Digital Brands Group, owner of apparel labels such as ACE Studios, Stateside and Bailey 44, is warning of its viability as a going concern due to mounting losses, hinting at the possibility of a bankruptcy filing, less than a year after going public.
For the year ended Dec. 31, the company reported a $32.4 million net loss, up from $10.7 million in fiscal 2020, on revenue of $7.6 million, up from $5.2 million in the prior year. Its stock, meanwhile, is down 46.7% year to date to $1.29 as of Tuesday’s close.
All of this plus a working capital deficit of $30.3 million as of Dec. 31 makes the company’s model of growth through acquisition — at one time it was envisioning six such transactions in 2022 — difficult to achieve.
Digital Brands Group CEO Hil Davis put a positive spin on the company’s position, noting a 425% jump in Q4 revenue, as well as continued growth in January and February, and its 2021 acquisitions of Stateside — owner of DSTLD jeans — and Harper & Jones.
“Our operating losses were driven by our low revenue results, especially in the first nine months of 2021,” Davis said in a release. “We expect to leverage these fixed costs in 2022 with the revenue momentum we have experienced.”
In its annual 10k filing, Digital Brands Group noted it has incurred losses every year since its inception, and expects to continue to do so, cautioning it may not be able to obtain capital on favorable terms, further hampering its operational prospects.
If that turns out to be the case, the filing stated, “… we will be required to significantly delay, scale back or restrict our operations or obtain funds by entering into agreements on unattractive terms, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained … (and) we could be required to seek bankruptcy protection or other alternatives.”
In a conference call on Q4 and year-end results, which analysts did not attend live, Davis said Digital Brands Group is using cash from its 2021 IPO to grow the business, and it’s starting to see momentum grow.
“That’s what people don’t necessarily understand about an operating business,” he said. “Going from zero to one is the hardest, then going from one to two to three to four to five is significantly easier every step of the way. And 2021 was all about going from zero to one. What you’re starting to see in Q4 is we started to see a shift from one to the upper gears. That’s what exciting and we saw it across every part of the business.”
Digital Brands Group has also been subject to litigation over the past two years from vendors and a service provider for non-payment, as well as from an investor for reimbursement, some of which have been settled while others are pending.