美國
證券交易委員會
華盛頓特區，20549
表格
| 根據1934年證券交易法第13條或15(d)條的規定的季度報告 |
截至季度結束
| 根據1934年證券交易法第13或第15(d)款的規定，根據過渡報告 |
對於 從 _______ 到 ______ 的過渡期
佣金
文件編號:
（公司章程中指定的準確公司名稱）
| （註冊地或組織所在管轄區） | （美國國稅局僱主號碼） | |
| 文件號碼） | (主要 執行人員之地址) |
（總部地址，包括郵政編碼）
電話:
（註冊人的 電話號碼，包括區號）
無適用
(公司更名、更改地址和更改財年情況的以往名稱、以前地址和以前財年，如與上次報告有所改變)
根據法案第12(b)節註冊的證券:
| 每一類別的名稱 | 交易符號 | 在每個交易所註冊的名稱 | ||
| 該 股票市場有限責任公司 | ||||
| 股票 股票市場有限責任公司 |
請勾選標記以指示註冊者是否（1）在過去12個月內（或註冊者需要提交這些報告的更短時間內）已提交證券交易所法案第13或15（d）節要求提交的所有報告，及 （2）是否已被提交要求過去90天的提交要求所制約。
通過勾選圓圈表明註冊者是否在過去12個月內(或註冊者需要提交這些文件的較短期限內)已經遞交規章S-T(本章第232.405條)規定的每個交互式數據文件。
用複選標記表示註冊人是大型高速申報者、高速申報者、非高速申報者、小型報告公司還是新興成長型公司。請參閱《交易所法案》第120億.2條中「大型高速申報者」、「高速申報者」、「小型報告公司」和「新興成長型公司」的定義。
| 大型加速文件提交人 | ☐ | 加速文件提交人 | ☐ |
| ☒ | 小型報告公司 | ||
| 新興成長公司 |
如果是新興成長公司，請在這裏打勾，表示該註冊人已選擇不使用根據證券交易所法第13(a)條規定提供的遵守任何新的或修訂財務會計準則所規定的延長過渡期。
請勾選適用的圓圈，表示註冊登記者是否是空殼公司(根據交易所法案第12b-2條的定義)。是 ☐ 否
截至2024年11月14日，公司已經 普通股股票，$ 面值、發行和流通量。
數字品牌集團，北卡羅來納州。
10-Q表格
目錄
| 頁面 | |||
| 關於前瞻性聲明的警示說明 | 3 | ||
| 第一部分 財務信息 | 4 | ||
| 項目1. | 基本報表 | 4 | |
| 截至2024年9月30日的未經審計的簡明綜合資產負債表，以及2023年12月31日 | 4 | ||
| 2024年9月30日和2023年三個月及九個月結束的未經審計簡明綜合損益表 | 5 | ||
| 2024年9月30日和2023年的三個月和九個月未經審計的簡明綜合股東權益（赤字）報表 | 6 | ||
| 2024年9月30日和2023年未經審計的簡明合併現金流量表 | 7 | ||
| 簡明聯合財務報表附註(未經審計) | 8 | ||
| 項目 2. | 分銷計劃 | 20 | |
| 項目 3 | 市場風險的定量和定性披露 | 32 | |
| 項目 4. | 控制和程序 | 32 | |
| 第二部分.其他信息 | 34 | ||
| 項目 1. | 法律訴訟 | 34 | |
| 條目 1A. | 風險因素 | 35 | |
| 項目 2. | 未註冊的股票股權銷售和籌款用途 | 35 | |
| 項目 3. | 對高級證券的違約。 | 35 | |
| 項目 4. | 礦山安全披露 | 35 | |
| 條目 5。 | 其他信息 | 35 | |
| 條目 6。 | 展示資料 | 36 | |
| 簽名 | 37 | ||
| 2 |
關於前瞻性聲明的注意事項
除歷史信息外，這份10-Q表格的季度報告包含根據《1933年證券法》第27（a）條修正案（「證券法」）和《1934年證券交易法》第21（E）條修正案（「交易所法案」）的涉及風險和不確定性的前瞻性聲明。這些前瞻性聲明可以通過使用前瞻性術語來識別，包括「相信，」「估計，」「項目，」「目標，」「預期，」「尋找，」「預測，」「考慮，」「持續，」「可能，」「打算，」「可能」，「計劃，」「預測，」「未來，」「可能，」「將會，」“可以，「將」或「應該」或, 在各種情況下，它們的否定或其他變體或可比術語。這些前瞻性聲明包括所有不是歷史事實的事項。它們出現在這份10-k年度報告中的多個地方，包括有關我們意圖、信仰或目前對我們的運營結果、財務狀況、流動性、前景、增長戰略、我們所在行業和潛在收購等事項的聲明。我們的許多前瞻性聲明源自我們的運營預算和預測，這些預測基於許多詳細的假設。雖然我們認爲我們的假設是合理的，但我們警告說，預測已知因素的影響非常困難，當然，我們無法預料可能影響我們實際結果的所有因素。所有前瞻性聲明均基於我們在本季度10-Q表格上獲得的信息日期。
由於其本質，前瞻性聲明涉及風險和不確定性，因爲它們與事件相關，並依賴於可能在未來發生或不發生的情況。我們提醒您，前瞻性聲明並不是未來表現的保證，並且我們的實際經營結果、財務狀況和流動性，以及我們所處行業的穩定性，可能與在本季度10-Q報告中包含的前瞻性聲明中作出的或提示的內容存在實質性差異。此外，即使我們的經營結果、財務狀況和流動性以及我們所處行業的發展與本季度10-Q報告中包含的前瞻性聲明一致，這些結果或發展也可能不代表後續期間的結果或發展。可能導致我們結果與預期不同的重要因素包括在我們最近的10-K年度報告中討論的「風險因素」，並可能會不時更新。
估計和前瞻性聲明僅代表其作出之日期的情況，並且除非法律要求，我們不承擔更新或審查任何估計和/或前瞻性聲明的義務，也不因新信息、未來事件或其他因素而另行審查。
| 3 |
部分I—財務信息
項目 1. 合併基本報表
數字化 品牌集團有限公司
彙編簡明資產負債表
（未經審計）
| 2023年9月30日 | 2024年12月31日， | |||||||
| 2024 | 2023 | |||||||
| 資產 | ||||||||
| 流動資產： | ||||||||
| 現金及現金等價物 | $ | $ | ||||||
| 應收賬款淨額 | ||||||||
| Due from factor, net | ||||||||
| 存貨 | ||||||||
| 預付費用及其他流動資產 | ||||||||
| 總流動資產 | ||||||||
| 資產、設備及軟件淨額 | ||||||||
| 商譽 | ||||||||
| 無形資產-淨額 | ||||||||
| 存款 | ||||||||
| 使用權資產 | ||||||||
| 總資產 | $ | $ | ||||||
| 負債和股東權益 | ||||||||
| 流動負債: | ||||||||
| 應付賬款 | $ | $ | ||||||
| 應計費用和其他負債 | ||||||||
| 應付關聯方 | ||||||||
| 可轉換票據應付款，淨額 | ||||||||
| 應付應計利息 | ||||||||
| 應付貸款，流動 | ||||||||
| 應付本票淨額 | ||||||||
| 租賃負債，流動部分 | ||||||||
| 總流動負債 | ||||||||
| 應付貸款 | ||||||||
| Right of use liability, non current portion | ||||||||
| 遞延所得稅負債 | ||||||||
| 總負債 | ||||||||
| 承諾和 contingencies | ||||||||
| 股東權益: | ||||||||
| 未指定優先股，每股面值爲美元 par, 授權股份， 截至2024年9月30日和2023年12月31日，已發行並流通的股份 | ||||||||
| A輪可轉換首選股，$ 每股面值， 股份指定, 截至2024年9月30日和2023年12月31日期間已發行和流通的股份數 | ||||||||
| 系列C可轉換優先股，每股面值 $; 每股面值， 和 截至2024年9月30日和2023年12月31日期間分別已發行和流通的股份數 | ||||||||
| 普通股，每股面值爲 $0.0001； 每股面值， 已獲得授權的股份， 和 截至2024年9月30日和 2023年12月31日分別發行和流通的股份 | ||||||||
| 其他資本公積 | ||||||||
| 累積赤字 | ( | ) | ( | ) | ||||
| 股東權益總額 | ||||||||
| 總負債和股東權益 | $ | $ | ||||||
請參閱未審計的簡明合併基本報表附帶說明
| 4 |
數字化 品牌集團有限公司
精簡 合併損益表
（未經審計）
| 三個月結束 | 截至九個月 | |||||||||||||||
| 9月30日 | 九月三十日 | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| 淨收入 | $ | $ | $ | $ | ||||||||||||
| 淨收入成本 | ||||||||||||||||
| 毛利 | ||||||||||||||||
| 營業費用： | ||||||||||||||||
| 一般與管理 | ||||||||||||||||
| 銷售和市場推廣 | ||||||||||||||||
