Digital Brands Group, Inc. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2025 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______to______ Commission file number: 001-40400 DIGITAL BRANDS GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 46-1942864 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1400 Lavaca Street Austin , TX 78701 (Address of principal executive offices, including zip code) (209) 651-0172 (Registrant’s telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered N/A N/A N/A Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☒ If an emerging growth company, indicate by check mark if this registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of May 15, 2025, the Company had 4,146,494 shares of common stock, $ 0.0001 par value, issued and outstanding. DIGITAL BRANDS GROUP, INC. FORM 10-Q TABLE OF CONTENTS Page CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 3 PART I. FINANCIAL INFORMATION 4 ITEM 1. Financial Statements 4 Condensed Consolidated Balance Sheets as of March 31, 2025 (Unaudited), and December 31, 2024 4 Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2025 and 2024 5 Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2025 and 2024 6 Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2025 and 2024 7 Notes to Unaudited Condensed Consolidated Financial Statements 8 ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24 ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 35 ITEM 4. Controls and Procedures 35 PART II. OTHER INFORMATION 37 ITEM 1. Legal Proceedings 37 ITEM 1A. Risk Factors 38 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 38 ITEM 3. Defaults upon Senior Securities 38 ITEM 4. Mine Safety Disclosures 38 ITEM 5. Other Information 38 ITEM 6. Exhibits 39 SIGNATURES 40 2 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Except for historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward- looking terminology, including the terms “believe,” “estimate,” “project,” “aim,” “anticipate,” “expect,” “seek,” “predict,” “contemplate,” “continue,” “possible,” “intend,” “may,” “plan,” “forecast,” “future,” “might,” “will,” “could,” would” or “should” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Annual Report on Form 10-K and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth strategies, the industry in which we operate and potential acquisitions. We derive many of our forward- looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this Quarterly Report on Form 10-Q. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward- looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the stability of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause our results to vary from expectations include those discussed in “Risk Factors” in our most recent Annual Report on Form 10-K, as the same may be updated from time to time. Estimates and forward-looking statements speak only as of the date they were made, and, except to the extent required by law, we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. 3 PART I – FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIGITAL BRANDS GROUP, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, December 31, 2025 2024 ASSETS Current assets: Cash and cash equivalents $ 2,244,142 $ 164,431 Accounts receivable, net 50,137 44,067 Due from factor, net 306,065 390,186 Inventory 4,253,602 3,823,940 Prepaid expenses and other current assets 5,614,625 274,643 Total current assets 12,468,571 4,697,267 Property, equipment and software, net 22,404 24,089 Goodwill 8,973,501 8,973,501 Intangible assets, net 5,703,499 6,120,039 Deposits 75,431 75,431 Total assets $ 27,243,406 $ 19,890,327 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities: Accounts payable $ 6,006,880 $ 6,424,661 Accrued expenses and other liabilities 5,431,740 5,257,102 Due to related parties 411,921 411,921 Convertible note payable, net - 100,000 Accrued interest payable 2,416,028 2,328,078 Loan payable, current 1,920,570 2,798,116 Promissory note payable, net 3,500,000 3,500,000 Total current liabilities 19,687,139 20,819,878 Loan payable 1,083,295 150,000 Deferred tax liability 248,990 248,990 Total liabilities 21,019,424 21,218,868 Commitments and contingencies - - Stockholders’ equity (deficit): Undesignated preferred stock, $ 0.0001 par, 10,000,000 shares authorized, 0 shares issued and outstanding as of both March 31, 2025 and December 31, 2024 - - Series A convertible preferred stock, $ 0.0001 par, 6,300 shares designated, 6,300 shares issued and outstanding as of both March 31, 2025 and December 31, 2024 1 1 Series C convertible preferred stock, $ 0.0001 par, 1,344 and 4,786 shares issued and outstanding as of March 31, 2025 and December 31, 2024, respectively 1 1 Preferred stock, value 1 1 Common stock, $ 0.0001 par, 1,000,000,000 shares authorized, 4,146,494 and 22,285 shares issued and outstanding as of March 31, 2025 and December 31, 2024, respectively 413 83 Additional paid-in capital 135,414,515 125,772,412 Accumulated deficit ( 129,190,948 ) ( 127,101,038 ) Total stockholders’ equity (deficit) 6,223,982 ( 1,328,541 ) Total liabilities and stockholders’ equity (deficit) $ 27,243,406 $ 19,890,327 4 DIGITAL BRANDS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 2025 2024 Three Months Ended March, 31 2025 2024 Net revenues $ 1,871,701 $ 3,576,587 Cost of net revenues 999,246 1,855,851 Gross profit 872,455 1,720,736 Operating expenses: General and administrative 1,973,803 971,732 Sales and marketing 828,788 708,150 Distribution 66,424 265,499 Total operating expenses 2,869,015 1,945,381 Loss from operations ( 1,996,560 ) ( 224,645 ) Other income (expense): Interest expense ( 134,923 ) ( 504,991 ) Other non-operating income (expenses) 41,573 45,901 Total other income (expense), net ( 93,350 ) ( 459,090 ) Income tax benefit (provision) - - Net loss $ ( 2,089,910 ) $ ( 683,735 ) Weighted average common shares outstanding - basic and diluted 2,278,447 29,704 Net loss per common share - basic and diluted $ ( 0.92 ) $ ( 23.02 ) 5 DIGITAL BRANDS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (UNAUDITED) Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit) Series A Convertible Series C Convertible Additional Total Stockholders’ Preferred Stock Preferred Stock Common Stock Paid-in Accumulated Equity Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit) Balances at December 31, 2023 6,300 1 4,786 1 22,287 $ 2 115,597,037 ( 113,994,449 ) 1,602,592 Issuance of common stock pursuant to private placements - - - - 8,898 1 1,736,206 - 1,736,207 Shares issued for services - - - - 1,372 - 224,265 - 224,265 Conversion of preferred shares into common stock - - ( 1,547 ) - 1,726 - - - - Stock-based compensation - - - - - - 100,299 - 100,299 Net loss - - - - - - - ( 683,735 ) ( 683,735 ) Balances at March 31, 2024 6,300 1 3,239 1 34,283 3 117,657,807 ( 114,678,184 ) 2,979,628 Balances at December 31, 2024 6,300 $ 1 1,344 $ 1 838,584 $ 83 $ 125,772,412 $ ( 127,101,038 ) $ ( 1,328,541 ) Balance 6,300 $ 1 1,344 $ 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 1,344 1 4,146,494 413 135,414,514 ( 129,190,948 ) 6,223,982 Balance 6,300 1 1,344 1 4,146,494 413 135,414,514 ( 129,190,948 ) 6,223,982 6 DIGITAL BRANDS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 2025 2024 Three Months Ended March 31, 2025 2024 Cash flows from operating activities: Net loss $ ( 2,089,910 ) $ ( 683,735 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 418,225 719,547 Amortization of loan discount and fees 11,124 665,932 Stock-based compensation - 100,299 Shares issued for services - 142,536 Change in credit reserve - ( 151,611 ) Non-cash lease expense - 244,694 Changes in operating assets and liabilities: Accounts receivable, net ( 6,070 ) ( 207,071 ) Due from factor 84,121 ( 297,951 ) Inventory ( 429,662 ) 201,127 Prepaid expenses and other current assets ( 2,339,982 ) ( 24,545 ) Accounts payable ( 417,781 ) ( 1,190,358 ) Accrued expenses and other liabilities 262,588 ( 440,775 ) Accrued interest payable - ( 161,130 ) Lease liabilities - ( 157,500 ) Net cash used in operating activities ( 4,507,347 ) ( 1,240,540 ) Cash flows from investing activities: Purchase of property, equipment and software - ( 13,785 ) Net cash used in investing activities - ( 13,785 ) Cash flows from financing activities: Repayments from related party advances - ( 1,234 ) Advances from factor - 27,936 Proceeds from loans and note payable 100,000 - Repayments of convertible notes and loan payable ( 155,376 ) ( 518,026 ) Issuance of common stock and pre-funded warrants pursuant to private placement offering 6,642,433 - Issuance of common stock in public offering - 1,736,206 Net cash provided by financing activities 6,587,057 1,244,882 Net change in cash and cash equivalents 2,079,711 ( 9,443 ) Cash and cash equivalents at beginning of year 164,431 20,773 Cash and cash equivalents at end of year $ 2,244,142 $ 11,330 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: Noncash prepaid vendor agreement $ 3,000,000 $ - Shares issued for services and conversion of accounts payable $ - $ 81,371 Noncash issuance of shares $ 318 $ - Conversion of preferred shares into common stock $ - $ 9 7 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 NOTE 1: NATURE OF OPERATIONS Digital Brands Group, Inc. (the “Company” or “DBG”), was organized on September 17, 2012 under the laws of Delaware as a limited liability company under the name Denim.LA LLC. The Company converted to a Delaware corporation on January 30, 2013 and changed its name to Denim.LA, Inc. Effective December 31, 2020, the Company changed its name to Digital Brands Group, Inc. (DBG). On February 12, 2020, Denim.LA, Inc. entered into an Agreement and Plan of Merger with Bailey 44, LLC (“Bailey”), a Delaware limited liability company. On the acquisition date, Bailey 44 , LLC became a wholly owned subsidiary of the Company. See Note 4. On August 30, 2021, the Company closed its acquisition of Mosbest, LLC dba Stateside (“Stateside”) pursuant to its Membership Interest Purchase Agreement with Moise Emquies to purchase 100 % of the issued and outstanding equity of Stateside. On the acquisition date, Stateside became a wholly owned subsidiary of the Company. See Note 4. On December 30, 2022, the Company closed its previously announced acquisition of Sunnyside, LLC dba Sundry (“Sundry”) pursuant to its Second Amended and Restated Membership Interest Purchase Agreement with Moise Emquies to purchase 100 % of the issued and outstanding equity of Sundry. On the acquisition date, Sundry became a wholly owned subsidiary of the Company. See Note 4. On June 21, 2023, the Company and the former owners of H&J executed a Settlement Agreement and Release (the “Settlement Agreement”) whereby contemporaneously with the parties’ execution of the Settlement Agreement (i) the Company agreed to make an aggregate cash payment of $ 229,000 to D. Jones Tailored Collection, Ltd. (“D. Jones”), (ii) the Company issued 39,052 shares of common stock to D. Jones, and (iii) the Company assigned and transferred one hundred percent ( 100 % ) of the Company’s membership interest in H&J to D. Jones. The H&J Settlement was accounted for a business disposition. Reverse Stock Split On December 11, 2024, the Board of Directors approved a one-for-50 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s preferred stock. The reverse stock split became effective as of December 11, 2024. Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios. NOTE 2: GOING CONCERN The accompanying consolidated financial statements have been prepared on a going concern basis. The Company has not generated profits since inception, has sustained net losses of $ 2,089,910 and $ 683,735 for the three months ended March 31, 2025 and 2024, respectively, and has incurred negative cash flows from operations for the years ended March 31, 2025 and 2024. The Company has historically lacked liquidity to satisfy obligations as they come due and as of March 31, 2025, and the Company had a working capital deficit of $ 8,151,863 . These factors, among others, arise substantial doubt about the Company’s ability to continue as a going concern. 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. Through the date the 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, which did occur in February 2025. 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 file for an ELOC and shelf eligibility for an At-The-Market (“ATM”), no assurance can be given that the Company will be successful in these efforts. 8 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 Management’s Plans In February 2025, the Company completed an offering consisting of the sale of common stock, warrants and pre-funded warrants for gross proceeds of $ 7,500,000 , before deducting placement agent fees and commissions and other offering expenses. As of May XX, 2025, the date of issuance of these condensed consolidated financial statements, the Company expects that its cash and cash equivalents of $ 2,244,142 and measures described below will be sufficient to fund its operating expenses, debt obligations and capital expenditure requirements for at least one year from the date these consolidated financial statements are issued. Throughout the next twelve months, the Company intends to fund its operations from the funds raised through the offering. Additionally, the Company intends to fund operations from increased revenues due to its new marketing efforts and increased wholesale pricing and a more wholesale doors, through settlement and renegotiation of aged payables, conversions of outstanding debt and accrued interest, and continuing its cost cutting measures, which the Company has already made during the first several months of 2025. The Company also plans to continue to fund its capital funding needs through a combination of public or private equity offerings, debt financings or other sources. This includes warrant exercises, an equity line of credit and At-The-Market (“ATM”) equity financings made available to us. The Company has 22,730,680 warrants outstanding in connection with the offering in Registration Statement No. 3330-284508 filed on February 18, 2025. The Company has an inducement agreement that was signed by the Company and the investors that allows the Company at its discretion to require the warrant holders to exercise warrants up to an aggregate value of $ 2 million in warrants per thirty calendar days commencing on April 8, 2025, which would increase the Company’s cash position by $ 15 million over the next eight months. There can be no assurance as to the availability or terms upon which such financing and capital might be available in the future. If the Company is unable to secure additional funding, it may be forced to curtail or suspend its business plans. 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, 2024 included in the Company’s Annual Report on Form 10-K filed with the SEC on April 09, 2025. Principles of Consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Bailey, Stateside and Sundry from the dates of acquisition. 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, 2025 and December 31, 2024, 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 . 9 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 Fair Value of Financial Instruments The Company’s financial instruments consist of cash and cash equivalents, prepaid expenses, accounts payable, accrued expenses, due to related parties, related party note payable, and convertible debt. The carrying value of these assets and liabilities is representative of their fair market value, due to the short maturity of these 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 statement 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, 2025, and December 31, 2024, the Company determined an allowance for credit losses of $ 312,332 and $ 295,837 , respectively. Inventory Inventory is stated at the lower of cost or net realizable value and accounted for using the weighted average cost method for DSTLD and first-in, first-out method for Bailey, Stateside and Sundry. The inventory balances as of March 31, 2025, and December 31, 2024 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. Inventory consisted of the following: SCHEDULE OF INVENTORY March 31, December 31, 2025 2024 Raw materials $ 678,177 $ 665,450 Work in process 250,820 250,820 Finished goods 3,324,605 2,907,670 Inventory $ 4,253,602 $ 3,823,940 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, 2025 and December 31, 2024 consist of software with three ( 3 ) year lives, property and equipment with three ( 3 ) to ten ( 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 $ 1,685 and $ 2,156 for the three months ended March 31, 2025 and 2024. 10 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 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 with business combinations and consist of brand names and customer relationships. 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 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 every year. 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. Annual Impairment Tests At December 31, 2024, management determined that certain events and circumstances occurred that indicated that the carrying value of the Company’s brand name assets, and the carrying amount of the reporting units, pertaining to each reporting unit (Bailey44, Stateside and Sundry) may not be recoverable. The qualitative assessment was primarily due to reduced or stagnant revenues of each entities as compared to the Company’s initial projections at the time of each respective acquisitions, as well as certain entities’ liabilities in excess of assets. As such, the Company compared the estimated fair value of the brand names with its carrying value and recorded an impairment loss of $ 1,388,000 in the consolidated statements of operations, as detailed below by entity. Additionally, the Company compared the fair value of the reporting units to the carrying amounts and recorded no impairment loss pertaining to goodwill in the consolidated statements of operations. The Company utilized the enterprise value approach in the impairment tests of each reporting unit in 2024. 11 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 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. 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 12 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 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. 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. 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. Cost of revenues also includes inventory write-offs and reserves. 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, 2025 and December 31, 2024, 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 number of stock award forfeitures are recognized as incurred. 13 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 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. 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 (“ASC 280”), we identify our operating segments according to how our business activities are managed and evaluated. As of March 31, 2025, we had one 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 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, 2025, 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, 2025 and 2024 are as follows: SCHEDULE OF POTENTIALLY DILUTIVE ITEMS OUTSTANDING 2025 2024 March 31, 2025 2024 Series A convertible preferred stock 542 542 Series C convertible preferred stock 1,500 3,615 Common stock warrants 33,651,481 23,604 Stock options 31 31 Total potentially dilutive shares 33,653,554 27,792 The stock options and warrants above are out-of-the-money as of March 31, 2025 and 2024. Leases The Company accounts for leases in accordance with ASC 842, Leases, which requires the recognition of right-of-use (ROU) assets and corresponding lease liabilities on the balance sheet for both operating and finance leases. However, the Company has elected to apply the short-term lease exemption under ASC 842, whereby leases with a term of 12 months or less are not recorded on the balance sheet. Instead, lease payments for these short-term leases are recognized as lease expense on a straight-line basis over the lease term in the statement of operations. This policy simplifies accounting for leases of shorter duration while maintaining compliance with disclosure requirements. 14 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 Recent Accounting Pronouncements In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures, which requires disclosure of incremental segment information on an annual and interim basis, primarily disclosure of significant segment expense categories and amounts for each reportable segment. The new standard is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company adopted ASU 2023-07 in the annual financial statements for the twelve months ended December 31, 2024, and for interim periods beginning in 2025. The Company believes the amendments of ASU 2023-07 will not have a significant impact on the Company’s consolidated financial statements and will include all required disclosures upon adoption. 