Digital Brands Group, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS DIGITAL BRANDS GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, December 31, 2026 2025 ASSETS Current assets: Cash and cash equivalents $ 5,120,371 $ 1,934,831 Restricted cash - 5,744,174 Accounts receivable, net 214,017 153,983 Due from factor, net 188,426 273,437 Inventory 3,546,404 3,136,660 Prepaid expenses and other current assets 10,273,379 9,372,958 Total current assets 19,342,597 20,616,043 Property, equipment and software, net 214,873 15,736 Right of use asset 4,123,037 - Goodwill 5,788,445 5,788,445 Intangible assets, net 4,353,515 4,494,871 Deposits 222,831 82,331 Prepaid marketing expenses 13,273,867 13,491,954 Total assets $ 47,319,165 $ 44,489,380 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 6,623,673 $ 6,270,892 Accrued expenses and other liabilities 5,649,147 5,561,491 Due to related parties 370,921 370,921 Accrued interest payable 2,911,332 2,787,506 Loan payable, current 2,556,888 2,624,749 Stock payable 5,227,035 4,951,128 Promissory note payable 3,500,000 3,500,000 Total current liabilities 26,838,996 26,066,687 Share based payment liability 12,462,887 9,405,699 Right of use liability 4,189,735 - Deferred tax liability 248,990 248,990 Total liabilities 43,740,608 35,721,376 Commitments and contingencies (Note 13) - - Stockholders’ equity: Undesignated preferred stock, $ 0.0001 par, 10,000,000 shares authorized, 0 shares issued and outstanding as of both March 31, 2026 and December 31, 2025 - - Series A convertible preferred stock, $ 0.0001 par, 6,300 shares designated, 6,300 shares issued and outstanding as of both March 31, 2026 and December 31, 2025 1 1 Series C convertible preferred stock, $ 0.0001 par, 1,344 shares issued and outstanding as of both March 31, 2026 and December 31, 2025, respectively 1 1 Series D convertible preferred stock, $ 0.0001 par, 14,656 and 15,906 shares issued and outstanding as of March 31, 2026 and December 31, 2025, respectively 2 2 Preferred stock value 2 2 Common stock, $ 0.0001 par, 1,000,000,000 shares authorized, 15,091,800 and 8,788,335 shares issued and outstanding as of March 31, 2026 and December 31, 2025, respectively 1,509 879 Common stock to be issued 2,428,737 - Additional paid-in capital 167,893,936 164,120,717 Accumulated deficit ( 166,745,629 ) ( 155,353,596 ) Total stockholders’ equity 3,578,557 8,768,004 Total liabilities and stockholders’ equity $ 47,319,165 $ 44,489,380 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 4 DIGITAL BRANDS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 2026 2025 Three Months Ended March 31, 2026 2025 Net revenues $ 1,315,984 $ 1,871,701 Cost of net revenues 1,270,603 999,246 Gross profit 45,381 872,455 Operating expenses: General and administrative 2,572,284 1,973,803 Sales and marketing 4,752,255 828,788 Distribution 139,974 66,424 Total operating expenses 7,464,513 2,869,015 Loss from operations ( 7,419,132 ) ( 1,996,560 ) Other income (expense): Change in fair value of share based payment liability ( 3,871,454 ) - Interest expense ( 123,826 ) ( 134,923 ) Other non-operating income 22,379 41,573 Total other income (expense), net ( 3,972,901 ) ( 93,350 ) Income tax benefit (provision) - - Net loss $ ( 11,392,033 ) $ ( 2,089,910 ) Weighted average common shares outstanding - basic and diluted 10,703,563 2,278,447 Net loss per common share - basic and diluted $ ( 1.06 ) $ ( 0.92 ) The accompanying notes are an integral part of these financial statements 5 DIGITAL BRANDS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED) Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit) Series A Convertible Series C Convertible Series D Convertible Common Stock to Additional Total Stockholders’ Preferred Stock Preferred Stock Preferred Stock Common Stock be issued Paid-in Accumulated Equity Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit) Balances at December 31, 2024 6,300 $ 1 4,786 $ 1 - $ - 838,584 $ 83 - $ - $ 125,772,412 $ ( 127,101,038 ) $ ( 1,328,541 ) Issuance of pre-funded warrants in connection with vendor agreement - - - - - - - - 3,000,000 - 3,000,000 Issuance of common stock and pre-funded warrants pursuant to private placement offering - 125,535 13 - - 6,642,420 6,642,433 Exercise of pre-funded warrants in connection with private placement offering - - - - - - 3,182,375 318 - - ( 318 ) - - Net loss - - - - - - - - - - - ( 2,089,910 ) ( 2,089,910 ) Balances at March 31, 2025 6,300 $ 1 4,786 $ 1 - $ - 4,146,494 $ 414 - $ - 135,414,514 $ ( 129,190,948 ) $ 6,223,982 Balances at December 31, 2025 6,300 $ 1 1,344 $ 1 15,906 $ 2 8,788,335 $ 879 - $ - $ 164,120,717 $ ( 155,353,596 ) $ 8,768,004 Balance 6,300 $ 1 1,344 $ 1 15,906 $ 2 8,788,335 $ 879 - - $ 164,120,717 $ ( 155,353,596 ) $ 8,768,004 Exercise of cash warrants in connection with private placement offering - - - - - - 4,464,604 446 - - 2,946,381 - 2,946,827 Extinguishment of share based payment liability- Buffalo Sport LLC - - - - - - - - - - 814,266 - 814,266 Common stock to be issued pursuant to pre-funded warrant exercises - - - - - - - - 4,897,905 2,428,737 - - 2,428,737 Exercise of pre-funded warrants pursuant to service contract - - - - - - 1,275,577 128 - - 12,628 - 12,756 Conversion of Series D preferred stock into common stock - - - - ( 1,250 ) - 563,284 56 - - ( 56 ) - - Net loss - - - - - - - - - - - ( 11,392,033 ) ( 11,392,033 ) Balances at March 31, 2026 6,300 $ 1 1,344 $ 1 14,656 $ 2 15,091,800 $ 1,509 4,897,905 $ 2,428,737 $ 167,893,936 $ ( 166,745,629 ) $ 3,578,557 Balance 6,300 $ 1 1,344 $ 1 14,656 $ 2 15,091,800 $ 1,509 4,897,905 $ 2,428,737 $ 167,893,936 $ ( 166,745,629 ) $ 3,578,557 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 6 DIGITAL BRANDS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 2026 2025 Three Months Ended March 31, 2026 2025 Cash flows from operating activities: Net loss $ ( 11,392,033 ) $ ( 2,089,910 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 145,650 418,225 Amortization of loan discount and fees - 11,124 Change in fair value of share based payment liability 3,871,454 - Non-cash lease expense 138,989 - Changes in operating assets and liabilities: Accounts receivable, net ( 60,034 ) ( 6,070 ) Due from factor 85,011 84,121 Inventory ( 409,744 ) ( 429,662 ) Prepaid expenses and other current assets 2,417,666 ( 2,339,982 ) Accounts payable 352,779 ( 417,781 ) Accrued expenses and other liabilities 87,656 262,588 Accrued interest payable 123,826 - Lease liabilities ( 72,290 ) - Net cash used in operating activities ( 4,711,070 ) ( 4,507,347 ) Cash flows from investing activities: Purchase of property, equipment and software ( 119,975 ) - Deposits ( 140,500 ) - Net cash provided by investing activities ( 260,475 ) - Cash flows from financing activities: Issuance of loans and note payable - 100,000 Repayments of loan payable ( 151,316 ) ( 155,376 ) Proceeds of issuance of Series D preferred stock, net of issuance costs - 6,642,433 Proceeds from exercise of warrants 2,564,227 - Net cash provided by financing activities 2,412,911 6,587,057 Net change in cash, cash equivalents, and restricted cash ( 2,558,634 ) 2,079,710 Cash, cash equivalents, and restricted cash at beginning of period 7,679,005 164,431 Cash, cash equivalents, and restricted cash at end of period $ 5,120,371 $ 2,244,141 Supplemental disclosure of cash flow information: Cash paid for income taxes $ - $ - Cash paid for interest $ - $ 47,000 Supplemental disclosure of non-cash investing and financing activities: Issuance of common stock as a reduction to stock payable $ 2,758,800 $ - Prepaid marketing services recognized as stock payable $ 3,100,000 $ - Common stock to be issued pursuant to pre-funded warrant exercise $ 2,428,737 $ - Purchase of vehicle with debt $ 83,456 $ - Reclassification of share based payment liability to equity $ 814,266 $ - Recognition of right-of-use asset $ 4,120,769 $ - Noncash prepaid vendor agreement $ - $ 3,000,000 Noncash issuance of shares $ - $ 318 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 7 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 NOTE 1: NATURE OF OPERATIONS Digital Brands Group, Inc. (the “Company”) was organized on September 17, 2012 and is a portfolio company of apparel brands, including Bailey 44, Stateside and Sundry. The Company completed the acquisitions of Bailey 44 in February 2020, Stateside in August 2021 and Sundry in December 2022. NOTE 2: LIQUIDITY The Company has not generated profits since inception and has sustained net losses of $ 11,392,033 and $ 2,089,910 for the three months ended March 31, 2026 and 2025, respectively. The Company also incurred negative cash flow from operations for the three months ended March 31, 2026. Historically, the Company has lacked sufficient liquidity to satisfy obligations as they come due and, as of March 31, 2026, reported a working capital deficit of $ 7,496,399 . The Company expects to continue to generate operating losses for the foreseeable future. The accompanying consolidated financial statements do not include any adjustments as a result of this uncertainty. 8 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 Through the date these financial statements were available to be issued, the Company has been primarily financed through the issuance of capital stock and debt. In the event that the Company cannot generate sufficient revenue to sustain its operations, the Company will need to reduce expenses, which it has done, or obtain financing through the sale of debt and/or equity securities, which it has done. The issuance of additional equity would result in dilution to existing shareholders. If the Company is unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable to the Company, the Company would be unable to execute upon the business plan or pay costs and expenses as they are incurred, which would have a material, adverse effect on the business, financial condition and results of operations. While the Company has several potential sources of cash including cash warrants that are registered and exercisable that are in the money, the ability to initiate an at-the-market (“ATM”) offering under its current shelf registration statement, no assurance can be given that the Company will be successful in these efforts. Management’s Plans On April 15, 2026, the Company entered into an At-the-Market Issuance Sales Agreement with Aegis Capital Corp., pursuant to which the Company may offer and sell, from time to time, shares of its common stock having an aggregate offering price of up to $ 100.0 million under the Company’s effective shelf registration statement on Form S-3. The Company intends to utilize the At-the-Market facility, together with other potential financing transactions, as a source of future liquidity and working capital. As of May 20, 2026, the date of issuance of these unaudited condensed consolidated financial statements, the Company had cash and cash equivalents of approximately $ 5.1 million as of March 31, 2026. During the three months ended March 31, 2026, the Company used approximately $ 5.0 million of cash in operating activities and continues to evaluate additional sources of liquidity to support ongoing operations and satisfy its debt obligations. Throughout the next twelve months, the Company intends to fund its operations from the funds raised through equity offerings, including at-the-market equity financings, further warrant exercises or other public or private equity offerings. Additionally, the Company intends to fund operations from increased revenues due to its new marketing efforts, including its collegiate apparel program and increased wholesale pricing, through settlement and renegotiation of aged payables, conversions of outstanding debt and accrued interest, continuing its cost-cutting measures implemented during 2025 and the three months ended March 31, 2026. Management believes that the Company’s existing cash balances, together with anticipated proceeds from future financing activities and operational improvement initiatives, may provide sufficient liquidity to support operations for at least the next twelve months from the date of issuance of these unaudited condensed consolidated financial statements. However, there can be no assurance that the Company will be successful in obtaining additional financing or achieving its operational objectives. If the Company is unable to obtain additional financing or improve operating cash flows, the Company may be required to modify, delay or reduce certain operating and strategic initiatives. NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited condensed financial statements included herein contain all adjustments necessary to present fairly the Company’s financial position and the results of its operations and cash flows for the period presented. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and the notes to those statements for the year ended December 31, 2025 included in the Company’s Annual Report on Form 10-K filed with the SEC on April 15, 2026. 9 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 Principles of Consolidation These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries (Bailey, Stateside and Sundry). All inter-company transactions and balances have been eliminated on consolidation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Equivalents and Concentration of Credit Risk The Company considers all highly liquid securities with an original maturity of less than three months to be cash equivalents. As of March 31, 2026 and December 31, 2025, the Company did not hold any cash equivalents. The Company’s cash and cash equivalents in bank deposit accounts, at times, may exceed federally insured limits of $ 250,000 . Prepaid Marketing Expenses and Liability-Classified Share-Based Awards The Company enters into long-term marketing, licensing, manufacturing, and sponsorship arrangements with third-party service providers under which it may issue common stock or equity-linked instruments in exchange for future services, including distribution, licensing access, product specification support, and marketing and promotional activities. These arrangements are accounted for as share-based payments to nonemployees in accordance with ASC 718, Compensation—Stock Compensation. Where share-based consideration is determined to be in exchange for distinct goods or services, including those received from a customer, the Company accounts for such transactions as the purchase of services. The Company recognizes a prepaid marketing or service asset measured at the grant-date fair value of the share-based consideration issued, representing the value of services to be received over the contractual term. Such prepaid assets are amortized on a straight-line basis over the period in which the related services are received, which generally corresponds to the contractual service period. Certain share-based arrangements include make-whole provisions that require the Company to deliver a fixed monetary value using a variable number of shares, or, in certain cases, cash. These provisions result in liability classification under ASC 718 and ASC 480, Distinguishing Liabilities from Equity, as the Company has an obligation to settle a fixed dollar amount rather than a fixed number of shares. Liability-classified share-based awards are initially measured at fair value on the grant date and subsequently remeasured at fair value at each reporting date until settlement. Changes in fair value are recognized in earnings in the period of change. Compensation cost is recognized over the requisite service period, with cumulative adjustments recorded for changes in fair value. The Company evaluates features within these arrangements, including make-whole provisions, under ASC 815, Derivatives and Hedging, to determine whether such features should be accounted for separately as derivatives. The Company has concluded that these features qualify for the scope exception applicable to share-based payment arrangements and therefore are not accounted for as freestanding or embedded derivatives. Accordingly, no bifurcation is required. The fair value of liability-classified share-based awards is estimated using a Monte Carlo simulation model. This valuation technique incorporates significant assumptions, including the Company’s stock price, expected volatility, risk-free interest rate, expected term, and other market-based inputs. Due to the use of significant unobservable inputs, these measurements are classified within Level 3 of the fair value hierarchy. Separately, certain contractual marketing investment commitments represent best-efforts obligations and do not create a present obligation or identifiable asset. Accordingly, such costs are expensed as incurred in accordance with ASC 720, Advertising Costs. 10 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 Fair Value of Financial Instruments The Company measures certain assets and liabilities at fair value on a recurring basis in accordance with ASC 820, Fair Value Measurement. ASC 820 establishes a three-level hierarchy that prioritizes the inputs used in valuation techniques: Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data. Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement. These inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. The Company’s only recurring fair value measurements are its share-based payment liabilities arising from the make-whole provisions in the collegiate apparel agreements. These are classified as Level 3, as their valuation relies on significant unobservable inputs that are significant to the overall fair value measurement. Specifically, the expected stock price volatility is estimated from the Company’s own historical stock price data; because the Company does not have actively traded options or other instruments from which implied volatility could be observed, this input is unobservable. Under ASC 820-10-35-52, an instrument is classified based on the lowest level input that is significant to the fair value measurement. Changes in fair value are recognized in earnings each reporting period. See Note 8. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and short-term debt approximate fair value due to their short-term nature. The carrying value of the Company’s long-term SBA loan approximates fair value as the interest rate is fixed at a rate commensurate with current market rates for similar instruments. Accounts Receivable and Expected Credit Loss We carry our accounts receivable at invoiced amounts less allowances for customer credit losses and other deductions to present the net amount expected to be collected on the financial asset. All receivables are expected to be collected within one year of the consolidated balance sheet. We do not accrue interest on the trade receivables. Management evaluates the ability to collect accounts receivable based on a combination of factors. Receivables are determined to be past due based on individual credit terms. An allowance for credit losses is maintained based on the length of time receivables are past due, historical collections, or the status of a customer’s financial position. Receivables are written off in the year deemed uncollectible after efforts to collect the receivables have proven unsuccessful. We do not have any off-balance sheet credit exposure related to our customers. We periodically review accounts receivable, estimate an allowance for bad debts, and simultaneously record the appropriate expense in the statements of operations. Such estimates are based on general economic conditions, the financial conditions of customers, and the amount and age of past due accounts. Past due accounts are written off against that allowance only after all collection attempts have been exhausted and the prospects for recovery are remote. Recoveries of accounts receivable previously written off are recorded as income when received. The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. As of March 31, 2026, and December 31, 2025, the Company determined an allowance for credit losses of $ 308,460 and $ 307,526 , respectively. Inventory Inventory is stated at the lower of cost or net realizable value and accounted for using the weighted average cost method for the Company’s DSTLD brand and first-in, first-out method for Bailey, Stateside and Sundry. The inventory balances as of March 31, 2026, and December 31, 2025 consist substantially of finished good products purchased or produced for resale, as well as any raw materials the Company purchased to modify the products and work in progress. 11 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 Inventory consisted of the following: SCHEDULE OF INVENTORY March 31, December 31, 2026 2025 Raw materials $ 81,352 $ 585,609 Work in process 725,053 999,366 Finished goods 2,739,999 1,551,685 Inventory $ 3,546,404 $ 3,136,660 Property, Equipment, and Software Property, equipment, and software are recorded at cost. Depreciation/amortization is recorded for property, equipment, and software using the straight-line method over the estimated useful lives of assets. The Company reviews the recoverability of all long-lived assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable. The balances at March 31, 2026 and December 31, 2025 consist of software with three 3 year lives, property and equipment with three 3 to 10 year lives, and leasehold improvements which are depreciated over the shorter of the lease life or expected life. Depreciation and amortization charges on property, equipment, and software are included in general and administrative expenses and amounted to $ 4,294 and $ 1,685 for the three months ended March 31, 2026 and 2025. Business Combinations The Company accounts for acquisitions in which it obtains control of one or more businesses as a business combination. The purchase price of the acquired businesses is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the purchase price over those fair values is recognized as goodwill. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments, in the period in which they are determined, to the assets acquired and liabilities assumed with the corresponding offset to goodwill. If the assets acquired are not a business, the Company accounts for the transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase. Goodwill represents the excess of the purchase price of an acquired entity over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Intangible assets are established through business combinations and asset acquisitions. Technology assets are acquired through asset acquisitions, while brand names and customer relationships are primarily recognized in connection with business combinations. Intangible assets with finite lives are recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives using the straight-line method. The estimated useful lives of amortizable intangible assets are as follows: SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS ACQUIRED AS PART OF BUSINESS COMBINATION Customer relationships 3 years Technology assets 3 years 12 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 Impairment Long-Lived Assets The Company reviews its long-lived assets (property and equipment and amortizable intangible assets) for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. Goodwill Goodwill and identifiable intangible assets that have indefinite useful lives are not amortized, but instead are tested annually for impairment and upon the occurrence of certain events or substantive changes in circumstances. The annual goodwill impairment test allows for the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An entity may choose to perform the qualitative assessment on none, some or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit and proceed directly to step one of the quantitative impairment test. If it is determined, on the basis of qualitative factors, that the fair value of a reporting unit is, more likely than not, less than its carrying value, the quantitative impairment test is required. The quantitative impairment test calculates any goodwill impairment as the difference between the carrying amount of a reporting unit and its fair value, but not to exceed the carrying amount of goodwill. It is our practice, at a minimum, to perform a qualitative or quantitative goodwill impairment test in the fourth quarter at every year end on December 31st. Indefinite-Lived Intangible Assets Indefinite-lived intangible assets established in connection with business combinations consist of the brand name. The impairment test for identifiable indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Convertible Instruments U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional as that term is described under applicable U.S. GAAP. 13 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. The Company also records, when necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares. Accounting for Preferred Stock ASC 480, Distinguishing Liabilities from Equity, includes standards for how an issuer of equity (including equity shares issued by consolidated entities) classifies and measures on its balance sheet certain financial instruments with characteristics of both liabilities and equity. Management is required to determine the presentation for the preferred stock as a result of the redemption and conversion provisions, among other provisions in the agreement. Specifically, management is required to determine whether the embedded conversion feature in the preferred stock is clearly and closely related to the host instrument, and whether the bifurcation of the conversion feature is required and whether the conversion feature should be accounted for as a derivative instrument. If the host instrument and conversion feature are determined to be clearly and closely related (both more akin to equity), derivative liability accounting under ASC 815, Derivatives and Hedging, is not required. Management determined that the host contract of the preferred stock is more akin to equity, and accordingly, liability accounting is not required by the Company. The Company has presented preferred stock within stockholders’ equity. Costs incurred directly for the issuance of the preferred stock are recorded as a reduction of gross proceeds received by the Company, resulting in a discount to the preferred stock. The discount is not amortized. Revenue Recognition In accordance with FASB ASC 606, Revenue from Contracts with Customers¸ the Company determines revenue recognition through the following steps: ● Identification of a contract with a customer; ● Identification of the performance obligations in the contract ● Determination of the transaction price ● Allocation of the transaction price to the performance obligations in the contract, and ● Recognition of revenue when or as the performance obligations are satisfied Revenue is recognized when performance obligations are satisfied through the transfer of control of promised goods to the Company’s customers in an amount that reflects the consideration expected to be received in exchange for transferring goods or services to customers. Control transfers once a customer has the ability to direct the use of, and obtain substantially all of the benefits from, the product, upon shipment of product. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance. The Company derives its revenue primarily from wholesale and e-commerce transactions. For both channels, revenue is recognized at the time the product is shipped to the customer, which is the point in time when control is transferred. The Company considers the sale of products as a single performance obligation. For the Company’s licensing agreement via Bailey44, the Company recognizes royalty revenue on a monthly basis over the term of the license agreement. 14 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 The Company provides the customer the right of return on the product and revenue is adjusted based on an estimate of the expected returns based on historical rates. The Company deducts discounts, sales tax, and estimated refunds to arrive at net revenue. Sales tax collected from clients is not considered revenue and is included in accrued expenses until remitted to the taxing authorities. Shipping and handling fees charged to customers are included in net revenues. All shipping and handling costs are accounted for as distribution expenses, and are therefore not evaluated as a separate performance obligation. University Collegiate Apparel Revenue Starting in 2025, the Company generates revenue through its collegiate apparel agreements with AAA Tuscaloosa, LLC, Traffic Holdco, LLC, The Grove Collective, LLC, and Buffalo Sports Properties / Learfield. Revenue is recognized through two channels: (i) university store consignment, under which products are shipped to university campus bookstores and revenue is recognized based on actual sales reported by the store, and (ii) university online direct-to-consumer, under which revenue is recognized based on Shopify sales data from each university’s dedicated online portal when products are sold to end customers. In both cases, products are placed with the counterparty on consignment and the Company recognizes revenue only when a sale to an end consumer has occurred, consistent with ASC 606-10-55-37. Revenue from university channels is tracked separately in dedicated receivable accounts. Cost of Revenues Cost of revenues consists primarily of inventory sold and related freight-in. Cost of revenues includes direct labor pertaining to our inventory production activities and an allocation of overhead costs including rent and insurance. Shipping and Handling The Company recognizes shipping and handling billed to customers as a component of net revenues, and the cost of shipping and handling as distribution costs. Total shipping and handling billed to customers as a component of net revenues was approximately $ 12,975 and $ 17,654 for the three months ended March 31, 2026 and 2025, respectively. Total shipping and handling costs included in distribution costs were $ 139,974 and $ 66,424 , respectively. Advertising and Promotion Advertising and promotional costs are expensed as incurred. Advertising and promotional expense for the three months ended March 31,2026 and 2025 amounted to approximately $ 72,646 and $ 102,853 , respectively. The amounts are included in sales and marketing expense. General and Administrative General and administrative expenses consist primarily of compensation and benefits costs, professional services and information technology. General and administrative expenses also include payment processing fees, design and warehousing fees. Common Stock Purchase Warrants and Other Derivative Financial Instruments The Company accounts for derivative instruments in accordance with ASC 815, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedging relationships and the types of relationships designated are based on the exposures hedged. At March 31, 2026 and December 31, 2025, the Company did not have any derivative instruments that were designated as hedges. Stock Option and Warrant Valuation Stock option and warrant valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model. For warrants and stock options issued to non- employees, the Company accounts for the expected life based on the contractual life of the warrants and stock options. For employees, the Company accounts for the expected life of options in accordance with the “simplified” method, which is used for “plain-vanilla” options, as defined in the accounting standards codification. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of options grants. The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options. The Company recognizes forfeitures as they occur. Stock-Based Compensation The Company accounts 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 an expense over the employee’s requisite vesting period and over the nonemployee’s period of providing goods or services. 15 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 The Company measures employee stock-based awards at grant-date fair value and recognizes employee compensation expense on a straight-line basis over the vesting period of the award. Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for stock options, the expected life of the option, and expected stock price volatility. The Company used the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards. Segment Information In accordance with ASC 280, Segment Reporting, we identify our operating segments according to how our business activities are managed and evaluated. As of March 31, 2026, we had one 1 operating segment which pertains to the sale of apparel. All brands and reporting units currently report to the Chief Executive Officer. Each of our brands serve or are expected to serve customers through our wholesale, in store and online channels, allowing us to execute on our omni-channel strategy. We have determined that each of our brands share similar economic and other qualitative characteristics, and therefore the results of our operating businesses are aggregated into one 1 reportable segment. All of the operating businesses have met the aggregation criteria and have been aggregated and are presented as one reportable segment, as permitted by ASC 280. We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments. Net Loss per Share Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of the diluted net loss per share if their inclusion would be anti-dilutive. As all potentially dilutive securities are anti-dilutive as of March 31, 2026, and 2024, diluted net loss per share is the same as basic net loss per share for each year. Potentially dilutive items outstanding as of March 31, 2026 and 2025 are as follows: SCHEDULE OF POTENTIALLY DILUTIVE ITEMS OUTSTANDING 2026 2025 March 31, 2026 2025 Series A convertible preferred stock 542 542 Series C convertible preferred stock 1,500 1,500 Series D convertible preferred stock 8,469,692 - Common stock warrants 17,934,256 33,651,481 Stock options 31 31 Total potentially dilutive shares 26,406,021 33,653,554 The stock options and warrants above are out-of-the-money as of March 31, 2026 and 2025. Leases The Company accounts for leases in accordance with ASC 842, Leases. The Company determines whether an arrangement contains a lease at inception and recognizes operating lease right-of-use (“ROU”) assets and corresponding lease liabilities at the commencement date based on the present value of lease payments over the lease term. Lease expense for operating leases is recognized on a straight-line basis over the lease term. The Company uses its incremental borrowing rate in determining the present value of lease payments when the implicit rate is not readily determinable. The Company has elected the short-term lease exemption for leases with an initial term of 12 months or less. Recent Accounting Pronouncements In November 2024, the FASB issued ASU No. 2024-03, Income Statement—Reporting Comprehensive Income (Topic 220): Expense Disaggregation Disclosures. This update requires entities to disaggregate operating expenses into specific categories, such as salaries and wages, depreciation, and amortization, to provide enhanced transparency into the nature and function of expenses. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, with early adoption permitted. ASU 2024-03 may be applied retrospectively or prospectively. The Company is currently evaluating the impact of this standard on its financial statement presentation and disclosures. In December 2025, the FASB issued ASU No. 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements. The amendments clarify the applicability and disclosure requirements associated with interim financial reporting and enhance consistency in interim financial statement presentation. ASU 2025-11 is effective for interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of adopting this guidance on its condensed consolidated financial statements and related disclosures. Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances. 16 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 NOTE 4: PREPAID MARKETING EXPENSES In 2025 and during three months ended March 31, 2026, the Company entered into multi-year marketing, licensing, sponsorship, and service agreements under which it provides equity instruments, pre-funded warrants, or cash as consideration. Amounts paid or the fair value of instruments issued in excess of amounts currently expensed are recorded as prepaid assets and amortized over the contractual service period on a straight-line basis. University Marketing Agreements AAA Tuscaloosa, LLC — University of Alabama Effective July 16, 2025, the Company entered into a three-year Exclusive Private Label Manufacturing Agreement with AAA Tuscaloosa, LLC (“AAA”), pursuant to which the Company manufactures University of Alabama–branded apparel. AAA is responsible for marketing and selling the products through its website and campus bookstores and is considered the Company’s customer under ASC 606; revenue is recognized upon sale of products to end customers through AAA’s distribution channels. As consideration, the Company agreed to issue common stock valued at $ 1,000,000 per year over the three-year term (total equity commitment of $ 3,000,000 ). On December 12, 2025, the Company issued 285,714 shares of common stock at a grant-date fair value of $ 7.92 per share (grant date: September 22, 2025; aggregate equity fair value: $ 2,262,855 ). The share-based consideration represents payment for distinct services, including licensing access, distribution, and marketing services, and is accounted for under ASC 718. The total consideration, including the equity component and the initial fair value of the make-whole provision at grant date, was $ 4,341,104 . The Company recorded a prepaid asset equal to the fair value of consideration provided, amortized on a straight-line basis over the three-year term. For the three months ended March 31, 2026, the Company recognized $ 356,809 of marketing expense, representing quarterly amortization. As of March 31, 2026, the prepaid balance was $ 3,318,326 , of which $ 1,447,060 is classified as current and $ 1,871,266 as non-current. 17 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 The agreement includes a 15-month make-whole provision (through March 12, 2027), under which the Company is required to issue additional shares or cash if the fair value of shares delivered falls below the $ 3,000,000 commitment; accordingly, the award is liability-classified under ASC 718. See Note 8 for the fair value detail and Monte Carlo assumptions. Traffic Holdco, LLC — Collegiate NIL Program Effective July 16, 2025, the Company entered into a three-year Exclusive Private Label Manufacturing Agreement with Traffic Holdco, LLC (“Traffic”), pursuant to which the Company obtained exclusive apparel manufacturing rights for collegiate Name, Image and Likeness (“NIL”) programs at a minimum of three universities. Traffic is responsible for licensing, marketing, and distribution through university channels and is considered the Company’s customer under ASC 606; revenue is recognized upon sale of products to end customers through Traffic’s distribution channels. As consideration, the Company agreed to issue common stock valued at $ 1,000,000 per university per year over the three-year term (minimum total equity commitment of $ 9,000,000 ). On December 12, 2025, the Company issued 857,143 shares of common stock at a grant-date fair value of $ 7.92 per share (grant date: September 22, 2025; aggregate equity fair value: $ 6,788,573 ). The share-based consideration represents payment for distinct services, including licensing access, distribution, marketing, and compliance services, and is accounted for under ASC 718. The total consideration, including the equity component and the initial fair value of the make-whole provision, was $ 13,023,328 . The Company recorded a prepaid asset equal to the fair value of consideration provided, amortized on a straight-line basis over the three-year term. For the three months ended March 31, 2026, the Company recognized $ 1,070,479 of marketing expense, representing quarterly amortization. As of March 31, 2026, the prepaid balance was $ 9,955,453 , of which $ 4,341,386 is classified as current and $ 5,614,067 as non-current. The agreement includes a 15-month make-whole provision (through March 12, 2027), under which the Company is required to issue additional shares or cash if the fair value of shares delivered falls below the guaranteed commitment; accordingly, the award is liability-classified under ASC 718. See Note 8 for the fair value detail and Monte Carlo assumptions. The Grove Collective, LLC — University of Mississippi Effective November 19, 2025, the Company entered into a three-year Exclusive Private Label Manufacturing Agreement with The Grove Collective, LLC (“Grove”), pursuant to which the Company will exclusively manufacture apparel products to be sold through Grove’s website and retail channels. The agreement supports marketing and brand development initiatives related to the University of Mississippi NIL program. Grove is considered the Company’s customer under ASC 606; revenue is recognized upon sale of products to end customers through Grove’s channels. As consideration, the Company issued 385,107 shares of common stock at a grant-date fair value of $ 7.50 per share (aggregate equity fair value: $ 2,888,303 ), representing a total equity commitment of $ 3,000,000 . The share-based consideration is accounted for as payment for distinct marketing, distribution, and related services under ASC 718. The total consideration, including the equity component and the initial fair value of the make-whole provision at grant date, was $ 4,970,835 . The Company recorded a prepaid asset equal to the fair value of consideration provided, amortized on a straight-line basis over the three-year term. For the three months ended March 31, 2026, the Company recognized $ 408,460 of marketing expense, representing quarterly amortization. As of March 31, 2026, the prepaid balance was $ 4,371,713 , of which $ 1,656,984 is classified as current and $ 2,714,729 as non-current. The agreement includes a 15-month make-whole provision; accordingly, the award is liability-classified under ASC 718. See Note 8 for the fair value detail and Monte Carlo assumptions. Buffalo Sports Properties / Learfield — University of Colorado Effective December 3, 2025, the Company entered into a three-year Marketing and Sponsorship Agreement with Buffalo Sports Properties, LLC and Learfield (the “Provider”) for the University of Colorado athletic program. Under the agreement, the Company receives sponsorship, media, and NIL marketing benefits in exchange for a combination of cash and equity consideration. The Provider is considered the Company’s customer under ASC 606; revenue is recognized upon delivery of sponsorship and marketing benefits over the term. As consideration, the Company agreed to pay $ 550,000 per year over the three-year term, consisting of $ 350,000 per year in common stock (total equity commitment: $ 1,050,000 ) and $ 200,000 per year in cash (total cash: $ 537,931 ). On December 12, 2025, the Company issued 193,036 shares of common stock at $ 6.68 per share (grant date: December 3, 2025; aggregate equity fair value: $ 1,289,480 ). The equity component is accounted for as payment for distinct sponsorship, media, and marketing services under ASC 718. The total consideration, including the equity component and the initial fair value of the make-whole provision, was $ 2,014,433 . The Company recorded a prepaid asset equal to the fair value of consideration provided, amortized on a straight-line basis over the three-year term. For the three months ended March 31, 2026, the Company recognized $ 165,568 of marketing expense, representing quarterly amortization. As of March 31, 2026, the prepaid balance was $ 1,797,329 , of which $ 671,469 is classified as current and $ 1,125,860 as non-current. The agreement includes an 18-month make-whole provision (through June 12, 2027), under which the Company is required to issue additional shares or cash if the fair value of shares delivered falls below the guaranteed amount; accordingly, the award is liability-classified under ASC 718. See Note 8 for the fair value detail and Monte Carlo assumptions. 18 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 Athlete Capital Sports Effective March 12, 2026, the Company entered into a consulting agreement with Athlete Capital Sports LLC pursuant to which the Company is required to issue shares with an aggregate value of $ 3,000,000 in exchange for consulting services to be provided over a three-year term. As the arrangement represents a binding obligation and the related services are to be received over the contractual term, the Company recorded a prepaid consulting asset with a corresponding stock payable, and will amortize the prepaid balance over the service period. For the period from March 12, 2026 through March 31, 2026, the Company recognized $ 52,055 as consulting expense, with the remaining balance of $ 2,947,945 recorded as prepaid expense as of March 31, 2026. Although the agreement includes a make-whole provision that may result in variability in settlement, no shares had been issued as of March 31, 2026 and therefore no equity instrument or share-based liability existed as of the reporting date. Learfield College LLC Effective January 26, 2026, the Company entered into a Marketing and Sponsorship Agreement with Learfield pursuant to which the Company is required to issue shares with a value of $ 100,000 as consideration for marketing services to be provided during the first contract year ending June 30, 2026. As the arrangement represents a binding obligation and the related services are to be received over the contractual service period, the Company recorded a prepaid marketing asset with a corresponding stock payable liability, and will amortize the prepaid balance over the service period. For the period from January 26, 2026 through March 31, 2026, the Company recognized $ 40,000 of marketing expense, with the remaining balance of $ 60,000 recorded as prepaid expense as of March 31, 2026. Although the agreement includes a make-whole provision that may result in variability in settlement, no shares had been issued as of March 31, 2026 and therefore no make-whole adjustment or share-based liability was recognized as of the reporting date. Other Marketing Agreements MavDB Consulting LLC In January 2025, the Company entered into a two-year marketing services agreement with MavDB Consulting LLC for content production, social media marketing, student athlete engagement, and event staffing. The consideration was satisfied through the issuance of 2,068,965 pre-funded warrants with an aggregate fair value of $ 2,689,656 , accounted for as share-based consideration for marketing and advisory services. The warrants are equity-classified with no make-whole provision. The Company recognized $ 332,056 of marketing expense for the three months ended March 31, 2026, representing quarterly amortization over the two-year term. As of March 31, 2026, the prepaid balance was $ 1,096,480 , classified as current. Other Costs associated with all cash-based agreements are recognized as prepaid assets and expensed over the respective contractual service periods. 