| 分銷 | ||||||||||||||||
| 無形資產減值 | ||||||||||||||||
| 可換履行條件公允價值變動 | ( | ) | ||||||||||||||
| 總營業費用 | ||||||||||||||||
| 經營活動收入（損失） | ( | ) | ( | ) | ( | ) | ||||||||||
| 其他收入（費用）： | ||||||||||||||||
| 利息費用 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| 其他營業外收入（費用） | ( | ) | ( | ) | ( | ) | ||||||||||
| 其他總收益（費用），淨額 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| 所得稅費用 | ||||||||||||||||
| 持續經營的淨虧損 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (損失) 來自已終止的經營活動，稅後 | ( | ) | ||||||||||||||
| 淨損失 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 加權平均普通股在外流通股數 - 基本和攤薄 | ||||||||||||||||
| Revenue | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
請參閱未經審計的簡明合併基本報表附帶的說明。
| 5 |
數字品牌集團公司
凝縮 合併股東權益（赤字）報表
（未經審計）
| A系列可轉換債券 | C輪可轉換債券 | 附加 | 總計 股東權益 | |||||||||||||||||||||||||||||||||
| 優先股 | 優先股 | 普通股 | 實繳資本 | 累計 | 股本 | |||||||||||||||||||||||||||||||
| 股份 | 數量 | 股份 | 數量 | 股份 | 金額 | 資本 | 虧損 | (虧損) | ||||||||||||||||||||||||||||
| 2022年12月31日的餘額 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| 根據私人配售發行普通股 | - | - | ||||||||||||||||||||||||||||||||||
| 發行成本 | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| 爲服務發行的股份 | - | - | ||||||||||||||||||||||||||||||||||
| 發行附有票據的股份和warrants | - | - | ||||||||||||||||||||||||||||||||||
| 股票-based補償 | - | - | - | |||||||||||||||||||||||||||||||||
| 淨損失 | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| 2023年3月31日的餘額 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| 取消票據及發行優先股 | - | - | ||||||||||||||||||||||||||||||||||
| 發行B系列優先股 | - | - | - | |||||||||||||||||||||||||||||||||
| 根據處置發行普通股 | - | - | ||||||||||||||||||||||||||||||||||
| 股權獎勵 | - | - | - | |||||||||||||||||||||||||||||||||
| 淨收入 | - | - | - | |||||||||||||||||||||||||||||||||
| 2023年6月30日的餘額 | ( | ) | ||||||||||||||||||||||||||||||||||
| 取消B系列優先股 | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| 根據定向增發發行普通股，扣除發行費用 | - | - | ||||||||||||||||||||||||||||||||||
| 因服務發行的普通股 | - | - | ||||||||||||||||||||||||||||||||||
| 行使認股權 | - | - | ||||||||||||||||||||||||||||||||||
| 股權獎勵 | - | - | - | |||||||||||||||||||||||||||||||||
| 淨虧損 | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| 2023年9月30日的餘額 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| 2023年12月31日的餘額。 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| 發行普通股以換取現金 | - | - | ||||||||||||||||||||||||||||||||||
| 爲服務發行的股份 | - | - | ||||||||||||||||||||||||||||||||||
| 優先股轉換爲普通股 | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| 基於股票的補償 | - | - | - | |||||||||||||||||||||||||||||||||
| 淨虧損 | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| 2024年3月31日的結餘 | ( | ) | ||||||||||||||||||||||||||||||||||
| 現金髮行的普通股 | - | - | ||||||||||||||||||||||||||||||||||
| 貸款轉換爲普通股 | - | - | ||||||||||||||||||||||||||||||||||
| 優先股轉換爲普通股 | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| 基於股票的補償 | - | - | - | |||||||||||||||||||||||||||||||||
| 淨虧損 | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| 截至2024年6月30日的餘額 | ( | ) | ||||||||||||||||||||||||||||||||||
| 以現金髮行的普通股 | - | - | ||||||||||||||||||||||||||||||||||
| 爲服務發行的股份 | - | - | ||||||||||||||||||||||||||||||||||
| 優先股轉換爲普通股 | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| 股票基礎補償 | - | - | - | |||||||||||||||||||||||||||||||||
| 淨損失 | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| 截至2024年9月30日的餘額 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
請參閱未經審計的簡明合併基本報表附帶的說明。
| 6 |
數字品牌集團公司
簡明綜合現金流量表
（未經審計）
| 截至九個月 | ||||||||
| 2023年9月30日 | ||||||||
| 2024 | 2023 | |||||||
| 經營活動現金流量： | ||||||||
| 淨損失 | $ | ( | ) | $ | ( | ) | ||
| 調整爲淨損失到經營活動現金流量淨使用： | ||||||||
| 折舊與攤銷 | ||||||||
| 貸款折扣和費用的攤銷 | ||||||||
| 無形資產減值 | ||||||||
| 債務攤銷損失 | ||||||||
| 處置業務損失 | ||||||||
| 股票-based補償 | ||||||||
| 爲服務發行的股份 | ||||||||
| 信貸準備金的變化 | ( | ) | ||||||
| 可換履行條件公允價值變動 | ( | ) | ||||||
| 停止操作 | ||||||||
| 非現金租賃費用 | ||||||||
| 運營資產和負債的變化： | ||||||||
| 應收賬款淨額 | ( | ) | ||||||
| 來自保理商的應收款 | ||||||||
| 存貨 | ( | ) | ||||||
