Digital Brands Group, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the historical financial statements of the relevant entities and the pro forma financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Unless otherwise indicated by the context, references to “DBG” refer to Digital Brands Group, Inc. solely, and references to “Digital Brands Group,” the “Company,” “our,” “we,” “us” and similar terms refer to Digital Brands Group, Inc., together with its wholly owned subsidiaries Bailey 44, LLC (“Bailey”), MOSBEST, LLC (“Stateside”) and Sunnyside (“Sundry”). Overview Our Company Digital Brands Group is a curated collection of lifestyle brands, including Bailey 44, DSTLD, Stateside, Sundry and Avo, that offers a variety of apparel products through direct-to-consumer and wholesale distribution. Our complementary brand portfolio provides us with the unique opportunity to cross merchandise our brands. We aim for our customers to wear our brands head to toe and to capture what we call “closet share” by gaining insight into their preferences to create targeted and personalized content specific to their cohort. Operating our brands under one portfolio provides us with the ability to better utilize our technological, human capital and operational capabilities across all brands. As a result, we have been able to realize operational efficiencies and continue to identify additional cost-saving opportunities to scale our brands and overall portfolio. Our portfolio consists of five significant brands that leverage our three channels: our websites, wholesale and license revenue. ● Bailey 44 combines beautiful, luxe fabrics and on-trend designs to create sophisticated ready-to-wear capsules for women on-the-go. Designing for real life, this brand focuses on feeling and comfort rather than how it looks on a runway. Bailey 44 is primarily a wholesale brand, which we are transitioning to a digital, direct-to-consumer brand. ● DSTLD offers stylish high-quality garments without the luxury retail markup valuing customer experience over labels. DSTLD is primarily a digital direct-to-consumer brand, to which we recently added select wholesale retailers to generate brand awareness. ● Stateside is an elevated, America-first brand with all knitting, dyeing, cutting and sewing sourced and manufactured locally in Los Angeles. The collection is influenced by the evolution of the classic T-shirt offering a simple yet elegant look. Stateside is primarily a wholesale brand that we will be transitioning to a digital, direct-to-consumer brand. ● Sundry offers distinct collections of women’s clothing, including dresses, shirts, sweaters, skirts, shorts, athleisure bottoms and other accessory products. Sundry’s products are coastal casual and consist of soft, relaxed and colorful designs that feature a distinct French chic, resembling the spirits of the French Mediterranean and the energy of Venice Beach in Southern California. Sundry is primarily a wholesale brand that we will be transitioning to a digital, direct-to-consumer brand. ● Avo is a women’s essential brand that will offer t-shirts, sweats, dresses, sweaters and athleisure. Avo eliminates the wholesale mark-up, so its products have a sharper price point. Avo also offers larger discounts when the customer bundles multiple products to their cart, which allows Avo to leverage its shipping and fulfillment costs. Avo leverages the Company’s current design and supply chain infrastructure, so we use similar or the same fabrics and contractors for Avo that we do for our other brands. 31 We believe that successful apparel brands sell in all revenue channels. However, each channel offers different margin structures and requires different customer acquisition and retention strategies. We were founded as a digital-first retailer that has strategically expanded into select wholesale and direct retail channels. We strive to strategically create omnichannel strategies for each of our brands that blend physical and online channels to engage consumers in the channel of their choosing. Our products are sold direct-to-consumers principally through our websites and our own showrooms, but also through our wholesale channel, primarily in specialty stores and select department stores. With the continued expansion of our wholesale distribution, we believe developing an omnichannel solution further strengthens our ability to efficiently acquire and retain customers, while also driving high customer lifetime value (“LTV”), which we define as an estimate of the average revenue that a customer will generate throughout their lifespan as our customer. This value/revenue of a customer helps us determine many economic decisions, such as marketing budgets per marketing channel, retention versus acquisition decisions, unit level economics, profitability and revenue forecasting. We believe that by leveraging a physical footprint to acquire customers and increase brand awareness, we can use digital marketing to focus on retention and a very tight, disciplined high value new customer acquisition strategy, especially targeting potential customers lower in the sales funnel. Building a direct relationship with the customer as the customer transacts directly with us allows us to better understand our customer’s preferences and shopping habits. Our substantial