Less than a year after going public, Digital Brands warns it could file for bankruptcy

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Digital Brands is on the hunt for growth. At the same time, he tries to overcome financial distress.

The company revealed in its 10-K that it may have to file for bankruptcy or seek other options if the company cannot find sufficient funds to run its operations.

The bankruptcy language was not included in the company’s most recent prospectus or quarterly filings. Its latest S-1, as well as the 10-K, included a “going concern” warning that it may not be able to survive without sufficient capital.

Digital Brands – which went public last May and owns Stateside, Bailey 44 and other apparel brands – announced fourth-quarter revenue rose 425% to $4 million and annual revenue increased nearly 45% to $7.6 million. Net losses also tripled from the previous year to $32.4 million in 2021.

The significant increase in sales last year included both acquisitions and organic growth. The company said in its earnings report that it saw growth across all of its brands.

“We know the hardest part of growing a business is [going from] zero to one, we got through this,” said Hil Davis, CEO of Digital Brands, during a conference call Thursday. “And now we’re taking that momentum, and we’re just going to keep picking it up and going cheeky.”

The direct-to-consumer specialist model is based on acquisitions. In January, the company reached an agreement to acquire womenswear brand Sundry – which is subject to financing and other closing conditions – after taking over Stateside last summer. Ultimately, the company aims to develop a platform to cross-sell to consumers across its portfolio while also expanding into beauty and home products.

But first he must survive.

The company is on S&P Global Market Intelligence’s list of most vulnerable retail companies. Digital Brands ended 2021 with a working capital deficit of $30.3 million. She had $528,395 in cash, down from last year when the business was smaller. The company also owes $6 million to a secured lender, which matures in December.

In its 10-K, Digital Brands Group said it plans to use its equity line of credit — which it secured last year through a deal with Oasis Capital — to fund its operations through 2022.

However, Digital Brands said in its 10-K that it may not be able to draw on the line of credit if its shares are delisted from the Nasdaq stock exchange or trade below $3 for the five days prior. a levy. The company received a warning from Nasdaq in January that it was non-compliant and could be delisted.

Digital Brands did not respond to questions about capital availability and listing status.

As for the company’s operating losses, Davis said on the call that they were primarily the result of Digital Brands’ relatively weak revenue and that as the company’s sales grow, it will be able to leverage of its operating costs, thereby reducing its losses.

The risk for companies with limited cash or capital shortages is tightening of terms by sellers trying to protect their own finances. Without enough products to sell, revenue growth becomes all the more difficult.

In the past, sellers have sued the company for non-payment for goods. In its 10-K, Digital Brands disclosed three lawsuits filed by vendors in 2020 for nonpayment, two of which were settled and a third ended in judgment against Digital Brands after it failed to comply. the terms of payment. Two other lawsuits have been filed by third-party service providers, one of which has been settled and another is still active, and an investor has filed a lawsuit seeking a $100,000 refund before the IPO of Digital Brands.

Another supplier lawsuit, filed in 2019 by DD Apparel and still active, seeks damages for what the company said was non-payment of $21,000 of merchandise sold and accuses Digital Brands of defamation and misleading statements. Digital Brands filed its own lawsuit against the seller for alleged non-delivery of goods, which DD Apparel’s lawsuit disputes.

Davis has his own financial troubles. He filed for personal bankruptcy in December. Digital Brands is among its creditors, and documents show that Davis both refunded money to the company and has an outstanding balance. A creditor has sued Digital Brands in Davis’ bankruptcy case, seeking detailed documents related to all aspects of the company’s financial relationship with Davis, including any payments for living expenses or child support.

Despite the company’s financial difficulties, it remains optimistic about its future. The company said in March that its e-commerce sales rose a record 776% in January and February, while wholesale rose 200%, although it did not break the growth of its existing brands versus growing through acquisitions. On the call Thursday, Davis said the company’s marketing spend has helped it acquire new customers who already show a propensity for repeat purchases.

“We see success in every brand we own,” Davis said.

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