19 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 Summary of Consideration and Prepaid Balances The following table summarizes the consideration provided under each agreement and the resulting prepaid marketing balances as of March 31, 2026: SCHEDULE OF CONSIDERATION AND PREPAID BALANCES Consideration Agreement Term March 31, December 31, Agreement Type Amount (Years) 2026 2025 MavDB (Jan 2025) PFW* $ 2,689,656 2 $ 1,096,480 $ 1,420,463 Traffic Holdco Shares + MW** 13,023,328 3 9,955,453 11,025,228 AAA Tuscaloosa Shares + MW 4,341,104 3 3,318,326 3,675,072 Grove Shares + MW 4,970,835 3 4,371,713 4,780,173 Learfield Shares + MW 2,014,433 3 1,797,329 1,962,551 Vanderbilt Shares 100,000 0.41 60,000 - Athlete Shares 3,000,000 3 2,947,945 - $ 30,139,356 $ 23,547,246 $ 22,863,487 * PFW = pre-funded warrants, equity-classified with no make-whole provision. ** Shares + MW = common stock issued plus a make-whole provision guaranteeing the counterparty a minimum aggregate share value. The make-whole creates a liability-classified share-based award under ASC 718, measured at fair value via Monte Carlo simulation. See Note 8. The Company’s collegiate apparel and marketing agreements include make-whole provisions under which the Company may be required to deliver additional shares or cash to satisfy guaranteed value commitments. Because the settlement value may vary based on the Company’s stock price, these arrangements are classified as liability-classified share-based payment awards under ASC 718 and are remeasured at fair value at each reporting date, with changes in fair value recognized in earnings. SCHEDULE OF DISAGGREGATES TOTAL CONSIDERATION FOR SHARE BASED AGREEMENTS FV at 12/31/25 FV at 03/31/26 FV Change Traffic Holdco $ 5,390,539 $ 7,537,074 $ 2,146,535 AAA Tuscaloosa 1,813,512 2,512,417 698,905 Grove 1,635,666 2,413,396 777,730 Learfield 565,982 - 248,284 $ 9,405,699 $ 12,462,887 $ 3,871,454 As of March 31, 2026, the aggregate fair value of the Company’s share-based payment liabilities related to make-whole provisions was $ 12,462,887 . During the three months ended March 31, 2026, the Company recognized a fair value loss of $ 3,871,454 related to the remeasurement of these liabilities, including a remeasurement loss of $ 248,284 associated with the Buffalo Sport Properties/Learfield arrangement, primarily attributable to changes in the Company’s stock price and other valuation assumptions utilized in the Monte Carlo simulation model. As of March 31, 2026, share-based payment liabilities of $ 814,266 related to the Buffalo Sport Properties/Learfield arrangement were reclassified to additional paid-in capital upon settlement in equity. Classification and Future Amortization Prepaid marketing expenses are classified as current or non-current based on the portion of each agreement expected to be amortized within the next twelve months from the balance sheet date. Current prepaid balances represent the pro-rata share of total consideration allocable to services to be received in the twelve months ending March 31, 2027. Non-current prepaid balances represent the remaining unamortized consideration allocable to periods beyond March 31, 2027. Total prepaid marketing expenses recognized during the three months ended March 31, 2026 was $ 2,424,314 . Estimated future amortization of prepaid marketing expenses as of March 31, 2026 is as follows: SCHEDULE OF AMORTIZATION OF PREPAID MARKETING EXPENSES March 31, Amount 2026 $ 10,273,379 2027 7,293,092 2028 5,980,775 Prepaid marketing expenses $ 23,547,246 NOTE 5: DUE FROM FACTOR The Company, via its subsidiaries, Bailey, Stateside and Sundry, assigns a portion of its trade accounts receivable to third-party factoring companies, who assumes the credit risk with respect to the collection of non-recourse accounts receivable. The Company may request advances on the net sales factored at any time before their maturity date. The factor charges a commission on the net sales factored for credit and collection services. For one factoring company, interest on advances is charged as of the last day of each month at a rate equal to the LIBOR rate plus 2.5 % for Bailey. For Stateside and Sundry, should total commission and fees payable be less than $ 30,000 in a single year, then the factor shall charge the difference between the actual fees in said year and $ 30,000 to the Company. Interest on advances is charged as of the last day of each month at a rate equal to the greater of either, (a) the Chase Prime Rate + ( 2.0 )% or (b) ( 4.0 )% per annum. For another factoring company, interest is charged at 1/33 of 1 per day, which rate will increase or decrease in accordance with changes in the “Prime Rate”, which such prime rate to be deemed to be 4.25 % on the date of the agreement. Advances are collateralized by a security interest in substantially all of the companies’ assets. Due to/from factor consist of the following: SCHEDULE OF DUE TO/ FROM FACTOR March 31, December 31, 2026 2025 Outstanding receivables: Without recourse $ 173,308 $ 283,849 With recourse 3,951 13,920 Matured funds and deposits 65,337 61,838 Advances ( 54,170 ) ( 86,170 ) Credits due customers - - Due from factor, net $ 188,426 $ 273,437 20 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 NOTE 6: GOODWILL AND INTANGIBLE ASSETS Goodwill The Company recorded goodwill from each of its business combinations. The following is a summary of goodwill by entity as of March 31, 2026, and December 31, 2025: SCHEDULE OF GOODWILL BY ENTITY March 31, December 31, 2026 2025 Bailey $ 2,077,123 $ 2,077,123 Sundry 3,711,322 3,711,322 Goodwill $ 5,788,445 $ 5,788,445 Intangible Assets The following table summarizes information relating to the Company’s identifiable intangible assets as of March 31, 2026: SCHEDULE OF INFORMATION RELATING TO THE COMPANY’S IDENTIFIABLE INTANGIBLE ASSETS March 31, 2026 Gross Accumulated Carrying Amount Impairment Amortization Value Amortized: Customer relationships $ 8,634,560 $ - $ ( 8,634,560 ) $ - Technology asset 1,301,491 - ( 141,356 ) 1,160,135 $ 9,936,051 $ - $ ( 8,775,916 ) $ 1,160,135 Indefinite-lived: Brand name 3,193,380 - - 3,193,380 Total $ 13,129,431 $ - $ ( 8,775,916 ) $ 4,353,515 December 31, 2025 Gross Accumulated Carrying Amount Impairment Amortization Value Amortized: Customer relationships $ 8,634,560 $ - $ ( 8,634,560 ) $ - Technology asset 2,948,275 ( 1,228,448 ) ( 418,336 ) 1,301,491 $ 11,582,835 $ ( 1,228,448 ) $ ( 9,052,896 ) $ 1,301,491 Indefinite-lived: Brand name 4,453,880 ( 1,260,500 ) - 3,193,380 Total $ 16,036,715 $ ( 2,488,948 ) $ ( 9,052,896 ) $ 4,494,871 On April 1, 2025, the Company entered into an Asset Purchase Agreement (the “Open Daily APA”) with Open Daily Technologies Inc. (“Open Daily”). Pursuant to the terms of the Open Daily APA, the Company agreed to purchase, and Open Daily agreed to sell certain intellectual property owned by Open Daily, including, but not limited to, patent applications, trademarks, and software products and platforms (the “Open Daily Assets”), but not any liability or obligation of Open Daily in connection with the Company’s purchase of the Open Daily Assets, in exchange for the issuance by the Company of 344,827 shares of the Company’s common stock (the “Open Daily Acquisition”). The technology asset acquired from Open Daily Technologies Inc. was placed in service during 2025 and is being amortized on a straight-line basis over its estimated useful life. The Company recorded amortization expense of $ 141,356 and $ 416,540 during the three months ended March 31, 2026 and 2025, respectively, which is included in general and administrative expenses in the consolidated statements of operations 21 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 NOTE 7: LIABILITIES AND DEBT Accrued Expenses and Other Liabilities The Company accrued expenses and other liabilities line in the consolidated balance sheets is comprised of the following as of March 31, 2026 and December 31, 2025: SCHEDULE OF ACCRUED EXPENSES AND OTHER LIABILITIES March 31, December 31, 2026 2025 Accrued expenses $ 591,371 $ 591,371 Payroll related liabilities 4,750,738 4,646,647 Sales tax liability 142,136 158,571 Other liabilities 164,902 164,902 Accrued expenses and other liabilities $ 5,649,147 $ 5,561,491 Payroll related liabilities are primarily related to overdue payroll taxes due to be remitted to federal and state authorities by the parent company (Digital Brands Group, Inc.) and Bailey. Accrued interest payable of $ 2,911,332 as of March 31, 2026 (December 31, 2025: $ 2,787,506 ) relates primarily to unpaid interest on the Bailey sellers’ promissory note and is presented separately on the consolidated balance sheet. Debt The following table summarizes the Company’s outstanding debt obligations as of March 31, 2026 and December 31, 2025: SCHEDULE OF OUTSTANDING DEBT OBLIGATIONS March 31, December 31, 2026 2025 Current: Advantage Capital (merchant cash advance) $ 1,351,159 $ 1,483,159 Sunnyside Shopify loan, net of discount 40,749 58,296 B44 PPP note payable 933,294 933,294 Promissory note payable, net 3,500,000 3,500,000 Sunnyside Motor loan 81,686 - Notes payable 150,000 150,000 Total debt $ 6,056,888 $ 6,124,749 Non-current: Notes payable (long-term) - - Total non-current debt - - Total debt $ 6,056,888 $ 6,124,749 Loan Payable — PPP and SBA Loan In April 2022, Bailey received notification of full forgiveness of its second SBA Paycheck Protection Program (“PPP”) loan totaling $ 1,347,050 and partial forgiveness of its first PPP loan totaling $ 413,705 . As of March 31, 2026 and December 31, 2025, Bailey had an outstanding PPP loan balance of $ 933,294 , classified as current. The loan matures in April 2026 . No additional forgiveness was recognized during 2025. In June 2020, the Company received a SBA loan in the principal amount of $ 150,000 , bearing interest at a rate of 3.75 % per annum. As of March 31, 2026 and December 31, 2025, the Company maintained an outstanding balance of $ 150,000 on this loan. The loan matures in April 2050 . The Company’s Sunnyside subsidiary maintains a Shopify Capital loan with an outstanding balance of $ 40,749 and $ 58,296 as of March 31, 2026 and December 31, 2025, respectively, classified as current. In January 2026, the Company’s subsidiary availed a motor loan with an outstanding balance of $ 81,686 as of March 31, 2026. Merchant Advances Future Sales Receipts From 2022 through 2024, the Company obtained several merchant advances. These advances are, for the most part, secured by expected future sales transactions of the Company with expected payments on a weekly basis. The Company made total cash repayments, pertaining to principal and interest, of $ 132,000 for the three months ended March 31, 2026. 