experience as a company originally founded as a digitally native-first retailer gives us the ability to strategically review and analyze the customer’s data, including contact information, browsing and shopping cart data, purchase history and style preferences. This in turn has the effect of lowering our inventory risk and cash needs since we can order and replenish product based on the data from our online sales history, replenish specific inventory by size, color and SKU based on real times sales data, and control our mark-down and promotional strategies versus being told what mark downs and promotions we have to offer by the department stores and boutique retailers. We define “closet share” as the percentage (“share”) of a customer’s clothing units that (“of closet”) she or he owns in her or his closet and the amount of those units that go to the brands that are selling these units. For example, if a customer buys 20 units of clothing a year and the brands that we own represent 10 of those units purchased, then our closet share is 50% of that customer’s closet, or 10 of our branded units divided by 20 units they purchased in the entirety. Closet share is a similar concept to the widely used term wallet share; it is just specific to the customer’s closet. The higher our closet share, the higher our revenue, as higher closet share suggests the customer is purchasing more of our brands than our competitors. We have strategically expanded into an omnichannel brand offering these styles and content not only online but at selected wholesale and retail storefronts. We believe this approach provides us opportunities to successfully drive LTV, while increasing new customer growth. Material Trends, Events and Uncertainties Supply Chain Disruptions We are subject to global supply chain disruptions, which may include longer lead times for raw fabrics, inbound shipping and longer production times. Supply chain issues have specifically impacted our brands as follows: ● Increased costs in raw materials from fabric prices, which have increased 10% to 100% depending on the fabric, the time of year, and the origin of the fabric, as well as where the fabric is being shipped; ● Increased cost per kilo to ship via sea or air, which has increased from 25% to 300% depending on the time of year and the country we are shipping from; ● Increased transit time via sea or air, which has increased by two weeks to two months; and ● Increased labor costs for producing the finished goods, which have increased 5% to 25% depending on the country and the labor skill required to produce the goods. We have been able to pass along some of these increased costs and also offset some of these increased costs with higher gross margin online revenue. 32 Seasonality Our quarterly operating results vary due to the seasonality of our individual brands, and are historically stronger in the second half of the calendar year. Substantial Indebtedness As of March 31, 2026, we had an aggregate principal amount of debt outstanding of approximately $6.4 million. We believe this amount of indebtedness may be considered significant for a company of our size and current revenue base. Our substantial debt could have important consequences to us. For example, it could: ● Make it more difficult for us to satisfy our obligations to the holders of our outstanding debt, resulting in possible defaults on and acceleration of such indebtedness; ● Require us to dedicate a substantial portion of our cash flows from operations to make payments on our debt, which would reduce the availability of our cash flows from operations to fund working capital, capital expenditures or other general corporate purposes; ● Increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations; ● Place us at a competitive disadvantage to our competitors with proportionately less debt for their size; ● Limit our ability to refinance our existing indebtedness or borrow additional funds in the future; ● Limit our flexibility in planning for, or reacting to, changing conditions in our business; and ● Limit our ability to react to competitive pressures or make it difficult for us to carry out capital spending that is necessary or important to our growth strategy. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. We currently have $3.5 million in notes outstanding pursuant to our Bailey acquisition. However, we have recently generated cash flows through a private offering and have established business plans that we believe are sufficient to enable us to repay the outstanding notes, including principal, premium (if any), and interest on our indebtedness. In addition, while our ability to make scheduled payments or refinance obligations under our debt agreements remains subject to prevailing economic and competitive conditions—as well as the financial and business risks described herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025—we believe our current liquidity position and forward-looking strategies provide us with the necessary resources to meet these obligations as they come due. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures or planned growth objectives, seek to obtain additional equity capital or restructure our indebtedness. In the future, our cash flows and capital resources may not be sufficient for payments of interest on and principal of our debt, and such alternative measures may not be successful and may not permit us to meet scheduled debt service obligations. In addition, the recent worldwide credit crisis could make it more difficult for us to refinance our indebtedness on favorable terms, or at all. 33 In the absence of such operating results and resources, we may be required to dispose of material assets to meet our debt service obligations. We may not be able to consummate those sales, or, if we do, we will not control the timing of the sales or whether the proceeds that we realize will be adequate to meet debt service obligations when due. Performance Factors We believe that our future performance will depend on many factors, including the following: ● Ability to Increase Our Customer Base in both Online and Traditional Wholesale Distribution Channels. We are currently growing our customer base through both paid and organic online channels, as well as by expanding our presence in a variety of physical retail distribution channels. Online customer acquisitions typically occur at our direct websites for each brand. Our online customer acquisition strategies include paid and unpaid social media, search, display and traditional media. Our products for Bailey, DSTLD and Stateside are also sold through a growing number of physical retail channels, including specialty stores, department stores and online multi-brand platforms. ● Ability to Acquire Customers at a Reasonable Cost. We believe an ability to consistently acquire customers at a reasonable cost relative to customer retention rates, contribution margins and projected life-time value will be a key factor affecting future performance. To accomplish this goal, we intend to balance advertising spend between online and offline channels, as well as cross marketing and cross merchandising our portfolio brands and their respective products. We believe the ability to cross-merchandise products and cross-market brands, will decrease our customer acquisition costs while increasing the customer’s lifetime value and contribution margin. We will also balance marketing spend with advertising focused on creating emotional brand recognition, which we believe will represent a lower percentage of our spend. ● Ability to Drive Repeat Purchases and Customer Retention. We accrue substantial economic value and margin expansion from customer cohort retention and repeat purchases of our products on an annual basis. Our revenue growth rate and operating margin expansion will be affected by our customer cohort retention rates and the cohorts annual spend for both existing and newly acquired customers. ● Ability to Expand Our Product Lines. Our goal is to expand our product lines over time to increase our growth opportunity. Our customers’ annual spend and brand relevance will be driven by the cadence and success of new product launches. ● Ability to Expand Gross Margins. Our overall profitability will be impacted by our ability to expand gross margins through effective sourcing and leveraging buying power of finished goods and shipping costs, as well as pricing power over time. ● Ability to Expand Operating Margins. Our ability to expand operating margins will be impacted by our ability to leverage (i) fixed general and administrative costs; (ii) variable sales and marketing costs; (iii) elimination of redundant costs as we acquire and integrate brands; (iv) cross marketing and cross merchandising brands in our portfolio; and (v) drive customer retention and customer lifetime value. Our ability to expand operating margins will result from increasing revenue growth above our operating expense growth, as well as increasing gross margins. For example, we anticipate that our operating expenses will increase substantially in the foreseeable future as we undertake the acquisition and integration of different brands, incur expenses associated with maintaining compliance as a public company, and increased marketing and sales efforts to increase our customer base. While we anticipate that the operating expenses in absolute dollars will increase, we do not anticipate that the operating expenses as a percentage of revenue will increase. We anticipate that the operating expenses as a percentage of revenue will decrease as we eliminate duplicative costs across brands including a reduction in similar labor roles, contracts for technologies and operating systems and creating lower costs from higher purchasing power from shipping expenses to purchase orders of products. This reduction of expenses and lower cost per unit due to purchasing power should create meaningful savings in both dollars and as a percentage of revenue. 