| 預付費用及其他流動資產 | ( | ) | ( | ) | ||||
| 應付賬款 | ( | ) | ||||||
| 應計費用和其他負債 | ||||||||
| 遞延收入 | ( | ) | ||||||
| 應付應計利息 | ||||||||
| 應付關聯方 | ||||||||
| 租賃負債 | ( | ) | ||||||
| 用於經營活動的淨現金 | ( | ) | ( | ) | ||||
| 投資活動現金流量： | ||||||||
| 現金處置 | ( | ) | ||||||
| 購買固定資產、設備和軟件 | ( | ) | ( | ) | ||||
| 存款 | ( | ) | ||||||
| 投資活動產生的淨現金流量 | ( | ) | ||||||
| 籌集資金的現金流量： | ||||||||
| 關聯方借款的償還款項 | ( | ) | ||||||
| 來自因素的預付款 | ||||||||
| 貸款和應付票據的發行 | ||||||||
| 可轉換票據和應付貸款的還款 | ( | ) | ( | ) | ||||
| 現金購買普通股的保險 | ||||||||
| 行使權證 | ||||||||
| 公開發行普通股 | ||||||||
| 發行成本 | ( | ) | ||||||
| 融資活動提供的淨現金 | ||||||||
| 現金及現金等價物淨變動額 | ( | ) | ||||||
| 期初現金及現金等價物餘額 | ||||||||
| 期末現金及現金等價物 | $ | $ | ||||||
| 現金流量補充披露： | ||||||||
| 支付的所得稅費用 | ||||||||
| 支付的利息現金 | $ | $ | ||||||
| 非現金投資和籌資活動的補充披露: | ||||||||
| 使用權資產 | $ | $ | ||||||
| 用於服務和應付賬款轉換的股份 | $ | $ | ||||||
| 將優先股轉換爲普通股 | $ | $ | ||||||
| 將票據轉換爲優先股 | $ | $ | ||||||
請參閱未經審計的簡明合併基本報表附帶的說明。
| 7 |
注意事項1：綜述業務性質
數字品牌集團公司（「公司」或「DBG」）於2012年9月17日在特拉華州根據法律組織，原名爲Denim.LA LLC的有限責任公司。公司於2013年1月30日轉爲特拉華州公司，並更改名稱爲Denim.LA, Inc. 自2020年12月31日起，公司更名爲數字品牌集團公司（DBG）。
公司是一個精心挑選的生活方式品牌集合，包括Bailey 44、DSTLD、Stateside和ACE Studios，通過直接面向消費者和批發分銷提供各種服裝產品。
在2020年2月12日，Denim.LA, Inc.與德拉瓦州有限責任公司Bailey 44, LLC（「Bailey」）簽署了一項合併協議與計劃。在收購日期，Bailey 44, LLC成爲公司的全資子公司。
在2021年5月18日，公司完成了對Harper & Jones, LLC（「H&J」）的收購，依據與D. Jones Tailored Collection, Ltd.的會員權益股票購買協議。
在
2021年8月30日，公司完成了對Mosbest, LLC（以Stateside爲名）("Stateside")的收購，依據其與Moise Emquies簽署的成員權益購買協議，購買了
2022年12月30日，公司完成了之前宣佈的對Sunnyside, LLC dba Sundry（「Sundry」）的收購，依據與Moise Emquies的第二次修訂並重述的會員權益購買協議，購買
在2023年6月21日，公司與H&J的前所有者簽署了一份和解協議（「和解協議」），根據該協議，雙方同時簽署和解協議，(i) 公司同意向D. Jones Tailored Collection, Ltd.（「D. Jones」）支付總計現金
註釋2：經營情況
附註的簡明綜合基本報表已根據持續經營原則進行編制，這意味着在業務正常運作過程中實現資產和償付負債。公司自成立以來尚未盈利，截至$
公司在財務報表可用之日起的未來12個月內繼續作爲持續經營實體的能力，取決於其能否生成足夠的經營現金流以滿足其義務，迄今尚未能夠實現，並/或獲得額外的資金融資。截至財務報表可用之日，公司主要通過發行股份和債務融資。如果公司無法生成足夠的營業收入來維持其經營，公司將需要減少支出或通過出售債務和/或股本證券融資。發行額外股本將導致現有股東的稀釋。如果公司在需要時無法獲得額外資金，或者無法獲得公司接受的條件下獲得這些資金，公司將無法執行業務計劃或支付費用和支出，這將對業務、財務狀況和運營結果產生重大不利影響。不能保證公司在這些努力中將取得成功。
| 8 |
注意 3: 重要會計政策摘要
表述基礎
公司的會計和報告政策符合美國通行的會計原則（"GAAP"）。
反向 股票拆分
在
2023年8月21日，董事會批准了一項
未經審計的中期財務信息
截至2024年9月30日的附註未經審計的簡明綜合資產負債表、2024年9月30日、2023年9月30日三個和九個月度營業的簡明綜合利潤表以及2024年9月30日、2023年9月30日九個月度現金流量表已按照公司根據SEC的中期財務報表的規則和法規編制。根據規則和法規，按照GAAP編制的財務報表通常包含的某些信息和腳註披露已被壓縮或省略。然而，公司認爲披露充分可以使所呈現的信息不具有誤導性。未經審計的中期綜合財務報表已按照經審計的綜合財務報表保持一致的原則編制，在管理層看法中，體現了所有調整，僅包括正常的回顧調整，以便公平呈現所呈現的中期業績和截至中期綜合資產負債表日的綜合財務狀況的所有板塊結果。經營業績不一定能反映2024年12月31日結束的年度預期結果。
隨附的未經審計的臨時簡明合併基本報表應與公司截至2023年12月31日的經審計合併基本報表及其附註一起閱讀，這些信息包含在公司於2024年4月15日向SEC提交的年度表格10-k中。
合併原則
這些 合併後的基本報表包括本公司及其全資子公司Bailey和Stateside的帳戶，自收購之日起計算。所有的內部交易和餘額已在合併時被消除。
中止營業
某些 前年的帳戶已重新分類，以符合當前年度關於已終止經營業務的收入（損失）的展示。
使用估計值
公司的基本報表的編制必須遵循GAAP，這要求管理層做出影響資產和負債報告金額、財務報表日期的或有資產和負債的披露以及報告期內收入和費用報告金額的估計和假設。這些基本報表中反映的重要估計和假設包括但不限於庫存、長期資產減值、或有對價和衍生負債。公司根據歷史經驗、已知趨勢及其他市場特定或其他相關因素來制定其估計，這些因素在當時的情況下被認爲是合理的。管理層在情況、事實和經驗發生變化時，持續評估其估計。估計的變化在其被知曉的期間內記錄。實際結果可能與這些估計有所不同。
| 9 |
現金 及等價物和信用風險集中
公司認爲所有原始期限不超過六個月的高流動性證券均可視爲現金等價物。截至2024年9月30日和2023年12月31日，公司未持有任何現金等價物。公司在銀行存款帳戶中的現金及現金等價物，有時可能超過由聯邦保險覆蓋的極限金額$。
金融工具的公允價值
公司的金融工具包括現金及現金等價物、預付費用、應付賬款、應計費用、應付關聯方款項、關聯方應付款和可轉換債務。這些資產和負債的賬面價值代表了它們的公允市場價值，因爲這些工具的到期較快。
應收賬款和預期信用損失
我們按發票金額減少客戶信用損失和其他扣款後載列應收賬款，以呈現對金融資產的預期收回淨額。所有應收款項預期在合併資產負債表一年內收回。我們不對貿易應收賬款計提利息。管理根據多種因素評估收回應收賬款的能力。根據各自的信用條件，確定應收賬款是否逾期。根據逾期時間、歷史回收情況或客戶財務狀況維護信用損失準備金。在收集應收款項未能成功的努力之後，認定無法收回的年份將覈銷應收款項。我們與客戶關聯的資產負債表外信貸敞口爲零。
我們 定期審查應收賬款，估算壞賬準備金，並同時在 運營報表中記錄適當的費用。這些估算基於一般經濟情況、客戶的財務狀況以及逾期賬款的金額 和年齡。逾期賬款只有在所有催收嘗試都已耗盡且回收前景渺茫的情況下，才能從準備金中核銷。 之前核銷的應收賬款的回收在收到時記錄爲收入。 公司在正常業務中向客戶提供信用，並已建立信用評估和監控流程 以降低信用風險。
截至2024年9月30日和2023年12月31日，公司確定了$的信貸損失準備金。
存貨
庫存 按成本或可變現淨值中較低者計提，並且使用加權平均成本法對DSTLD進行會計處理，而對Bailey、Stateside和Sundry則採用先進先出法。 截至2024年9月30日和2023年12月31日的庫存餘額主要由購入或生產用於轉售的成品，以及公司購入以修改產品的任何原材料和在製品組成。
存貨包括以下內容:
| 2023年9月30日 | 2024年12月31日， | |||||||
| 2024 | 2023 | |||||||
| 原材料 | $ | $ | ||||||
| 在製品 | ||||||||
| 成品 | ||||||||
| 存貨 | $ | $ | ||||||
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.
