In January, Digital Brands Group announced the proposed acquisition of women's apparel brand Sundry in a cash-and-stock deal, adding to its stable of direct-to-consumer assets.
The cash-strapped Digital Brands has said the deal closing is probable but warned it is not certain to complete the deal.
Now a vendor is demanding it be paid before Digital Brands closes on Sundry or expands any further.
In a letter to Digital Brands' board, Climas Lo, the CEO of Trade Harvest Industrial, asked that the company be paid for product shipments going back to 2019 and 2020 before Digital Brands carries out any further expansion plans.
Trade Harvest filed a lawsuit against Digital Brands in September 2020 seeking more than $750,000 related to missing payments from goods purchased by Bailey 44, which Digital Brands acquired in February 2020. Bailey 44 made the purchases prior to Digital Brands buying the brand, but the company remained short on payments after the acquisition.
Trade Harvest and Digital Brands reached a settlement in December, whereby Digital Brands would pay the vendor $350,000 in three installments. After the DTC company missed the first installment in January, Digital Brands CEO Hil Davis in court papers blamed Trade Harvest for delaying the sending of retraction letters to all Digital Brands vendors, a contingency of the payment.
In February, Trade Harvest won a judgment against Digital Brands — which the latter has disclosed in filings — as well as a lien. Yet Lo wrote that his company has yet to be paid.
"I am aware that your company has great plans to acquire Sundry and other companies," Lo wrote. "There is just one problem with all your plans; your company owes my company Trade Harvest Industrial Ltd over $750,000."
According to Lo, Digital Brands Group CEO Hil Davis said that the company did not have the cash to pay Trade Harvest and asked to work out a payment plan. Lo wrote that a previous payment plan arrangement ended in default by Digital Brands.
"Before proceeding further with all your expansion plans, as fiduciaries of Digital Brands Group, you have a duty to meet your obligations to us as your creditor," Lo said in the letter to the board, which was posted to the website of the Sarachek Law Firm, a creditor and investors' rights specialist that represented Trade Harvest in its lawsuit.
Asked for comment, Digital Brands Group's Davis referred to disclosures around the Trade Harvest lawsuit without commenting specifically on the letter.
Since going public last year, Digital Brands Group has also acquired the Stateside and Harper & Jones apparel brands. The company's model is based on acquisitions to build out a platform of brands that can cross-sell to each other, and share customers and data. As the company puts it, "We intend to continue to actively pursue acquisitions to increase and tighten customer cohorts and increase our ability to create more customized content and personalized looks and styles for each customer cohort."
In that respect, acquisitions are key to the company's success. "So what we'll do is, we'll leverage wholesale and our own stores to acquire the customer physically, we'll trade them across brands, because we'll be able to have their email address," Davis told Retail Dive last year. "And we'll show them styles and looks across all our brands that are compelling."
When Digital Brands announced the Sundry acquisition, it said the brand would immediately add scale and cash flow, and would create synergies with its brands. The company also said Sundry "should drive more brand awareness and customer demand, which in turn should fuel our future growth across our platform, brands and customers."
But there is no guarantee that the acquisition will close, as the company has noted in filings. In an S-1 filed this week, Digital Brands said that it "has not arranged for nor entered into any agreements with any potential sources of financing to pay the required amounts" under the agreement, which includes several complicated contingencies around financing.
Earlier this month, Digital Brands said in a filing that it had entered into a financing arrangement with a group of investors. The agreement includes notes worth about $3.1 million, of which 20% (or roughly $614,000) is a discount paid to lenders, that matures in three months from its issue date.
The company has warned in past filings that it may not be able to survive without sufficient capital. In its 10-K, filed at the end of March, Digital Brands included a note that it may have to file for bankruptcy protection, or seek other options, if the company cannot come up with sufficient funds to run operations.
Last year, the company's revenue rose nearly 45% to $7.6 million while its net losses roughly tripled from the previous year to $32.4 million in 2021.
Davis said in a March conference call that the company's operating losses should decline as it grows and can leverage its expenses. But the company could struggle to grow, or even survive, without cash.
Trade Harvest is not the only vendor that has gone to court with Digital Brands seeking payment. In its most recent S-1 filing, Digital Brands disclosed six lawsuits at various stages by parties seeking payment or reimbursement.
Davis, who founded the J.Hilburn custom clothing retailer, has financial troubles as well. He filed for personal bankruptcy in December, with Digital Brands listed among his creditors.