34 As an example, we were able to eliminate several million in expenses within six months of acquiring Bailey. Examples of these savings include eliminating several Bailey teams, which our teams took over. We merged over half of the technology contracts and operating systems contracts from two brands into one brand contract at significant savings. We also eliminated our office space and rent and moved everyone into the Bailey office space. Finally, we eliminated DSTLD’s third-party logistics company and started using Bailey’s internal logistics. This resulted in an increase in our operating expenses in absolute dollars as there were now two brands versus one brand. However, the operating expenses as a percentage of pre-COVID revenue declined meaningfully and as we increase revenue for each brand, we expect to experience higher margins. ● Ability to Create Free Cash Flow. Our goal is to achieve near term free cash flow through cash flow positive acquisitions, elimination of redundant expenses in acquired companies, increasing customer annual spend and lowering customer acquisition costs through cross merchandising across our brand portfolio. Financial Statement Components Bailey ● Net Revenue. Bailey sells its products directly to customers. Bailey also sells its products indirectly through wholesale channels that include third-party online channels and physical channels such as specialty retailers and department stores. ● Cost of Net Revenue. Bailey’s cost of net revenue includes the direct cost of purchased and manufactured merchandise; inventory shrinkage; inventory adjustments due to obsolescence including excess and slow-moving inventory and lower of cost and net realizable reserves; duties; and inbound freight. Cost of net revenue also includes direct labor to production activities such as pattern makers, cutters and sewers. Cost of net revenue includes an allocation of overheard costs such as rent, utilities and commercial insurance pertaining to direct inventory activities. ● Operating Expenses. Bailey’s operating expenses include all operating costs not included in cost of net revenues and sales and marketing. These costs consist of general and administrative, fulfillment and shipping expense to the customer. General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, occupancy expenses related to Bailey’s operations at its headquarters, including utilities, depreciation and amortization, and other costs related to the administration of its business. Bailey’s fulfillment and shipping expenses include the cost to operate its warehouse including occupancy and labor costs to pick and pack customer orders and any return orders; packaging; and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse. ● Sales & Marketing. Bailey’s sales and marketing expense primarily includes digital advertising; photo shoots for wholesale and direct-to-consumer communications, including email, social media and digital advertisements; and commission expenses associated with sales representatives. ● Interest Expense. Bailey’s interest expense consists primarily of interest related to its outstanding debt to our senior lender. 35 DBG ● Net Revenue. We sell our products to our customers directly through our website. In those cases, sales, net represents total sales less returns, promotions and discounts. ● Cost of Net Revenue. Cost of net revenue includes direct cost of purchased merchandise; inventory shrinkage; inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost and net realizable reserves. ● Operating Expenses. Our operating expenses include all operating costs not included in cost of net revenues. These costs consist of general and administrative, sales and marketing, and fulfillment and shipping expense to the customer. General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, and expenses related to our operations at our headquarters, including utilities, depreciation and amortization, and other costs related to the administration of our business. We expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC and higher expenses for insurance, investor relations and professional services. We expect these costs will increase our operating costs. Fulfillment and shipping expenses include the cost to operate our warehouse — or prior to Bailey 44 acquisition, costs paid to our third-party logistics provider — including occupancy and labor costs to pick and pack customer orders and any return orders; packaging; and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse. In addition, going forward, the amortization of the identifiable intangibles acquired in the acquisitions will be included in operating expenses. ● Interest Expense. Interest expense consists primarily of interest related to our debt outstanding to our senior lender, convertible debt, and other interest-bearing liabilities. Stateside ● Net Revenue. Stateside sells its products directly to customers. Stateside also sells its products indirectly through wholesale channels that include third-party online channels and physical channels such as specialty retailers and department stores. ● Cost of Net Revenue. Stateside’s cost of net revenue includes the direct cost of purchased and manufactured merchandise; inventory shrinkage; inventory adjustments due to obsolescence including excess and slow-moving inventory and lower of cost and net realizable reserves; duties; and inbound freight. Cost of net revenue also includes direct labor to production activities such as pattern makers, cutters and sewers. Cost of net revenue includes an allocation of overheard costs such as rent, utilities and commercial insurance pertaining to direct inventory activities. ● Operating Expenses. Stateside’s operating expenses include all operating costs not included in cost of net revenues and sales and marketing. These costs consist of general and administrative, fulfillment and shipping expense to the customer. 