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. NOTE 4: 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 one-thirty-third (1/33) of one percent per day, such rate to 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. 15 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 Due to/from factor consist of the following: SCHEDULE OF DUE TO/ FROM FACTOR March 31 December 31 2025 2024 Outstanding receivables: Without recourse $ 461,534 $ 460,815 With recourse 17,086 142,914 Matured funds and deposits 62,536 61,941 Advances ( 235,091 ) ( 275,484 ) Credits due customers - - Due from factor, net $ 306,065 $ 390,186 NOTE 5: CERTAIN ASSETS Prepaid Expenses and Other Current Assets As of March 31, 2025 , prepaid expenses and other current assets included $ 5,386,675 in remaining capitalized amounts pursuant to prepaid vendor service agreements as noted below. In January 2025, the Company entered into a marketing services agreement for a 5 five-year period, whereby the Company issued pre-funded warrants for the purchase of 2,068,965 shares of common stock. The fair value of the Vendor Pre-Funded Warrants was $ 3,000,000 , or $ 1.45 per share. Through March 31, 2025, $ 113,425 of the prepaid amount was amortized to sales and marketing expenses. See Note 8 for further detail. In March 2025, the Company’s Bailey44 subsidiary entered into a long-term marketing service agreement with the same vendor as above. The Company paid $ 2,500,000 pursuant to the agreement, which was included in prepaid expenses on the consolidated balance sheet as of March 31, 2025 as the services did not commence until the second quarter of 2025. The parties are still finalizing the terms of the agreement. Goodwill The Company recorded goodwill from each of its business combinations. The following is a summary of goodwill by entity as of March 31, 2025, and December 31, 2024: SCHEDULE OF GOODWILL ATTRIBUTABLE TO EACH BUSINESS COMBINATION 2025 2024 March 31, December 31, 2025 2024 Bailey $ 3,158,123 $ 3,158,123 Stateside 2,104,056 2,104,056 Sundry 3,711,322 3,711,322 Goodwill $ 8,973,501 $ 8,973,501 Intangible Assets The following table summarizes information relating to the Company’s identifiable intangible assets as of March 31, 2025: SCHEDULE OF INFORMATION RELATING TO THE COMPANY’S IDENTIFIABLE INTANGIBLE ASSETS Gross Accumulated Carrying March 31, 2025 Amount Impairment Amortization Value Amortized: Customer relationships 8,634,560 - ( 7,384,941 ) 1,249,619 $ 8,634,560 $ - $ ( 7,384,941 ) $ 1,249,619 Indefinite-lived: Brand name 4,453,880 - - 4,453,880 Total $ 13,088,440 $ - $ ( 7,384,941 ) $ 5,703,499 The Company recorded amortization expense of $ 416,540 and $ 719,547 during the three months ended March 31, 2025 and 2024, respectively, which is included in general and administrative expenses in the consolidated statements of operations. 16 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 NOTE 6: 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, 2025 and December 31, 2024: SCHEDULE OF ACCRUED EXPENSES AND OTHER LIABILITIES March 31, December 31, 2025 2024 Accrued expenses $ 591,371 $ 591,371 Payroll related liabilities 4,476,780 4,268,880 Sales tax liability 154,709 187,971 Other liabilities 208,880 208,880 Accrued expenses and other liabilities $ 5,431,740 $ 5,257,102 Payroll related liabilities are primarily related in DBG and Bailey44 payroll taxes due to remit to federal and state authorities. The amounts are subject to further penalties and interest. As of March 31, 2025, accrued expenses included $ 535,000 in accrued common stock issuances pursuant to an advisory agreement for services performed in 2022. The 4 shares of common stock owed per the agreement are expected to be issued in the second quarter of 2025. Convertible Debt On February 20, 2025, the Company settled the remaining convertible debt principal in cash, along with $ 47,000 of accrued interest. As of March 31, 2025 and December 31, 2024, the outstanding principal balance was $ 0 and $ 100,000 , respectively. Sixth Street Diagonal Promissory Note On January 16, 2025, the Company entered into a loan agreement with 1800 Diagonal Lending, LLC for a $ 121,900 promissory note, with a purchase price of $ 100,000 and a 12 % one-time interest charge. The Company will make nine monthly payments of $ 15,170 , with the note maturing on October 16, 2025 .As of March 31, 2025, there is $ 80,784 outstanding net of debt discount of $ 25,404 . Loan Payable — PPP and SBA Loan In April 2022, Bailey received notification of full forgiveness of its 2 nd PPP Loan totaling $ 1,347,050 and partial forgiveness of its 1 st PPP Loan totaling $ 413,705 . As of March 31, 2025 and December 31, 2024, Bailey had an outstanding PPP Loan balance of $ 933,295 and matures in April 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 $ 20,500 for the three months ending March 31, 2025. The following is a summary of the merchant advances as of March 31, 2025 and December 31,2024: SCHEDULE OF MERCHANT ADVANCES March 31, December 31, 2025 2024 Principal $ 1,837,657 $ 1,858,157 Merchant cash advances, net $ 1,837,657 $ 1,858,157 Promissory Note Payable As of March 31, 2025, and December 31,2024, the outstanding principal on the note to the sellers of Bailey was $ 3,500,000 . Interest expense was $ 105,000 and $ 105,000 for the three months ended March 31, 2025 and 2024 respectively, which was accrued and unpaid as of December 31, 2024. The note matures on December 8, 2025. 17 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 NOTE 7: STOCKHOLDERS’ EQUITY (DEFICIT) Common Stock The Company had 1,000,000,000 shares of common stock authorized with a par value of $ 0.0001 as of March 31, 2025. 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. 2025 Transactions Offerings On February 13, 2025, the Company entered into securities purchase agreements (the “Purchase Agreements”) with certain accredited investors named therein (the “Purchasers”), pursuant to which the Company agreed to issue and sell, in a best efforts offering (the “Offering”) 11,365,340 units (the “Units”), including (i) 125,535 units consisting of one share of common stock, par value $ 0.0001 per share (the “Common Stock”) and two warrants to purchase one share of Common Stock each (the “Share Unit Warrants”), at a purchase price per unit equal to $ 0.66 , and (ii) 11,239,805 units consisting of a pre-funded warrant to purchase one share of Common Stock (“Pre-Funded Warrants”), immediately exercisable at an exercise price of $ 0.0001 per share, and two warrants to purchase one share of Common Stock each (the “PFW Unit Warrants, and collectively with the Share Unit Warrants, the “Warrants”), at a purchase price per unit equal to $ 0.6599 . The Warrants may be exercised for an aggregate of 22,730,680 shares of Common Stock at an exercise price equal to $ 0.66 per share, subject to adjustment for stock splits and similar events. The Purchase Agreement contains customary representations and warranties and agreements of the Company and the Purchasers and customary indemnification rights and obligations of the parties. The Offering closed on February 18, 2025. The Company offered Pre-Funded Warrants to those Purchasers whose purchase of Common Stock in the Offering would have resulted in the Purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or at the election of the Purchaser, 9.99%) of our Common Stock immediately following the consummation of the Offering in lieu of the Common Stock that would otherwise result in ownership in excess of 4.99% (or at the election of the purchaser, 9.99%) of the outstanding Common Stock of the Company. The Pre-Funded Warrants may be exercised commencing on the issuance date and do not expire. The Pre-Funded Warrants are exercisable for cash; provided, however that they may be exercised on a cashless exercise basis if, at the time of exercise, there is no effective registration statement registering, or no current prospectus available for, the issuance or resale of the Common Stock issuable upon exercise of the Pre-Funded Warrants. The exercise of the Pre-Funded Warrants will be subject to a beneficial ownership limitation, which will prohibit the exercise thereof, if upon such exercise the holder of the Pre-Funded Warrants, its affiliates and any other persons or entities acting as a group together with the holder or any of the holder’s affiliates would hold 4.99% (or, upon election of a Purchaser prior to the issuance of any shares, 9.99%) of the number of Common Stock outstanding immediately after giving effect to the issuance of Common Stock issuable upon exercise of the Pre-Funded Warrant held by the applicable holder, provided that the holder may increase or decrease the beneficial ownership limitation (up to a maximum of 9.99%) upon 60 days advance notice to the Company, which 60 day period cannot be waived. During the three months ended March 31, 2025, the Company issued an aggregate of 3,307,910 shares of common stock pursuant to the offerings detailed above for net proceeds of $ 6,642,433 . The issuance of 3,307,910 shares referenced above includes 3,182,375 shares issued upon the exercise of warrants originally issued as part of the February 2025 offering. 