so when the lenders wanted their money back,

there wasn't any money to give them back, which is why they're pissed, and i can understand that. but nothing illegal was done. it was just bad business. i've seen all the loan documents. we've gone through it. it's crystal clear. it's a hot mess, but it doesn't look like fraud to me. up until this point, all of my contact with the lenders has been either through rachel or through e-mails. i want to meet with them directly and sit down at the table and see if there's actually a deal that can get done. how many orders do you have on the table today that cannot be fulfilled? david: it's $70,000 or $80,000. lemonis: so there's not that much pent-up demand. that's important to recognize. it's not like we're talking about half a million dollars of orders that are sitting there. let's be realistic about what's out there and not oversell it. i'm hopeful that it works out. i'm hopeful in that people are logical. and if they're as smart as i think they are, they'll recognize best alternative...

even if they're mad as hell about it. ♪ okay? rachel: all right. let's give it a shot. ♪ lemonis: after going over the books with rachel and getting more comfortable with it, i reached out to the lenders and asked if we can have a meeting. and they said yes, but there's one catch -- "we want it to be you and you only, no rachel and no david." rachel: i am just anxious to hear what's happening, and i hate not knowing. it's nerve-wracking that he's in there without me. this is my company. ♪ lemonis: well, that was an interesting day. rachel: what happened? lemonis: what do you think happened? rachel: i don't know. lemonis: they said they felt very good about the product. they felt very good about you.

and then they felt like the wheels fell off the bus. they are extremely fond of mike. david: wow. lemonis: but they said -- there was one issue that came up. they have a lot of opinions about you. a lot. rachel: right. lemonis: they felt like you would tell them one thing, and something different would happen, about short-term money and bridge loans. david: that has never been mentioned to me once. lemonis: oh. i think there's a personality conflict more than there is anything else between you and them. i made it clear to them that i validated that you've taken no money out of the business. they acknowledge that. they believe in the brand, and they truly do believe in you. rachel: well, that's nice to hear. lemonis: i think they feel like you've been given bad advice by david. what i said to them is, "okay, how do we move forward?" there wasn't fraud. there was mistakes. rachel: right. lemonis: the couple of points that are important to them is, one, they agreed to convert to equity.

two, they think you should have 25% of the equity. ♪ rachel: that doesn't make sense to me. lemonis: but wait a second, rachel. i mean, just be objective about this, right. the fact of the matter is, is that money came in that was supposed to be bridge loans, and you guys didn't give it back to them. and they're pissed. and they have a right to be. rachel: i've put in what they've put in, money-wise, plus more time, and i'm gonna get less than them, collectively. lemonis: so, do you want me to call them and tell them that 25% is no good? rachel: yeah. lemonis: okay. but i need to know what i'm going back with. i said 25%, you said, "[bleep] no." rachel: right. lemonis: you said, "i'll just burn the place to the ground." rachel: right. so, 35%. lemonis: okay. let me call them. rachel: okay. lemonis: let me just give you a summary of where we're at. david: they won't sit in a room with us, but they'll make accusations. they tell him stuff that's not factually accurate, okay? and yet, you're supposed to negotiate

based on all of that craziness. lemonis: okay. i'm comfortable with it if you are. ♪ the best deals are when everybody walks away a little unhappy. i think 30%'s probably something that we can get to. rachel: so, they're just pretty much pushing me in the corner, so... lemonis: is that the way you see it, though? rachel: i do. lemonis: so, what do you want me to tell them? ♪ you sort of just make up numbers. david: i'm not making up a number, so let's go back to -- lemonis: you've made up numbers the whole time since i met you. rachel: i don't agree with that.

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rachel: how are you? lemonis: how are you? rachel: good. good to see you. michael: hey, marcus. good to see you. lemonis: mike, how you been? lemonis: before we shift the business to a co-packer, i want to make sure that the remaining orders get filled, and that means that we're gonna have to keep manufacturing going out of her current facility for a little bit longer. so, today, i want to sit down and map out a way to do that in the most cost-effective manner possible. how many orders do you have today in dollars? rachel: right this second is -- david: so, open pos right now -- $5,800. lemonis: i thought there was a lot more. i thought that you said there was $70,000 of pos right now. david: we're -- of the -- i don't keep reference -- rachel: yeah, that's the count. lemonis: so, you're -- david: right, but we literally have orders coming in, approximately $8,000 that are gonna be needed for holiday sales. lemonis: david, you told me specifically there was $70,000 worth of pos. david: i actually said there would be $70,000. my words were -- this is what i remember saying --

