Grabar Law Office is investigating claims on behalf of shareholders who purchased Party City Holdco Inc. shares between November 8, 2022 and June 9, 2023 (NYSE: PRTY) (OTC: PRTYQ).

On November 8, 2022, Party City filed its Form 10-Q with the SEC for the third quarter ended September 30, 2022 (the “Q3 2022 10-Q”). The Q3 2022 10-Q included several misleading statements about the Company’s liquidity position, capital resources, and borrowing capacity. For example, the Company stated: “We expect to rely on cash on hand, cash generated by operations and borrowings available under our credit agreements to meet our working capital needs, and [those] will be our principal sources of liquidity. . . . [W]e believe that these sources will be adequate to meet our liquidity needs for at least the next 12 months.” (Emphasis added.) The Company gave no indication that it was facing a liquidity shortfall, that its borrowing capacity was insufficient to satisfy its cash needs, and that it was unable to locate lenders willing to provide additional loans.

Just ten weeks later, on January 17, 2023, Party City abruptly filed for bankruptcy pursuant to Chapter 11 of the U.S. Bankruptcy Code. The Company explained in its bankruptcy filings that the need for bankruptcy protection arose due to an ongoing liquidity shortfall, the need for additional loans beyond the credit lines currently available to the Company, and an inability to locate lenders willing to issue new loans. As a result, the Company was forced to seek costly debtor-in-possession financing via its bankruptcy restructuring.

Information disclosed in the bankruptcy filings indicates that Party City was well aware of its liquidity problems and lending shortfalls for several months, dating back to before it filed its Q3 2022 10-Q. Nevertheless, the Company did not disclose those issues in the Q3 2022 10-Q. As a result, from the beginning of the Class Period through the date of bankruptcy, investors purchased Party City stock without any knowledge of material adverse facts bearing on the Company’s liquidity and lending shortfalls.

On June 9, 2023, the last day of the Class Period, Party City filed a Form 8-K with the SEC revealing that its independent audit firm Ernst & Young LLP (“E&Y”) resigned as the Company’s auditor due to a disagreement about the Company’s decision not to include a “going concern” warning in the Q3 2022 10-Q. The going concern warning would have alerted investors that there was substantial doubt about the Company’s ability to continue as a going concern. The Form 8-K stated, in relevant part:

The Form 8-K also revealed that there were material weaknesses in the Company’s internal controls over financial reporting as of September 30, 2022, which led to the Company’s failure to include the going concern warning.

Investors were previously unaware that there was a substantial doubt about the Company’s ability to continue as a going concern. Even when the Company filed bankruptcy, its filings cast the liquidity and lending shortfalls as matters that would be resolved by additional financing to be obtained via the bankruptcy proceedings. The bankruptcy is a Chapter 11 restructuring rather than Chapter 7 liquidation. This means the Company will remain operational as a result of the restructuring. Thus, the new going concern revelation in the Form 8-K was important additional news that shed light on the extent of the Company’s liquidity and credit facility shortfalls.

Accordingly, even Class Members who purchased Party City stock after the bankruptcy date continued to be deceived by the false statements and omissions in the Q3 2022 10-Q. The Q3 2022 10-Q was the most recent quarterly or annual SEC filing on file from the date of its issuance to the end of the Class Period. The Company did not issue any other quarterly or annual SEC filings during that period. Investors were left to rely solely on the Q3 2022 10-Q in making investment decisions, without knowing that it contained materially false and misleading information.

In sum, throughout the Class Period, Defendants made or caused to be made misleading statements and omissions concerning the Company’s financial strength. Specifically, in the Q3 2022 10-Q, the Company: (i) affirmatively misrepresented that its capital resources “will be adequate to meet our liquidity needs for at least the next 12 months”; (ii) omitted that there was substantial doubt about the Company’s ability to continue as a going concern; (iii) omitted that the Company was experiencing significant liquidity challenges; (iv) omitted that the Company’s existing credit facilities were insufficient to satisfy its operations and that it was unable to obtain additional loans in the normal course of business; and (v) omitted that there were material weaknesses in its internal controls over financial reporting.

As a result of these misleading statements and omissions, the Company’s stock price was artificially inflated throughout the Class Period. When the truth was revealed through a series of partial corrective disclosures, the Company’s stock price declined, causing compensable damages to shareholders.

If you purchased Party City shares between November 8, 2022 and June 9, 2023, and would like to learn more about this matter, contact us at jgrabar@grabarlaw.com, or call 267-507-6085.