22 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 The following is a summary of the merchant advances as of March 31, 2026 and December 31, 2025: SCHEDULE OF MERCHANT ADVANCES March 31, December 31, 2026 2025 Principal $ 1,351,159 $ 1,483,159 Less: unamortized debt discount - - Merchant cash advances, net $ 1,351,159 $ 1,483,159 Promissory Note Payable As of March 31, 2026 and December 31, 2025, the outstanding principal on the note payable to the sellers of Bailey 44, LLC was $ 3,500,000 . The note bears interest at 12 % per annum, payable quarterly. Interest expense was $ 105,000 for the three months ended March 31, 2026 ($ 105,000 per quarter). Accrued and unpaid interest was $ 2,911,332 as of March 31, 2026, recorded separately as accrued interest payable on the Consolidated Balance Sheet. The note matured on December 8, 2025. As of March 31, 2026, the note has not been repaid and is in technical default. The Company is currently in discussions with the lender regarding repayment, extension, or refinancing of the obligation. Management has not identified any cross-default provisions in other material agreements that would be triggered by this default. This default has been considered in the Company’s going concern assessment. As of March 31, 2026, the note remains outstanding and unpaid. The Company continues to accrue interest at the contractual rate of 12 % per annum. No formal acceleration notice has been received from the lender as of the date these financial statements were available to be issued. NOTE 8: SHARE-BASED PAYMENT LIABILITY The Company’s collegiate apparel agreements (AAA Tuscaloosa, Traffic Holdco, Grove Collective, Buffalo Sports / Learfield – see Note 4) include make-whole provisions under which the Company is required to deliver a guaranteed aggregate dollar value through a variable number of common shares. Because the number of shares required for settlement varies based on the Company’s stock price, these arrangements are classified as liability-classified share-based payment awards under ASC 718. At inception, the Company measures the liability at fair value using a Monte Carlo simulation model, with a corresponding prepaid marketing asset recognized. The liability is remeasured at fair value at each subsequent reporting date, with changes recognized in earnings. The prepaid marketing asset is amortized on a straight-line basis over the contractual service period. See Note 4 for prepaid marketing balances. The share-based payment liability is classified within Level 2 of the fair value hierarchy under ASC 820. The primary inputs to the Monte Carlo simulation model — including the Company’s stock price, risk-free interest rate, and contractual term — are observable market inputs. Accordingly, the Company classifies these liabilities as Level 2. There were no transfers between levels during the three months ended March 31, 2026. The following assumptions were used in the Monte Carlo simulation model at remeasurement as of March 31, 2026 of each make-whole liability: SCHEDULE OF ASSUMPTIONS WERE USED IN SHARE BASED PAYMENT LIABILITY At Remeasurement (March 31, 2026) Stock Price Strike Price Term (Yrs) Volatility Risk-Free Rate Fair Value per Share Total Fair Value Traffic Holdco $ 1.80 $ 10.50 0.95 171 % 3.61 % $ 8.79 $ 7,537,074 AAA Tuscaloosa $ 1.80 $ 10.50 0.97 171 % 3.61 % $ 8.79 2,512,417 Grove $ 1.80 $ 7.79 0.95 171 % 3.61 % $ 6.27 2,413,396 $ 12,462,887 The fair value of share based payment liability for buffalo Sports/Learfield agreement is $ 0 as of March 31, 2026. Volatility was estimated based on the historical stock price of the Company over the applicable measurement period. The risk-free rate is based on the U.S. Treasury yield curve for the instrument’s remaining term as of the measurement date. The strike price represents the minimum guaranteed aggregate value per the respective agreement divided by the number of shares issued. 23 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 The following is a summary of activity of the share-based payment liability for the three months ended March 31, 2026: SCHEDULE OF ACTIVITY OF SHARE BASED PAYMENT LIABILITY Share-Based Payment Liability Balance, December 31, 2025 $ 9,405,699 Initial recognition - make-whole provisions - Change in fair value 3,871,454 Reclassification to equity ( 814,266 ) Balance, March 31, 2026 $ 12,462,887 There were no transfers between levels during the three months ended March 31, 2026. NOTE 9: STOCKHOLDERS’ EQUITY Amendments to Certificate of Incorporation and Reincorporation On August 21, 2023, the Board of Directors approved a 1-for-25 reverse stock split, effective August 22, 2023. On December 11, 2024, the Board approved a 1-for-50 reverse stock split, effective December 11, 2024. All share and per share amounts for all periods presented have been retroactively adjusted to reflect both reverse stock splits. Effective December 29, 2025, the Company reincorporated from the State of Nevada to the State of Nevada pursuant to a plan of conversion approved by the Board of Directors. The reincorporation did not affect the Company’s authorized capital structure, par values, or outstanding equity. Common Stock As of March 31, 2026, the Company had 1,000,000,000 shares of common stock, $ 0.0001 par value per share, authorized. Common stockholders have voting rights of one vote per share. The voting, dividend, and liquidation rights of the holders of common stock are subject to and qualified by the rights, powers, and preferences of preferred stockholders. 2026 Transactions During the three months ended March 31, 2026, the Company issued 1,275,577 shares of common stock upon the exercise of pre-funded warrants previously issued in connection with a January 2025 marketing services agreement. In February 2026, the Company issued 563,284 shares of common stock upon the conversion of 1,250 shares of Series D Preferred Stock. During the three months ended March 31, 2026, the Company issued 4,464,604 shares of common stock upon the exercise of common stock purchase warrants originally issued in connection with the February 2025 Offering, including 2,365,968 shares issued pursuant to warrant exchange agreements entered into on February 16, 2026. During April and May 2026, certain holders exercised an aggregate of 3,679,905 common stock purchase warrants at an exercise price of $ 0.66 per share. The cash proceeds from these exercises had been received by the Company prior to March 31, 2026 and were initially recorded within stock payable pending completion of the exercise mechanics. As of March 31, 2026, the Company had received irrevocable notices of exercise and the corresponding cash proceeds in full, with no remaining conditions to issuance other than the ministerial act of delivering the shares through the Company’s transfer agent. Because the warrants had been validly exercised and the Company had a non-contingent obligation to issue a fixed number of shares as of the balance sheet date, the related amounts were reclassified from stock payable to common stock to be issued within stockholders’ equity in the accompanying condensed consolidated balance sheet as of March 31, 2026, in accordance with ASC 505-10. The underlying shares were subsequently issued during April and May 2026. 24 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 Stock Payable As of March 31, 2026, stock payable of $ 5,227,035 represents amounts received in connection with common stock issuances for which the underlying shares had not yet been issued as of the reporting date. The balance primarily relates to warrant exercises for which proceeds had been received and recorded within stock payable pending issuance of the related shares of common stock. During the three months ended March 31, 2026, the Company issued shares related to the exercise of 1,162,452 warrants for which the cash proceeds had been previously recorded within stock payable, and accordingly reclassified the corresponding balances from stock payable to common stock and additional paid-in capital within stockholders’ equity. In addition, during the three months ended March 31, 2026, the Company received approximately $ 264,000 of proceeds related to shares issued during 2025, which had been previously reflected through stock payable and stockholders’ equity adjustments. During April and May 2026, certain holders exercised 3,679,905 common stock purchase warrants at an exercise price of $ 0.66 per share, resulting in the issuance of shares of the Company’s common stock. The related proceeds had been previously received and recorded within stock payable and subsequently reclassified to common stock to be issued as of March 31, 2026. The stock payable balance also includes obligations to issue shares under certain marketing and consulting agreements entered into during the three months ended March 31, 2026, including arrangements for which corresponding prepaid marketing and consulting assets were recognized. Upon issuance of the related shares of common stock, the associated balances will be reclassified from stock payable to stockholders’ equity. Series A Convertible Preferred Stock On September 29, 2022, the Company designated up to 6,800 shares of Series A Convertible Preferred Stock, par value $ 0.0001 , with a stated value of $ 1,000 per share. Each share of Series A Preferred Stock is convertible at the holder’s option into a number of shares of common stock determined by dividing the stated value ($ 1,000 ) by the conversion price of $ 9.30 (the closing price on September 29, 2022). Series A holders are entitled to vote with the holders of common stock on an as-converted basis. Series A Preferred Stock ranks senior to common stock and junior to Senior Securities as to dividends and liquidation. As of March 31, 2026 and December 31, 2025, there were 6,300 shares of Series A Convertible Preferred Stock issued and outstanding, with an aggregate liquidation preference of $ 6,300,000 . Series C Convertible Preferred Stock On June 21, 2023, the Company issued 5,761 shares of Series C Convertible Preferred Stock, par value $ 0.0001 , with a stated value of $ 1,000 per share, to the Sundry sellers in exchange for cancellation of promissory notes issued in December 2022. Each share of Series C Preferred Stock is convertible at the holder’s option into common stock at a conversion price of $ 896.25 per share (the lower of the closing price on June 20, 2023 and the five-day average preceding the issuance date). The Company may redeem all or any portion of the outstanding Series C shares at 112% of the then-current stated value at any time after June 21, 2023, provided an effective registration statement is in place. Series C holders are entitled to vote with common stockholders on an as-converted basis. Series C ranks pari passu with Series A and senior to common stock. As of March 31, 2026 and December 31, 2025, there were 1,344 shares of Series C Convertible Preferred Stock issued and outstanding, with an aggregate liquidation preference of $ 1,344,000 . 