18 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 Series A Convertible Preferred Stock On September 29, 2022, the Company filed the Certificate of Designation designating up to 6,800 shares out of the authorized but unissued shares of its preferred stock as Series A Convertible Preferred Stock Except for stock dividends or distributions for which adjustments are to be made pursuant to the Certificate of Designation, the holders of the Series A Preferred Stock (the “Holders”) shall be entitled to receive, and the Company shall pay, dividends on shares of the Series A Preferred Stock equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid on shares of the Common Stock. No other dividends shall be paid on shares of the Series A Preferred Stock. With respect to any vote with the class of Common Stock, each share of the Series A Preferred Stock shall entitle the Holder thereof to cast that number of votes per share as is equal to the number of shares of Common Stock into which it is then convertible. The Series A Preferred Stock shall rank (i) senior to all of the Common Stock; (ii) senior to any class or series of capital stock of the Company hereafter created specifically ranking by its terms junior to any Preferred Stock (“Junior Securities”); (iii) on parity with any class or series of capital stock of the Corporation created specifically ranking by its terms on parity with the Preferred Stock (“Parity Securities”); and (iv) junior to any class or series of capital stock of the Company hereafter created specifically ranking by its terms senior to any Preferred Stock (“Senior Securities”), in each case, as to dividends or distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntarily or involuntarily. Each share of the Series A Preferred Stock shall be convertible, at any time and from time to time from and after September 29, 2022 at the option of the Holder thereof, into that number of shares of Common Stock determined by dividing the Stated Value of such share of the Series A Preferred Stock ($ 1,000 as of September 29, 2022) by the Conversion Price. The conversion price for each share of the Series A Preferred Stock is the closing price of the Common Stock on September 29, 2022, which was $ 9.30 . As of both March 31, 2025 and December 31, 2024, there were 6,300 shares of Series A Convertible Preferred Stock issued and outstanding. Series C Convertible Preferred Stock On June 21, 2023, the Company, on the one hand, and Moise Emquies, George Levy, Matthieu Leblan, Carol Ann Emquies, Jenny Murphy and Elodie Crichi (collectively, the “Sundry Investors”), on the other hand, executed a Securities Purchase Agreement (the “Sundry SPA”) whereby the Company issued 5,761 shares of Series C Convertible Preferred Stock, par value $ 0.0001 per share (the “Series C Preferred Stock”) to the Sundry Investors at a purchase price of $ 1,000 per share. The Series C Preferred Stock is convertible into a number of shares of the Company’s Common Stock equal to $ 1,000 divided by an initial conversion price of $ 0.717 which represents the lower of (i) the closing price per share of the Common Stock as reported on the Nasdaq on June 20, 2023, and (ii) the average closing price per share of Common Stock as reported on the Nasdaq for the five trading days preceding June 21, 2023. The shares of Series C Preferred Stock were issued in consideration for the cancellation of certain promissory notes issued by the Company to the Sundry Investors dated December 30, 2022 (the “Sundry Loan Documents”). The following is a summary of the rights and preferences of the Series C Convertible Preferred Stock On June 21, 2023, the Company filed the Certificate of Designation with the Secretary of State for the State of Delaware designating up to 5,761 shares out of the authorized but unissued shares of its preferred stock as Series C Convertible Preferred Stock. The following is a summary of the principal terms of the Series C Preferred Stock. Except for stock dividends or distributions for which adjustments are to be made pursuant to the Certificate of Designation, the holders of the Series C Preferred Stock (the “Series C Holders”) shall be entitled to receive, and the Company shall pay, dividends on shares of the Series C Preferred Stock equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid on shares of the Common Stock. No other dividends shall be paid on shares of the Series C Preferred Stock. 19 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 The Series C Holders are entitled to vote as a class as expressly provided in the Certificate of Designation. The Series C Holders are also entitled to vote with the holders of shares of Common Stock, voting together as one class, on all matters in which the Series C Holders are permitted to vote with the class of shares of Common Stock. With respect to any vote with the class of Common Stock, each share of the Series C Preferred Stock shall entitle the Holder thereof to cast that number of votes per share as is equal to the number of shares of Common Stock into which it is then convertible (subject to the ownership limitations specified in the Certificate of Designation) using the record date for determining the stockholders of the Company eligible to vote on such matters as the date as of which the conversion price is calculated. The Series C Preferred Stock shall rank (i) senior to all of the Common Stock; (ii) senior to Junior Securities; (iii) on parity with Parity Securities; and (iv) junior to Senior Securities, in each case, as to dividends or distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntarily or involuntarily. Subject to any superior liquidation rights of the holders of any Senior Securities of the Company and the rights of the Company’s existing and future creditors, upon a Liquidation, each Holder shall be entitled to be paid out of the assets of the Company legally available for distribution to stockholders, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of the Common Stock and Junior Securities and pari passu with any distribution to the holders of Parity Securities, an amount equal to the Stated Value (as defined in the Certificate of Designation) for each share of the Series C Preferred Stock held by such Holder and an amount equal to any accrued and unpaid dividends thereon, and thereafter the Series C Holders shall be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of Common Stock would receive if the Series C Preferred Stock were fully converted (disregarding for such purposes any conversion limitations hereunder) to Common Stock which amounts shall be paid pari passu with all holders of Common Stock. Each share of the Series C Preferred Stock shall be convertible, at any time and from time to time from and after June 21, 2023 at the option of the Holder thereof, into that number of shares of Common Stock determined by dividing the Stated Value of such share of the Series C Preferred Stock ($ 1,000 as of June 21, 2023) by the Conversion Price. The conversion price for each share of the Series C Preferred Stock is $ 0.717 , which is the lower of (a) the closing price per share of the Common Stock as reported on the Nasdaq on June 20, 2023 (the trading day before the date of the Sundry SPA), and (b) the average closing price per share of Common Stock as reported on the Nasdaq for the five trading days preceding the date of the Sundry SPA, subject to adjustment herein (the “Series C Conversion Price”). The Company has the option to redeem any or all of the then outstanding Series C Preferred Stock at 112 % of the then Stated Value any time after June 21, 2023 and so long as there is an effective Registration Statement covering the shares issuable upon conversion of the Series C Preferred Stock. In October 2023, 975 shares of Series C Convertible Preferred Stock converted into 1,088 shares of common stock. During the year ended December 31, 2024, 3,442 shares of Series C Convertible Preferred Stock converted into 3,840 shares of common stock. As of both March 31, 2025 and December 31, 2024, there were 1,344 shares of Series C Convertible Preferred Stock issued and outstanding. NOTE 8: RELATED PARTY TRANSACTIONS As of both March 31, 2025 and December 31, 2024, amounts due to related parties was $ 411,921 , The advances are unsecured, non-interest bearing and due on demand. Amounts due to related parties consist of current and former executives, and a board member. As of both March 31, 2025 and December 31, 2024, due to related parties includes advances from the former officer, Mark Lynn, who also serves as a director, totaling $ 104,568 respectively, and accrued salary and expense reimbursements of $ 87,221 , respectively, to current officers. 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, 2025 and December 31, 2024, an amount of $ 190,000 was outstanding. 20 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 NOTE 9: SHARE-BASED PAYMENTS Common Stock Warrants A summary of information related to common stock warrants for the three month ended March 31, 2025 is as follows: SCHEDULE OF INFORMATION RELATED TO COMMON STOCK WARRANTS Common Weighted Stock Average Warrants Exercise Price Outstanding - December 31, 2024 45,701 $ 580.12 Granted 36,788,155 .42 Exercised ( 3,182,375 ) - Forfeited - - Outstanding - March 31, 2025 33,651,481 $ 1.25 Exercisable at December 31, 2024 45,701 $ 580.12 Exercisable at March 31, 2025 33,651,481 $ 1.25 Warrants transactions Vendor Agreement On or around January 20, 2025, the Company entered into a vendor agreement (the “Vendor Agreement”) with MavDB Consulting LLC (the “Vendor”). The engagement of the Vendor is for a five ( 5 ) year period and the vendor services to be provided include, but are not limited to, product content production, social media marketing, engagement of influencers and student athletes for product awareness, and event and staffing costs (the “Services”). In consideration for the Services, the Company will pay the Vendor a vendor fee equal to $ 3,000,000 (the “Cash Fee”) within thirty calendar days after the date of the Vendor Agreement (the “Payment Period”), provided, however, that Vendor may elect to receive the Vendor Shares (as defined below) and/or Vendor Pre-Funded Warrants (as defined below) as described below in lieu of the Cash Fee by providing written notice to the Company of such election during the Payment Period (the “Written Notice”). The “Vendor Shares” shall mean a number of Common Stock equal to the Cash Fee divided by $ 1.45 , provided, however, if the issuance of any of the Vendor Shares would cause the Vendor to exceed 4.99% of the of the outstanding Common Stock, as determined in accordance with Section 16 of the Exchange Act and the regulations promulgated thereunder, then the Company shall instead issue to Vendor pre-funded warrants (the “Vendor Pre-Funded Warrants”) for the purchase of the amount of Vendor Shares in excess of the beneficial ownership limitation, provided, further, that if the Vendor specifies in the Written Notice that the Vendor elects to receive Vendor Pre-Funded Warrants in lieu of the entire amount of the Vendor Shares, then the Company shall instead issue to Vendor the Vendor Pre-Funded Warrants to purchase the entire amount of the Vendor Shares. The Vendor delivered the Written Notice to the Company during the Payment Period in lieu of the Cash Fee and the Company issued the Vendor Pre-Funded Warrants for the purchase of 2,068,965 shares of Common Stock to the Vendor on January 21, 2025. The fair value of the Vendor Pre-Funded Warrants was $ 3,000,000 , or $ 1.45 per share, which was included as prepaid expenses on the consolidated balance sheet. The Vendor Pre-Funded Warrants have an initial exercise price per share of Common Stock equal to $ 0.01 . The Vendor Pre-Funded Warrants are immediately exercisable and will expire five ( 5 ) years after the issuance date of the Vendor Pre-Funded Warrants. The exercise price and number of shares of Common Stock issuable upon exercise is subject to appropriate adjustment in the event of share dividends, share splits, reorganizations or similar events. The Vendor Pre-Funded Warrants will be exercisable, at the option of the Vendor, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of Common Stock purchased upon such exercise (except in the case of a cashless exercise). The Vendor (together with its affiliates) may not exercise any portion of the Vendor Pre-Funded Warrants to the extent that the Vendor would own more than 4.99% of the outstanding shares of Common Stock immediately after exercise, except that upon at least 61 days’ prior notice from the Vendor to us, the Vendor may increase the amount of beneficial ownership of outstanding shares after exercising the Vendor’s Pre-Funded Warrants up to 9.99 % of the number of our shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Vendor Pre-Funded Warrants. In lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the Vendor may elect instead to receive upon such exercise (either in whole or in part) the number of shares of Common Stock determined according to a formula set forth in the Vendor Pre-Funded Warrants. 