| 10 |
Annual Impairment
At December 31, 2023, 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 Bailey44, Stateside and Sundry may not be recoverable. The qualitative assessment was primarily due to reduced or stagnant revenues of both entities as compared to the Company’s initial projections at the time of each respective acquisition, as well as the entities’ liabilities in excess of assets. Upon the quantitative analysis performed, the Company determined that the fair value of the intangible assets and reporting units were greater than the respective carrying values. As such, no impairment was recorded. The Company utilized the enterprise value approach in the impairment tests of each reporting unit in 2023.
At September 30, 2024, management determined that indicators of impairment
existed with regards to the Bailey44 reporting unit. The qualitative assessment was primarily due to reduced revenues of Bailey44 as compared
to the Company’s projections, as well as the entity’ liabilities in excess of assets. As such, the Company recorded an impairment
to intangible assets of $
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 September 30, 2024 and 2023, diluted net loss per share is the same as basic net loss per share for each year. Potentially dilutive items outstanding as of September 30, 2024 and 2023 are as follows:
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Series A convertible preferred stock | ||||||||
| Series C convertible preferred stock | ||||||||
| Common stock warrants | ||||||||
| Stock options | ||||||||
| Total potentially dilutive shares | ||||||||
The stock options and warrants above are out-of-the-money as of September 30, 2024 and 2023.
Recent Accounting Pronouncements
在 2024年1月，公司採用了 ASU 2020-06，債務—具有轉換及其他期權的債務（子主題470-20）以及衍生工具 和對沖—實體自身權益的合同（子主題815-40）： 可轉換工具和合同會計 在實體自身權益中的：此ASU解決了某些可轉換工具和合同在 實體自身權益中的指引的複雜性。該ASU適用於滿足SEC申報人定義的公共業務實體，排除符合SEC定義的較小報告公司的實體，適用於在2021年12月15日後開始的財政年度，包括這些財政年度內的中期期間。對於所有其他實體，ASU將在2023年12月15日後開始的財政年度中生效，包括這些財政年度內的中期期間。該ASU對合並基本報表沒有產生重大影響。
管理層認爲最近發佈的但尚未生效的任何其他會計準則對附帶的基本報表可能產生重大影響。隨着新的會計準則的發佈，公司將根據情況採納適用的準則。
截至2024年5月20日，以下會計公告已發佈，但尚未生效，可能會影響公司未來的財務報告：
| ● | ASU 2022-03，公允價值計量（主題820）：受合同銷售限制的股權證券公允價值計量： 該ASU旨在澄清在計量受合同限制的股權證券公允價值時的指導原則，這些限制禁止出售該證券。對於公開業務實體，ASU 2022-03中的修訂自2023年12月15日之後開始的財政年度生效，以及這些財政年度內的中期期間。對於所有其他實體，該ASU自2024年12月15日之後開始的財政年度生效，以及這些財政年度內的中期期間。 |
| 11 |
註釋4:來自因素的到期
由於/來自因素包括以下內容:
| 2023年9月30日 | 2024年12月31日， | |||||||
| 2024 | 2023 | |||||||
| 未收賬款： | ||||||||
| 無追索權 | $ | $ | ||||||
| 有追索權 | ||||||||
| 到期基金和存款 | ||||||||
| 預付款項 | ( | ) | ( | ) | ||||
| 向客戶應付的貸款 | ( | ) | ||||||
| $ | $ | |||||||
注意 5: 商譽和無形資產
以下是每個業務合併對應的商譽摘要：
| 2023年9月30日 | 12月31日 | |||||||
| 2024 | 2023 | |||||||
| 貝利 | $ | $ | ||||||
| 美國本土 | ||||||||
| 其他 | ||||||||
| $ | $ | |||||||
下表總結了截至2024年9月30日公司可識別的無形資產相關信息：
| 總計 | 累積 | 攜帶 | ||||||||||
| 金額 | 攤銷 | 價值 | ||||||||||
| 攤銷： | ||||||||||||
| 客戶關係 | $ | $ | ( | ) | $ | |||||||
| $ | $ | ( | ) | $ | ||||||||
| Infinite-Lived： | ||||||||||||
| 品牌名稱 | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||
2024年9月30日，管理層確定貝利44報告單位存在減值指標。定性評估主要是因爲貝利44的收入較公司的預測有所下降，以及實體的負債超過資產。因此，公司對品牌名稱無形資產進行減值，金額爲$
公司在截至2024年9月30日和2023年9月30日的三個月內記錄了$的攤銷費用，
注意 6: 負債與債務
應計 費用和其他負債
截至2024年9月30日和2023年12月31日，合併資產負債表中的公司應計費用及其他負債項目包括以下內容：
| 2023年9月30日 | 2024年12月31日， | |||||||
| 2024 | 2023 | |||||||
| 應計費用 | $ | $ | ||||||
| 與工資相關的負債 | ||||||||
| 銷售稅負債 | ||||||||
| 其他負債 | ||||||||
| $ | $ | |||||||
| 12 |
可轉換債務
截至2024年9月30日和2023年12月31日，尚有$
目標 資本可轉換本票
在2024年4月30日，公司簽發了一張可轉換的 promissory note，原始本金金額爲$
貸款 應付 — PPP和SBA貸款
2022年4月，貝利的第一筆PPP貸款部分獲得豁免，總額爲$
商家 預付款
未來 銷售收據
在
2022年和2023年，公司獲得了幾筆商戶預付款。這些預付款大部分是由公司預計未來銷售交易擔保的，預計每週付款。公司總現金還款，包括本金
和利息，金額爲$
以下是截至2024年9月30日和2023年12月31日的商家融資摘要：
| 9月30日, | 2023年12月31日, | |||||||
| 2024 | 2023 | |||||||
| 負責人 | $ | $ | ||||||
| 減：未攤銷債券折價 | ( | ) | ( | ) | ||||
| 商戶現金預支，淨額 | $ | $ | ||||||
未攤銷的債務折價爲$
其他
公司通過shopify資本獲得了傑出的商戶預付款。2024年9月結束的三個月裏，公司還款金額爲$
公司還與Gynger, Inc.有未償商戶預付款。2024年5月，公司將欠Gynger的未償本金和應計利息$
| 13 |
本票 應付票據
截至2024年9月30日和2023年12月31日，向Bailey賣方的票據未償本金爲$
2023年3月，公司與各購買方簽署了一份《證券購買協議》（以下簡稱「2023年3月票據」），投資者從公司購買了總本金金額爲$的本票。
2024年5月，公司償還了$
以下是應付票據淨額摘要：
| 9月30日, | 2023年12月31日, | |||||||
| 2024 | 2023 | |||||||
| 貝利筆記 | $ | $ | ||||||
| 2023年三月票據 - 本金 | ||||||||
| 2023年三月票據 - 未攤銷債務折扣 | ( | ) | ||||||
| 應付本票淨額 | $ | $ | ||||||
注意 7: 股東權益虧損
對公司章程的修訂
在
2023年8月21日，董事會批准了一項
普通股
截至2024年6月30日，公司共有1113622份認股權證尚未行使，按照加權平均行權價格計算爲$。 每股面值。 截至2024年9月30日，應付票據餘額降至$。
