What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-16 · 55 added, 38 removed, 140 unchanged (40% of the section changed)

10 unchanged sentences

Business Overview

Digital Brands Group is a curated collection of lifestyle brands, including Bailey 44, DSTLD, Harper and Jones, Stateside and ACE Studios, that offers a variety of apparel products through direct-to-consumer and wholesale distribution.

Digital Brands Group is a curated collection of lifestyle brands, including Bailey 44, DSTLD, Harper & Jones, Stateside and ACE Studios, that offers a variety of apparel products through direct-to-consumer and wholesale distribution.

Our complementary brand portfolio provides us with the unique opportunity to cross merchandise our brands.

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our websites, wholesale and our own stores.

● Bailey 44 combines beautiful, luxe fabrics and on-trend designs to create sophisticated ready-to-wear capsules for women on-the-go.

● Bailey 44 (“Baily”) combines beautiful, luxe fabrics and on-trend designs to create sophisticated ready-to-wear capsules for women on-the-go.

Designing for real life, this brand focuses on feeling and comfort rather than how it looks on a runway.

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DSTLD is primarily a digital direct-to-consumer brand, to which we recently added select wholesale retailers to generate brand awareness.

● Harper & Jones was built with the goal of inspiring men to dress with intention.

● Harper & Jones (H&J) was built with the goal of inspiring men to dress with intention.

It offers hand- crafted custom fit suits for those looking for a premium experience.

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However, each channel offers different margin structures and requires different customer acquisition and retention strategies.

We were founded as a digital-first retailer that has strategically

expanded into select wholesale and direct retail channels.

We were founded as a digital-first retailer that has strategically expanded into select wholesale and direct retail channels.

We strive to strategically create omnichannel strategies for each of our brands that blend physical and online channels to engage consumers in the channel of their choosing.

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Material Trends, Events and Uncertainties

The COVID-19 pandemic is ongoing and dynamic in nature, and continues to drive global uncertainty and disruption.

As a result, COVID-19 had a significant negative impact on the Company’s business, including the consolidated financial condition, results of operations and cash flows through of 2021.

While we are not able to determine the ultimate length and severity of the COVID-19 pandemic, we expect store closures, an anticipated reduction in traffic once stores initially reopen and a highly promotional marketplace will have a significant negative impact on our financial performance for at least the first two quarters of 2022.

We have implemented cost controls to reduce discretionary spending to help mitigate the loss of sales and to conserve cash while continuing to support employees.

After the impact of COVID-19, we have implemented cost controls to reduce discretionary spending to help mitigate the loss of sales and to conserve cash while continuing to support employees.

We are also assessing our forward inventory purchase commitments to ensure proper matching of supply and demand, which will result in an overall reduction in future commitments.

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Results of Operations

Three Months Ended March 31, 2022 compared to Three Months Ended March 31, 2021

The following table presents our results of operations for the three months ended March 31, 2022 and 2021:

Three Months Ended June 30, 2022 compared to Three Months Ended June 30, 2021

The following table presents our results of operations for the three months ended June 30, 2022 and 2021:

Three Months Ended

Cost of net revenues

Gross profit (loss)

General and administrative

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Operating loss

Other expenses

Other income (expenses)

Loss before provision for income taxes

Provision for income taxes

Revenues increased by $3.0 million to $3.4 million for the three months ended March 31, 2022, compared to $0.4 million in the corresponding fiscal period in 2021.

Revenues increased by $2.7 million to $3.7 million for the three months ended June 30, 2022, compared to $1.0 million in the corresponding fiscal period in 2021.

The increase was primarily due to full results in 2022 pertaining to the acquisition of H&J in May 2021 and Stateside in August 2021.

Gross Profit (Loss)

Our gross profit increased by $1.7 million for the three months ended March 31, 2022 to $1.5 million from a gross loss of ($0.2) million for the corresponding fiscal period in 2021.

The increase in gross margin was primarily attributable to increased revenue in the three months ended March 31, 2022 and the gross profit achieved by H&J and Stateside since the acquisitions.

Furthermore, in the three months ended March 31, 2021, we made mark downs to net realizable value for certain inventory that liquidated and sold in the second quarter of 2021.

Our gross margin was 42.9% for three months ended March 31, 2022 compared to (50.8)% for the three months ended March 31, 2021.

Our gross profit increased by $1.8 million for the three months ended June 30, 2022 to $2.2 million from a gross profit of $0.4 million for the corresponding fiscal period in 2021.