21 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 Other On February 18, 2025, the Company issued 748,705 warrants to RBW Capital Partners LLC, through Dawson James Securities, Inc. (the “Placement Agent”), entitling the holder to purchase 568,267 shares of common stock at an exercise price of $ 0.759 per share (the “Placement Agent Warrants”). In February 2025, the Company issued 33,970,485 warrants pursuant to the S-1 offering (see Note 7) which includes 11,239,805 pre-funded warrants with no expiration date for exercise. Stock Options As of both March 31, 2025, and December 31, 2024, the Company had 31 stock options outstanding with a weighted average exercise price of $ 452,500 per share. Stock-based compensation expense of $ 0 and $ 100,299 was recognized for the three months ended March 31, 2025 and 2024. NOTE 10: LEASE OBLIGATIONS Rent is classified by function on the consolidated statements of operations either as general and administrative, sales and marketing, or cost of revenue. The Company determines whether an arrangement is or contains a lease at inception by evaluating potential lease agreements including services and operating agreements to determine whether an identified asset exists that the Company controls over the term of the arrangement. Lease commencement is determined to be when the lessor provides access to, and the right to control, the identified asset. The company currently maintains two leased properties under month-to-month agreements, which are classified as short-term leases in accordance with ASC 842. The first property, located in Vernon, California, serves as the Corporate Warehouse and Distribution Center, encompassing approximately 42,000 square feet with a monthly base rent of $ 12,000 . The second property, situated in Los Angeles, California, functions as a Showroom, covering approximately 2,000 square feet with a monthly base rent of $ 25,000 . NOTE 11: CONTINGENCIES ● On March 21, 2023, a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $ 43,501 . Such amounts include interest due, and are included in accounts payable, net of payments made to date, in the accompanying consolidated balance sheets. The Company does not believe it is probable that the losses in excess of such trade payables will be incurred. ● On November 16, 2023 a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $ 345,384 , which represents past due fees and late fees. Such amounts are included in the accompanying balance sheets. The Company does not believe it is probable that the losses in excess of such pay trade payables will be incurred. ● On December 21, 2023, an individual who last worked with the Company more than two years prior to filing the lawsuit initiated a wrongful termination claim against the Company. The Company is disputing the claim and the matter has been moved to arbitration, which has been granted. 22 DIGITAL BRANDS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2025 ● On March 20, 2024, an individual who last worked with the Company two years prior to filing the lawsuit initiated a wrongful termination claim against the Company. The Company is disputing the claim, as the individual was never a direct employee but rather a temporary worker engaged through a third-party staffing agency. ● On April 17, 2024, a former employee filed a wrongful termination lawsuit against the Company. The Company is disputing this claim and has been awarded arbitration for this matter. This employee was part of the marketing team. The marketing team was let go and the Company moved to a third-party outsourced marketing solution. ● In June 2021, a vendor filed a lawsuit against Bailey 44 related to a retail store lease in the amount of $ 1.5 million. 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. ● On November 15, 2023, a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $ 582,208 , which represents “double damages.” The amount due to the vendor is $ 292,604 . Such amounts are included in the accompanying balance sheets. The Company does not believe it is probable that losses in excess of such pay trade payables will be incurred. The matter was settled for $ 400,000 and is currently on a monthly payment plan. 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, 2025. 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 12: 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, 2025. 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, 2025. 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, 2025, and no history of generating taxable income. NOTE 13: SUBSEQUENT EVENTS Asset Purchase Agreement 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”) for total equity consideration of $ 3,000,000 . The Open Daily Acquisition closed on April 2, 2025. The Open Daily APA contains certain covenants, representations, warranties and closing conditions customary for an agreement of this type, including, but not limited to, non-competition and non-solicitation provisions. University of Alabama Partnership In April 2025 , the Company launched its apparel partnership with the University of Alabama with a collection of t-shirts and fleece tops and bottoms sold at the campus bookstores and also on the Yea Alabama website. With the guidance of the University of Alabama marketing team, the Company engaged a University of Alabama Tik Tok influencer and University of Alabama student athlete to design and create the product collaboration. The Company plans to expand the product offering starting this summer ahead of the football season with a significant marketing increase during football season . The Company will continue to partner with major social media influencers and University of Alabama student athletes to collaborate on monthly product capsules and also game day and campus bookstore events. Amaze Partnership On April 22, 2025, the Company announced a strategic partnership with Amaze, a global leader in creator-powered commerce. Digital Brands Group becomes the first third-party partner to offer its products on the recently revamped Teespring Marketplace by Amaze. Through this partnership, Amaze customers can shop AVO, one of Digital Brands Group’s fashion labels that offers knits, wovens, and jeans for multiple occasions, directly within the Teespring Marketpl ace. Amaze has over 12.3 million unique stores launched and attracts more than 1.2 billion unique visitors. These visitors now have access to AVO products, significantly boosting AVO’s brand visibility and introducing its amazing products to a massive audience. Equity Line of Credit In May 2025, the Company entered into a $ 100 million equity line of credit. The Company plans to file a proxy in the near term for the amount above the 20% that requires a shareholder vote. The Company expects that the shareholders will approve this motion. The equity line of credit will be used to fund the University of Alabama program noted above, as well as the broad expansion of this collegiate program. 23 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 – 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. 24 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 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 the following for our brands: ● 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 from the country we are shipping from; ● Increased transit time via sea or air, which have 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. 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. 25 Substantial Indebtedness As of March 31, 2025, we had an aggregate principal amount of debt outstanding of approximately $6.5 million. We believe this is an amount of indebtedness which may be considered significant for a company of our size and current revenue base. Our substantial debt could have important consequences to us. For example, it could: ● Make it more difficult for us to satisfy our obligations to the holders of our outstanding debt, resulting in possible defaults on and acceleration of such indebtedness; ● Require us to dedicate a substantial portion of our cash flows from operations to make payments on our debt, which would reduce the availability of our cash flows from operations to fund working capital, capital expenditures or other general corporate purposes; ● Increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations; ● Place us at a competitive disadvantage to our competitors with proportionately less debt for their size; ● Limit our ability to refinance our existing indebtedness or borrow additional funds in the future; ● Limit our flexibility in planning for, or reacting to, changing conditions in our business; 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. We are currently unable to repay or refinance borrowings so any such action by these lenders could force us into bankruptcy or liquidation. In addition, our ability to make scheduled payments on our indebtedness or to refinance our obligations under our debt agreements, will depend on our financial and operating performance, which, in turn, will be subject to prevailing economic and competitive conditions and to the financial and business risk factors we face as described in this section, many of which may be beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures or planned growth objectives, seek to obtain additional equity capital or restructure our indebtedness. In the future, our cash flows and capital resources may not be sufficient for payments of interest on and principal of our debt, and such alternative measures may not be successful and may not permit us to meet scheduled debt service obligations. In addition, the recent worldwide credit crisis could make it more difficult for us to refinance our indebtedness on favorable terms, or at all. In the absence of such operating results and resources, we may be required to dispose of material assets to meet our debt service obligations. We may not be able to consummate those sales, or, if we do, we will not control the timing of the sales or whether the proceeds that we realize will be adequate to meet debt service obligations when due. Performance Factors 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. 