普通
股東擁有每股的投票權。
| 14 |
2024年交易
在截至2024年9月30日的九個月期間，公司發行了
截至2024年9月30日爲止的九個月裏，公司總計發行了 根據服務和應付賬款轉換，共計以公允價值計算的普通股股份。
截至9月30日的九個月期間， C系列可轉換優先股轉爲 股普通股。
正如之前所報道的，公司與一名合格投資者（「投資者」）簽署了一份證券購買協議，依據該協議，公司於2023年9月5日發行了某些系列A warrants。
在2024年5月3日，公司與投資者簽署了某項誘導性股票購買權行使提案（「誘導協議」），根據該協議（i）公司同意將現有股票權證的行使價格降低至$
2024年5月，公司將欠Gynger的未償本金和應計利息￥
A系列可轉換優先股
在 2022年9月29日，公司提交了指定證書，指定最多 從授權但未發行的優先股中 作爲A系列可轉換優先股的股份。
除非根據指定證書應進行調整的股票股利或分配，否則持有人應有權獲得並由公司支付對等（按照轉換爲普通股的基礎）於並形式相同的優先股的股票上實際支付的股息，在普通股的股票上支付的如果有其他股息將不會支付的優先股上。
就普通股類別的任何表決事宜而言，每股A系列優先股應賦予持有人投票權，其數量等於其可轉換爲的普通股數量。
A類優先股應排在（i）優先於所有普通股; （ii）優先於公司此後創建的任何一類或一系列資本股票，該股票特別按其條款排名低於任何優先股（「較低證券」）; （iii）與公司創建的任何一類或一系列資本股票並按其條款與優先股平等排名的資本股票（「平級證券」）; 以及（iv）優先於公司此後創建的任何一類或一系列資本股票，該股票特別按其條款排名高於任何優先股（「高級證券」），在每種情況下，就分紅或公司清算、解散或清盤時的資產分配而言，無論是自願還是非自願。
每股A種優先股可於2022年9月29日起的任何時間，由持有人選擇，轉換爲普通股數量，該數量通過將A種優先股的面值（$
截至2024年9月30日和2023年12月31日，共有 股A系列可轉換優先股已發行並流通。
| 15 |
2023 年 3 月 4 日，公司向懷俄明州國務印發了一份指定證書，成立了公司的 C 系列可轉換優先股，其 規定的陳述價值爲 $
開啓
2023 年 6 月 21 日，公司一方面是 Moise Emquies、George Levy、Matthieu Leblan、Carol Ann Emquies、Jenny Murphy 和 Elodie
另一方面，Crichi（統稱爲 「雜項投資者」）簽署了證券購買協議（「雜項投資者」）
SPA”），公司據此發行 C系列可轉換優先股的股份，面值美元 每股（「系列」
C 優先股”）以美元收購價向雜項投資者提供 每股。C系列優先股可兌換
轉化爲等於美元的公司普通股的數股
在 2023年6月21日，公司向特拉華州國務卿提交了指定證書，指定了高達 的股份作爲其優先股的授權但未發行的股份中的C系列可轉換優先股。以下是C系列優先股主要條款的摘要。
除了根據指定證明書進行調整的送轉股分紅或分配，C系列優先股的持有人（「C系列持有人」）將有權獲得，並且公司將支付對C系列優先股進行分紅派息的權益（按轉換爲普通股計算），分紅的形式與對普通股進行實際支付的分紅相同。C系列優先股將不再支付其他分紅。
系列C持有人有權作爲一個類別投票，具體條款在指定證書中明確規定。系列C持有人也有權與普通股的持有人一起投票，作爲一個類別對所有系列C持有人被允許與普通股類別投票的事項進行投票。
關於普通股類別的任何投票，每股C系列優先股應使持有者有權投票，其投票數量等於當前可轉換爲的普通股的股數（受《指定證書》中規定的持有限制的約束），以確定有資格投票的股東的記錄日期作爲計算轉換價格的日期。
C系列優先股應按以下順序排位：(i) 在所有普通股之前；(ii) 在初級證券之前；(iii) 與平價證券平等；(iv) 在高級證券之後，在上述每種情況下，關於分紅或在公司清算、解散或結束時分配資產，無論是自願還是非自願。根據公司的高級證券持有者的任何優先清算權以及公司現有和未來債權人的權利，在清算時，每位持有者有權從公司合法可供向股東分配的資產中優先獲得支付，優先於任何對普通股和初級證券持有者的資產或盈餘資金的分配，與平價證券持有者的任何分配等同。持有者每持有一股C系列優先股，應獲得等於規定價值（在指定證書中定義）的金額以及任何累計和未支付的分紅；之後，C系列持有者有權從公司的資產中獲得與普通股持有者在C系列優先股完全轉換爲普通股時（在此情況下忽略任何轉換限制）將獲得的相同金額，這些金額應與所有普通股持有者平等支付。
每股C系列優先股在2023年6月21日後的任何時間，持有人可以選擇將其轉換爲普通股數量，所轉換普通股的數量應根據C系列優先股的面值（$
公司有權在截至日期後的任何時候以摺合時估值的%的價格贖回當時的C系列優先股
In October 2023, shares of Series C Convertible Preferred Stock converted into shares of common stock.
During the nine months ended September 30, 2024, shares of Series C Convertible Preferred Stock converted into shares of common stock.
| 16 |
NOTE 8: RELATED PARTY TRANSACTIONS
As
of September 30, 2024 and December 31, 2023, amounts due to related parties were $
Common Stock Warrants
A summary of information related to common stock warrants for the nine months ended September 30, 2024 is as follows:
| Common | Weighted | |||||||
| Stock | Average | |||||||
| Warrants | Exercise Price | |||||||
| Outstanding - December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Forfeited | ||||||||
| Outstanding - September 30, 2024 | $ | |||||||
| Exercisable at December 31, 2023 | $ | |||||||
| Exercisable at September 30, 2024 | $ | |||||||
Stock Options
As of September 30, 2024 and December 31, 2023, the Company had stock options outstanding with a weighted average exercise price of $ per share.
Stock-based compensation expense of $ and $ was recognized for the three months ended September 30, 2024 and 2023, respectively and $ and $ was recognized for the nine months ended September 30, 2024 and 2023. During the nine months ended September 30, 2024 and 2023, $ and $ was recorded to sales and marketing expense, and all other stock compensation was included in general and administrative expense in the condensed consolidated statements of operations. Total unrecognized compensation cost related to non-vested stock option awards as of September 30, 2024 amounted to $ and will be recognized over a weighted average period of years.
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 rental payments for the Company’s leases are typically structured as either fixed or variable payments. Fixed rent payments include stated minimum rent and stated minimum rent with stated increases. The Company considers lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from the calculation of lease liabilities.
| 17 |
Management uses judgment in determining lease classification, including determination of the economic life and the fair market value of the identified asset. The fair market value of the identified asset is generally estimated based on comparable market data provided by third-party sources.
