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Modnique, a Los Angeles-based online retailer with 300 employees across five offices and four countries, has ceased operations and may be forced to liquidate. The company’s website currently reads “Our site is under construction. Please check back soon.” But the reality is that the company’s lender has instituted foreclosure proceedings. Worse, the situation is not entirely one of its own making.

Stepping back a bit, Modnique was created in 2011 as an experimental flash sales business within then-public parent company Bidz.com Inc., which itself was a fine jewelry etailer. Soon after, Bidz went private through an acquisition by parent holding company Glendon Group, and its business began to sour. At the same time however, Modnique’s fortunes were rising and the two businesses began taking steps to separate. The problem is, they never completed the process.

Glendon Group took out a $23.4 million debt facility in 2013 from lender Salus Capital Partners to fund the operations of both Bidz and Modnique. With the Bidz business continuing to struggle, the company made the decision to cease operations on June 12 and a number of its vendors – Dinurje Corp., Kiran Jewels, Quintessence Jewelry Corp., Orchid Jewelry Mfg., and Unique Designs – forced the company to file for Chapter 7 bankruptcy protection. An affidavit by court appointed trustee Insolvency Services Group indicates that there was $19 million outstanding on the Salus loan and an additional $8.4 million owed in unsecured trade and expense debts.

Modnique continued to operate for several more weeks, but now appears to have been caught in the crossfire. Modnique terminated all employees last Friday. It remains unclear, even to senior management within the company, what its fate will be. Salus may yet pursue a buyer for the business as a whole, or may liquidate its assets piecemeal, chiefly its inventory and intellectual property.

According to sources inside the company, employees have not been paid severance for their outstanding PTO days or, in some cases, for days of work completed. The company also has unfulfilled customer orders (for which payment was received) and outstanding invoices to a number of its vendors and marketing partners – likely corresponding, at least in part, to the above mentioned trade and expense debts.

Modnique was not profitable, but it was growing healthily according to internal sources, with both revenue and customers growing substantially in Q4 2013 and Q1 2014. Much of this growth occurred overseas – particularly in Russia and Ukraine – with non-US markets making up 55 percent of the company’s revenue. The company seemed to have hit on an underserved audience and one that, unlike Western markets, had yet to grow tired of an oversaturated flash sales model.

Nevertheless, there’s a reason that early-stage startups rarely take on debt. Term debt is akin to a ticking time bomb which, given the unpredictable nature of startup growth, is an obvious recipe for disaster. In this case, Modnique is in the even worse situation of being beholden not only to its own performance, but to that of a (for all intents and purposes) separate business.

There was a time in the mid-2000s when Bidz.com regularly generated more than $100 million in yearly revenue and tens of millions in profit. The global financial crisis hit hard and was followed by questions around its business model.

While Modnique never disclosed its financial performance, the sheer scale of its operation suggests that there was meaningful transaction volume – how healthy that revenue was on a contribution margin basis is another matter, and is unclear. The company was making strides to move away from the flash sales model on which it made its name, offering both discount and full-priced ecommerce “shops” as of the second half of 2013. Modnique also moved into the kids category through its acquisition of failed flash sale merchant Totsy.

We’ve said time and time again that ecommerce is hard, demanding flawless execution in customer acquisition, brand marketing, and supply chain management. Add in the weight of evolving away from a legacy business model – in Modnique’s case flash sales, but the same is true of Groupon’s daily deals – and there’s little room for error.

On the flip side, we’ve seen that the one thing that can save, or at least delay the failure of troubled ecommerce businesses is cash in the bank. It’s the only reason that one-time high fliers like Fab and Beachmint have thus far kept the lights. But debt is not equity, and in Modnique’s case, access to cash came with conditions that eventually proved to be its downfall.

[image by Erik Fitzpatrick]