26 ● 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 customer’s 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. 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. 27 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. 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 include 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. 28 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. 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. 29 ● 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. Recent Developments Limited Tariff Exposure The Company produces almost all of its products in Los Angeles, with the exception of sweaters. The Company estimates that over 90% of all its products produced are Made in the USA. This significantly limits its exposure to any increases in tariffs. The Company believes this could be an opportunity to increase market share as the majority of apparel brands produce goods overseas and will need to increase prices to cover some or all of the increased tariffs, while the Company’s brands will not need to increase pricing. The Company believes this could be a meaningful competitive advantage both online and in wholesale. 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. 1800 Diagonal Promissory Note On January 16, 2025, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with 1800 Diagonal Lending, LLC (the “1800 Diagonal”), pursuant to which 1800 Diagonal made a loan to the Company, evidenced by a promissory note in the aggregate principal amount of $121,900, including an original issue discount (“OID”) of $15,900 (the “Note”). The purchase price of the Note was $106,000 (the “Purchase Price”). The Purchase Agreement contains certain customary representations, warranties, and covenants made by the Company. Under the Note, the Company is required to make nine payments of $15,170, which includes a one-time interest charge of 12% ($14,628). The first payment was due on February 16, 2025, with eight subsequent payments due each month thereafter. The Note matures on October 16, 2025, and contains customary events of default. Upon the occurrence of any event of default under the Note, (i) the Note will become immediately due and payable in an amount equal to 150% times the outstanding principal and accrued interest under the Note plus default interest at the rate of 22% per annum (the “Default Amount”), and (ii) 1800 Diagonal will have the right to convert the balance owed under the Note, including the Default Amount, into shares of the Company’s common stock at a conversion price equal to 61% of the lowest closing bid price during the 10 trading days prior to the conversion date. The Note provides that 1800 Diagonal and its affiliates may not own greater than 4.99% of the Company’s outstanding shares of common stock at any time, and that the total aggregate number of shares of common stock that may be issued upon conversion of the Note shall not exceed 19.99% of the shares of common stock outstanding as of January 16, 2025. The Company received the Purchase Price minus applicable fees on January 21, 2025, and intends to use the proceeds from the Note for general working capital purposes. 30 David Joshua Bartch Note On January 22, 2025, the Company issued a promissory note in the principal amount of $260,000.00 (the “Second Note”) to Joshua Bartch (“Investor”), pursuant to which the Investor made a loan to the Company. The Second Note carries an original issue discount of $60,000.00, and accordingly the purchase price of the Second Note is $200,000.00. The Second Note matures on April 22, 2025, and contains customary events of default. Upon the occurrence of any event of default under the Second Note, the Second Note will become immediately due and payable in an amount equal to the outstanding principal and accrued interest under the Second Note plus default interest at the rate of sixteen percent (16%) per annum. MavDB Vendor Agreement; Issuance of Vendor Pre-Funded Warrants On or around January 21, 2025, the Company entered into a vendor agreement (the “Vendor Agreement”) with MavDB Consulting LLC (the “Vendor”). The Vendor’s engagement is for a five-year period and the vendor services to be provided include, but are not limited to, product content production, social media marketing, engagement of influencers and student athletes for product awareness, and event and staffing costs (the “Services”). In consideration for the Services, the Company agreed to pay the Vendor a fee equal to $3,000,000 (the “Cash Fee”) within 30 calendar days after the date of the Vendor Agreement (the “Payment Period”); provided, however, that Vendor may elect to receive the Vendor Shares (as defined below) and/or Vendor Pre-Funded Warrants (as defined below) as described below in lieu of the Cash Fee by providing written notice to the Company of such election during the Payment Period (the “Written Notice”). The “Vendor Shares” means a number of shares of common stock equal to the Cash Fee divided by $1.45; provided, however, if the issuance of any of the Vendor Shares would cause the Vendor to exceed 4.99% of the outstanding common stock, as determined in accordance with Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the regulations promulgated thereunder, then the Company shall instead issue to Vendor pre-funded warrants (the “Vendor Pre-Funded Warrants”) for the purchase of the amount of Vendor Shares in excess of the beneficial ownership limitation; provided, further, that if the Vendor specifies in the Written Notice that the Vendor elects to receive Vendor Pre-Funded Warrants in lieu of the entire amount of the Vendor Shares, then the Company shall instead issue to Vendor the Vendor Pre-Funded Warrants to purchase the entire amount of the Vendor Shares. The Vendor delivered the Written Notice to the Company during the Payment Period and the Company issued the Vendor Pre-Funded Warrants for the purchase of 2,068,965 shares of common stock to Vendor on January 21, 2025. The Vendor Pre-Funded Warrants have an initial exercise price per share of common stock equal to $0.01. The Vendor Pre-Funded Warrants are immediately exercisable and expire five years after the issuance date of the Vendor Pre-Funded Warrants. The exercise price and number of shares of common stock issuable upon exercise is subject to appropriate adjustment in the event of share dividends, share splits, reorganizations or similar events. The Vendor Pre-Funded Warrants will be exercisable, at the option of the Vendor, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of common stock purchased upon such exercise (except in the case of a cashless exercise). The Vendor (together with its affiliates) may not exercise any portion of the Vendor Pre-Funded Warrants to the extent that the Vendor would own more than 4.99% of the outstanding shares of common stock immediately after exercise, except that upon at least 61 days’ prior notice from the Vendor to the Company, the Vendor may increase the amount of beneficial ownership of outstanding shares after exercising the Vendor’s Pre-Funded Warrants up to 9.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Vendor Pre-Funded Warrants. In lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the Vendor may elect instead to receive upon such exercise (either in whole or in part) the number of shares of common stock determined according to a cashless formula set forth in the Vendor Pre-Funded Warrants. Closing of February 2025 Offering On February 13, 2025, the Company entered into securities purchase agreements (collectively, the “Purchase Agreements”) with certain accredited investors named therein (collectively, the “Purchasers”), pursuant to which the Company agreed to issue and sell, in a best efforts offering (the “February 2025 Offering”), an aggregate of 11,365,340 units (the “Units”), including (i) 125,535 units consisting of one share of the Company’s common stock and two warrants to purchase one share of common stock each (the “Share Unit Warrants”), at a purchase price per unit equal to $0.66, and (ii) 11,239,805 units consisting of a pre-funded warrant to purchase one share of common stock (“Pre-Funded Warrants”), immediately exercisable at an exercise price of $0.0001 per share, and two warrants to purchase one share of common stock each (the “PFW Unit Warrants, and collectively with the Share Unit Warrants, the “Warrants”), at a purchase price per unit equal to $0.6599. The Warrants may be exercised for an aggregate of 22,730,680 shares of common stock at an exercise price equal to $0.66 per share, subject to adjustment for stock splits and similar events. The Purchase Agreements contain customary representations and warranties and agreements of the Company and the Purchasers and customary indemnification rights and obligations of the parties. The February 2025 Offering closed on February 18, 2025. 