In
January 2023, the Company entered into a lease agreement extension for its corporate office and distribution center in Vernon, California
that expires on January 31, 2025. The lease has monthly base rent payments of $
In
September 2023, the Company entered into a lease agreement extension for a showroom space in Los Angeles, California that commences
in March 2023 which expired in September 2024. The lease had a monthly base rent of $
In
April 2024, the Company entered into a lease agreement extension for a retail outlet space in Allen, Texas that commences in April 2024
and expires in April 2027. The lease has a monthly base rent of $
The following is a summary of operating lease assets and liabilities:
| September 30, | December 31, | |||||||
| Operating leases | 2024 | 2023 | ||||||
| Assets | ||||||||
| ROU operating lease assets | $ | $ | ||||||
| Liabilities | ||||||||
| Current portion of operating lease | ||||||||
| Non Current portion of lease liability | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Operating leases | September 30, 2024 | December 31, 2023 | ||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % | ||||||
| September 30, 2024 | ||||
| Future minimum payments | $ | |||
| Less imputed interest | ( | ) | ||
| Total lease obligations | $ | |||
NOTE 11: CONTINGENCIES
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 $
On
February 7, 2023, a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $
In August 2020 and March 2021, two lawsuits were filed against Bailey’s by third-party’s related to prior services rendered.
The claims (including fines, fees, and legal expenses) total an aggregate of $
On
December 21, 2020, a Company investor filed a lawsuit against DBG for reimbursement of their investment totaling $
On
November 16, 2023 a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $
On
November 15, 2023 a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $
On December 21, 2023, a former employee from over two years ago filed a wrongful termination lawsuit against the Company. The Company is disputing this claim. To this point, this same law firm recently sent a demand letter for another wrongful termination of a temporary worker we used from a third party placement agency. This person was not a Company employee at any time.
A
vendor filed a lawsuit against Bailey 44 related to a retail store lease in the amount of $
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 September 30, 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.
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.
| 18 |
NOTE 12: SUBSEQUENT EVENTS
As previously reported, the Company and various purchasers (the “Investors”) executed a securities purchase agreement (the
“SPA”) on or around April 7, 2023, whereby the Investors purchased from the Company promissory notes in the aggregate principal
amount of approximately $
Between October 3, 2024 and October 15, 2024, the Company issued shares of the Company’s common stock (the “Shares”) to a certain note holder upon conversion of a portion of their promissory note originally issued by the Company on or around October 1, 2023 (the “Note”). On October 16, 2024, the Company became aware that the issuance of the Shares was in error and not permitted under the terms of the Note due to the requirement thereunder that stockholder approval be obtained prior to the issuance of more than % of the Company’s pre-transaction shares outstanding upon conversion(s) of the Note, as referenced and specifically required under Nasdaq Listing Rule 5635(d). The Company then notified the note holder that the Shares must be returned to the Company’s transfer agent for cancellation. Accordingly, the note holder is in the process of returning the Shares to the Company’s transfer agent for cancellation. Upon cancellation of the Shares, the Company’s issued and outstanding common stock count will decrease by shares. The Company is in communications with The Nasdaq Stock Market LLC regarding the aforementioned erroneous issuance of the Shares and subsequent remediation actions.
On November 5, 2024, the Holder facilitated the cancellation of shares of the Company’s common stock in accordance with the Company’s remediation plan.
Completion of offering Common Stock and Pre-Funded Warrants
On October 28, 2024, 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”):
(i) shares of common stock (the “Common Stock”), at a purchase price of $ per share of Common Stock, and (ii)
The Common Stock, the Pre-Funded Warrants, and the Common Stock issuable upon exercise of the Pre-Funded Warrants were offered pursuant to a registration statement on Form S-1 as filed with the SEC on October 24, 2024, as amended, and was declared effective on October 28, 2024 (the “Registration Statement”).
RBW Capital Partners LLC, acting through Dominari Securities LLC (the “Placement Agent”), acted as the exclusive placement agent for the Offering pursuant to a Placement Agency Agreement dated October 28, 2024 (the “Placement Agency Agreement”) by and between the Company and the Placement Agent.
The Offering resulted in gross
proceeds to the Company of approximately $
| 19 |
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 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 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”).
Some of the statements contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, particularly including those risks identified in Part II-Item 1A “Risk Factors” and our other filings with the SEC.
Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. 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 development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. 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, they may not be predictive of results or developments in future periods. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements
| 20 |
Business Overview
Recent Developments
Nasdaq Listing
On October 2, 2024, the Company received a letter from the Staff of Nasdaq notifying the Company that the Staff has determined to delist the Company’s common stock from Nasdaq at the opening of business on October 11, 2024, based on the Company’s failure to maintain a minimum bid price of $1 per share per Listing Rule 5550(a)(2), unless the Company requests an appeal of such determination by October 9, 2024. The Company submitted the appeal request to Nasdaq on October 9, 2024. Nasdaq granted a hearing of the appeal to be held on December 3, 2024.
The Company and various purchasers (the “Investors”) executed a securities purchase agreement (the “SPA”) on or around April 7, 2023, whereby the Investors purchased from the Company promissory notes in the aggregate principal amount of approximately $2,500,000 (the “Original Notes”), and the remaining balances of such Original Notes as of October 1, 2023, were exchanged by the Investors for replacement promissory notes issued on October 1, 2023, in the aggregate principal amount of approximately $1,789,668.37 (the “2023 Notes”). On May 24, 2024, the Company entered into settlement agreements with the Investors (each a “Settlement Agreement”), pursuant to which the Company agreed to pay aggregate cash payments equal to $1,789,668.37 to extinguish all obligations and claims under the SPA, Original Notes, and 2023 Notes, as follows: (i) $500,000.00 on or before May 28, 2024 and (ii) $1,289,668.37 on or before September 30, 2024 (the “Final Payment”). On or around October 3, 2024, the Company entered into amendments to each Settlement Agreement with the Investors, whereby the Final Payment due date was extended to October 31, 2024.
Between July 1, 2024 and October 22, 2024, the Company issued and sold 5,256,263 shares of Common Stock (the “Recent ATM Share Sales”) to H.C. Wainwright & Co., LLC (the “Agent”) as sales agent or principal, pursuant to the terms of the Company’s previously announced At-The-Market Offering Agreement, dated December 27, 2023, between us and the Agent (the “Sales Agreement”). The Company received net proceeds of $2,063,396.00 from the Recent ATM Share Sales.
Completion of Offering Common Stock and Pre-Funded Warrants
On October 28, 2024, 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”): (i) 6,233,650 shares of common stock (the “Common Stock”), at a purchase price of $0.10 per share of Common Stock, and (ii) 24,109,350 pre-funded warrants (“Pre-Funded Warrants”) to purchase Common Stock, at a purchase price of $0.0999 per Pre-Funded Warrant, immediately exercisable at an exercise price of $0.0001 per share. 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 October 30, 2024.
The Offering resulted in gross proceeds to the Company of approximately $3,000,000, 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 issued in the Offering. As compensation to the Placement Agent, as the exclusive placement agent in connection with the Offering, the Company paid to the Placement Agent a cash fee of 8.0% of the aggregate gross proceeds raised in the Offering, a non-accountable expense allowance of 1.0% of the aggregate gross proceeds raised in the Offering, reimbursement of up to $50,000 for expenses of legal counsel and other actual out-of-pocket expenses, and up to $15,950 for clearing agent closing costs.
Our Company
Digital Brands is a curated collection of lifestyle brands, including Bailey, DSTLD, 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.
| 21 |
Our portfolio consists of four significant brands that leverage our three channels: our websites, wholesale and our own stores.
● 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.
