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Item 7. Management’s Discussion and Analysis

2023-04-17 compared with 2022-03-31 · 102 added, 168 removed, 252 unchanged (52% of the section changed)

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Unless otherwise indicated by the context, references to “DBG” refer to Digital Brands Group, Inc.

solely, and references to the “Company,” “our,” “we,” “us” and similar terms refer to Digital Brands Group, Inc., together with its wholly-owned subsidiary Bailey 44, LLC, Harper & Jones LLC and MOSBEST, LLC (“Stateside”).

solely, and references to the “Company,” “our,” “we,” “us” and similar terms refer to Digital Brands Group, Inc., together with its wholly-owned subsidiaries Bailey 44, LLC (“Bailey”), Harper & Jones LLC (“H&J”), MOSBEST, LLC (“Stateside”) and Sunnyside (“Sundry”).

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.

Recent Development

We have been involved in a dispute with the former owners of H&J regarding our obligation to “true up” their ownership interest in our company further to that membership interest purchase agreement dated May 10, 2021 whereby we acquired all of the outstanding membership interests of H&J (as amended, the “H&J Purchase Agreement”).

Further to the H&J Purchase Agreement, we agreed that if, at May 18, 2022, the one year anniversary of the closing date of our initial public offering, the product of the number of shares of our common stock issued at the closing of such acquisition multiplied by the average closing price per share of our shares of common stock as quoted on the NasdaqCM for the thirty (30) day trading period immediately preceding such date plus the gross proceeds, if any, of shares of our stock issued to such sellers and sold by them during the one year period from the closing date of the offering does not exceed the sum of $9.1 million, less the value of any shares of common stock cancelled further to any indemnification claims or post-closing adjustments under the H&J Purchase Agreement, then we shall issue to the subject sellers an additional aggregate number of shares of common stock equal to any such valuation shortfall at a per share price equal to the then closing price per share of our common stock as quoted on the NasdaqCM.

We did not honor our obligation to issue such shares and the former owner of H&J have claimed that they were damaged as a result.

As part of a proposed settlement with such holders, we have tentatively agreed to the following:

(i) to transfer all membership interests of H&J back to the original owners, (ii) to pay such owners the sum of $229,000, (iii) issue the former owners of H&J an aggregate of $1,400,000 worth of our common stock to be issued on May 16, 2023 based on the lower of (a) the stock closing price per share on May 15, 2023, and (b) the average common stock closing price based on the average of the 5 trading days preceding May 16, 2023, with the closing price on May 9, 2023.

Such tentative terms are to be memorialized in definitive purchase agreements and as such there is no assurance that such arrangements will be finalized.

Digital Brands Group is a curated collection of lifestyle brands, including Bailey 44, DSTLD, Harper & Jones, Stateside, Sundry 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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Stateside is primarily a wholesale brand that we will be transitioning to a digital, direct-to-consumer brand.

● ACE STUDIOS will be built with the goal of inspiring men to dress with a purpose.

It will offer premium apparel with a sophisticated casual approach.

Harper & Jones will primarily be a direct-to-consumer brand.

● Sundry offers distinct collections of women’s clothing, including dresses, shirts, sweaters, skirts, shorts, athleisure bottoms and other accessory products.

Sundry’s products are coastal casual and consist of soft, relaxed and colorful designs that feature a distinct French chic, resembling the spirits of the French Mediterranean and the energy of Venice Beach in Southern California.

Sundry is primarily a wholesale brand that we will be transitioning to a digital, direct-to-consumer brand.

We believe that successful apparel brands sell in all revenue channels.

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This value/revenue of a customer helps us determine many economic decisions, such as marketing budgets per marketing channel, retention versus acquisition decisions, unit level economics, profitability and revenue forecasting.

We acquired Bailey in February 2020, H&J in May 2021 and Stateside in August 2021.

We agreed on the consideration that we paid/are paying in each acquisition in the course of arm’s length negotiations with the holders of the membership interests in each of Bailey, H&J and Stateside.

In determining and negotiating this consideration, we relied on the experience and judgment of our management and our evaluation of the potential synergies that could be achieved in combining the operations of Bailey, H&J and Stateside.

We acquired Bailey in February 2020, H&J in May 2021, Stateside in August 2021 and Sundry in December 2022.

We agreed on the consideration that we paid in each acquisition in the course of arm’s length negotiations with the holders of the membership interests in each of Bailey, H&J, Stateside and Sundry.

We did not obtain independent valuations, appraisals or fairness opinions to support the consideration that we paid/agreed to pay.

On January 18, 2022 we entered into entered into a Membership Interest Purchase Agreement (the “Agreement”) with Moise Emquies, George Levy, Matthieu Leblan and Carol Ann Emquies (“Sellers”), Sunnyside, LLC, a California limited liability company (“Sundry”), and George Levy as the Sellers’ representative, pursuant to which the Company will acquire all of the issued and outstanding membership interests of Sundry (such transaction, the “Acquisition”).