31 The Company offered Pre-Funded Warrants to those Purchasers whose purchase of common stock in the February 2025 Offering would have resulted in the Purchasers, together with their affiliates and certain related parties, beneficially owning more than 4.99% (or at the election of the Purchasers, 9.99%) of the Company’s common stock immediately following the consummation of the February 2025 Offering in lieu of the common stock that would otherwise result in ownership in excess of 4.99% (or at the election of the Purchasers, 9.99%) of the outstanding common stock of the Company. The Pre-Funded Warrants may be exercised commencing on the issuance date and do not expire. The Pre-Funded Warrants are exercisable for cash; provided, however, that they may be exercised on a cashless exercise basis if, at the time of exercise, there is no effective registration statement registering, or no current prospectus available for, the issuance or resale of the common stock issuable upon exercise of the Pre-Funded Warrants. The exercise of the Pre-Funded Warrants will be subject to a beneficial ownership limitation, which will prohibit the exercise thereof, if upon such exercise the holder of the Pre-Funded Warrants, its affiliates and any other persons or entities acting as a group together with the holder or any of the holder’s affiliates would hold 4.99% (or, upon election of a Purchaser prior to the issuance of any shares, 9.99%) of the number of common stock outstanding immediately after giving effect to the issuance of common stock issuable upon exercise of the Pre-Funded Warrant held by the applicable holder, provided that the holder may increase or decrease the beneficial ownership limitation (up to a maximum of 9.99%) upon 60 days advance notice to the Company, which 60-day period cannot be waived. The Warrants may be exercised commencing on the issuance date and expire one year from issuance. The Warrants are exercisable for cash at an exercise price of $0.66 per share; provided, however, that they may be exercised on a cashless exercise basis if, at the time of exercise, there is no effective registration statement registering, or no current prospectus available for, the issuance or resale of the common Stock issuable upon exercise of the Warrants. The exercise of the Warrants will be subject to a beneficial ownership limitation, which will prohibit the exercise thereof, if upon such exercise the holder of the Warrants, its affiliates and any other persons or entities acting as a group together with the holder or any of the holder’s affiliates would hold 4.99% (or, upon election of a Purchaser prior to the issuance of any shares, 9.99%) of the number of common stock outstanding immediately after giving effect to the issuance of common stock issuable upon exercise of the Warrants held by the applicable holder, provided that the holder may increase or decrease the beneficial ownership limitation (up to a maximum of 9.99%) upon 60 days advance notice to the Company, which 60-day period cannot be waived. At the closing of the February 2025 Offering, the Company issued warrants to RBW Capital Partners LLC, acting through Dawson James Securities, Inc. (the “Placement Agent”), for the purchase of 568,267 shares of common stock at an exercise price of $0.759 per share (the “Placement Agent Warrants”), w hich is equal to 115% of the price per Unit. The Placement Agent Warrants are exercisable at any time commencing six months from the date of commencement of sales in the February 2025 Offering and expiring five years from the commencement of sales in the February 2025 Offering. During the aforementioned six-month period, the Placement Agent Warrant may not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the Placement Agent Warrant pursuant to FINRA Rule 5110(e)(1)(A). The common stock, Pre-Funded Warrants, common stock issuable upon exercise of the Pre-Funded Warrants, Warrants, common stock issuable upon exercise of the Warrants, Placement Agent Warrants, and common stock issuable upon exercise of the Placement Agent Warrants were offered pursuant to a registration statement on Form S-1 (File No. 333-284508), as filed with the Securities and Exchange Commission (the “SEC”) on January 27, 2025, as amended, and was declared effective on February 11, 2025. The Placement Agent acted as the exclusive placement agent for the February 2025 Offering pursuant to a Placement Agency Agreement dated February 13, 2025 (the “Placement Agency Agreement”) by and between the Company and the Placement Agent. The Placement Agency Agreement contains customary conditions to closing, representations and warranties of the Company, and termination rights of the parties, as well as certain indemnification obligations of the Company and ongoing covenants for the Company. The February 2025 Offering resulted in gross proceeds to the Company of approximately $7,500,000, before deducting placement agent fees and commissions and other offering expenses, and excluding proceeds to the Company, if any, that may result from the future exercise of the Pre-Funded Warrants or Warrants issued in the February 2025 Offering. As compensation to the Placement Agent, as the exclusive placement agent in connection with the February 2025 Offering, the Company paid to the Placement Agent a cash fee of 8.0% of the aggregate gross proceeds raised in the February 2025 Offering (which amount shall not include any additional proceeds the Company may receive from the exercise of the Warrants, or the Pre-Funded Warrants, issued in the February 2025 Offering) and reimbursement of up to $150,000 for expenses of legal counsel and other actual out-of-pocket expenses. 32 Open Daily Asset Purchase Agreement 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 Open Daily Acquisition closed on April 2, 2025. The Open Daily APA contains certain covenants, representations, warranties and closing conditions customary for an agreement of this type, including, but not limited to, non-competition and non-solicitation provisions. Our Financial Position For the three months ended March 31, 2025 and 2024, we generated net revenues of $1,871,701and $3,576,587, respectively, and reported net loss of $2,089,910 and $683,735, respectively. As noted in our unaudited consolidated financial statements, as of March 31, 2024, we had an accumulated deficit of $129,190,948. Results of Operations Three Months Ended March 31, 2025 compared to Three Months Ended March 31, 2024 The following table presents our results of operations for the three months ended March 31, 2025 and 2024: Three Mnths Ended March 31, 2025 2024 Net revenues $ 1,871,701 $ 3,576,587 Cost of net revenues 999,246 1,885,851 Gross profit 872,455 1,720,736 General and administrative 1,973,803 971,732 Sales and marketing 828,788 708,150 Other operating expenses 66,424 265,499 Operating loss (1,996,560 ) (224,645 ) Other expenses (93,350 ) (459,090 ) Loss before provision for income taxes (2,089,910 ) (683,735 ) Provision for income taxes - - Net loss $ (2,089,910 ) $ (683,735 ) Net Revenues Net revenues decreased by $1.7 million to $1.9 million for the three months ended March 31, 2025, compared to $3.6 million in the corresponding fiscal period in 2024. The decrease was primarily associated with the Company dropping its largest wholesale account due its very low gross margins and operational costs required to manage this account. The other major factor for the decline was limited cash for marketing for half the quarter until the S-1 closed in mid February, a delay in wholesale shipments, and lower ecommerce revenues across each brand due to less digital advertising spend. This decline in wholesale revenue will be offset throughout the year by the Company’s second largest wholesale account asking to double the number of domestic retail doors from 50 to 100 and also expand to their international doors. Despite limited marketing spend in the first quarter, the Company’s digital revenue increased over 80% from the previous quarter. Gross Profit Our gross profit decreased by $0.8 million for the three months ended March 31, 2025 to $0.9 million from a gross profit of $1.7 million for the corresponding fiscal period in 2024. The decrease in gross margin was primarily attributable to a decrease in sales. Our gross margin was 46.6% for three months ended March 31, 2025, compared to 48.1% for the three months ended March 31, 2024. The decrease in gross margin was due to the deleverage associated with fixed costs in gross margins including warehouse and distribution rent, patternmakers and other fixed costs over a lower revenue total. 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. 33 Operating Expenses Operating expenses increased by $0.8 million for the three months ended March 31, 2025 as compared to the corresponding fiscal period in 2024, primarily driven by the extinguishment of $1.3 million in accounts payable in the first quarter of 2024. In April and May 2025, the Company eliminated significant headcount and related operating expenses associated with that headcount. The Company expects to reduce its operating expenses by an additional $700,000 over the next 12 months associated with these reductions. Other Expense Other expense was $0.1 million for the three months ended March 31, 2025, compared to $0.5 million for the three months ended March 31, 2024, primarily consisting of interest expense. Net Loss Our net loss was $2.1 million for the three months ended March 31, 2025 compared to $0.7 million in 2024. The higher loss was primarily due to lower revenues and higher operating expenses. 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. As of March 31, 2025, we had cash of $2.2 million, but we had a working capital deficit of $8.2 million. The Company requires significant capital to meet its obligations as they become due. Throughout the next twelve months, the Company intends to fund its operations primarily from the funds raised through its operations. The Company may pursue secondary equity offerings or debt financings to provide working capital and satisfy debt obligations. There can be no assurance as to the availability or terms upon which such financing and capital might be available in the future. If the Company is unable to secure additional funding, it may be forced to curtail or suspend its business plans. In February 2025, the Company completed an offering consisting of the sale of common stock, warrants and pre-funded warrants for gross proceeds of $7,500,000, before deducting placement agent fees and commissions and other offering expenses. Cash Flow Activities The following table presents selected captions from our condensed statements of cash flows for the three months ended March 31, 2025 and 2024: Three Mnths Ended March 31, 2025 2024 Net cash provided by operating activities: Net loss $ (2,089,910 ) $ (683,735 ) Non-cash adjustments $ 429,350 $ 1,721,397 Change in operating assets and liabilities $ (2,846,786 ) $ (2,278,203 ) Net cash used in operating activities $ (4,507,347 ) $ (1,240,540 ) Net cash provided by (used in) investing activities $ - $ (13,785 ) Net cash provided by financing activities $ 6,587,057 $ 1,244,883 Net change in cash $ 2,079,711 $ (9,443 ) Cash Flows Used In Operating Activities Our cash used in operating activities increased by $3.3 million to $4.5 million for the three months ended March 31, 2025, compared to cash used in operating activities of $1.2 million for the corresponding fiscal period in 2024. The decrease in net cash used in operating activities was primarily driven by a higher net loss and less non-cash charges in 2025. 