25 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 Series D Convertible Preferred Stock 2026 Transactions In February 2026, holders of the Company’s Series D Preferred Stock converted an aggregate of 1,250 shares of Series D Preferred Stock with an aggregate stated value of $ 1,437,501 into 563,284 shares of the Company’s common stock at a conversion price of $ 2.552 per share. No accrued or unpaid dividends were included in the conversion amount. Upon conversion, the carrying value of the converted Series D Preferred Stock was reclassified to common stock and additional paid-in capital within stockholders’ equity. As of March 31, 2026, there were 14,656 shares of Series D Convertible Preferred Stock issued and outstanding. Conversion: Each share of Series D Preferred Stock is convertible at the holder’s option into common stock at a price equal to 80% of the lowest closing price of the Company’s common stock for the five trading days immediately preceding the conversion date, subject to beneficial ownership limitations of 4.99% (adjustable to 9.99%) . Dividends: Series D holders are entitled to receive dividends equal (on an as-converted basis) to dividends paid on common stock, when and if declared. No dividends have been declared or paid. Voting: Series D holders vote with holders of common stock on an as-converted basis, subject to ownership limitations. Liquidation Preference: Series D ranks senior to common stock and Junior Securities, pari passu with Series A and Series C, and junior to Senior Securities. Upon liquidation, each Series D holder is entitled to receive the greater of: (i) the stated value plus accrued dividends, or (ii) the amount such holder would receive if Series D were converted to common stock immediately prior to such liquidation. As of March 31, 2026, the aggregate liquidation preference of the Series D Preferred Stock was approximately $ 14,656,250 . Under ASC 480-10-S99-3A, the Company evaluated whether the Series D should be classified as temporary equity. Because there are no redemption features exercisable at the option of the holder or upon the occurrence of events not solely within the Company’s control, the Series D Preferred Stock does not meet the criteria for temporary equity classification. Accordingly, the Series D is classified as permanent equity in the Consolidated Balance Sheets. Liquidation Preferences As of March 31, 2026, the aggregate liquidation preferences of the Company’s preferred stock were as follows: SCHEDULE OF LIQUIDATION PREFERENCE Series Liquidation Preference Series A Convertible Preferred Stock $ 6,300,000 Series C Convertible Preferred Stock 1,344,000 Series D Convertible Preferred Stock 14,656,250 Total $ 22,300,250 NOTE 10: WARRANTS AND STOCK OPTIONS Common Stock Warrants A summary of common stock warrant activity for the three months ended March 31, 2026 is as follows: SCHEDULE OF INFORMATION RELATED TO COMMON STOCK WARRANTS Common Weighted Stock Average Warrants Exercise Price Outstanding - December 31, 2025 31,111,481 $ 1.13 Granted 9,634,032 0.66 Exercised ( 5,740,181 ) 0.52 Forfeited ( 17,071,076 ) 0.66 Outstanding - March 31, 2026 17,934,256 $ 1.66 Exercisable at December 31, 2025 31,111,481 $ 1.13 Exercisable at March 31, 2026 17,934,256 $ 1.66 26 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 Warrant Transactions MavDB Consulting LLC Pre-Funded Warrants During the three months ended March 31, 2026, holders of certain pre-funded warrants previously issued to MavDB Consulting LLC exercised 1,275,577 pre-funded warrants at an exercise price of $ 0.0001 per share. The warrants were originally issued on January 21, 2025 in connection with a marketing services agreement and were recorded as a prepaid marketing asset at fair value upon issuance. Upon exercise, the Company issued the related shares of common stock and reclassified the related balance from stock payable to common stock and additional paid-in capital within stockholders’ equity. February 2025 Offering Warrants During the three months ended March 31, 2026, holders exercised an aggregate of 4,464,604 common stock purchase warrants originally issued in connection with the February 2025 Offering at an exercise price of $ 0.66 per share, which amount includes 2,365,968 warrants exercised pursuant to warrant exchange agreements entered into on February 16, 2026. Of the total warrant exercises during the quarter, 284,604 warrants were exercised for aggregate cash proceeds of approximately $ 187,383 , and the related shares of common stock were issued during the quarter. The remaining exercised warrants related to amounts for which proceeds had been received and recorded within stock payable as of December 31, 2025, including approximately $ 1.56 million associated with the February 16, 2026 warrant exchange transactions, and upon issuance of the related shares of common stock, the Company reclassified the corresponding balances from stock payable to common stock and additional paid-in capital within stockholders’ equity. During the three months ended March 31, 2026, an aggregate of 7,437,044 common stock purchase warrants issued in connection with the February 2025 Offering, which were previously unexercised, had expired. On February 16, 2026, the Company entered into warrant inducement agreements with certain existing holders of common stock purchase warrants previously issued in connection with the Company’s February 2025 financing. Pursuant to the agreements, the holders exercised an aggregate of 2,365,968 existing warrants at an exercise price of $ 0.66 per share. In consideration for such exercises, the Company agreed to issue 9,634,032 modified common stock purchase warrants with substantially similar terms to the original warrants, except that the expiration date was extended to June 17, 2026. To the extent a holder would have exceeded applicable beneficial ownership limitations, pre-funded warrants were issued in lieu of common stock purchase warrants. The Company evaluated the transaction in accordance with the accounting guidance applicable to modifications and inducements of freestanding equity-classified warrants. The Company concluded that the modified warrants substantially represent a continuation and extension of the existing warrants rather than the issuance of entirely new freestanding instruments, as the exercise price and underlying economics remained substantially unchanged and the primary modification related to the extension of the contractual term. The Company further evaluated the accounting impact of the transaction, including the shares issued upon exercise, cash proceeds received, and the modification of the warrant terms. Based on such evaluation, the Company concluded that any accounting impact associated with the warrant modification represents an equity-classified financing-related adjustment within additional paid-in capital and therefore did not result in recognition of an operating expense in the accompanying condensed consolidated financial statements for the three months ended March 31, 2026 Stock Options As of March 31, 2026 and December 31, 2025, the Company had 31 stock options outstanding with a weighted average exercise price of $ 452,500 per share. All outstanding options are exercisable. No options were granted, exercised, or forfeited during the three months ended March 31, 2026. There was no stock-based compensation expense for the three months ended March 31, 2026 or 2025. There is no unrecognized compensation cost related to outstanding stock options as of March 31, 2026. The 2020 Omnibus Incentive Stock Plan (the “2020 Plan”) authorizes an aggregate of 26 shares of common stock for awards. As of March 31, 2026, grants covering 22 shares have been made and 4 shares remain available for future issuance under the 2020 Plan. 27 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 NOTE 11: RELATED PARTY TRANSACTIONS As of both March 31, 2026 and December 31, 2025, amounts due to related parties was $ 370,921 and $ 370,921 , respectively. The advances are unsecured, non-interest bearing and due on demand. Amounts due to related parties consist of amounts due to current and former executives, and a board member. As of both March 31, 2026 and December 31, 2025, due to related parties includes $ 87,222 in advances from Mark Lynn, a director and former officer of the company, and accrued salary and expense reimbursements of $ 134,699 to current officers of the company. In October 2022, the Company received advances from a director, Trevor Pettennude, totaling $ 325,000 . The advances are unsecured, non-interest bearing and due on demand. As of both March 31, 2026 and December 31, 2025, $ 149,000 and $ 149,000 , respectively, was outstanding. NOTE 12: LEASE OBLIGATIONS Management uses judgment in determining lease classification, including determination of the economic life and the fair market value of the identified asset. The fair market value of the identified asset is generally estimated based on comparable market data provided by third-party sources. In January 2026, the Company entered into a lease agreement extension for its distribution center in Round Rock, Texas that expires on June 30, 2033. The lease provides for initial monthly base rent payments of $ 45,627 , which increase annually each July in accordance with the terms of the agreement. The Company recognized a right of use asset of $ 4,193,060 and lease liability of $ 4,120,769 using a discount rate of 10.0 %. The following is a summary of operating lease assets and liabilities: SCHEDULE OF OPERATING LEASE ASSETS AND LIABILITIES March 31, Operating leases 2026 Assets ROU operating lease assets $ 4,123,037 Liabilities Current portion of operating lease - Non-current portion of lease liability 4,189,735 Total operating lease liabilities $ 4,189,735 March 31, Operating leases 2026 Weighted average remaining lease term (years) 7.25 Weighted average discount rate 10.00 % SUMMARY OF OPERATING LEASE OBLIGATIONS March 31, 2026 Future minimum payments 6,112,709 Less imputed interest ( 1,922,974 ) Total lease obligations $ 4,189,735 28 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 NOTE 13: CONTINGENCIES Marketing Agreement Commitments The Company has entered into multi-year marketing and sponsorship agreements with AAA Tuscaloosa, LLC, Traffic Holdco, LLC, The Grove Collective, LLC, and Athlete Sports Capital and Vanderbilt, each of which includes equity and, in some cases, cash commitments over three-year terms. Certain of these agreements include make-whole provisions under which the Company may be required to issue additional shares or cash if the fair value of shares delivered falls below the guaranteed commitment during the protection period. These arrangements are accounted for as liability-classified share-based payment awards; the related liabilities are measured at fair value at each reporting date using Monte Carlo simulation models. See Note 4 for the prepaid marketing balances and Note 8 for the fair value of those liabilities as of March 31, 2026. Legal Contingencies ● In June 2022, a dispute originated due to a contractual arrangement involving alleged unpaid service fees of approximately $ 28,000 , as well as additional disputed amounts, and counterclaims asserted by the Company for damages arising from website-related issues. A default judgment of approximately $ 28,000 was entered against the Company in January 2025. The Company is currently challenging the judgment and has initiated a new action reasserting its claims. ● On March 20, 2024, a former temporary worker engaged through a third-party placement agency, who was never an employee of the Company, filed a wrongful termination lawsuit against the Company. The Company is disputing this claim. The