36 General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, occupancy expenses related to Stateside’s stores and to Stateside’s operations at its headquarters, including utilities, depreciation and amortization, and other costs related to the administration of its business. Stateside’s fulfillment and shipping expenses include the cost to operate its warehouse including occupancy and labor costs to pick and pack customer orders and any return orders; packaging; and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse. ● Sales & Marketing. Stateside’s sales and marketing expense primarily includes digital advertising; photo shoots for wholesale and direct-to-consumer communications, including email, social media and digital advertisements; and commission expenses associated with sales representatives. Sundry ● Net Revenue . Sundry sells its products directly to customers. Sundry also sells its products indirectly through wholesale channels that include third-party online channels and physical channels such as specialty retailers and department stores. ● Cost of Net Revenue. Sundry’s cost of net revenue includes the direct cost of purchased and manufactured merchandise; inventory shrinkage; inventory adjustments due to obsolescence including excess and slow-moving inventory and lower of cost and net realizable reserves; duties; and inbound freight. Cost of net revenue also includes direct labor to production activities such as pattern makers, cutters and sewers. Cost of net revenue includes an allocation of overheard costs such as rent, utilities and commercial insurance pertaining to direct inventory activities. ● Operating Expenses. Our operating expenses include all operating costs not included in cost of net revenues. These costs consist of general and administrative, sales and marketing, and fulfillment and shipping expense to the customer. General and administrative expenses consist primarily of all payroll and payroll-related expenses, stock-based compensation, professional fees, insurance, software costs, and expenses related to our operations at our headquarters, including utilities, depreciation and amortization, and other costs related to the administration of our business. Sales and marketing expense primarily includes digital advertising; photo shoots for wholesale and direct-to-consumer communications, including email, social media and digital advertisements; and commission expenses associated with sales representatives. We expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC and higher expenses for insurance, investor relations and professional services. We expect these costs will increase our operating costs. Distribution expenses includes costs paid to our third-party logistics provider, packaging and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse. At each reporting period, we estimate changes in the fair value of contingent consideration and recognize any change in fair in our consolidated statement of operations, which is included in operating expenses. Additionally, amortization of the identifiable intangibles acquired in the acquisitions is also included in operating expenses. ● Interest Expense. Interest expense consists primarily of interest related to our debt outstanding to promissory notes, convertible debt, and other interest-bearing liabilities. 37 Recent Developments During the three months ended March 31, 2026, the Company continued to expand its collegiate apparel, marketing and strategic advisory platform through existing arrangements with AAA Tuscaloosa (University of Alabama), LLC, Traffic Holdco, LLC, Buffalo Sports Properties / Learfield, The Grove Collective, LLC and MavDB Consulting LLC. Effective January 26, 2026, the Company entered into a Marketing and Sponsorship Agreement with Learfield in connection with the University of Colorado athletic program. Under the agreement, the Company is required to provide annual consideration consisting of cash and equity in exchange for sponsorship, media and marketing rights. The equity component is accounted for in accordance with ASC 718 and, as of March 31, 2026, no shares had been issued under the arrangement. The Company recorded a prepaid marketing asset with a corresponding stock payable liability and amortizes the prepaid balance over the related service period. The agreement includes a make-whole provision; however, no make-whole adjustment had been triggered as of March 31, 2026 because no shares had been issued. Effective March 12, 2026, the Company entered into a consulting agreement with Athlete Capital Sports LLC pursuant to which the Company agreed to issue shares with an aggregate value of approximately $3.0 million in exchange for consulting and advisory services to be provided over a three-year term. As of March 31, 2026, no shares had been issued under the agreement. The Company recorded a prepaid consulting asset with a corresponding accrued liability/stock payable and amortizes the prepaid balance over the contractual service period. The agreement includes a make-whole provision that may result in variability in settlement; however, because no shares had been issued as of March 31, 2026, no derivative liability was recognized. During the three months ended March 31, 2026, holders exercised 1,275,577 pre-funded warrants previously issued in connection with the MavDB