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.
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 on-line but at selected wholesale and retail storefronts. We believe this approach allows us opportunities to successfully drive Lifetime Value (“LTV”) while increasing new customer growth. We define Lifetime Value or LTV 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 acquired Bailey in February 2020, Stateside in August 2021 and Sundry in December 2022. We agreed on the consideration that we paid in each acquisition in the course of arm’s length negotiations with the holders of the membership interests in each of Bailey, H&J, Stateside and Sundry. In determining and negotiating this consideration, we relied on the experience and judgment of our management and our evaluation of the potential synergies that could be achieved in combining the operations of Bailey, Stateside and Sundry. We did not obtain independent valuations, appraisals or fairness opinions to support the consideration that we paid/agreed to pay.
| 22 |
Avo – Brand Summary
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.
Avo launched in late August 2024 and prices for t-shirts range from $20 to $50 based on the size of the customer’s bundle. Other product prices will range from $17.50 for tanks to $198 for sweaters with no retail price above $99 if the customer bundles three units or more. If the customer bundles two units then they receive a 40% discount and if they bundle three units or more the customer receives a 60% discount.
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.
Substantial Indebtedness
As of September 30, 2024, we had an aggregate principal amount of debt outstanding of approximately $8.2 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 impacts of our substantial indebtedness could have a material adverse effect on our business, financial condition and results of operations.
| 23 |
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.
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.
| 24 |
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 (1) fixed general and administrative costs, (2) variable sales and marketing costs, (3) elimination of redundant costs as we acquire and integrate brands, (4) cross marketing and cross merchandising brands in our portfolio, and (4) 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.
Components of Our Results of Operations
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.
| 25 |
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.
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.
| 26 |
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.
| 27 |
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
| 28 |
Results of Operations
Three Months Ended September 30, 2024 compared to Three Months Ended September 30, 2023
The following table presents our results of operations for the Three months ended September 30, 2024 and 2023:
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net revenues | $ | 2,440,801 | $ | 3,257,332 | ||||
| Cost of net revenues | 1,319,214 | 1,554,044 | ||||||
| Gross profit | 1,121,587 | 1,703,288 | ||||||
| General and administrative | 2,429,040 | 3,735,527 | ||||||
| Sales and marketing | 655,833 | 1,151,326 | ||||||
| Other operating (income) / expenses | 780,879 | 238,546 | ||||||
| Operating (loss) /income | (2,144,165 | ) | (3,422,162 | ) | ||||
| Other expenses | (797,072 | ) | (2,013,832 | ) | ||||
| Loss before provision for income taxes | (3,541,237 | ) | (5,435,994 | ) | ||||
| Provision for income taxes | - | - | ||||||
| Net income/(loss) from continuing operations | $ | (3,541,237 | ) | $ | (5,435,994 | ) | ||
Net Revenues
Revenues decreased by $0.8 million to $2.4 million for the three months ended September 30, 2024, compared to $3.3 million in the corresponding fiscal period in 2023. The decrease was primarily due to a delay in wholesale shipments in April 2024, and lower ecommerce revenues across each brand due to less digital advertising spend.
Gross Profit
Our gross profit decreased by $0.6 million for the three months ended September 30, 2024 to $1.1 million from a gross profit of $1.7 million for the corresponding fiscal period in 2023. The decrease in gross margin was primarily attributable to a decrease in sales.
Our gross margin was 46% for three months ended September 30, 2024, compared to 52% for the three months ended June 30, 2023. The decrease in gross margin was due to corresponding decrease in the ecommerce revenue.
Operating Expenses/(Income)
Our operating expenses decreased by $1.3 million for the three months ended September 30, 2024 to $3.8 million compared to $5.1 million for the corresponding fiscal period in 2023. General and administrative expenses decreased by $1.3 million, and sales and marketing expenses decreased by $0.5 million. The deceases were primarily due to cost cutting measures and synergies from the Sundry acquisition including the elimination of its warehouse, office, fulfillment and redundancies in headcount. In the third quarter of 2024, the Company recorded impairment expense of $600,000 pertaining to Bailey’s intangibles.
Other Income (Expenses)
Other expenses were $0.8 million while other expense was $2.0 million for the three months ended September 30, 2024 and 2023, respectively, primarily consisting of interest expense.
| 29 |
Net Loss from Continuing Operations
Our net loss from continuing operations decreased by $1.9 million to a net loss from continuing operations of $3.5 million for the three months ended September 30, 2024 compared to income from continuing operations of $5.4 million for the corresponding fiscal period in 2023, primarily due to the change in fair value of contingent consideration in 2023 and lower gross profit in 2024, partially offset by lower general and administrative and sales and marketing expenses.
Nine Months Ended September 30, 2024 compared to Nine Months Ended September 30, 2023
The following table presents our results of operations for the nine months ended September 30, 2024 and 2023:
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net revenues | $ | 9,413,457 | $ | 12,127,135 | ||||
| Cost of net revenues | 5,012,457 | 6,054,532 | ||||||
| Gross profit | 4,401,000 | 6,032,603 | ||||||
| General and administrative | 6,347,460 | 12,115,590 | ||||||
| Sales and marketing | 1,979,173 | 3,188,054 | ||||||
| Other operating expenses/(income) | 1,345,412 | (9,947,530 | ) | |||||
| Operating (loss)/income | (4,671,045 | ) | 676,489 | |||||
| Other expenses | (2,464,407 | ) | (5,642,068 | ) | ||||
| Loss before provision for income taxes | (7,735,453 | ) | (4,965,579 | ) | ||||
| Provision for income taxes | - | - | ||||||
| Net income/(loss) from continuing operations | $ | (7,735,453 | ) | $ | (4,965,579 | ) | ||
Net Revenues
Revenues decreased by $2.7 million to $9.4 million for the nine months ended September 30, 2024, compared to $12.1 million in the corresponding fiscal period in 2023. The decrease was primarily due to a delay in wholesale shipments in April 2024, and lower ecommerce revenues across each brand due to less digital advertising spend.
Gross Profit
Our gross profit decreased by $1.6 million for the nine months ended September 30, 2024 to $4.4 million from a gross profit of $6 million for the corresponding fiscal period in 2023. The decrease in gross margin was primarily attributable to a decrease in sales.
Our gross margin was 47% for nine months ended September 30, 2024, compared to 50% for the nine months ended September 30, 2023. The decrease in gross margin was due to corresponding decrease in the ecommerce revenue.
Operating Expenses
Our operating expenses increased by $4.3 million for the nine months ended September 30, 2024 to $9.7 million compared to $5.4 million for the corresponding fiscal period in 2023. General and administrative expenses decreased by $5.7 million, and sales and marketing expenses decreased by $1.2 million. The deceases were primarily due to cost cutting measures and synergies from the Sundry acquisition including the elimination of its warehouse, office, fulfillment and redundancies in headcount. Other operating expenses included a gain of $10.7 million in 2023 due to the change in fair value of contingent consideration. In the third quarter of 2024, the Company recorded impairment expense of $600,000 pertaining to Bailey’s intangibles.
Other Income (Expenses)
Other expenses were $2.5 million while other expense was $5.6 million for the nine months ended September 30, 2024 and 2023, respectively. Interest expense in 2024 decreased due to less merchant advances and lower principal on outstanding loans.