matter is scheduled for arbitration this fall. ● On April 17, 2024, a former employee filed a wrongful termination lawsuit against the Company. The employee was part of the marketing team, which was fully transitioned to a third-party outsourced marketing solution. The Company disputed the claim and initially pursued arbitration; however, the matter was settled in May 2025 for a payment by the company of $ 81,000 . Of this amount, $ 41,000 was paid in June 2025, with the remaining $ 40,000 to be paid in three equal installments of $ 13,000 in July, August 2025, and September 2025. ● In June 2021, a vendor filed a lawsuit against Bailey related to a retail store lease in the amount of $ 1,500,000 . The Company is disputing the claim for damages and the matter is ongoing. The vendor has recently updated the claim to now be $ 450,968 after signing a long-term lease with another brand for this location. The Company is disputing this new amount after review of the lease. In the summer of 2024, Century City Mall, LLC obtained a judgment against Bailey 44, LLC in the amount of approximately $ 1.4 million, inclusive of both damages for unpaid rent and attorney fees and costs. This amount is included within the liabilities of Bailey 44, LLC in these accompanying financial statements. In this action, Century City Mall is attempting to hold Digital liable for the judgment against Bailey 44 on the theory that Digital is Bailey 44’s “alter ego.” The case is set for trial on July 21, 2026. The Company is unable to weigh in on the likely outcome of the case but will vigorously defend. ● On November 15, 2023, a vendor, Simon Showroom, filed a lawsuit against the company related to trade payables totaling approximately $ 582,208 , representing “double damages,” while the actual amount due to the vendor was $ 292,604 . The case was settled in full on December 10, 2024, for a total settlement amount of $ 400,000 . As part of the settlement, the Company paid $ 50,000 in December 2024, followed by a $ 60,000 payment in February 2025. As of March 31, 2026, the Company had an outstanding balance of $ 130,000 remaining, with monthly payments of $ 30,000 being made under the terms of the settlement agreement. All claims above, to the extent management believes it will be liable, have been included in accounts payable and accrued expenses and other liabilities in the accompanying consolidated balance sheet as of March 31, 2026. Depending on the nature of the proceeding, claim, or investigation, we may be subject to monetary damage awards, fines, penalties, or injunctive orders. Furthermore, the outcome of these matters could materially adversely affect our business, results of operations, and financial condition. The outcomes of legal proceedings, claims, and government investigations are inherently unpredictable and subject to significant judgment to determine the likelihood and amount of loss related to such matters. While it is not possible to determine the outcomes, we believe based on our current knowledge that the resolution of all such pending matters will not, either individually or in the aggregate, have a material adverse effect on our business, results of operations, cash flows, or financial condition. Except as may be set forth above the Company is not a party to any legal proceedings, and the Company is not aware of any claims or actions pending or threatened against us. In the future, the Company might from time to time become involved in litigation relating to claims arising from its ordinary course of business, the resolution of which the Company does not anticipate would have a material adverse impact on our financial position, results of operations or cash flows. NOTE 14: INCOME TAXES The Company has historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. The Company has used a discrete effective tax rate method to calculate taxes for the fiscal three month periods ended March 31, 2026. The Company determined that since small changes in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the fiscal three month period ended March 31, 2026. The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The Company assessed the need for a valuation allowance against its net deferred tax assets and determined a full valuation allowance is required due, cumulative losses through March 31, 2026, and no history of generating taxable income. NOTE 15: SEGMENT REPORTING The Company operates as a single 1 reportable segment — direct-to-consumer (“DTC”) fashion brands. The Company’s Chief Executive Officer has been identified as the Chief Operating Decision Maker (“CODM”). The CODM reviews consolidated financial results to evaluate performance, allocate resources, and make operating decisions for the Company as a whole. In accordance with ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, effective for annual periods beginning after December 15, 2023, the Company is required to disclose significant segment expenses regularly provided to the CODM and included in the reported measure of segment profit or loss, even as a single reportable segment entity. 29 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2026 The CODM uses net loss as the measure of segment profit or loss to assess performance and allocate resources. The significant segment expenses regularly provided to the CODM are presented in the table below. SCHEDULE OF SIGNIFICANT SEGMENT EXPENSES 2026 2025 Three Months Ended March 31, 2026 2025 Revenue $ 1,315,984 $ 1,871,701 Significant segment expenses: Cost of net revenues 1,270,603 999,246 General and administrative 2,572,284 1,973,803 Sales and marketing 4,752,255 828,788 Distribution 139,974 66,424 Impairment of goodwill and intangible assets - - Total significant segment expenses 8,735,116 3,868,261 Other segment items (a) - - Other income (expense), net: Change in fair value of SBP liability ( 3,871,454 ) - Interest expense ( 123,826 ) ( 134,923 ) Other non-operating income (expenses) 22,379 41,573 Total other income (expense), net ( 3,972,901 ) ( 93,350 ) Income tax benefit (provision) - - Segment net loss (CODM measure) $ ( 11,392,033 ) $ ( 2,089,910 ) (a) Other segment items consists of change in fair value of contingent consideration, change in credit reserve, and other immaterial items not separately identified as significant segment expenses. Since the Company operates as a single reportable segment, there are no reconciling items between segment totals and consolidated totals. Total segment assets as of March 31, 2026 and 2025 were $ 47,319,165 and $ 44,489,380 , respectively, equal to total consolidated assets. All assets are attributable to the Company’s single operating segment. All revenues and long-lived assets are attributable to operations within the United States. No single customer accounted for more than 10 % of net revenues during either period presented NOTE 16: SUBSEQUENT EVENTS Warrant Exercise Amendments On April 14, 2026, the Company entered into Amendments (the “Amendments”) to those certain letter agreements originally dated February 16, 2026 with four existing holders (the “Holders”) of Common Share Purchase Warrants. Pursuant to the Amendments, the Holders collectively agreed to exercise an aggregate of 946,970 New Warrants at an exercise price of $ 0.66 per share on or prior to May 31, 2026. The Company expects to receive aggregate gross proceeds of approximately $ 2.5 million from these exercises. In connection with the Amendments, the Company also agreed to file a Registration Statement on Form S-3 to register the resale of the shares of common stock issuable upon exercise of the New Warrants within ten business days following the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2025. Issuance of Common stock Per Exercise of Warrants In April and May 2026, holders exercised 3,679,905 common stock purchase warrants at an exercise price of $ 0.66 per share. The related proceeds had been previously recorded within stock payable and were reclassified to common stock to be issued as of March 31, 2026. At-the-Market Offering On April 15, 2026, the Company entered into an At-the-Market Issuance Sales Agreement (the “ATM Agreement”) with Aegis Capital Corp., as sales agent, pursuant to which the Company may offer and sell, from time to time, shares of its common stock having an aggregate offering price of up to $ 100.0 million. Sales under the ATM Agreement, if any, will be made pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-291361), which was declared effective by the Securities and Exchange Commission on November 26, 2025, and the related prospectus supplement filed on April 15, 2026. The Company will pay the sales agent a commission equal to 2.0 % of the gross proceeds from any sales of common stock under the ATM Agreement. In accordance with General Instruction I.B.6 of Form S-3, so long as the aggregate market value of the Company’s common stock held by non-affiliates remains below $ 75.0 million, the Company may not sell, in any twelve-month period, securities with an aggregate market value exceeding one-third of such non-affiliate float. Marketing and Sponsorship Agreements In May 2026, the Company issued 940,439 shares of common stock to Athlete Capital Sports LLC pursuant to an agreement entered into on March 12, 2026, and issued 151,538 shares of common stock to Learfield Communications LLC pursuant to an agreement entered into on January 26, 2026, each in connection with marketing and sponsorship services. Florida State Collegiate Apparel Agreement On May 1, 2026, the Company entered into an Exclusive Private Label Manufacturing Agreement with The Battle’s End, LLC, the marketing agent for certain student-athletes attending Florida State University. The agreement has a three-year term, with the option to renew for successive one-year periods. Under the agreement, the Company is engaged as the exclusive manufacturer of private label apparel products bearing The Battle’s End’s logos and trademarks and Florida State University marks (excluding athletic jerseys), and The Battle’s End will utilize student-athletes for marketing and distribution as a licensee of the University. As partial consideration for the exclusive engagement, the Company agreed to issue to The Battle’s End $ 1,050,000 of the Company’s common stock, representing the entire stock consideration for the 3 three-year term, with the number of shares to be determined based on the five-day volume-weighted average price ending one day prior to issuance. The shares vest immediately upon issuance and are subject to a 15-month make-whole guarantee pursuant to which the Company will issue additional shares or cash if the share price declines, with any true-up to be delivered within 90 days following the first anniversary and, if applicable, the 15-month anniversary of the Effective Date. The Company has also agreed to use reasonable best efforts to file a registration statement with the SEC covering the resale of the shares within 45 days of the Effective Date. The shares issued will be accompanied by a proxy agreement assigning voting rights to the Company’s President, Hil Davis. If Florida State University-branded merchandise gross sales rank among the top four for any university-specific licensed merchandise in any calendar year during the term, the Company will issue an additional $ 500,000 of common stock to The Battle’s End. In addition to the stock consideration, the Company has agreed to invest $ 250,000 per year for three years in digital advertising, influencer marketing, and related expenses in support of the program. 30