Consulting LLC marketing services agreement, and the Company issued the related shares of common stock. In addition, holders exercised an aggregate of 4,464,604 common stock purchase warrants originally issued in connection with the February 2025 Offering, including 2,365,968 warrants exercised pursuant to warrant exchange agreements entered into on February 16, 2026. In consideration for such exercises, the Company issued 9,634,032 new common stock purchase warrants exercisable at $0.66 per share and expiring on 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. During the three months ended March 31, 2026, holders also converted 1,250 shares of Series D Preferred Stock into 563,284 shares of the Company’s common stock. No Exposure to de-Minimis The Company does not use and has never used the “de minimis” exemption. The “de minimis” provision, which allowed duty-free entry for low-value imports (under $800), has been overturned for goods from China and Hong Kong, effective May 2, 2025. This means that goods imported from these countries, even if under the $800 threshold, will now be subject to tariffs. A significant number of e-commerce retailers relied on the de minimis exemption, which the Company believes will require them to significantly increase their prices or to experience a significant decline in gross margin and profitability. The Company has been approached by several e-commerce companies with the de minimis exposure seeking to sell their company at meaningfully reduced valuations. The Company believes this change in the de minimis policy should reduce the number of online apparel brands, and create a less crowded marketplace. 38 Our Financial Position For the three months ended March 31, 2026 and 2025, we generated net revenues of $1.3 million and $1.9 million, respectively, and reported net loss of $11.4 million and $2.1 million, respectively. As noted in our unaudited condensed consolidated financial statements, as of March 31, 2026, we had an accumulated deficit of $166.8 million. Results of Operations Three Months Ended March 31, 2026 compared to Three Months Ended March 31, 2025. The following table presents our results of operations for the three months ended March 31, 2026 and 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 General and administrative 2,572,284 1,973,803 Sales and marketing 4,752,255 828,788 Other operating expenses 139,974 66,424 Operating loss (7,419,132 ) (1,996,560 ) Other expenses (3,972,901 ) (93,350 ) Loss before provision for income taxes (11,392,033 ) (2,089,910 ) Provision for income taxes - - Net loss $ (11,392,033 ) $ (2,089,910 ) Net Revenues Net revenues decreased by $0.6 million to $1.3 million for the three months ended March 31, 2026, compared to $1.9 million in the corresponding fiscal period in 2025. The decrease was primarily associated with lower wholesale activity period over period, partially offset by the Company’s continued investment in its direct-to-consumer brand portfolio. The Company expects revenue growth in subsequent periods through its expanded NIL and licensing partnerships, including the recently announced Penn State NIL agreement and Sundry / TJX licensing arrangement. However, the Company continues to experience pressure on gross margins due to the operational costs required to support and manage these programs and related wholesale relationships. The Company expects this decline in wholesale revenue to be offset in the remainder of 2025 as a result of the Company’s second largest wholesale account’s anticipated doubling of the number of its domestic retail doors from 50 to 100 and expansion of its international doors. Gross Profit Our gross profit decreased by $0.8 million for the three months ended March 31, 2026 to $45,381 from a gross profit of $0.9 million for the corresponding fiscal period in 2025. The decrease in gross profit was primarily attributable to a decrease in revenue combined with higher cost of goods sold relative to revenue, reflecting product mix and inventory positioning. 39 Our gross margin was approximately 3% for the three months ended March 31, 2026, compared to 47% for the three months ended March 31, 2025. The compression in gross margin reflects the lower revenue base relative to cost of goods sold during the period. The Company expects gross margins to recover as revenues increase, leveraging fixed costs, a higher mix of e-commerce revenue, and improved wholesale account mix. The Company expects gross margins to expand as revenues increase and leverage fixed costs, a higher mix of e-commerce revenue, which as higher gross margins and the mix of wholesale accounts with higher gross margins. Operating Expenses Operating expenses totaled $7.5 million for the three months ended March 31, 2026, compared to $2.9 million for the corresponding period in 2025. The $4.6 million increase was primarily driven by higher sales and marketing expense reflecting amortization of prepaid marketing assets from the collegiate apparel name, image and likeness (“NIL”) agreements (AAA Tuscaloosa, Traffic Holdco, Grove Collective, Learfield/Buffalo Sports) and the MavDB Consulting agreement, all of which were entered into during 2025. Other Expense Other expense was $4.0 million for the three months ended March 31, 2026, compared to $0.1 million for the three months ended