London-based digital services company 7digital faces the possibility of going into administration -- a process similar to chapter 11 bankruptcy -- unless it can raise "at least" £4.5 million ($5.5 million) in additional funds by the end of July, according to its year-end financial results.
Despite generating £19.9 million ($24.7 million) in revenue in 2018, up 19% on the previous year, and gross profit rising 25% to £14.7 million ($18.3 million), the company reported more than £12 million ($15 million) in statutory operating losses for the year ending Dec. 31.
Throughout 2018, 7digital made a number of strategic and organizational changes to improve its financial position, including the closure of its French business and a wave of redundancies at its U.K., Denmark and U.S. offices that reduced overall employee headcount by 35%.
The business got off to a terrible start in 2019, however, with news that 7digital had lost a major contract with electronics giant MediaMarktSaturn, owners of German music service Juke, to which 7digital provided backend operational support.
The termination of that contract saw Juke pay 7digital a settlement of £4 million ($4.5 million at the time the settlement was announced in March), and then in May the company announced the €1 million ($1.1 million) sale of unspecified "bespoke technology" from its Danish business to telecommunications company TDC group. The transfer of the Danish platform and staff to TDC will eliminate around £1.6 million ($2 million) of annualized losses from 7digital, states the financial report.
The company also underwent dramatic executive changes during the first half of 2019, with the departures of CEO Simon Cole, deputy CEO Pete Downton and interim CFO David Holmwood, who all left the company in March and April. Chairman Donald Cruickshank and non-executive director Eric Cohen followed them out of the door last month.
John Aalbers was appointed CEO and Julia Hubbard CFO in April and they immediately carried out an urgent review of the business. In June, a consortium led by Tamir Koch and David Lazarus became majority shareholders in 7digital, acquiring outstanding loans of £600,000 and investing £1.3 million in capital. Both Koch and Lazarus are due to join 7digital’s board of directors shortly and are committed to making further funds available for the business, says 7digital.
"Having arrived at 7digital in April 2019 with Julia Hubbard and finding the company facing financial difficulties, we are pleased to have been able to secure excellent new investors in the form of the consortium headed up by Tamir Koch and David Lazarus," states Aalbers in the financial document.
"Tamir and David have an exciting vision for the music industry and see 7digital as playing a key role. As such, they have expressed a strong desire to invest further funds to stabilise the business and enable 7digital to execute its new enterprise strategy," Aalbers went on to say.
Key to that strategy is fully capitalizing on 7digital's cloud-based streaming platform. "The Company's focus should be on winning repeatable, long-term business through the provision of a standardised product," outlines the report, calling an end to the "unprofitable" previous model of implementing bespoke solutions for a diverse range of customers.
"Our vision is to become the leading supplier of B2B music streaming solutions globally," states the document, identifying expansion into new markets as one source of potential growth.
However, before that can happen 7digital needs to raise further equity of at least £4.5 million in the immediate near-term, "failing which it is highly likely that the Company would need to be placed into administration," warns Aalbers.
He surmises, "The Company remains committed to executing the new strategy and firmly believe that 7digital has an excellent platform which, along with a strengthened team and new financing and partnerships, will enable the delivery of 7digital's vision."