Net Loss from Continuing Operations
Our net loss from continuing operations increased by $2.7 million to a net loss from continuing operations of $7.7 million for the nine months ended September 30, 2024 compared to income from continuing operations of $5.0 million for the corresponding fiscal period in 2023, primarily due to the change in fair value of contingent consideration in 2023 and lower gross profit in 2024, partially offset by lower general and administrative and sales and marketing expenses.
| 30 |
Liquidity and Capital Resources
Each of DBG, Bailey, Stateside and Sundry has historically satisfied our liquidity needs and funded operations with borrowings capital raises and internally generated cash flow, Changes in working capital, most notably accounts receivable, 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 September 30, 2024, we had cash of $158,601, but we had a working capital deficit of $16.0 million. The Company requires significant capital to meet its obligations as they become due. These factors raise substantial doubt about our Company’s ability to continue as a going concern. Throughout the next twelve months, the Company intends to fund its operations primarily from the funds raised through the equity line of credit agreement. The Company may pursue secondary 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.
Cash Flow Activities
The following table presents selected captions from our condensed statement of cash flows for the nine months ended September 30, 2024 and 2023:
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash provided by operating activities: | ||||||||
| Net loss | $ | (7,735,453 | ) | $ | (6,582,082 | ) | ||
| Non-cash adjustments | $ | 6,025,549 | $ | (1,717,038 | ) | |||
| Change in operating assets and liabilities | $ | (1,583,366 | ) | $ | 1,787,481 | |||
| Net cash used in operating activities | $ | (3,293,269 | ) | $ | (6,457,639 | ) | ||
| Net cash provided by (used in) investing activities | $ | (101,081 | ) | $ | 41,331 | |||
| Net cash provided by financing activities | $ | 3,662,923 | $ | 6,207,950 | ||||
| Net change in cash | $ | 268,573 | $ | (208,357 | ) | |||
Cash Flows Used In Operating Activities
Our cash used by operating activities decreased by $3.2 million to cash used of $3.3 million for the nine months ended September 30, 2024, as compared to cash used of $6.5 million for the corresponding fiscal period in 2023. The decrease in net cash used in operating activities was primarily driven by non-cash charges in 2024, partially offset by our net loss and cash used in operating assets and liabilities.
Cash Flows Provided By (Used in) Investing Activities
Our cash used investing activities was $101,080 in the nine months ended September 30, 2024, primarily due to purchase of property, equipment & software and deposits on leases.
Our cash provided by investing activities was $41,331 in 2023 primarily due to a reduction of deposits, partially offset by purchase of property and cash sold in the H&J disposition.
Cash Flows Provided by Financing Activities
Cash provided by financing activities was $3.7 million for the nine months ended September 30, 2024. Cash inflows included $5.4 million in net proceeds from the issuance from the common stock for cash and $0.8 million in proceeds from loans and notes. Cash outflows are primarily due to $2.5 million in repayments of notes.
| 31 |
Contractual Obligations and Commitments
As of September 30, 2024, we had $8.2 million in outstanding principal on debt, primarily our promissory notes due to the Bailey44 Sellers, the March 2023 Notes, PPP and merchant advances. Aside from our remaining non-current SBA obligations, all outstanding loans have maturity dates through 2024.
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 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 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 Securities and Exchange Act of 1934, as amended (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 Securities Exchange Act of 1934, as amended, or 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.
| 32 |
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 September 30, 2024. 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 such date.
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 controls 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.
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 September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 33 |
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 February 7, 2023, a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $182,400. 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 settled for $250,000, in October 2024, which included additional legal costs. | |
| In August 2020 and March 2021, two lawsuits were filed against Bailey’s by third-party’s related to prior services rendered. The claims (including fines, fees, and legal expenses) total an aggregate of $96,900. Both matters were settled in February 2022 and are on payment plans which will be paid off in the second quarter of 2025. | |
| On December 21, 2020, a Company investor filed a lawsuit against DBG for reimbursement of their investment totaling $100,000. Claimed amounts are included in short-term convertible note payable in the accompanying consolidated balance sheets and the Company does not believe it is probable that losses in excess of such short-term note payable will be incurred. The Company is actively working to resolve this matter. | |
| 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 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 the losses in excess of such pay trade payables will be incurred. |
| 34 |
On December 21, 2023, a former employee from over two years ago filed a wrongful termination lawsuit against the Company. The Company is disputing this claim. To this point, this same law firm recently sent a demand letter for another wrongful termination of a temporary worker we used from a third party placement agency. This person was not a Company employee at any time.
| 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. |
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 September 30, 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
During the nine months ended September 30, 3,442 shares of Series C Convertible Preferred Stock converted into 192,027 shares of common stock.
As previously reported, the Company entered into a securities purchase agreement with an accredited investor (the “Investor”), pursuant to which the Company issued on September 5, 2023 those certain Series A warrants to purchase 513,875 shares of common stock and Series B warrants to purchase 513,875 shares of common stock (collectively, the “Existing Warrants”), amongst other securities.
On May 3, 2024, the Company entered into that certain inducement offer to exercise common stock purchase warrants with the Investor (the “Inducement Agreement”), pursuant to which (i) the Company agreed to lower the exercise price of the Existing Warrants to $3.13 per share and (ii) the Investor agreed to exercise the Existing Warrants into 1,027,750 shares of common stock (the “Exercise Shares”) by payment of the aggregate exercise price of $3,216,857. The closing occurred on May 7, 2024.
Through September 30, 2024, the Company had exercised 378,750 of the 1,027,750 warrants at the amended exercise price of $3.13 per share. The Company received the entire gross proceeds of $3,216,857 in May 2024, which represents the exercise of the entire 1,027,750 warrants at the $3.13 exercise price. The Company received net proceeds of $2,877,475 after placement agent fees and expenses. Company also exercised 649,000 warrants which were prefunded through PIPE offerings in the third of 2023.
In July 2024, the Company issued 60,527 shares of common stock to a vendor for services rendered for a total value of $172,501.
In July 2024, 299 shares of Series C Convertible Preferred Stock converted into 16,681 shares of common stock.
In August 2024, 101 shares of Series C Convertible Preferred Stock converted into 5,635 shares of common stock.
In August 2024, the Company issued 106,020 shares of common stock to a commercial debt holder in satisfaction of $313,816.45 of debt.
Between October 3, 2024 and October 15, 2024, the Company issued 1,311,345 shares of the Company’s common stock (the “Shares”) to a certain note holder upon conversion of a portion of their promissory note originally issued by the Company on or around October 1, 2023 (the “Note”). On October 16, 2024, the Company became aware that the issuance of the Shares was in error and not permitted under the terms of the Note due to the requirement thereunder that stockholder approval be obtained prior to the issuance of more than 19.9% of the Company’s pre-transaction shares outstanding upon conversion(s) of the Note, as referenced and specifically required under Nasdaq Listing Rule 5635(d). The Company then notified the note holder that the Shares must be returned to the Company’s transfer agent for cancellation. Accordingly, the note holder is in the process of returning the Shares to the Company’s transfer agent for cancellation. Upon cancellation of the Shares, the Company’s issued and outstanding common stock count will decrease by 1,311,345 shares. On November 5, 2024, the Holder facilitated the cancellation of 1,311,345 shares of the Company’s common stock in accordance with the Company’s remediation plan.
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 September 30, 2024, no director or officer of the Company
| 35 |
ITEM 6. EXHIBITS
* Filed herewith.
** Furnished herewith
# Indicates management contract or compensatory plan or arrangement.
| 36 |
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. | ||
| November 14, 2024 | By: | /s/ John Hilburn Davis, IV |
| John Hilburn Davis, IV, Chief Executive Officer | ||
| November 14, 2024 | By: | /s/ Reid Yeoman |
| Reid Yeoman, Chief Financial Officer | ||
| 37 |