March 31, 2025. The increase was primarily driven by a $3.9 million non-cash charge for the change in fair value of the share-based payment liability arising from the make-whole provisions in the collegiate apparel NIL agreements. Interest expense remained consistent at approximately $0.1 million in both periods. Net Loss Our net loss was $11.4 million for the three months ended March 31, 2026 compared to a net loss of $2.1 million for the three months ended March 31, 2025. The increase in net loss was primarily driven by (i) the $3.9 million non-cash charge for the change in fair value of the share-based payment liability, (ii) higher sales and marketing expense from amortization of prepaid marketing assets, and (iii) lower gross profit from reduced revenue. Liquidity and Capital Resources Each of DBG, Bailey, Stateside and Sundry has historically satisfied both liquidity needs and funding of operations through borrowings capital raises and internally generated cash flow, Changes in working capital, are driven primarily by levels of business activity. Historically each of DBG, Bailey, Stateside and Sundry has maintained credit line facilities to support such working capital needs and makes repayments on that facility with excess cash flow from operations. The Company requires significant capital to meet its obligations as they become due. Management believes its existing cash resources and planned operations—including revenues expected from its collegiate apparel program, continued cost reduction measures will be sufficient to fund operations for at least twelve months from the date of issuance of these financial statements. The Company may also pursue additional equity or debt financings as needed. There can be no assurance as to the availability or terms upon which such financing might be available. The Bailey sellers’ promissory note of $3,500,000 matured on December 8, 2025 and remains in default; management is in active discussions with the lender regarding repayment or extension. 40 Cash Flow Activities The following table presents selected captions from our condensed statements of cash flows for the three months ended March 31, 2026, and 2025: Three Months Ended March 31, 2026 2025 Net cash provided by operating activities: Net loss $ (11,392,033 ) $ (2,089,910 ) Non-cash adjustments $ 4 ,156,093 $ 429,349 Change in operating assets and liabilities $ 2,524,870 $ (2,846,786 ) Net cash used in operating activities $ (4,711,070 ) $ (4,507,347 ) Net cash provided by (used in) investing activities $ (260,475 ) $ - Net cash provided by financing activities $ 2,412,911 $ 6,587,057 Net change in cash $ (2,558,634 ) $ 2,079,710 Cash Flows Used In Operating Activities Our cash used in operating activities was $4.7 million for the three months ended March 31, 2026, compared to cash used in operating activities of $4.5 million for the corresponding fiscal period in 2025. The change in net cash used in operating activities was primarily driven by higher net loss in 2026 (offset by non-cash adjustments including the $3.9 million change in fair value of share-based payment liability), and changes in operating assets and liabilities compared to the prior period, higher operational losses, including increased sales and marketing expenses, and lower non-cash charges in 2025. Cash Flows Used in Investing Activities Net cash used in investing activities was approximately $0.3 million and $0 during the three months ended March 31, 2026 and March 31, 2025, respectively, primarily related to the purchase of a vehicle and payment of security deposit for Texas lease during the three months ended March 31, 2026. Cash Flows Provided by Financing Activities Cash provided by financing activities was $2.4 million for the three months ended March 31, 2026, compared to $6.6 million for the three months ended March 31, 2025. Cash inflows in 2026 included approximately $2.6 million from the exercise of warrants offset by payment of loan. Cash inflows in 2025 primarily consists of $6.6 million in net proceeds from issuance of common stock and pre funded warrants. Contractual Obligations and Commitments As of March 31, 2026, we had $6.1 million in outstanding principal on debt, primarily our promissory notes due to the Bailey sellers, U.S. Small Business Association (“SBA”) Paycheck Protection Program (PPP) loans, and merchant advances. Aside from our remaining non-current SBA obligations, all outstanding loans have maturity dates through 2025. Off-Balance Sheet Arrangements and Future Commitment We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Critical Accounting Policies and Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. See Note 3 to the accompanying unaudited condensed consolidated financial statements, which disclosure is incorporated herein by reference. 41 Emerging Growth Company Status We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), and, as such, have elected to comply with certain reduced public company reporting requirements. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may, therefore, not be comparable to those of companies that comply with such new or revised accounting standards. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 promulgated under the Exchange Act and are not required to provide the information required by this Item 3.