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Lawsuit Alleges Kornit Digital Misled Investors, Violated Securities Law; Also Implicates Amazon Subsidiary

The suit seeks damages compensation and asserts the digital printing solutions provider knew it was going to lose substantial business from key clients Fanatics and Delta Apparel, but continued to publicly assert sales would be on the rise.

As Kornit Digital knew it stood to lose business from two high-volume customers, Top 40 supplier Delta Apparel (asi/49172) and retailer Fanatics, executives for the publicly traded firm allegedly continued to paint a rosy picture about the strength of the company’s prospects, a practice that inflated stock price.

However, when the reality of Kornit’s financial situation finally hit quarterly reports, resulting in sales drops and income losses, the company’s stock price rapidly declined, causing substantial losses for investors.

law, legal

Now, Kornit Digital – which makes direct-to-garment printers used by apparel decorators and offers other digital printing technology products and solutions to the garment and textile industry – is facing a class action lawsuit in federal court in New Jersey.

The suit is rooted in assertions that Kornit made materially false and/or misleading public statements about its business situation, obscuring the reality from investors and violating federal securities law.

The complaint seeks to have the suit certified as a class action and asks a judge to award affected investors compensation for financial losses they sustained due to Kornit’s alleged actions, which plaintiffs characterize as reckless at best or downright deceptive.

The suit was filed by the Cleveland Bakers and Teamsters Pension Fund, which had invested in Kornit during the class period in which the alleged wrong actions are asserted to have fraudulently inflated stock price – Aug. 10, 2021 to July 5, 2022.

This suit seeks to represent those who purchased shares of Kornit Digital common stock during that period, including purchases made directly in Kornit Digital’s Nov. 19, 2021, public stock offering.

Those who invested in Kornit have until Monday, April 17, to sign on as lead plaintiffs to the class action. A lead plaintiff is a representative party acting on behalf of other class members in directing the litigation. An investor could still recover damages even if they are not a lead plaintiff.

Named defendants include Kornit Digital, several of its senior officers and directors, banking firms that served as underwriters in the offering, and shareholders that sold stock in the offering, including Amazon.com NV Investment Holdings LLC, a wholly owned subsidiary of Amazon.com.

The Genesee County Employees Retirement System has also separately filed what’s a second proposed class action lawsuit against Kornit in federal court in New Jersey, making similar allegations as the Cleveland Bakers and Teamsters Pension Fund complaint. That second suit does not name Amazon or banking firm underwriters as defendants; it’s limited to Kornit and certain company leaders.

ASI Media has contacted Kornit Digital and its attorney for comment but has not heard back as of this writing.

Allegations Explained, Amazon Subsidiary Connection

Based in Israel, with U.S. headquarters in Englewood, NJ, Kornit Digital develops, designs and markets digital fashion and textile production technologies, with a focus on digital printing and cloud-based software for the global printed textile industry.

The Cleveland Bakers and Teamsters Pension Fund suit, which this article focuses on, states that during the class period Kornit claimed it was experiencing favorable financial and operating trends, repeatedly highlighting its purportedly robust revenue, customer base, pipeline and visibility.

Said one Kornit executive, according to the suit: “We enter 2022 for what will be one of the busiest and most exciting years in the history of Kornit, a year with strong growth and a remarkable pipeline of groundbreaking new product introductions, starting already in the first quarter. We have never been in a better position as a company and we are extremely confident in our ability to meet our $1B revenue goal by 2026, if not before.”

That was malarkey, according to the plaintiff attorneys.

What Kornit allegedly wasn’t sharing with investors was that it was in the process of losing substantial business from two of its biggest customers: DTG2Go, a print-on-demand business owned by Delta Apparel, and Fanatics, the mega retailer of licensed sports merch. According to the suit, DTG2Go was transitioning to a Kornit competitor’s products, while Fanatics was outsourcing production, a substantial portion of which was going to partners that didn’t use Kornit systems.

Other clouds were allegedly darkening Kornit’s outlook too, including diminishing demand for high-margin consumables and lessening e-commerce-related demand, the lawsuit states.

“Defendants’ failure to disclose these adverse facts caused the price of Kornit Digital stock to trade at artificially inflated prices, reaching a high of over $181 per share during the class period,” the suit states.

It continues: “With the price of Kornit Digital stock artificially inflated, defendants conducted a $450 million follow-on offering of Kornit Digital stock in November 2021. In addition, Kornit Digital insiders collectively sold nearly $12 million worth of their own Kornit Digital shares during the class period at fraud-inflated prices…[that were] over six times higher than the stock price at the end of the class period.”

Attorneys for the plaintiffs assert that Kornit Digital sold approximately 2.3 million shares in the offering, while approximately 700,000 shares were sold in the offering by Amazon.com NV Investment Holdings LLC, pursuant to the exercise of a warrant granted to Amazon by the company.

Both Kornit and the Amazon subsidiary were “culpable participants” in securities law violations because, in part, they marketed and participated in the process that allowed the offering to be successfully completed, the suit asserts. In 2021, the suit says, Amazon accounted for 27% of Kornit Digital’s total revenue.

The true picture of Kornit’s financial position began to become clear publicly in 2022, as the impact of lost business and other factors began to take hold.

First-quarter results that missed the mark were followed by a second quarter that was far below previously indicated expectations: A July 2022 release on preliminary Q2 results slashed Kornit’s expected second-quarter revenue outlook from its original projection of $85 million to $95 million, to just $56.4 million to $59.4 million – a 35% decrease, the suit says.

The release also revealed that Kornit Digital’s adjusted operating margin was expected to fall to negative 28% to 34%, from the prior range of negative 2% to positive 2%, and the company’s adjusted EBITDA margin was expected to slip to negative 24% to negative 30%, from the prior range of 0% to 4%, according to attorneys for the plaintiff.

“As a result of this news, the price of Kornit Digital common stock dropped precipitously from $31.56 per share when the market closed on July 5, 2022, to $23.46 per share when the market closed on July 6, 2022, a nearly 26% decline on abnormally heavy volume of over 11 million shares traded,” the suit says.

In 2022, Kornit executives did begin to share about the Delta Apparel and Fanatics business loss and also pointed to a drop in e-commerce-related demand as another business headwind. These public revelations contributed to stock price declines, the suit says.

“The decline in the price of Kornit Digital common stock after the corrective disclosures came to light was a direct result of the nature and extent of defendants’ fraudulent misrepresentations being revealed to investors and the market,” according to the suit. “The timing and magnitude of the price decline in Kornit Digital common stock negates any inference that the losses suffered by the plaintiff and the other class members were caused by changed market conditions, macroeconomic or industry factors, or company-specific facts unrelated to defendants’ fraudulent conduct.”

In February 2023, Kornit Digital reported a 28% revenue decline and a $35.4 million loss for the fourth quarter of 2022. Stock price dropped to $22 per share on the news, the suit says. As of the morning of Friday, April 14, 2023, Kornit was trading on the NASDAQ for $18.