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Item 2. Management’s Discussion and Analysis

2023-08-21 compared with 2023-05-22 · 75 added, 41 removed, 136 unchanged (46% of the section changed)

12 unchanged sentences

Business Overview

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.

Recent Developments

We have filed a definitive proxy statement for a special meeting of stockholders scheduled for August 21, 2023 seeking stockholder approval to effectuate a reverse stock split of the Company’s outstanding common stock at an exchange ratio between 1-for-2.5 and 1-for-50, as determined by the Company’s Board of Directors.

The purpose of the reverse split would be to achieve the requisite increase in the market price of our common stock to be in compliance with the minimum bid price of Nasdaq.

Should the Company’s stockholders fail to approve the reverse stock split at the aforementioned meeting, it is substantially likely that the Company’s common stock and public warrants would be delisted from Nasdaq.

On June 21, 2023, Digital Brands Group, Inc.

(the “Company”) and John Hilburn Davis IV (collectively, the “DBG Parties”), on the one hand, and Drew Jones (“Jones”), D.

Jones Tailored Collection, Ltd.

Jones”), and Harper & Jones, LLC (“H&J” and collectively with Jones, D.

Jones, the “Jones Parties” and together with DBG Parties, the “Parties”) executed a Settlement Agreement and Release (the “Settlement Agreement”) whereby contemporaneously with the Parties’ execution of the Settlement Agreement (i) the Company made aggregate cash payment of $229,000 to D.

Jones, (ii) the Company issued 1,952,580 shares of the Company’s common stock, par value $0.0001 (the “Common Stock”), to D.

Jones, at a per share purchase price of $0.717 which represented the lower of (i) the closing price per share of the Common Stock as reported on The Nasdaq Capital Market (the “Nasdaq”) on June 20, 2023, and (ii) the average closing price per share of Common Stock as reported on the Nasdaq for the five trading days preceding June 21, 2023, and (iii) the Company assigned and transferred one hundred percent (100%) of the Company’s membership interest in H&J to D.

The HJ Settlement was accounted for a business disposition in accordance with ASC 810-40-40-3A.

As of June 21, 2023, the Company no longer consolidated the assets, liabilities, revenues and expenses of H&J.

Digital Brands Group is a curated collection of lifestyle brands, including Bailey 44, DSTLD, 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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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.

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

Harper & Jones is primarily a direct-to-consumer brand using its own showrooms.

● Stateside is an elevated, America first brand with all knitting, dyeing, cutting and sewing sourced and manufactured locally in Los Angeles.

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The higher our closet share, the higher our revenue as higher closet share suggests the customer is purchasing more of our brands than our competitors.

We have strategically expanded into an omnichannel brand offering these styles and content not only on-line but at selected wholesale and retail storefronts.

We have strategically expanded into an omni channel brand offering these styles and content not only on-line but at selected wholesale and retail storefronts.

We believe this approach allows us opportunities to successfully drive Lifetime Value (“LTV”) while increasing new customer growth.

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

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

Stateside and Sundry sell its products directly to customers.

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and inbound freight.

H&J’s cost of net revenue sold is associated with procuring fabric and custom tailoring each garment.

Operating Expenses

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Results of Operations

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 June 30, 2023 compared to Three Months Ended June 30, 2022

The following table presents our results of operations for the three months ended June 30, 2023 and 2022:

Three Months Ended

4 unchanged sentences

Operating loss

Other expenses

Other income (expenses)

Loss before provision for income taxes

Provision for income taxes

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.

Net income (loss) from continuing operations

Revenues increased by $1.8 million to $4.5 million for the three months ended June 30, 2023, compared to $2.7 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.

Our gross profit increased by $1.2 million for the three months ended June 30, 2023 to $2.3 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 six months ended June 30, 2023 and the gross profit achieved by Sundry since the acquisition.

Our gross margin was 52.0% for three months ended June 30, 2023 compared to 42.0% for the three months ended June 30, 2022.

The increase in gross margin was due to a shift in sales mix towards e-commerce, led by the Sundry business, which is able to achieve higher margins than wholesale.

Operating Expenses

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.

Our operating expenses decreased by $17.0 million for the three months ended June 30, 2023 to a $5.3 million gain compared to $11.8 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 $16.6 million.

General and administrative expenses decreased by $0.2 million due to lower consulting and professional fees.

Sales and marketing expenses decreased by $0.3 million due to decreased spending on advertising and other cost-cutting marketing efforts.

Other Income (Expenses)

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.