34 Cash Flows Provided By (Used in) Investing Activities Our cash used in investing activities was nominal in 2024. Cash Flows Provided by Financing Activities Cash provided by financing activities was $6.6 million for the three months ended March 31, 2025. Cash inflows included $6.6 million in net proceeds from the issuance from the common stock and pre-funded warrants. Contractual Obligations and Commitments As of March 31, 2025, we had $6.5 million in outstanding principal on debt, primarily our promissory notes due to the Bailey44 Sellers, PPP and merchant advances. Aside from our remaining non-current SBA obligations, all outstanding loans have maturity dates through 2025. 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. Emerging Growth Company Status We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (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, as amended (the “Securities Act”), 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 Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs. 35 Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, who serve as our principal executive officer and principal financial and accounting officer, respectively, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2025. In making this evaluation, our management considered the material weakness in our internal control over financial reporting described below. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2025. We have initiated various remediation efforts, including the hiring of additional financial personnel/consultants with the appropriate public company and technical accounting expertise and other actions that are more fully described below. As such remediation efforts are still ongoing, we have concluded that the material weaknesses have not been fully remediated. Our remediation efforts to date have included the following: ● We have made an assessment of the basis of accounting, revenue recognition policies and accounting period cutoff procedures. In some cases, we made the necessary adjustments to convert the basis of accounting from cash basis to accrual basis. In all cases we have done the required analytical work to ensure the proper cutoff of the financial position and results of operations for the presented accounting periods. ● We have made an assessment of the current accounting personnel, financial reporting and information system environments and capabilities. Based on our preliminary findings, we have found these resources and systems lacking and have concluded that these resources and systems will need to be supplemented and/or upgraded. We are in the process of identifying a single, unified accounting and reporting system that can be used by the Company and Bailey, with the goal of ensuring consistency and timeliness in reporting, real time access to data while also ensuring ongoing data integrity, backup and cyber security procedures and processes. ● We engaged external consultants with public company and technical accounting experience to facilitate accurate and timely accounting closes and to accurately prepare and review the financial statements and related footnote disclosures. We plan to retain these financial consultants until such time that the internal resources of the Company have been upgraded and the required financial controls have been fully implemented. ● We have made an assessment on significant judgments and estimates, including impairment of long-lived assets and inventory valuation. We plan to take the steps as noted above to have the proper resources to conduct proper analyses on areas requiring judgments and estimates. The actions that have been taken are subject to continued review, implementation and testing by management, as well as audit committee oversight. While we have implemented a variety of steps to remediate these weaknesses, we cannot assure you that we will be able to fully remediate them, which could impair our ability to accurately and timely meet our public company reporting requirements. Notwithstanding the assessment that our internal control over financial reporting are not effective and that material weaknesses exist, we believe that we have employed supplementary procedures to ensure that the financial statements contained in this filing fairly present our financial position, results of operations and cash flows for the reporting periods covered herein in all material respects. 36 Limitations on Effectiveness of Controls and Procedures Our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Management believes that the material weakness set forth above did not have an effect on our financial results. Changes in Internal Control over Financial Reporting No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2025 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are currently involved in, and may in the future be involved in, legal proceedings, claims, and government investigations in the ordinary course of business. These include proceedings, claims, and investigations relating to, among other things, regulatory matters, commercial matters, intellectual property, competition, tax, employment, pricing, discrimination, consumer rights, personal injury, and property rights. These matters also include the following: ● On March 21, 2023, a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $43,501. Such amounts include interest due, and are included in accounts payable, net of payments made to date, in the accompanying consolidated balance sheets. The Company does not believe it is probable that the losses in excess of such trade payables will be incurred. ● On November 16, 2023 a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $345,384 , which represents past due fees and late fees. Such amounts are included in the accompanying balance sheets. The Company does not believe it is probable that the losses in excess of such pay trade payables will be incurred. ● On December 21, 2023, an individual who last worked with the Company more than two years prior to filing the lawsuit initiated a wrongful termination claim against the Company. The Company is disputing the claim and the matter has been moved to arbitration, which has been granted. ● On March 20, 2024, an individual who last worked with the Company two years prior to filing the lawsuit initiated a wrongful termination claim against the Company. The Company is disputing the claim, as the individual was never a direct employee but rather a temporary worker engaged through a third-party staffing agency. ● On April 17, 2024, a former employee filed a wrongful termination lawsuit against the Company. The Company is disputing this claim and has been awarded arbitration for this matter. This employee was part of the marketing team. The marketing team was let go and the Company moved to a third-party outsourced marketing solution. ● In June 2021, a vendor filed a lawsuit against Bailey 44 related to a retail store lease in the amount of $1.5 million. 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. ● On November 15, 2023, a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $582,208, which represents “double damages.” The amount due to the vendor is $292,604. Such amounts are included in the accompanying balance sheets. The Company does not believe it is probable that losses in excess of such pay trade payables will be incurred. The matter was settled for $400,000 and is currently on a monthly payment plan. 37 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 December 31, 2024. 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. ITEM 1A. RISK FACTORS As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS See Note 8 to the financial statements. The above issuances were made pursuant to an exemption from registration pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. MINE SAFETY DISCLOSURE Not applicable. ITEM 5. OTHER INFORMATION (a) None. (b) There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the Company last provided disclosure in response to the requirements of Item 407(c)(3) of Regulation S-K. (c) During the quarter ended March 31, 2025, no director or officer of the Company adopted or terminated a contract, instruction or written plan for the purchase or sale of securities of the Company intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) and/or a non-Rule 10b5-1 trading arrangement. 38 ITEM 6. EXHIBITS Exhibit Number Description 4.1 Pre-Funded Warrant issued by the Company to MavDB, dated as of January 21, 2025 (incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on January 23, 2025). 10.1 Securities Purchase Agreement between the registrant and 1800 Diagonal Lending, LLC, dated as of January 16, 2025 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on January 23, 2025). 10.2 Promissory Note issued by the registrant to 1800 Diagonal Lending, LLC, dated January 16, 2025 (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the SEC on January 23, 2025). 10.3 Vendor Agreement between the registrant and MavDB Consulting LLC, dated as of January 21, 2025 (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the SEC on January 23, 2025). 10.4 Promissory Note issued by the Company to Bartch, dated January 22, 2025 (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed with the SEC on January 23, 2025). 31.1* Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) 31.2* Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) 32.1** Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 32.2** Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 101.INS* Inline XBRL Instance 101.SCH* Inline XBRL Taxonomy Extension Schema 101.CAL* Inline XBRL Taxonomy Extension Calculation 101.LAB* Inline XBRL Taxonomy Extension Labels 101.PRE* Inline XBRL Taxonomy Extension Presentation 104 Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) * Filed herewith. ** Furnished herewith # Indicates management contract or compensatory plan or arrangement. 39 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIGITAL BRANDS GROUP, INC. Date: May 15, 2025 By: /s/ John Hilburn Davis, IV John Hilburn Davis, IV, Chief Executive Officer Date: May 15, 2025 By: /s/ Reid Yeoman Reid Yeoman, Chief Financial Officer 40