that if i were to call tomorrow, that we have orders that literally would come in the same day. lemonis: $5,800 is a long way from $70,000. and now i'm feeling the same way the lenders feel -- annoyed and deceived. and honestly, i don't trust one thing that these guys tell me anymore. where are you at with your landlord? rachel: at compton? lemonis: mm-hmm. rachel: you know what? there's some discrepancy in rent. you know, he's showing the property right now, so... because we had filed a petition against his eviction. lemonis: you were served for eviction notices. well, how come you didn't tell me about the eviction notice? rachel: i'm sure i told you that i've been served. i mean, maybe i didn't. i don't know. but... it's -- it is true. lemonis: you could literally be in the middle of production, and he could lock the door.

rachel: right, technically. lemonis: as i'm sitting here, i'm kind of wondering why i'm still sitting here. this is not a charity case for me. the problem is this labyrinth of craziness is big, because it isn't just the lenders. it's the equipment leases and the personal guarantees. and it's not a personal attack on david, but, i'm sorry, his optimism led you to these decisions. because you sort of just make up numbers. david: i'm not making up a number, so let's go back to -- lemonis: you've made up numbers the whole time since i met you. rachel: i don't agree with that.

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but, i'm sorry, his optimism led you to these decisions. because you sort of just make up numbers. david: i'm not making up a number, so let's go back to -- lemonis: you've made up numbers the whole time since i met you. david: okay. lemonis: sorry. rachel: i don't agree with that. lemonis: of course you don't, because you can't see it clearly 'cause you're in a relationship. you can't see the fact that he has led you down this path with this optimistic sales organization that doesn't exist. rachel: i have been very up-front, and so has he! and yes, he is an optimist, and we all know he is, so, okay.

but you know what? go talk to a buyer. just go talk to them and see what kind of person he is who has worked his ass off to help me in this business. lemonis: this is not a personal -- rachel: it's just frustrating to me. lemonis: i know, but it's not -- nobody is saying anything about david as an individual, as a human being. but it's not good for you guys to work together, because instead of you being logical, you become emotional. i think the fact that the company has been served an eviction notice -- it definitely changed my opinion about making anything. i'm not investing into something that i can't get the truth, and i can't get the answers. the business is gonna go through some sort of cleansing. that's a fact. there'll probably be an organized process with the other lenders. rachel: are you sure these people are gonna do it? because, right now, my expectations are that nothing good will happen, and that it will not happen. lemonis: i have a big fear that the lenders are gonna pull out, because as part of that agreement,

i was gonna be investing. michael: the question in my mind is, is it time to start seeking bankruptcy protections, right? that's an option. but if we go forward, you're gonna be basically set up with a new business plan that actually makes sense. lemonis: since the day i met you, like, the angry people aren't so angry anymore, and you didn't need that in your life. rachel: no. lemonis: and so, maybe it's not perfect, but... michael: getting that behind everyone? lemonis: [ sighs ] rachel: that would be so nice. less stress. lemonis: it is. you just got to let it play out. rachel: all right. lemonis: okay? rachel: yes. lemonis: i think at this point, they have two options -- work out things with the lenders or go through a bankruptcy process. but i know for sure i don't want my money in the deal, 'cause i don't trust them. ♪ a few days later, i got a phone call from rachel, and i think as the dust settled, they had no choice but to go into bankruptcy. the landlord was trying to foreclose on the property. the lenders basically backed out of the deal

that they had on the table. i hope that rachel recognizes that she probably needs to go back to square one and start over, 'cause i know she's capable, and i know she's smart enough, and she's got a great product. ♪ wow, this place is beautiful. a gifted designer started his business when he was just 8 years old... so you make all of this stuff? ben: yep. lemonis: this is all yours, too? ben: yep, these are all of our designs. lemonis: wow. ...eventually building a million-dollar home brand around his dazzling creations. now ben's garden has stopped growing. ben: i want to scale, and that's what i've been really stuck on. lemonis: and so has your business gone down? ben: yes. lemonis: though owner ben busko has overcome incredible challenges... ben: i was diagnosed with asperger's syndrome, which is a form of autism. lemonis: ...he still struggles as a leader. victoria: there's a lot of finger pointing that i'm not doing my job. i'm not doing anything. i'm costing the company money.