Pursuant to the Agreement, Sellers, as the holders of all of the outstanding membership interests of Sundry, will exchange all of such membership interests for (i) $7.5 million of shares of the Company’s common stock at the volume-weighted average (rounded to the nearest $0.0001) of the closing price of the Company’s common stock on the Nasdaq Capital Market (“NasdaqCM”) during the thirty (30) trading day period immediately prior to the closing, but in no event at a price less than $1.59;

and (ii) $34.0 million in cash, $20.0 million of which will be paid at the closing and the balance of which will be evidenced by promissory notes due December 31, 2022 (“Seller Notes”);

provided, however, that if the audited aggregate net revenue of Sundry for the year ended December 31, 2021 (the “Audited Net Revenue”) times 1.5 is greater than $34.0 million, the Company will pay the difference in cash pro rata to the Sellers and if the Audited Net Revenue times 1.5 is less than $34.0 million, the Seller Notes will be reduced pro rata for such difference.

A portion of the purchase price will be paid to certain employees of Sundry who have a contractual right to receive a portion of the consideration payable in the Acquisition (“Payees”).

Of the $34.0 million in cash payable in the Acquisition, $2.0 million will be held in escrow to cover possible indemnification claims.

If the Seller Notes, plus all unpaid interest thereunder, are not repaid in full on or prior to March 31, 2022, then on March 31, 2022, the Company will issue an additional $2.5 million of shares of common stock pro rata to the Sellers and the Payees.

If the Seller Notes, plus all unpaid interest thereunder remain outstanding after March 31, 2022 and are not repaid in full on or prior to June 30, 2022, then on June 30, 2022, the Company will issue an additional $2.5 million of shares of common stock pro rata to the Sellers and the Payees.

If the Seller Notes, plus all unpaid interest thereunder remain outstanding after June 30, 2022 and are not repaid in full on or prior to September 30, 2022, then on September 30, 2022, the Company will issue an additional $2.5 million of shares of common stock pro

rata to the Sellers and the Payees.

Any shares issued on either March 31, June 30 or September 30, 2022 shall be issued at the closing price of the Company’s common stock as quoted on the NasdaqCM as of the date immediately preceding the date of issuance but in no event at a price less than $1.59.

The Agreement contains customary representations, warranties and covenants by the Company, the Sellers and Sundry.

The closing of the Acquisition is subject to customary closing conditions and financing and there is no assurance that we will be able to complete the Acquisition.

Material Trends, Events and Uncertainties

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) a pandemic.

As the global spread of COVID-19 continues, DBG remains first and foremost focused on a people-first approach that prioritizes the health and well-being of its employees, customers, trade partners and consumers.

To help mitigate the spread of COVID-19, DBG has modified its business practices, including in response to legislation, executive orders and guidance from government entities and healthcare authorities (collectively, “COVID-19 Directives”).

These directives include the temporary closing of offices and retail stores, instituting travel bans and restrictions and implementing health and safety measures including social distancing and quarantines.

Our digital platform remains a high priority through which its brands stay connected with consumer communities while providing experiential content.

In accordance with local government guidelines and in consultation with the guidance of global health professionals, DBG has implemented measures designed to ensure the health, safety and well-being of associates employed in its distribution and fulfillment centers.

Many of these facilities remain operational and support digital consumer engagement with its brands and to service retail partners as needed.

Our business has been, and will continue to be, impacted by the effects of the COVID-19 global pandemic in countries where our suppliers, third-party service providers or consumers are located.

These effects include recommendations or mandates from governmental authorities to close businesses, limit travel, avoid large gatherings or to self-quarantine, as well as temporary closures and decreased operations of the facilities of our suppliers, service providers and customers.

The impacts on us have included, and in the future could include, but are not limited to:

● significant uncertainty and turmoil in global economic and financial market conditions causing, among other things:

decreased consumer confidence and decreased consumer spending, now and in the mid and long-term.

Specifically, COVID has impacted our business in several ways, including store closings, supply chain disruptions and delivery delays, meaningfully lower net revenue, furloughs and layoffs of 52 employees and increased costs to operate our warehouse to ensure a healthy and safe work environment.

Approximately 220 boutique stores where we sold our products closed temporarily and permanently in 2020 and into 2021, representing a reduction in approximately 40% of such stores prior to COVID.

Additionally, approximately 40 department stores that carried our products have closed as well, representing a reduction of approximately 35% of such stores prior to COVID.

We do not anticipate the department stores will open those stores back up, and we do not anticipate a majority of the closed boutique stores will reopen.

We also waited to hire a new designer until the summer, once we knew that stores would open back up at some capacity.

This delay in hiring a new designer also impacted the first four months of 2021, as her first collection was not offered until recently for a May 2021 shipment to our accounts.

We expect to also experience lower order quantities from our accounts throughout the first half of 2022 versus pre-COVID levels, but meaningfully higher than 2021 or 2020.

