What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-22 compared with 2022-11-14 · 54 added, 77 removed, 123 unchanged (52% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes for the year ended December 31, 2021 included in Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC on March 31, 2022.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes for the year ended December 31, 2022 included in Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC on April 17, 2023.

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 subsidiaries Bailey 44, LLC (“Bailey”), Harper & Jones LLC (“H&J”), MOSBEST, LLC (“Stateside”) and Sunnyside (“Sundry”).

Some of the statements contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

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Business Overview

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.

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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our websites, wholesale and our own stores.

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

● Bailey 44 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 (H&J) was built with the goal of inspiring men to dress with intention.

● Harper & Jones 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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Stateside is primarily a wholesale brand that we will be transitioning to a digital, 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 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.

Material Trends, Events and Uncertainties

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.

Supply Chain Disruptions

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H&J sells its products directly to customers through their showrooms and sales reps.

Stateside sells its products directly to customers.

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

Stateside and Sundry sell its products directly to customers.

Stateside and Sundry also sell 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

DSTLD, Bailey and Stateside’s cost of net revenue include direct cost of purchased merchandise;

DSTLD, Bailey, Stateside and Sundry’s cost of net revenue include direct cost of purchased merchandise;

inventory shrinkage;

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Interest Expense

Interest expense consists primarily of interest related to our debt outstanding to our senior lender, convertible debt, and other interest bearing liabilities.

Interest expense consists primarily of interest related to our debt outstanding to promissory notes, convertible debt, and other interest bearing liabilities.

Results of Operations

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

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

Three Months Ended March 31, 2023 compared to Three Months Ended March 31, 2022

The following table presents our results of operations for the three months ended March 31, 2023 and 2022:

Three Months Ended

September 30,

Cost of net revenues

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Provision for income taxes

Revenues increased by $1.2 million to $3.4 million for the three months ended September 30, 2022, compared to $2.2 million in the corresponding fiscal period in 2021.

The increase was primarily due to full results in 2022 pertaining to the acquisition of Stateside in August 2021, as well we increased results from the Company’s other brands including Bailey.

Our gross profit increased by $0.5 million for the three months ended September 30, 2022 to $1.7 million from a gross profit of $1.2 million for the corresponding fiscal period in 2021.

The increase in gross margin was primarily attributable to increased revenue in the three months ended September 30, 2022 and the gross profit achieved by Stateside since the acquisition.

Our gross margin was 48.3% for three months ended September 30, 2022 compared to 55.9% for the three months ended September 30, 2021.

The decrease in the gross margin was due to H&J and Stateside’s higher margins in 2021, as well as lower margins achieved by Bailey in 2022.

Revenues increased by $1.7 million to $5.1 million for the three months ended March 31, 2023, compared to $3.4 million in the corresponding fiscal period in 2022.

The increase was primarily due to full results in 2023 pertaining to the acquisition of Sundry in December 2022.

Our gross profit increased by $1.3 million for the three months ended March 31, 2023 to $2.4 million from a gross profit of $1.1 million for the corresponding fiscal period in 2022.

The increase in gross margin was primarily attributable to increased revenue in the three months ended March 31, 2023 and the gross profit achieved by Sundry since the acquisition.

Our gross margin was 47.9% for three months ended March 31, 2023 compared to 33.2% for the three months ended March 31, 2022.

The increase in gross margin was due to our ability to achieve cost efficiencies amongst all brands after the Sundry acquisition in December 2022, as well as heavy discounting in the first quarter of 2022.

Operating Expenses

Our operating expenses decreased by $4.9 million for the three months ended September 30, 2022 to $4.2 million compared to $9.1 million for the corresponding fiscal period in 2021.

The decrease in operating expenses was primarily due to the change in fair value of contingent consideration of $4.0 million in 2021, as well as slightly lower marketing and general and administrative expenses in 2022 due to various cost cutting measures.

Our operating expenses decreased by $0.7 million for the three months ended March 31, 2023 to $6.0 million compared to $6.7 million for the corresponding fiscal period in 2022.

The decrease in operating expenses was primarily due to the change in fair value of contingent consideration of $1.2 million in 2022, as well as slightly lower general and administrative expenses in 2022 due to various cost cutting measures and efficiencies in fully absorbing all of our brands.

The decrease was partially offset by $0.5 million in general and administrative expenses in 2023 based on shares issued to employees.

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

Other Income (Expenses)

Other income/expenses increased by $1.3 million to $2.3 million in the three months ended September 30, 2022 compared to other expenses of $1.0 million in the corresponding fiscal period in 2021.

The increase in other expenses in 2022 was primarily due to the amortization of debt discount and interest expense on the Company’s outstanding notes.

Our net loss decreased by $4.

million to a loss of $4.9 million for the three months ended September 30, 2022 compared to a loss of $8.9 million for the corresponding fiscal period in 2021 primarily due to less operating expenses driven by the change in fair value of contingent consideration.