The increase in gross margin was primarily attributable to increased revenue in the three months ended June 30, 2022 and the gross profit achieved by H&J and Stateside since the acquisitions.

Our gross margin was 58.1% for three months ended June 30, 2022 compared to 39.3% for the three months ended June 30, 2021.

The increase in the gross margin was due to H&J and Stateside’s margins in 2021, as well as discounting and liquidation measures by both DBG and Bailey to sell aged inventory in 2021.

Operating Expenses

Our operating expenses increased by $4.9 million for the three months ended March 31, 2022 to $7.1 million compared to $2.2 million for the corresponding fiscal period in 2021.

The increase in operating expenses was primarily due to the change in fair value of contingent consideration of $1.2 million, as well as increased personnel costs, professional fees, marketing expenses and overall operations due to the Company’s full results of the H&J and Stateside acquisitions.

Our operating expenses increased by $1.6 million for the three months ended June 30, 2022 to $12.8 million compared to $11.2 million for the corresponding fiscal period in 2021.

The increase in operating expenses was primarily due to the change in fair value of contingent consideration of $5.9 million and increased marketing expenses, partially offset by lower general and administrative expenses due to the Company’s stock-based compensation expense in the quarter ended June 30, 2021.

We expect operating expenses to increase in total dollars and as a percentage of revenues as our revenue base increases.

Other Expenses

Other expenses increased by $1.6 million to $2.3 million in the three months ended March 31, 2022 compared to $0.7 million in the corresponding fiscal period in 2021.

The increase in the other expense was primarily due to the change in fair value of derivative liability pertaining to the convertible notes and interest expense and amortization of debt discount on the outstanding notes.

Our net loss increased by $4.8 million to a loss of $7.8 million for the three months ended March 31, 2022 compared to a loss of $3.1 million for the corresponding fiscal period in 2021 primarily due to change in fair value of contingent consideration of $1.2 million, as well as increased personnel costs, professional fees, marketing expenses, other operating expenses and interest expense, partially offset by higher gross profit.

Other Income (Expenses)

Other income/expenses increased by $2.1 million to a $1.1 million income in the three months ended June 30, 2022 compared to other expenses of $0.1 million in the corresponding fiscal period in 2021.

The increase in other income in 2022 was primarily due to the change in fair value of derivative liability and PPP forgiveness.

Our net loss decreased by $1.2 million to a loss of $9.5 million for the three months ended June 30, 2022 compared to a loss of $10.7 million for the corresponding fiscal period in 2021 primarily due to the higher gross profit and other income in 2022, partially offset by the increase in the change in fair value of contingent consideration and other operating expenses.

Six Months Ended June 30, 2022 compared to Three Months Ended June 30, 2021

The following table presents our results of operations for the six months ended June 30, 2022 and 2021:

Six Months Ended

Cost of net revenues

General and administrative

Sales and marketing

Other operating expenses

Operating loss

Other income (expenses)

Loss before provision for income taxes

Provision for income taxes

Revenues increased by $5.8 million to $7.2 million for the six months ended June 30, 2022, compared to $1.4 million in the corresponding fiscal period in 2021.

The increase was primarily due to full results in 2022 pertaining to the acquisition of H&J in May 2021 and Stateside in August 2021.

Our gross profit increased by $3.5 million for the six months ended June 30, 2022 to $3.6 million from a gross profit of $0.2 million for the corresponding fiscal period in 2021.

The increase in gross margin was primarily attributable to increased revenue in the six months ended June 30, 2022 and the gross profit achieved by H&J and Stateside since the acquisitions, as well as discounting and liquidation measures by both DBG and Bailey to sell aged inventory in 2021.

Our gross margin was 50.8% for six months ended June 30, 2022 compared to 13.2% for the six months ended June 30, 2021.

The increase in the gross margin was due to H&J and Stateside’s margins in 2021, as well as discounting and liquidation measures by both DBG and Bailey to sell aged inventory in 2021.

Operating Expenses

Our operating expenses increased by $6.5 million for the six months ended June 30, 2022 to $19.9 million compared to $13.4 million for the corresponding fiscal period in 2021.

The increase in operating expenses was primarily due to the change in fair value of contingent consideration of $7.1 million and increased marketing expenses due to full scale operations of all subsidiaries in 2022.

Other Income (Expenses)

Other expenses decreased by $0.5 million to $1.1 million in the six months ended June 30, 2022 compared to other expenses of $1.6 million in the corresponding fiscal period in 2021.