Other income (expense) was ($1.1) million and $1.2 million for the three months ended June 30, 2023 and 2022, respectively.

In 2023, the Company had less interest expense due to less outstanding notes.

In 2022, other income was driven by the change in fair value of derivative liability in 2022.

Net Loss from Continuing Operations

Our net loss from continuing operations decreased by $16.0 million to a net income from continuing operations of $6.5 million for the three months ended June 30, 2023 compared to a loss from continuing operations of $9.5 million for the corresponding fiscal period in 2022, primarily due to the change in fair value of contingent consideration, higher gross profit and lower operating expenses, partially offset by other expenses.

Six Months Ended June 30, 2023 compared to Six Months Ended June 30, 2022

The following table presents our results of operations for the six months ended June 30, 2023 and 2022:

Six Months Ended

Cost of net revenues

General and administrative

Sales and marketing

Other operating expenses (income)

Operating loss

Other income (expenses)

Loss before provision for income taxes

Provision for income taxes

Net income (loss) from continuing operations

Revenues increased by $3.6 million to $8.9 million for the six months ended June 30, 2023, compared to $5.3 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 $2.6 million for the six months ended June 30, 2023 to $4.3 million from a gross profit of $1.7 million for the corresponding fiscal period in 2022.

The increase in gross margin was primarily attributable to increased revenue in the six months ended June 30, 2023 and the gross profit achieved by Sundry since the acquisition, as well as increasing margins across all entities.

Our gross margin was 48.8% for the six months ended June 30, 2023 compared to 32.7% for the six months ended June 30, 2022.

The increase in gross margin was due to a shift in sales mix towards e-commerce, led by the Sundry business, which is able to achieve higher margins than wholesale, as well as heavy discounting in the first quarter of 2022.

Operating Expenses

Our operating expenses decreased by $17.6 million for the six months ended June 30, 2023 to $0.2 compared to $17.8 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 $17.8 million.

General and administrative expenses increased by $0.3 million primarily due to Sundry’s operations.

Sales and marketing expenses decreased by $0.2 million due to decreased spending on advertising and other cost-cutting marketing efforts.

Through the second quarter of 2023, we were able to obtain and efficiencies in fully absorbing all of our brands.

Other Income (Expenses)

Other expenses was $3.6 million and $1.1 million for the six months ended June 30, 2023 and 2022, respectively.

In 2023, the Company had less interest expense due to less outstanding notes.

In 2022, other expense was offset by a gain due to the change in fair value of derivative liability in 2022.

Net Loss from Continuing Operations

Our net loss from continuing operations decreased by $17.7 million to income of $0.5 million for the six months ended June 30, 2023 compared to a loss of $17.2 million for the corresponding fiscal period in 2022, primarily due to the change in fair value of contingent consideration, higher gross profit and lower operating expenses, partially offset by other expenses.

Liquidity and Capital Resources

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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.

As of June 30, 2023, we had cash of $0.3 million, but we had a working capital deficit of $16.0 million.

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

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Cash Flow Activities

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

The following table presents selected captions from our condensed statement of cash flows for the six months ended June 30, 2023 and 2022:

Six Months Ended

Net cash provided by operating activities:

2 unchanged sentences

Net cash used in operating activities

Net cash provided by (used in) investing activities

Net cash provided by investing activities

Net cash provided by financing activities

1 unchanged sentence

Cash Flows Used In Operating Activities

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.

Our cash used by operating activities decrease by $3.6 million to cash used of $3.0 million for the six months ended June 30, 2023 as compared to cash used of $6.6 million for the corresponding fiscal period in 2022.

The increase in net cash used in operating activities was primarily driven by the lower net loss and changes in our operating assets and liabilities, partially offset by non-cash adjustments.

Cash Flows Provided By Investing Activities

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.

Our cash provide by investing activities was $41,331 in 2023 primarily due to a reduction of deposits, partially offset by purchase of property and cash sold in the H&J disposition.

Cash Flows Provided by Financing Activities

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

Cash provided by financing activities was $2.0 million for the six months ended June 30, 2023.

Cash inflows included $4.3 million in net proceeds from the January Private Transaction, $4.2 million in proceeds from loans and promissory notes and $4.3 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.

Cash provided by financing activities was $6.9 million for the six months ended June 30, 2022.

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.

Contractual Obligations and Commitments

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.

As of June 30, 2023, we have a $7.6 million in outstanding principal on debt, primarily our promissory notes due to the Bailey44 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.

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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