Nine months Ended September 30, 2022 compared to Three Months Ended September 30, 2021

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

Nine Months Ended

September 30,

Cost of net revenues

General and administrative

Sales and marketing

Other operating expenses

Operating loss

Other expenses

Loss before provision for income taxes

Provision for income taxes

Revenues increased by $7.0 million to $10.6 million for the nine months ended September 30, 2022, compared to $3.6 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 $3.9 million for the nine months ended September 30, 2022 to $5.3 million from a gross profit of $1.4 million for the corresponding fiscal period in 2021.

The increase in gross margin was primarily attributable to increased revenue in the nine months ended September 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 50.0% for nine months ended September 30, 2022 compared to 39.1% for the nine months ended September 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 $1.6 million for the nine months ended September 30, 2022 to $24.1 million compared to $22.5 million for the corresponding fiscal period in 2021.

The increase in operating expenses was primarily due to increased general and administrative and marketing expenses due to full scale operations of all subsidiaries in 2022.

Other Income (Expenses)

Other expenses increased by $0.8 million to $3.4 million in the nine months ended September 30, 2022 compared to other expenses of $2.7 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 nine months ended September 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.

Other income/expenses was $2.6 and $2.3 million for the three months ended March 31, 2023 and 2022, respectively.

Other expense includes interest expense, consisting of interest on outstanding loans and amortization of debt discount, loss on extinguishment of debt in 2023 and change in fair value of derivative liability in 2022.

Our net loss decreased by $1.7 million to a loss of $6.1 million for the three months ended March 31, 2023 compared to a loss of $7.8 million for the corresponding fiscal period in 2022 primarily due to higher gross profit resulting from our Sundry acquisition and less operating expenses driven by the change in fair value of contingent consideration.

Liquidity and Capital Resources

Each of DBG, Bailey, H&J and Stateside has historically funded operations with internally generated cash flow and borrowings and capital raises.

Each of DBG, Bailey, H&J, Stateside and Sundry has historically funded operations with internally generated cash flow and borrowings and capital raises.

Changes in working capital, most notably accounts receivable, are driven primarily by levels of business activity.

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 September 30, 2022, we had cash of $195,399, but we had a working capital deficit of $40.7 million.

Historically each of DBG, Bailey, H&J, Stateside and Sundry 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, 2023, we had cash of $2.0 million, but we had a working capital deficit of $31.2 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 its business plans or file for bankruptcy protection.

On May 10, 2022, the Company sold 373,898 shares of its common stock pursuant to a Registration Statement on Form S-1 and related prospectus at a public offering price of $2.50 per share.

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

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

Cash Flow Activities

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

Nine Months Ended

September 30,

The following table presents selected captions from our condensed statement of cash flows for the three months ended March 31, 2023 and 2022:

Three Months Ended

Net cash provided by operating activities:

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Net cash used in operating activities

Net cash used in investing activities

Net cash provided by (used in) investing activities

Net cash provided by financing activities

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Cash Flows Used In Operating Activities

Our cash used by operating activities decreased by $2.6 million to cash used of $8.9 million for the nine months ended September 30, 2022 as compared to cash used of $11.5 million for the corresponding fiscal period in 2021.

The decrease in net cash used in operating activities was primarily driven by changes in our operating assets and liabilities in 2022.

Our cash used by operating activities increased by $1.1 million to cash used of $1.7 million for the three months ended March 31, 2023 as compared to cash used of $0.6 million for the corresponding fiscal period in 2022.

The increase in net cash used in operating activities was primarily driven by changes in our operating assets and liabilities, partially offset by a lower net loss in 2023.

Cash Flows Provided By Investing Activities

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

Our cash provide by investing activities was $87,379 in 2023 due to return of deposits.

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

Cash Flows Provided by Financing Activities

Cash provided by financing activities was $8.4 million for the nine months ended September 30, 2022, compared to $16.7 million for the corresponding fiscal period in 2021.

Cash inflows in the nine months ended September 30, 2022 were primarily related to $7.3 million in equity proceeds after offering costs, $3.8 million from convertible notes and loans, partially offset by note repayments of $3.1 million.

Cash inflows in the nine months ended September 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, exercises of warrants of $1.8 million and proceeds from convertible notes payable of $5.1 million, partially offset by loan and note repayments of $2.0 million.

Cash provided by financing activities was $2.3 million for the three months ended March 31, 2023.

Cash inflows included $4.3 million in net proceeds from the January Private Transaction, $3.5 million in proceeds from loans and promissory notes and $0.2 million in advances from the factor.

Cash provided by financing activities was $0.7 million for the three months ended March 31, 2022.

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.

Contractual Obligations and Commitments

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.

The loan bears interest at 12.5% per annum, compounded monthly, including fees.

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.

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

As of September 30, 2022 we have $9.9 million in outstanding principal pertaining to our convertible notes which mature in various dates through 2023.

As of March 31, 2023, we have a $13.6 million in outstanding principal on debt, primarily our promissory notes due to the Bailey44 and Sundry Sellers, the March 2023 Notes, PPP and merchant advances.

Aside from our remaining non-current SBA obligations, all outstanding loans have maturity dates through 2024.

Critical Accounting Policies and Estimates

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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