● inability to access financing in the credit and capital markets at reasonable rates (or at all) in the event we, or our suppliers find it desirable to do so, increased exposure to fluctuations in foreign currency exchange rates relative to the U.S.

Dollar, and volatility in the availability and prices for commodities and raw materials we use for our products and in our supply chain.

Specifically, the pandemic shut down our supply chain for several months in 2020, and delayed deliveries throughout the year.

● inability to meet our consumers’ needs for inventory production and fulfillment due to disruptions in our supply chain and increased costs associated with mitigating the effects of the pandemic caused by, among other things:

reduction or loss of workforce due to illness, quarantine or other restrictions or facility closures, scarcity of and/or increased prices for raw materials, scrutiny or embargoing of goods produced in infected areas, and increased freight and logistics costs, expenses and

failure of third parties on which we rely, including our suppliers, customers, distributors, service providers and commercial banks, to meet their obligations to us or to timely meet those obligations, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties, including business failure or insolvency and collectability of existing receivables;

● significant changes in the conditions in markets in which we do business, including quarantines, governmental or regulatory actions, closures or other restrictions that limit or close our operating and manufacturing facilities and restrict our employees’ ability to perform necessary business functions, including operations necessary for the design, development, production, distribution, sale, marketing and support of our products.

Specifically, we had to furlough and layoff a significant amount of employees to adjust to our lower revenues.

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.

As we continue to actively monitor the situation, we may take further actions that affect our operations.

Although we have taken several measures to maximize liquidity and flexibility to maintain operations during the disruptions caused by the COVID-19 pandemic, uncertainty regarding the duration and severity of the COVID-19 pandemic, governmental actions in response to the pandemic, and the impact on us and our consumers, customers and suppliers, there is no certainty that the measures we take will be sufficient to mitigate the risks posed by COVID-19.

Supply Chain Disruptions

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Our quarterly operating results vary due to the seasonality of our individual brands, and are historically stronger in the second half of the calendar year

However, the second half of each of 2021 and 2020 were negatively impacted by the COVID-19 global pandemic.

Senior Credit Facility

As of December 31, 2021, we owed our senior secured lender approximately $6.0 million that is due on the scheduled maturity date of December 31, 2022.

Our credit agreement contains negative covenants that, subject to significant exceptions limit our ability, among other things to make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, or

undergo other fundamental changes.

A breach of any of these covenants could result in a default under the credit facility and permit the lender to cease making loans to us.

If for whatever reason we have insufficient liquidity to make scheduled payments under our credit facility or to repay such indebtedness by the scheduled maturity date, we would seek the consent of our senior lender to modify such terms.

Although our senior lender has previously agreed to seven prior modifications of our credit agreement, there is no assurance that it will agree to any such modification and could then declare an event of default.

Upon the occurrence of an event of default under this agreement, the lender could elect to declare all amounts outstanding thereunder to be immediately due and payable.

We have pledged all of our assets as collateral under our credit facility.

If the lender accelerates the repayment of borrowings, we may not have sufficient assets to repay them and we could experience a material adverse effect on our financial condition and results of operations.

For a description of our other outstanding indebtedness, please see “— Liquidity and Capital Resources” below.

Substantial Indebtedness

As of December 31, 2022, we had an aggregate principal amount of debt outstanding of approximately $15.4 million.

We believe this is an amount of indebtedness which may be considered significant for a company of our size and current revenue base.

Our substantial debt could have important consequences to us.

For example, it could:

● make it more difficult for us to satisfy our obligations to the holders of our outstanding debt, resulting in possible defaults on and acceleration of such indebtedness;

● require us to dedicate a substantial portion of our cash flows from operations to make payments on our debt, which would reduce the availability of our cash flows from operations to fund working capital, capital expenditures or other general corporate purposes;

● increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations;

● place us at a competitive disadvantage to our competitors with proportionately less debt for their size;

● limit our ability to refinance our existing indebtedness or borrow additional funds in the future;

● limit our flexibility in planning for, or reacting to, changing conditions in our business;

● limit our ability to react to competitive pressures or make it difficult for us to carry out capital spending that is necessary or important to our growth strategy.

Any of the foregoing impacts of our substantial indebtedness could have a material adverse effect on our business, financial condition and results of operations.

We issued a promissory note in the principal amount of $4,500,000 pursuant to the Bailey acquisition.

Upon the IPO closing in May 2021, we repaid $1,000,000 of the outstanding principal on this note in May 2021.

In August 2021, the maturity date was further

extended to December 31, 2022.

We are required to make prepayments of $2,000,000 to $4,000,000 if we complete a secondary public offering.

If a public offering is not consummated before October 31, 2021 and June 30, 2022, we were obligated to repay 10% of the outstanding principal at each date.

We did not make any payments in October 2021, and the lender agreed to defer these payments to the maturity date of the loan, December 31, 2022.

However, no payments have been made - while the parties are undergoing an extension of the maturity date, the note is in technical default.

In addition, we issued promissory notes in the aggregate principal amount of $5,500,000 pursuant to the Sundry acquisition with a maturity date of February 15, 2023.

However no payments have been made and the notes are in technical default.

If such holders enforce their rights in connection with such defaults and achieve a default judgement, this may also result in the acceleration of or default under any other debt to which a cross-acceleration or cross-default provision applies.

We are currently unable to repay or refinance these borrowings so any such action by these lenders could force us into bankruptcy or liquidation.

In addition, our ability to make scheduled payments on our indebtedness or to refinance our obligations under our debt agreements, will depend on our financial and operating performance, which, in turn, will be subject to prevailing economic and competitive conditions and to the financial and business risk factors we face as described in this section, many of which may be beyond our control.

We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures or planned growth objectives, seek to obtain additional equity capital or restructure our indebtedness.

In the future, our cash flows and capital resources may not be sufficient for payments of interest on and principal of our debt, and such alternative measures may not be successful and may not permit us to meet scheduled debt service obligations.

In addition, the recent worldwide credit crisis could make it more difficult for us to refinance our indebtedness on favorable terms, or at all.

In the absence of such operating results and resources, we may be required to dispose of material assets to meet our debt service obligations.

We may not be able to consummate those sales, or, if we do, we will not control the timing of the sales or whether the proceeds that we realize will be adequate to meet debt service obligations when due.

Performance Factors

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Our ability to expand operating margins will result from increasing revenue growth above our operating expense growth, as well as increasing gross margins.

For example, we anticipate that our operating expenses will increase substantially in the foreseeable future as we undertake the acquisition

and integration of different brands, incur expenses associated with maintaining compliance as a public company, and increased marketing and sales efforts to increase our customer base.

For example, we anticipate that our operating expenses will increase substantially in the foreseeable future as we undertake the acquisition and integration of different brands, incur expenses associated with maintaining compliance as a public company, and increased marketing and sales efforts to increase our customer base.

While we anticipate that the operating expenses in absolute dollars will increase, we do not anticipate that the operating expenses as a percentage of revenue will increase.

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We evaluate the carrying amount of intangible assets and other long-lived assets for impairment whenever indicators of impairment exist.

We test these assets for recoverability by comparing the net carrying amount of the asset or asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset or asset group.

We test these assets for recoverability by comparing the net carrying amount of the asset or asset group to the undiscounted net

cash flows to be generated from the use and eventual disposition of that asset or asset group.

If the assets are recoverable, an impairment loss does not exist, and no loss is recorded.

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Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage our business, there is significant judgment in determining the cash flows attributable to these assets, including markets and market share, sales volumes and mix, and working capital changes.

Stock Based Compensation

We account for stock-based compensation costs under the provisions of ASC 718, Compensation — Stock Compensation, which requires the measurement and recognition of compensation expense related to the fair value of stock-based compensation awards that are ultimately expected to vest.

Stock based compensation expense recognized includes the compensation cost for all stock-based payments granted to employees, officers, and directors based on the grant date fair value estimated in accordance with the provisions of ASC 718.

ASC 718 is also applied to awards modified, repurchased, or cancelled during the periods reported.

Stock-based compensation is recognized as expense over the employee’s requisite vesting period and over the nonemployee’s period of providing goods or services.

The Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes.

Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse.

A valuation allowance is recorded when it is unlikely that the deferred tax assets will not be realized.

We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date.

In accordance with ASC 740-10, for those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.

For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements.

Financial Statement Components

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and inbound freight.

Cost of net revenue also includes direct labor to production activities such as pattern makers, cutters and sewers.

Cost of net revenue includes an allocation of overheard costs such as rent, utilities and commercial insurance pertaining to direct inventory activities.

Operating Expenses

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and inbound freight.

Cost of net revenue also includes direct labor to production activities such as pattern makers, cutters and sewers.

Cost of net revenue includes an allocation of overheard costs such as rent, utilities and commercial insurance pertaining to direct inventory activities.

Operating Expenses

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and commission expenses associated with sales representatives.

Sundry sells its products directly to customers.

Sundry also sells its products indirectly through wholesale channels that include third-party online channels and physical channels such as specialty retailers and department stores.

Cost of Net Revenue

Sundry’s cost of net revenue includes the direct cost of purchased and manufactured merchandise;

inventory shrinkage;

inventory adjustments due to obsolescence including excess and slow-moving inventory and lower of cost and net realizable reserves;

and inbound freight.

Cost of net revenue also includes direct labor to production activities such as pattern makers, cutters and sewers.

Cost of net revenue includes an allocation of overheard costs such as rent, utilities and commercial insurance pertaining to direct inventory activities.

Operating Expenses

Sundry’s operating expenses include all operating costs not included in cost of net revenues and sales and marketing.

These costs consist of general and administrative, fulfillment and shipping expense to the customer.

General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, occupancy expenses related to Sundry’s stores and to Sundry’s operations at its headquarters, including utilities, depreciation and amortization, and other costs related to the administration of its business.

Sundry’s fulfillment and shipping expenses include the cost to operate its warehouse including occupancy and labor costs to pick and pack customer orders and any return orders;

and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse.

Sales and Marketing

Sundry’s sales and marketing expense primarily includes digital advertising;

photo shoots for wholesale and direct-to-consumer communications, including email, social media and digital advertisements;

and commission expenses associated with sales representatives.

Results of Operations

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Revenue increased by $6.4 million to $14.0 million for the year ended December 31, 2022, compared to $7.6 million in the corresponding fiscal period in 2021.

The increase is primarily due to the acquisition of H&J in May 2021 and Stateside in August 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 $4.0 million for the year ended December 31, 2022 to $5.9 million from $1.9 million for the corresponding fiscal period in 2021.

The increase in gross margin was primarily attributable to the margins achieved by H&J and Stateside, as well as significant write-downs to inventory in 2020, and liquidation of product and low margins to monetize inventory during COVID in 2020.

The increase in gross margin was primarily attributable to increased revenue in 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 42.5% for the year ended December 31, 2022 compared to 24.6% for year ended December 31, 2021.

The increase in in gross margin was due margins per our H&J and Stateside acquisitions, as well as mark downs to net realizable value of DBG and Bailey’s inventory in the third quarter of 2020.

Operating Expenses

Our operating expenses increased by $24.5 million for the year ended December 31, 2021 to $22.5 million compared to $9.7 million for the corresponding fiscal period in 2020, including an increase in general and administrative expenses of $10.6 million and an increase in sales and marketing expenses of $3.2 million.

The increase in operating expenses was primarily due to non-cash charges incurred in 2021 upon the IPO and acquisition of H&J, including stock-based compensation expense of $4.8 million and the change in fair value of contingent consideration of $8.8 million, the impairment of intangible assets of $3.4 million, as well as increased professional fees, marketing costs and investor relations costs.

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

The increase in the gross margin was due to H&J and Stateside’s margins in 2022, as well as discounting and liquidation measures by both DBG and Bailey to sell aged inventory in 2021.

General and Administrative

General and administrative expenses decreased by $0.4 million for the year ended December 31, 2022 to $16.4 million compared to $16.8 million in 2021.

The decrease in general and administrative expenses was primarily due to non-cash charges incurred in 2021 upon the IPO, including stock-based compensation expense of $4.8.

This was partially offset by increased general and administrative expenses in 2022 due to full scale operations of all subsidiaries, as well as increased headcount and corporate costs.

General and administrative expenses as a percentage of revenue was 117% in 2022 as compared to 221% in 2021.

Sales and Marketing

Sales and marketing expenses increased by $1.1 million for the year ended December 31, 2022 to $4.9 million compared to $3.8 million in 2021.

The increase in sales and marketing expenses was primarily due to full-year advertising and marketing efforts by each subsidiary.

Sales and marketing expenses as a percentage of revenue was 35% in 2022 as compared to 50% in 2021.

Other Operating Expenses

Other operating expenses includes distribution expenses, impairment and change in fair value of contingent consideration.

Other operating expenses was $16.7 million in 2022 as compared to $12.7 million in 2021, an increase of $4.0 million.

The increase was primarily due to a $12.1 million increase in impairment charges on Bailey and Harper’s goodwill and intangible assets, partially offset by a decrease in the change in fair value of contingent consideration of $8.2 million.

Other Income (Expense)

Other expenses increased by $3.8 million to $5.9 million in the year ended December 31, 2022 compared to $2.1 million in the corresponding fiscal period in 2021.

The increase in the other expense was primarily due to increased interest expense in 2021 from the Company’s debt, as well as amortization of debt discount of the April 2021 note, notes converted during the IPO and the convertible notes issued to Oasis and FirstFire.

The increase in other expenses was partially offset by a gain on the change in fair value of the derivative liability and gains on PPP forgiveness in 2021.

Our net loss increased by $21.6 million to a loss of $32.4 million for the year ended December 31, 2021 compared to a loss of $10.7 million for the corresponding fiscal period in 2020 primarily due to our increased operating expenses, partially offset by a higher gross profit and tax benefit recorded in 2021.

The majority of the increase was primarily due to non-cash charges incurred in 2021 upon the IPO and acquisition of H&J, including stock-based compensation expense of $4.8 million and the change in fair value of contingent consideration of $8.8 million, the impairment of intangible assets of $3.4 million, as well as increased professional fees, marketing costs and investor relations costs.

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

Our net loss increased by $5.6 million to a loss of $38.0 million for the year ended December 31, 2022 compared to a loss of $32.4 million for the corresponding fiscal period in 2021 primarily due to our increased operating expenses and other expenses, partially offset by a higher gross profit in 2022 and tax benefit recorded in 2021.

Liquidity and Capital Resources

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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 or suspend its business

The report of our independent registered public accounting firm for the year ended December 31, 2022 included herein contains an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a going concern as a result of recurring losses from operations.

In 2020 and 2021, each of DBG, Bailey, H&J and Stateside have benefited from PPP and EIDL loans to fund operations.

PPP loans are to be partially or fully forgiven based on the terms of the notes and related expenses incurred.

DBG has also benefited from convertible debt, which may convert upon a public offering into common stock.

Cash Flow Activities

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Cash Flows Used In Operating Activities

Our cash used in operating activities increased by $12.2 million to $14.2 million to cash used for the year ended December 31, 2021 as compared to cash used of $1.2 million for the corresponding fiscal period in 2020.

The increase in net cash used in operating activities was primarily driven by our higher net loss and less cash provided by changes in our operating assets and liabilities in 2021, partially offset by an increase in non-cash charges.

Our cash used in operating activities decreased by $3.6 million to $10.6 million to cash used for the year ended December 31, 2022 as compared to cash used of $14.2 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 adjustments of $5.4 million and more cash provided by changes in our operating assets and liabilities in 2022, partially offset by an increase in our net loss in 2022.

Cash Flows Used in Investing Activities

Our cash used in investing activities was $7.3 million in the year ended December 31, 2022 as compared to cash used of $6.0 million for the corresponding fiscal period in 2021.

Cash used in 2022 was primarily related to the cash consideration in the Sundry acquisition.

Cash used in 2021 was primarily related to the cash consideration in the H&J and Stateside acquisitions.

Cash used during 2020 was primarily related to purchases of property and equipment, partially offset by cash generated due to the acquisition of Bailey and deposits.

Cash Flows Provided by Financing Activities

Cash provided by financing activities was $18.6 million for the year ended December 31, 2022 compared to cash provided of $20.2 million for the corresponding fiscal period in 2021.

Cash inflows in 2022 were primarily related to $16.4 million in equity proceeds after offering costs, $10.2 million from convertible notes and loans, partially offset by note repayments of $7.4 million.

Cash inflows in 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 $2.8 million, exercises of warrants of $1.8 million and proceeds from convertible notes payable of $8.4 million, partially offset by loan and note repayments of $2.0 million.

Cash inflows in 2020 were primarily related to proceeds from PPP and SBA loans of $1.7 million, proceeds from our Series A-3 and CF preferred stock for $0.8 million and proceeds from venture debt of $1.1 million, partially offset by repayments to the factor of $1.9 million.

Contractual Obligations and Commitments

In March 2017, DBG entered into a senior credit agreement with an outside lender for up to $4,000,000, dependent upon the achievement of certain milestones.

In March 2017, we entered into a senior credit agreement with an outside lender for up to $4,000,000, dependent upon the achievement of certain milestones.

The initial close amount was a minimum of $1,345,000.

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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 December 31, 2021, we owed our senior secured lender approximately $6.0 million that is due on the scheduled maturity date of December 31, 2022.

Our credit agreement contains negative covenants that, subject to significant exceptions, limit our ability, among other things to make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, or undergo other fundamental changes.

A breach of any of these covenants could result in a default under the credit facility and permit the lender to cease making loans to us.

If for whatever reason we have insufficient liquidity to make scheduled payments under our credit facility or to repay such indebtedness by the schedule maturity date, we would seek the consent of our senior lender to modify such terms.

Upon the occurrence of an event of default under this agreement, the lender could elect to declare all amounts outstanding thereunder to be immediately due and payable.

We have pledged all of our assets as collateral under our credit facility.

Repayment is accelerated upon a change in control, as defined in the senior credit agreement.

The loan is senior to all other debts and obligations of DBG, is collateralized by all assets of DBG, and shares of DBG’s common stock pledged by officers of DBG.

As of December 31, 2021 and 2020, the gross loan balance was $6,001,755 resulting from cash disbursed to DBG of $0 and $1,459,211, respectively.

DBG failed to comply with certain debt covenants during the years ended December 31, 2020.

Accordingly, as of December 31, 2020, the entire amount is shown as a current liability.

The senior lender has waived any default in connection with DBG’s prior failure to comply with such debt covenants.

The lender was also granted warrants to purchase common stock representing 1% of the fully diluted capitalization of DBG for each $1,000,000 of principal loaned under the agreement, which was increased to 1.358% during 2020.

During the years ended December 31, 2021 and 2020, DBG granted 0 and 493,462 common stock warrants, respectively, to the lender with an exercise price of $2.50 per share and a ten-year contractual life.

As discussed in Note 10 to the financial statements, during the years ended December 31, 2021 and 2020, these warrants were valued at $0 and $184,191, respectively.

The value of the warrants was initially recorded as a discount to the note, which is amortized over its term.

As of December 31, 2021, the warrants were fully amortized.

Interest expense and effective interest rate on this loan for the years ended December 31, 2021 and 2020 was $825,219 and $770,277, 13.7% and 14.6%, all respectively.

On August 27, 2021, we entered into a Securities Purchase Agreement with Oasis Capital, LLC (“Oasis Capital”) further to which Oasis Capital purchased a Senior Secured Convertible Promissory Note (the “Oasis Note”), with an interest rate of 6% per annum, having a face value of $5,265,000 for a total purchase price of $5,000,000, secured by all of our assets.

The Oasis Note, in the principal amount of $5,265,000, bears interest at 6% per annum and is due and payable 18 months from the date of issuance, unless sooner converted.

The Note is convertible at the option of Oasis Capital into shares of our common stock at a conversion price (the “Oasis Conversion Price”) which is the lesser of (i) $3.601, and (ii) 90% of the average of the two lowest volume-weighted average prices during the five consecutive trading day period preceding the delivery of the notice of conversion.

Oasis Capital is not permitted to submit conversion notices in any thirty day period having conversion amounts equaling, in the aggregate, in excess of $500,000.

If the Oasis Conversion Price set forth in any conversion notice is less than $3.00 per share, we, at our sole option, may elect to pay the applicable conversion amount in cash rather than issue shares of our common stock.

In connection with the issuance of the Oasis Note, we entered into a security agreement (the “Security Agreement”) pursuant to which we agreed to grant Oasis Capital a security interest in substantially all of our assets to secure the obligations under the Oasis Note and a registration rights agreement with Oasis Capital (the “RRA”).

On October 1, 2021, we entered into an Amended and Restated Securities Purchase Agreement with FirstFire Global Opportunities Fund, LLC (“FirstFire”) and Oasis Capital further to which FirstFire purchased a Senior Secured Convertible Promissory Note (the “First FirstFire Note”), with an interest rate of 6% per annum, having a face value of $1,575,000 for a total purchase price of $1,500,000, secured by all of our assets.

The First FirstFire Note, in the principal amount of $1,575,000, bears interest at 6% per annum and is due and payable 18 months from the date of issuance, unless sooner converted.

The First FirstFire Note is convertible at the option of FirstFire into shares of our common stock at a conversion price (the “First FirstFire Conversion Price”) which is the lesser of (i) $3.952, and (ii) 90% of the average of the two lowest volume-weighted average prices during the five consecutive trading day period preceding the delivery of the notice of conversion.

FirstFire is not permitted to submit conversion notices in any thirty day period having conversion amounts equaling, in the aggregate, in excess of $500,000.

If the First FirstFire Conversion Price set forth in any conversion notice is less than $3.00 per share, we, at our sole option, may elect to pay the applicable conversion amount in cash rather than issue shares of our common stock.

In connection with the issuance of the First FirstFire Note, we, Oasis Capital and FirstFire amended the Security Agreement to grant FirstFire a similar security interest in substantially all of our assets to secure the obligations under the First FirstFire Note.

We, Oasis Capital and FirstFire also amended the Registrations Right Agreement (“RRA”) to join FirstFire as a party thereto and to include the shares of our common stock issuable under the First FirstFire Note as registrable securities.

On November 16, 2021, we entered into a Securities Purchase Agreement with FirstFire further to which FirstFire purchased a Senior Secured Convertible Promissory Note (the “Second FirstFire Note” and together with the First FirstFire Note, the “FirstFire Notes”), with an interest rate of 6% per annum, having a face value of $2,625,000 for a total purchase price of $2,500,000.

The Second FirstFire Note is convertible at the option of FirstFire into shares of our common stock at a conversion price (the “Second FirstFire Conversion Price”) which is the lesser of (i) $4.28, and (ii) 90% of the average of the two lowest volume-weighted average prices during the five consecutive trading day period preceding the delivery of the notice of conversion.

FirstFire is not permitted to submit conversion notices in any thirty day period having conversion amounts equaling, in the aggregate, in excess of $500,000.

If the Second FirstFire Conversion Price set forth in any conversion notice is less than $3.29 per share, we, at our sole option, may elect to pay the applicable conversion amount in cash rather than issue shares of our common stock.

In connection with the Second FirstFire Note, we issued (a) 30,000 additional shares of common stock to FirstFire and (b) 100,000 additional shares of common stock to Oasis Capital, as set forth in the waivers and consents (the “Waivers”), dated November 16, 2021 executed by each of FirstFire and Oasis Capital (collectively, the “Waiver Shares”).

In addition, we entered into an amendment to the RRA, dated November 16, 2021.

The RRA, as amended, provides that we shall file a registration statement registering the shares of common stock issuable upon conversion of the FirstFire Notes, and the Waiver Shares by November 30, 2021 and use our best efforts to cause such registration statement to be effective with the SEC no later than 120 days from the date of the FirstFire Note.

We filed such registration statement in December 2021 and it became effective in January 2022.

Equity Line of Credit

On August 27, 2021, we entered into what is sometimes termed an equity line of credit arrangement with Oasis Capital, LLC (“Oasis Capital”).

Specifically, we entered into an equity purchase agreement (the “Equity Purchase Agreement”), pursuant to which Oasis Capital is committed to purchase up to $17,500,000 of our common stock over the 24-month term of the Equity Purchase Agreement.

We are not obligated to request any portion of the $17,500,000.

In connection with the execution of the Equity Purchase Agreement, we issued Oasis Capital $350,000 of its shares of common stock, or 126,354 shares (the “Commitment Shares”) at a per share price which was based on the closing sale price per share on the NasdaqCM on the trading date prior to issuance (the “Issuance Reference Date”).

On the earlier of (i) the date that is nine months from the date of execution, and the date that the Equity Purchase Agreement is terminated in accordance with its terms (the “Reference Date”), if the closing sale price per share on the NasdaqCM on the trading date preceding the Reference Date is higher than the closing sale price on the Issuance Reference Date, then Oasis Capital shall return to us a portion of the Commitment Shares equal to the amount of Commitment Shares required to be issued on the execution date minus the amount of Commitment Shares that would have been required to have been issued if the closing sale price per share on the NasdaqCM on the trading date preceding the Reference Date had been used to calculate the amount of Commitment Shares issuable on the execution date.

As of the date of this Form 10-K, we have not drawn down any portion of this commitment, leaving the entire $17,500,000 available under the equity line of credit, and for which we have agreed, pursuant to the registration rights agreement (the “Oasis Equity RRA”), to register the shares of common stock issuable further to the equity line of credit with the SEC, before any such issuances.

We filed such registration statement in December 2021 and it became effective in January 2022.

During the 24-month term of the Equity Purchase Agreement, we may request a drawdown on the equity line of credit by delivering a “put notice” to Oasis Capital stating the dollar amount of shares we intend to sell to Oasis Capital.

We may make either an Option 1 or Option 2 request to Oasis Capital.

Under Option 1, the purchase price Oasis Capital is required to pay for the shares is the lesser of (i) the lowest traded price of our common stock on the NasdaqCM on the Clearing Date, which is the date on which Oasis Capital receives the put shares as DWAC shares in its brokerage account, or (ii) the average of the three lowest closing sale prices of our common stock on the NasdaqCM during the period of twelve (12) consecutive trading days immediately preceding the Clearing Date.

The maximum amount we may request in an Option 1 request is $500,000.

Under Option 2, the purchase price Oasis Capital is required to pay for the shares is the lesser of (i) 93% of the one (1) lowest traded price of our common stock on the NasdaqCM during the period of five (5) consecutive trading days immediately preceding the put date, or (ii) 93% of the VWAP on the Clearing Date, or (iii) 93% of the closing bid price of the Company’s common stock on the NasdaqCM on the Clearing Date.

The maximum amount we may request in an Option 2 request is $2,000,000.

We are not entitled to request a drawdown unless each of the following conditions is satisfied:

a registration statement is and remains effective for the resale of securities in connection with the equity line of credit;

the trading of our common stock shall not have been suspended by the SEC, the NasdaqCM or FINRA, or otherwise halted for any reason, and our common stock shall have been approved for listing or quotation on and shall not have been delisted from the NasdaqCM;

we have complied with its obligations and are otherwise not in breach or default of any agreement related to the equity line of credit;

no statute, regulation, order, guidance, decree, writ, ruling or injunction shall have been enacted, entered, promulgated, threatened or endorsed by any federal, state, local or foreign court or governmental authority of competent jurisdiction, including, without limitation, the SEC, which prohibits the consummation of or which would materially modify or delay any of the transactions contemplated by the equity line of credit;

our common stock must be DWAC eligible and not subject to a “DTC chill”;

all reports, schedules, registrations, forms, statements, information and other documents required to have been filed by us with the SEC pursuant to the reporting requirements of the Exchange Act of 1934 (other than Forms 8-K) shall have been filed with the SEC within the applicable time periods prescribed for such filings;

to the extent the issuance of the put shares requires shareholder approval under the listing rules of the NasdaqCM, we have or will seek such approval;

the lowest traded price of the common stock in the five (5) trading days immediately preceding the respective put date must exceed $3.00.

If any of the events described in clauses (a) through (h) above occurs after we make a drawdown request, then Oasis Capital shall have no obligation to fund that drawdown.

The equity line of credit terminates when Oasis Capital has purchased an aggregate of $17,500,000 of our common stock or August 30, 2024, whichever occurs first.

Under the terms of the Equity Purchase Agreement, Oasis Capital may not own more than 9.99% of our issued and outstanding stock at any one time.

The Company is unable to drawdown on the Equity Purchase Agreement until the lowest traded price of the common stock in the five (5) trading days immediately preceding the respective put date exceeds $3.00.

In September 2022, the entire outstanding principal was converted into preferred stock.

As of December 31, 2022 we have $4.0 million in outstanding principal pertaining to our convertible notes which mature in February 2023.

As of December 31, 2022, we have an additional 10.4 million in outstanding principal on other loans, primarily our promissory notes due to the Bailey44 and Sundry Sellers.

Aside from our remaining non-current SBA obligations, all outstanding loans have maturity dates through 2023.

Off-Balance Sheet Arrangements and Future Commitments

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Item 7. Management’s Discussion and Analysis