The increase in other expenses in 2022 was primarily due to amortization of debt discount and related interest expense, partially offset by the change in fair value of derivative liability and PPP forgiveness.

Our net loss increased by $3.6 million to a loss of $17.4 million for the six months ended June 30, 2022 compared to a loss of $13.7 million for the corresponding fiscal period in 2021 primarily due to increased operating expenses driven by the change in fair value of contingent consideration partially offset by the higher gross profit.

Liquidity and Capital Resources

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Historically each of DBG, Bailey, H&J and Stateside has maintained credit line facilities to support such working capital needs and makes repayments on that facility with excess cash flow from operations.

As of March 31, 2022, we had cash of $566,013, but we had a working capital deficit of $36.2 million.

As of June 30, 2022, we had cash of $802,724, but we had a working capital deficit of $38.4 million.

The Company requires significant capital to meet its obligations as they become due.

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There can be no assurance as to the availability or terms upon which such financing and capital might be available in the future.

If the Company is unable to secure additional funding, it may be forced to curtail or suspend its business plans.

If the Company is unable to secure additional funding, it may be forced to curtail its business plans or file for bankruptcy protection.

On May 10, 2022, the Company sold 37,389,800 shares of its common stock pursuant to a Registration Statement on Form S-1 and related prospectus at a public offering price of $0.25 per share.

The gross proceeds from the offering, before deducting underwriting discounts and commissions and other offering expenses payable by the Company, were $9,347,450.

The net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, was $8.1 million.

Cash Flow Activities

The following table presents selected captions from our condensed statement of cash flows for the three months ended March 31, 2022 and 2021:

Three Months Ended

Net cash provided by operating activities:

The following table presents selected captions from our condensed statement of cash flows for the six months ended June 30, 2022 and 2021:

Six Months Ended

Non-cash adjustments

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Cash Flows Used In Operating Activities

Our cash used by operating activities decreased by $1.0 million to cash used of $0.6 million for the three months ended March 31, 2022 as compared to cash used of $1.6 million for the corresponding fiscal period in 2021.

The decrease in net cash used in operating activities was primarily driven by an increase in non-cash charges and cash provided by changes in our operating assets and liabilities, partially offset by a higher net loss in 2022.

Our cash used by operating activities was $6.6 million for the six months ended June 30, 2022 and 2021.

Cash used in operating activities was primarily driven by our net loss, partially offset by non-cash charges and cash provided by changes in operating assets and liabilities.

Cash Flows Provided By Investing Activities

Our cash used in investing activities was $5,576 in 2022 due to purchases of property and equipment.

Our cash used in investing activities was $0.5 million in 2021, which was primarily related to the cash consideration in the H&J acquisition.

Cash Flows Provided by Financing Activities

Cash provided by financing activities was $0.7 million for the three months ended March 31, 2022, compared to $1.8 million for the corresponding fiscal period in 2020.

Cash inflows in the three months ended March 31, 2022 were primarily related to $0.9 million in proceeds from venture debt and loans, partially offset by factor repayments of $0.2 million.

Cash inflows in the three months ended March 31, 2021 were primarily related to proceeds from a loan payable of $1.3 million and proceeds from convertible notes payable of $0.5 million.

Cash provided by financing activities was $6.9 million for the six months ended June 30, 2022, compared to $10.6 million for the corresponding fiscal period in 2021.

Cash inflows in the three months ended June 30, 2022 were primarily related to $7.3 million in equity proceeds after offering costs, $2.9 million from convertible notes and loans, partially offset by note repayments of $3.1 million.

Cash inflows in the six months ended June 30, 2021 were primarily related to $8.6 million in net proceeds from the IPO after deducting underwriting discounts and commissions and offering expenses, as well as $1.4 million in net proceeds from the underwriter’s exercise of their over-allotment option.

Cash was also generated in 2021 from proceeds from loan payables of $2.6 million and proceeds from convertible notes payable of $0.5 million, partially offset by loan and note repayments of $2.0 million.

Contractual Obligations and Commitments

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A 5% closing fee is due upon each closing, legal and accounting fees of up to $40,000, and management fees of $4,167-$5,000 per month.

As of March 31, 2022, we owed our senior secured lender approximately $6.3 million that is due on the scheduled maturity date of December 31, 2022.

As of June 30, 2022, we owed our senior secured lender approximately $6.3 million that is due on the scheduled maturity date of December 31, 2022.

We have $8.0 million in outstanding principal pertaining to our convertible notes which mature in various dates through 2023.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis