Financial Data and Key Metrics Changes - Net revenues increased by 22.5% to $3.3 million compared to $2.7 million a year ago, excluding revenue from the disposition of Harper & Jones for both periods [19] - Gross margin increased by 77% to $1.7 million, with gross profit margins rising to 52.3% from 36% a year ago [20] - Net operating loss, excluding noncash charges, was reduced to $1.2 million from a loss of $2.5 million a year ago, indicating a significant improvement in operational efficiency [21] Business Line Data and Key Metrics Changes - Sundry's first quarter 2024 wholesale bookings have tripled compared to the third quarter 2023 wholesale revenue, indicating a strong turnaround [9] - Sundry's fall sweater sold out quickly, leading to an exclusive sweater program request from Anthropologie, which is expected to significantly boost wholesale revenues [10] Market Data and Key Metrics Changes - The company noted that the current e-commerce trends have been softer than expected due to a challenging macro environment, with many retailers experiencing similar promotional pressures [11][12] - Despite the softer trends, the company generated internal free cash flow in October, which was used to pay down old accounts payable and debt [13] Company Strategy and Development Direction - The company is focused on achieving EBITDA neutrality in the first quarter of 2024 and expects to be EBITDA positive in the second half of the year [16][18] - The Board is reviewing strategic alternatives due to the dislocation between the company's public market value and its intrinsic value, indicating a proactive approach to enhance shareholder value [22][23] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about accelerating revenues, projecting revenue growth of over 50% in the first and second quarters and close to 100% in the third and fourth quarters [18] - The management acknowledged frustration with the current market valuation and emphasized the need to pursue strategic alternatives to better reflect the company's performance [29][30] Other Important Information - The company is finalizing a lease for an outlet store expected to open around March 1, which could add significant cash flow with minimal operating costs [15] - The company anticipates generating more than $6 million in internal free cash flow for 2024, which does not include revenue from e-commerce or licensing income [23] Q&A Session Summary Question: Will gross margins continue at the current level? - Management confirmed that gross margins are expected to hold or potentially increase due to fixed costs leverage as revenues rise [27][28] Question: Is the company frustrated with its current position and pursuing strategic alternatives? - Management affirmed both frustrations with the current market appreciation and the seriousness of pursuing strategic alternatives to enhance shareholder value [29][30] Question: What is the situation with prefunded warrants? - Management explained that prefunded warrants are being exercised, which has created volatility, but this should soon be resolved as they are close to being cleared [34]

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%2E%20FINANCIAL%20INFORMATION) This section presents the company's financial statements and related disclosures [ITEM 1. Condensed Consolidated Financial Statements – Unaudited](index=3&type=section&id=ITEM%201%2E%20Condensed%20Consolidated%20Financial%20Statements%20%E2%80%93%20Unaudited) This section presents the unaudited condensed consolidated financial statements for Digital Brands Group, Inc., including the balance sheets, statements of operations, statements of stockholders' deficit, and statements of cash flows, along with detailed notes explaining significant accounting policies, financial instruments, debt, equity, and other relevant financial information for the periods ended September 30, 2023, and December 31, 2022 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The condensed consolidated balance sheets show a decrease in total assets and total liabilities from December 31, 2022, to September 30, 2023, with a significant improvement in stockholders' equity from a deficit to a positive balance | Metric | September 30, 2023 ($) | December 31, 2022 ($) | | :-------------------------------- | :------------------- | :------------------ | | Total assets | $27,737,807 | $33,738,055 | | Total liabilities | $22,516,462 | $41,191,229 | | Total stockholders' equity (deficit) | $5,221,345 | $(7,453,174) | - Current assets decreased from **$8,829,393** at December 31, 2022, to **$7,650,080** at September 30, 2023, primarily due to reductions in cash, accounts receivable, and due from factor[8](index=8&type=chunk) - Total current liabilities significantly decreased from **$40,893,791** at December 31, 2022, to **$22,359,678** at September 30, 2023, largely driven by the elimination of contingent consideration liability and a reduction in promissory notes payable[8](index=8&type=chunk) [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The condensed consolidated statements of operations show improved net revenues and gross profit for both the three and nine months ended September 30, 2023, compared to the prior year, leading to a reduced net loss for the nine-month period, despite an increased net loss for the three-month period | Metric | 3 Months Ended Sep 30, 2023 ($) | 3 Months Ended Sep 30, 2022 ($) | 9 Months Ended Sep 30, 2023 ($) | 9 Months Ended Sep 30, 2022 ($) | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net revenues | $3,257,332 | $2,658,844 | $12,127,135 | $7,937,406 | | Gross profit | $1,703,288 | $958,298 | $6,032,603 | $2,684,464 | | Income (loss) from operations | $(3,422,162) | $(2,438,800) | $676,489 | $(18,562,356) | | Net loss | $(5,435,994) | $(4,894,471) | $(6,528,082) | $(22,261,338) | | Net loss from continuing per common share - basic and diluted | $(14.55) | $(223.83) | $(17.50) | $(1,607.05) | - Net revenues increased by **22.5%** for the three months and **52.8%** for the nine months ended September 30, 2023, compared to the same periods in 2022[9](index=9&type=chunk) - Gross profit increased significantly by **77.7%** for the three months and **124.7%** for the nine months ended September 30, 2023, compared to the same periods in 2022[9](index=9&type=chunk) [Condensed Consolidated Statements of Stockholders' Deficit](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Deficit) The statements of stockholders' deficit reflect a substantial improvement from a deficit of $(7,453,174) at December 31, 2022, to a positive equity of $5,221,345 at September 30, 2023, primarily driven by significant increases in additional paid-in capital from equity issuances and a reduction in accumulated deficit | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------- | :------------------- | :------------------ | | Common stock shares outstanding | 578,090 | 317,502 | | Additional paid-in capital ($) | $115,496,683 | $96,294,123 | | Accumulated deficit ($) | $(110,275,397) | $(103,747,316) | | Total stockholders' equity (deficit) ($) | $5,221,345 | $(7,453,174) | - The Company issued **5,761** shares of Series C convertible preferred stock in 2023, contributing to the increase in equity[10](index=10&type=chunk) - Significant common stock issuances occurred in 2023, including shares for private placements, services, and the H&J Settlement Agreement, increasing outstanding shares and additional paid-in capital[10](index=10&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) The condensed consolidated statements of cash flows indicate a reduced net cash outflow from operating activities for the nine months ended September 30, 2023, compared to the prior year, and a shift to cash provided by investing activities. Financing activities continued to be a primary source of cash, though at a lower amount than the prior year | Metric | 9 Months Ended Sep 30, 2023 ($) | 9 Months Ended Sep 30, 2022 ($) | | :----------------------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(6,457,638) | $(8,689,857) | | Net cash provided by (used in) investing activities | $41,331 | $(5,533) | | Net cash provided by financing activities | $6,207,950 | $8,362,395 | | Net change in cash and cash equivalents | $(208,357) | $(332,995) | | Cash and cash equivalents at end of period | $1,067,259 | $195,399 | - Cash used in operating activities decreased by **$2.2 million**, primarily due to a lower net loss[11](index=11&type=chunk)[175](index=175&type=chunk) - Investing activities shifted from a net cash outflow of **$5,533** in 2022 to a net cash inflow of **$41,331** in 2023, mainly due to a reduction of deposits[11](index=11&type=chunk)[176](index=176&type=chunk) - Financing activities provided **$6.2 million** in cash, primarily from equity offerings and new loans, partially offset by debt repayments[11](index=11&type=chunk)[177](index=177&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes provide detailed explanations of the Company's business, significant accounting policies, financial instruments, debt, equity, and other relevant financial information, offering crucial context to the condensed consolidated financial statements [NOTE 1: NATURE OF OPERATIONS](index=8&type=section&id=NOTE%201%3A%20NATURE%20OF%20OPERATIONS) Digital Brands Group, Inc. (DBG) operates as a curated collection of lifestyle apparel brands, including Bailey 44, DSTLD, Stateside, and ACE Studios, offering products through direct-to-consumer and wholesale channels. The Company has expanded its portfolio through several acquisitions, with the most recent being Sundry in December 2022, and a disposition of Harper & Jones (H&J) in June 2023 - DBG is a curated collection of lifestyle brands (Bailey 44, DSTLD, Harper & Jones, Stateside, ACE Studios) offering apparel through direct-to-consumer and wholesale distribution[13](index=13&type=chunk) - Acquisitions include Bailey 44 (Feb 2020), Harper & Jones (May 2021), Stateside (Aug 2021), and Sundry (Dec 2022)[13](index=13&type=chunk)[14](index=14&type=chunk)[15](index=15&type=chunk)[16](index=16&type=chunk) - On June 21, 2023, the Company disposed of its membership interest in Harper & Jones (H&J) through a Settlement Agreement, involving a cash payment and issuance of common stock to the former owners[17](index=17&type=chunk) [NOTE 2: GOING CONCERN](index=8&type=section&id=NOTE%202%3A%20GOING%20CONCERN) The Company's ability to continue as a going concern is in substantial doubt due to a history of net losses, negative cash flows from operations, and a significant working capital deficit. Future operations depend on generating sufficient cash flows or securing additional financing, which may dilute existing shareholders - The Company has not generated profits since inception and sustained net losses of **$6,528,082** and **$22,261,338** for the nine months ended September 30, 2023 and 2022, respectively[18](index=18&type=chunk) - As of September 30, 2023, the Company had a working capital deficit of **$14,709,598**[18](index=18&type=chunk) - The Company's ability to continue as a going concern is dependent on generating sufficient cash flows from operations or obtaining additional capital financing, with no assurance of success[19](index=19&type=chunk) [NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=10&type=section&id=NOTE%203%3A%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note outlines the Company's key accounting policies, including GAAP conformity, retroactive adjustments for reverse stock splits, principles of consolidation, use of estimates, reclassification of prior period financial statements, and fair value measurements. It also details the accounting for contingent consideration, inventory valuation, goodwill impairment, and net loss per share calculations [Basis of Presentation](index=10&type=section&id=Basis%20of%20Presentation) The Company's financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) - Financial statements conform to GAAP[21](index=21&type=chunk) [Reverse Stock Split](index=10&type=section&id=Reverse%20Stock%20Split) The Company implemented two reverse stock splits: one-for-100 effective November 3, 2022, and one-for-25 effective August 22, 2023, with all share and per share amounts retroactively adjusted - A one-for-100 reverse stock split became effective on November 3, 2022[22](index=22&type=chunk) - A one-for-25 reverse stock split became effective on August 22, 2023[23](index=23&type=chunk) - All share and per share amounts in financial statements are retroactively adjusted to reflect these splits[22](index=22&type=chunk)[23](index=23&type=chunk) [Unaudited Interim Financial Information](index=10&type=section&id=Unaudited%20Interim%20Financial%20Information) The interim financial statements are unaudited, prepared according to SEC rules, and include only normal recurring adjustments. They should be read in conjunction with the Company's audited annual financial statements - Interim financial statements are unaudited and prepared in accordance with SEC rules for interim reporting[24](index=24&type=chunk) - Disclosures are condensed or omitted per rules, but adequate to prevent misleading information[24](index=24&type=chunk) - Results of operations are not necessarily indicative of the full year ended December 31, 2023[24](index=24&type=chunk) [Principles of Consolidation](index=10&type=section&id=Principles%20of%20Consolidation) The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries (Bailey, H&J, Stateside) from their acquisition dates, with inter-company transactions eliminated. H&J's accounts were no longer consolidated after June 21, 2023, due to its disposition - Consolidated financial statements include the Company and its wholly-owned subsidiaries Bailey, H&J, and Stateside from acquisition dates[26](index=26&type=chunk) - All inter-company transactions and balances are eliminated upon consolidation[26](index=26&type=chunk) - As of June 21, 2023, H&J's assets, liabilities, revenues, and expenses are no longer consolidated due to its disposition[26](index=26&type=chunk) [Use of Estimates](index=10&type=section&id=Use%20of%20Estimates) The preparation of financial statements requires management to make estimates and assumptions, particularly for inventory, impairment of long-lived assets, contingent consideration, and derivative liabilities. These estimates are based on historical experience and market factors, and actual results may differ - Significant estimates include inventory, impairment of long-lived assets, contingent consideration, and derivative liabilities[27](index=27&type=chunk) - Estimates are based on historical experience, known trends, and market factors, and are evaluated on an ongoing basis[27](index=27&type=chunk) - Actual results could differ from these estimates[27](index=27&type=chunk) [Reclassification of Previously Issued Financial Statements](index=12&type=section&id=Reclassification%20of%20Previously%20Issued%20Financial%20Statements) Certain prior year accounts were reclassified to conform with current year presentation, specifically regarding cost of net revenue, general and administrative expenses, and discontinued operations. These reclassifications had no effect on the reported results of operations - Reclassified **$916,693** in general and administrative expenses to net revenues for the nine months ended September 30, 2022, primarily for personnel and warehouse costs[29](index=29&type=chunk) - Reclassified H&J's assets and liabilities as of December 31, 2022, on the consolidated balance sheet due to its discontinued operations[30](index=30&type=chunk) - These reclassifications had no effect on the reported results of operations[29](index=29&type=chunk) [Cash and Equivalents and Concentration of Credit Risk](index=12&type=section&id=Cash%20and%20Equivalents%20and%20Concentration%20of%20Credit%20Risk) The Company defines cash equivalents as highly liquid securities with original maturities under three months. As of September 30, 2023, and December 31, 2022, the Company held no cash equivalents, and its cash in bank accounts may exceed federally insured limits - Cash equivalents are highly liquid securities with original maturities under three months[31](index=31&type=chunk) - No cash equivalents were held as of September 30, 2023, and December 31, 2022[31](index=31&type=chunk) - Cash in bank deposit accounts may exceed federally insured limits of **$250,000**[31](index=31&type=chunk) [Fair Value of Financial Instruments](index=12&type=section&id=Fair%20Value%20of%20Financial%20Instruments) The Company's financial instruments, including cash, prepaid expenses, accounts payable, and various debt, are carried at values representative of their fair market value due to their short maturity. Contingent consideration, previously a Level 3 liability, was valued at $0 as of September 30, 2023 - Carrying values of financial instruments (cash, prepaid expenses, accounts payable, accrued expenses, related party notes, convertible debt) approximate fair value due to short maturity[32](index=32&type=chunk) | Liabilities | September 30, 2023 (Level 3) ($) | December 31, 2022 (Level 3) ($) | | :------------------------ | :--------------------------- | :-------------------------- | | Contingent consideration | $0 | $12,098,475 | [Contingent Consideration](index=12&type=section&id=Contingent%20Consideration) Contingent consideration liabilities, related to stock price guarantees from the Bailey44 and H&J acquisitions, were valued using a Monte Carlo simulation model. As of September 30, 2023, these liabilities were reduced to $0 due to the Norwest Waiver and H&J Settlement Agreement, resulting in significant gains - Contingent consideration liability was related to stock price guarantees from Bailey44 and H&J acquisitions, classified as a Level 3 financial instrument[34](index=34&type=chunk) - The Norwest Waiver on June 21, 2023, resulted in a **$10,698,475** gain by reducing the Bailey Merger Agreement contingent consideration to **$0**[39](index=39&type=chunk) - The H&J Settlement Agreement on June 21, 2023, reduced the H&J contingent consideration to **$0**, resulting in a **$1,400,000** gain included in discontinued operations[40](index=40&type=chunk) | Company | September 30, 2023 ($) | December 31, 2022 ($) | | :-------------- | :------------------- | :------------------ | | Bailey | $0 | $10,698,475 | | Harper & Jones | $0 | $1,400,000 | | Total | $0 | $12,098,475 | [Inventory](index=14&type=section&id=Inventory) Inventory is valued at the lower of cost or net realizable value, using the weighted average cost method for DSTLD and FIFO for Bailey, Stateside, and Sundry. It primarily consists of finished goods, raw materials, and work in process, showing a slight decrease from December 31, 2022, to September 30, 2023 - Inventory is stated at the lower of cost or net realizable value[42](index=42&type=chunk) - Weighted average cost method is used for DSTLD, and first-in, first-out (FIFO) method for Bailey, Stateside, and Sundry[42](index=42&type=chunk) | Inventory Component | September 30, 2023 ($) | December 31, 2022 ($) | | :------------------ | :------------------- | :------------------ | | Raw materials | $1,508,416 | $1,611,134 | | Work in process | $653,412 | $888,643 | | Finished goods | $2,548,499 | $2,622,787 | | Total Inventory | $4,710,327 | $5,122,564 | [Goodwill](index=15&type=section&id=Goodwill) Goodwill and indefinite-lived intangible assets are not amortized but tested annually for impairment. In 2022, the Company recognized a significant impairment loss of $11,872,332 for goodwill and $3,667,000 for brand name assets due to reduced revenues and liabilities exceeding assets for Bailey44 and H&J. Goodwill remained stable at $8,973,501 as of September 30, 2023, after derecognizing $1,130,311 related to the H&J disposition - Goodwill and indefinite-lived intangible assets are tested annually for impairment, not amortized[44](index=44&type=chunk) - In 2022, an impairment loss of **$11,872,332** for goodwill and **$3,667,000** for brand name assets was recorded due to reduced revenues and liabilities exceeding assets for Bailey44 and H&J[45](index=45&type=chunk) | Business Combination | September 30, 2023 ($) | December 31, 2022 ($) | | :------------------- | :------------------- | :------------------ | | Bailey | $3,158,123 | $3,158,123 | | Stateside | $2,104,056 | $2,104,056 | | Sundry | $3,711,322 | $3,711,322 | | Total Goodwill | $8,973,501 | $8,973,501 | - The Company derecognized **$1,130,311** in goodwill in connection with the H&J disposition[55](index=55&type=chunk) [Net Loss per Share](index=15&type=section&id=Net%20Loss%20per%20Share) Net loss per share is calculated by dividing net loss by the weighted-average common shares outstanding. Potentially dilutive securities are excluded if their inclusion would be anti-dilutive, as was the case for all listed potentially dilutive shares as of September 30, 2023 and 2022 - Net loss per share is computed by dividing net loss by weighted-average common shares outstanding, excluding shares subject to redemption or forfeiture[46](index=46&type=chunk) - Potentially dilutive securities are excluded from diluted net loss per share if anti-dilutive[46](index=46&type=chunk) | Potentially Dilutive Shares | September 30, 2023 (Shares) | September 30, 2022 (Shares) | | :-------------------------- | :------------------- | :------------------- | | Convertible notes | — | 47,092 | | Series A convertible preferred stock | 27,097 | 27,097 | | Series C convertible preferred stock | 321,395 | — | | Common stock warrants | 1,662,096 | 5,285 | | Stock options | 1,558 | 1,558 | | Total potentially dilutive shares | 2,012,145 | 81,032 | - Stock options and warrants were out-of-the-money as of September 30, 2023 and 2022[47](index=47&type=chunk) [Recent Accounting Pronouncements](index=15&type=section&id=Recent%20Accounting%20Pronouncements) The Company adopted ASU 2019-04 and ASU 2019-05 (related to Topic 326, Financial Instruments-Credit Losses) on January 1, 2023, which did not materially impact its financial statements. No other recently issued, but not yet effective, accounting standards are expected to have a material effect - Adopted ASU 2019-04 and ASU 2019-05 (related to Topic 326, Financial Instruments-Credit Losses) on January 1, 2023[48](index=48&type=chunk) - Adoption of new guidance did not have a material impact on condensed consolidated financial statements[48](index=48&type=chunk) - No other recently issued, but not yet effective, accounting standards are expected to have a material effect[49](index=49&type=chunk) [Unaudited Pro Forma Financial Information](index=17&type=section&id=Unaudited%20Pro%20Forma%20Financial%20Information) Unaudited pro forma financial information is presented as if the Sundry acquisition occurred on January 1, 2022, showing hypothetical net revenues of $23,995,555 and a net loss of $8,405,222 for the nine months ended September 30, 2022. This information is not indicative of actual or future results - Pro forma financial information assumes Sundry acquisition occurred on January 1, 2022[49](index=49&type=chunk) | Metric | Nine Months Ended September 30, 2022 (Pro Forma) ($) | | :------------------------ | :--------------------------------------------- | | Net revenues | $23,995,555 | | Net loss | $(8,405,222) | | Net loss per common share | $(29.63) | - Pro forma information is not indicative of actual or future financial results and does not include potential cost savings or operating efficiencies[49](index=49&type=chunk) [NOTE 4: DISCONTINUED OPERATIONS](index=17&type=section&id=NOTE%204%3A%20DISCONTINUED%20OPERATIONS) On June 21, 2023, the Company disposed of Harper & Jones (H&J) through a Settlement Agreement, transferring its membership interest and issuing common stock and cash to the former owners. This transaction resulted in a loss on disposition of business of $1,523,940, and H&J's results are excluded from continuing operations - On June 21, 2023, the Company executed a Settlement Agreement to dispose of Harper & Jones (H&J)[50](index=50&type=chunk) - The H&J Settlement involved a cash payment of **$229,000** and the issuance of **1,952,580** shares of common stock to D. Jones[50](index=50&type=chunk) - The disposition resulted in a loss on disposition of business of **$1,523,940**[51](index=51&type=chunk)[52](index=52&type=chunk) | Metric (H&J Discontinued Operations) | 3 Months Ended Sep 30, 2023 ($) | 3 Months Ended Sep 30, 2022 ($) | 9 Months Ended Sep 30, 2023 ($) | 9 Months Ended Sep 30, 2022 ($) | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net revenues | $0 | $765,678 | $1,405,482 | $2,658,527 | | Gross profit | $0 | $409,329 | $839,861 | $1,696,765 | | Net loss from discontinued operations | $0 | $(160,432) | $(1,562,503) | $(326,507) | [NOTE 5: DUE FROM FACTOR](index=19&type=section&id=NOTE%205%3A%20DUE%20FROM%20FACTOR) The net amount due from factor decreased significantly from $839,400 at December 31, 2022, to $258,825 at September 30, 2023, reflecting changes in outstanding receivables and advances | Component | September 30, 2023 ($) | December 31, 2022 ($) | | :---------------------- | :------------------- | :------------------ | | Outstanding receivables: Without recourse | $308,918 | $1,680,042 | | Outstanding receivables: With recourse | $29,843 | $65,411 | | Matured funds and deposits | $103,095 | $81,055 | | Advances | $(172,285) | $(632,826) | | Credits due customers | $(10,746) | $(354,282) | | Total Due from Factor, net | $258,825 | $839,400 | [NOTE 6: GOODWILL AND INTANGIBLE ASSETS](index=20&type=section&id=NOTE%206%3A%20GOODWILL%20AND%20INTANGIBLE%20ASSETS) Goodwill remained stable at $8,973,501 as of September 30, 2023, after derecognizing $1,130,311 due to the H&J disposition. Identifiable intangible assets, primarily customer relationships and brand names, totaled $10,701,764, with amortization expense recognized for customer relationships | Business Combination | September 30, 2023 ($) | December 31, 2022 ($) | | :------------------- | :------------------- | :------------------ | | Bailey | $3,158,123 | $3,158,123 | | Stateside | $2,104,056 | $2,104,056 | | Sundry | $3,711,322 | $3,711,322 | | Total Goodwill | $8,973,501 | $8,973,501 | - The Company derecognized **$1,130,311** in goodwill and **$1,246,915** in intangible assets in connection with the H&J disposition[55](index=55&type=chunk)[56](index=56&type=chunk) | Intangible Asset | Gross Amount ($) | Accumulated Amortization ($) | Carrying Value ($) | | :----------------------- | :----------- | :----------------------- | :------------- | | Amortized: Customer relationships | $9,734,560 | $(4,874,676) | $4,859,884 | | Indefinite-lived: Brand name | $5,841,880 | — | $5,841,880 | | Total Intangible Assets | $15,576,440 | $(4,874,676) | $10,701,764 | - Amortization expense was **$719,547** and **$537,813** for the three months ended September 30, 2023 and 2022, respectively, and **$2,478,824** and **$1,613,438** for the nine months ended September 30, 2023 and 2022, respectively[57](index=57&type=chunk) [NOTE 7: LIABILITIES AND DEBT](index=20&type=section&id=NOTE%207%3A%20LIABILITIES%20AND%20DEBT) This note details the Company's various liabilities and debt instruments, including accrued expenses, convertible notes, PPP and SBA loans, merchant advances, and promissory notes. Significant changes include the repayment of December Notes, conversion of the Sundry Note into Series C Preferred Stock, and new March 2023 Notes [Accrued Expenses and Other Liabilities](index=20&type=section&id=Accrued%20Expenses%20and%20Other%20Liabilities) Accrued expenses and other liabilities increased to $4,781,632 as of September 30, 2023, from $3,936,920 at December 31, 2022, primarily due to higher payroll-related liabilities, including significant payroll taxes due | Component | September 30, 2023 ($) | December 31, 2022 ($) | | :------------------------ | :------------------- | :------------------ | | Accrued expenses | $489,628 | $668,714 | | Reserve for returns | — | $307,725 | | Payroll related liabilities | $3,792,438 | $2,618,870 | | Sales tax liability | $304,748 | $262,765 | | Other liabilities | $194,817 | $78,845 | | Total Accrued Expenses and Other Liabilities | $4,781,632 | $3,936,920 | - Payroll liabilities as of September 30, 2023, included **$1,406,403** in payroll taxes due to federal and state authorities, subject to penalties and interest[58](index=58&type=chunk) - Accrued expenses included **$535,000** for common stock issuances related to an advisory agreement, expected in Q4 2023[59](index=59&type=chunk) [Convertible Debt](index=21&type=section&id=Convertible%20Debt) The Company's convertible debt decreased significantly, with $100,000 remaining from the 2020 Regulation D Offering. The $4,000,000 December Notes were fully repaid in February 2023, leading to a $689,100 loss on extinguishment of debt - As of September 30, 2023, **$100,000** in outstanding principal remained from the 2020 Regulation D Offering[60](index=60&type=chunk) - The **$4,000,000** principal of the December Notes was fully repaid in February 2023[63](index=63&type=chunk) - A loss on extinguishment of debt of **$689,100** was recognized in connection with the December Notes repayment[63](index=63&type=chunk) | Convertible Note Summary | December 31, 2022 ($) | September 30, 2023 ($) | | :----------------------- | :------------------ | :------------------- | | Principal | $4,100,000 | $100,000 | | Unamortized Debt Discount | $(1,378,200) | $0 | | Convertible Note Payable, Net | $2,721,800 | $100,000 | [Loan Payable — PPP and SBA Loan](index=21&type=section&id=Loan%20Payable%20%E2%80%94%20PPP%20and%20SBA%20Loan) Bailey had an outstanding PPP Loan balance of $933,295 as of September 30, 2023, and December 31, 2022, which matures in 2026 - Bailey had an outstanding PPP Loan balance of **$933,295** as of September 30, 2023, and December 31, 2022[66](index=66&type=chunk) - The PPP Loan matures in **2026**[66](index=66&type=chunk) [Merchant Advances](index=22&type=section&id=Merchant%20Advances) The Company obtained merchant advances in 2022 and 2023, secured by future sales transactions. The outstanding principal from 2022 advances was $438,000 as of September 30, 2023, and new 2023 advances from Shopify Capital and another lender totaled $506,728 outstanding - Outstanding principal from 2022 merchant advances was **$438,000** as of September 30, 2023, after receiving **$2,880,238** in proceeds and making **$3,338,572** in repayments during the nine months ended September 30, 2023[67](index=67&type=chunk) - In 2023, new merchant advances totaling **$902,051** were obtained from Shopify Capital and another lender, with **$506,728** remaining outstanding as of September 30, 2023[68](index=68&type=chunk) - These advances are generally secured by expected future sales transactions with weekly or daily payments[67](index=67&type=chunk)[68](index=68&type=chunk) [Promissory Note Payable](index=22&type=section&id=Promissory%20Note%20Payable) Promissory notes payable decreased from $9,000,000 at December 31, 2022, to $4,899,018 at September 30, 2023. The Bailey Note's maturity was extended to June 30, 2024. The Sundry Note was cancelled and converted into Series C Preferred Stock. New March 2023 Notes, totaling $2,458,750 in principal, are currently in default but parties are working on an extension - The Bailey Note principal of **$3,500,000** had its maturity date extended to June 30, 2024[69](index=69&type=chunk) - The **$5,500,000** Sundry Note was cancelled and converted into **5,761** shares of Series C Convertible Preferred Stock in June 2023[70](index=70&type=chunk) - March 2023 Notes, with an aggregate principal of **$2,458,750**, are due September 30, 2023, and are currently in default, though an extension is being negotiated[71](index=71&type=chunk) | Promissory Note | September 30, 2023 ($) | December 31, 2022 ($) | | :---------------------- | :------------------- | :------------------ | | Bailey Note | $3,500,000 | $3,500,000 | | Sundry Note | — | $5,500,000 | | March 2023 Notes - principal | $1,399,018 | — | | Total Promissory Note Payable, net | $4,899,018 | $9,000,000 | [NOTE 8: STOCKHOLDERS' DEFICIT](index=22&type=section&id=NOTE%208%3A%20STOCKHOLDERS%27%20DEFICIT) This note details significant changes in stockholders' deficit, including multiple common stock issuances through private placements and for services, warrant exercises, and the designation and subsequent cancellation of Series A and B Preferred Stock. It also outlines the creation and terms of Series C Convertible Preferred Stock [Common Stock Issuances and Warrants](index=22&type=section&id=Common%20Stock%20Issuances%20and%20Warrants) The Company issued a significant number of common shares and warrants in 2023 through private placements (January and August), for services, and in connection with the H&J Settlement Agreement, raising substantial capital and increasing outstanding shares - January Private Placement: Issued **1,277,140** common shares (including pre-funded warrant exercises) for **$5.0 million** gross proceeds (**$4.3 million** net)[75](index=75&type=chunk) - August Private Placement: Agreed to issue **32,000** common shares and **481,875** pre-funded warrants (unexercised as of Sep 30, 2023) for **$5.0 million** gross proceeds (**$3.8 million** net)[78](index=78&type=chunk) - Issued **1,952,580** common shares for **$1,357,043** fair value as part of the H&J Settlement Agreement in June 2023[77](index=77&type=chunk) - Exercised warrants for **123,814** common shares for **$1,167,566** proceeds after a warrant amendment in August 2023[79](index=79&type=chunk) - Issued **63,000** common shares to employees and consultants under the 2023 Stock Purchase Plan, recording **$657,090** in stock-based compensation[82](index=82&type=chunk) [Series A Preferred Stock](index=24&type=section&id=Series%20A%20Preferred%20Stock) A single share of Series A Preferred Stock, issued to the CEO in August 2022 for $25,000, carried 250,000,000 votes for reverse stock split and authorized share increase proposals. It was redeemed in October 2022 and subsequently cancelled on September 13, 2023 - One share of Series A Preferred Stock was issued to the CEO for **$25,000** in August 2022[83](index=83&type=chunk)[84](index=84&type=chunk) - It had **250,000,000** votes per share, exclusively for reverse stock split and authorized common stock increase proposals[84](index=84&type=chunk)[85](index=85&type=chunk) - The share was redeemed in October 2022 and the Series A Certificate of Designation was cancelled on September 13, 2023[85](index=85&type=chunk)[86](index=86&type=chunk) [Series B Preferred Stock](index=26&type=section&id=Series%20B%20Preferred%20Stock) A single share of Series B Preferred Stock was issued to the CEO in May 2023 for $25,000, granting 250,000,000 votes solely for reverse stock split proposals. It had no conversion, dividend, or liquidation rights and was automatically redeemed upon the reverse stock split's effectiveness, with its certificate of designation cancelled on September 13, 2023 - One share of Series B Preferred Stock was issued to the CEO for **$25,000** in May 2023[87](index=87&type=chunk) - It carried **250,000,000** votes per share, exclusively for reverse stock split proposals[88](index=88&type=chunk) - The Series B Preferred Stock had no conversion, dividend, or liquidation rights[89](index=89&type=chunk) - It was automatically redeemed upon the effectiveness of a reverse stock split and its certificate of cancellation was filed on September 13, 2023[90](index=90&type=chunk)[91](index=91&type=chunk) [Series C Convertible Preferred Stock](index=26&type=section&id=Series%20C%20Convertible%20Preferred%20Stock) In June 2023, the Company issued 5,761 shares of Series C Convertible Preferred Stock to Sundry Investors at $1,000 per share, in exchange for the cancellation of promissory notes. These shares are convertible into common stock at a conversion price of $0.717, rank senior to common stock in liquidation, and have voting rights on an as-if-converted basis - Issued **5,761** shares of Series C Convertible Preferred Stock to Sundry Investors on June 21, 2023, at **$1,000** per share[92](index=92&type=chunk) - Issued in consideration for the cancellation of promissory notes from the Sundry acquisition[92](index=92&type=chunk) - Convertible into common stock at a conversion price of **$0.717** per share[99](index=99&type=chunk) - Ranks senior to common stock in liquidation and has voting rights on an as-if-converted basis[97](index=97&type=chunk)[98](index=98&type=chunk) [NOTE 9: RELATED PARTY TRANSACTIONS](index=28&type=section&id=NOTE%209%3A%20RELATED%20PARTY%20TRANSACTIONS) The Company made net repayments of $218,967 to related parties during the nine months ended September 30, 2023, reducing the outstanding balance to $336,250. These advances are unsecured, non-interest bearing, and due on demand, primarily from current and former executives and a board member - Net repayments to related parties totaled **$218,967** for the nine months ended September 30, 2023[101](index=101&type=chunk) | Metric | September 30, 2023 ($) | December 31, 2022 ($) | | :---------------------- | :------------------- | :------------------ | | Amounts due to related parties | $336,250 | $556,225 | - Advances from related parties are unsecured, non-interest bearing, and due on demand[101](index=101&type=chunk) - Advances from Trevor Pettennude totaling **$325,000** in October 2022 were paid off in September 2023[102](index=102&type=chunk) [NOTE 10: SHARE-BASED PAYMENTS](index=30&type=section&id=NOTE%2010%3A%20SHARE-BASED%20PAYMENTS) This note details the Company's share-based payment activities, including common stock warrants issued in connection with private placements and merchant advances, and stock options. It also reports the stock-based compensation expense recognized for the periods [Common Stock Warrants](index=30&type=section&id=Common%20Stock%20Warrants) The Company issued a significant number of common stock warrants in 2023 through private placements and merchant advances, with varying exercise prices and expiration dates. A warrant amendment in August 2023 reduced the exercise price of certain existing warrants, leading to immediate exercises - Granted **51,085** warrants in connection with the January Private Placement, with an exercise price of **$9.43** per share[105](index=105&type=chunk) - Granted **6,095** warrants for merchant advances with an exercise price of **$131.25**[106](index=106&type=chunk) - Granted **1,027,750** warrants in connection with the August Private Placement, with an exercise price of **$9.43** per share[107](index=107&type=chunk) - A warrant amendment in August 2023 reduced the exercise price of **196,542** existing warrants to **$9.43** per share, leading to the exercise of **123,814** shares for **$1,167,566**[108](index=108&type=chunk) | Warrant Activity | Common Stock Warrants (Shares) | Weighted Average Exercise Price ($) | | :----------------------- | :-------------------- | :------------------------------ | | Outstanding - Dec 31, 2022 | 176,733 | $209.25 | | Granted | 1,641,262 | $14.69 | | Exercised | (155,899) | $27.63 | | Outstanding - Sep 30, 2023 | 1,662,096 | $20.86 | [Stock Options](index=30&type=section&id=Stock%20Options) As of September 30, 2023, the Company had 1,558 stock options outstanding with a weighted average exercise price of $9,055.50 per share, of which 1,463 were exercisable. Stock-based compensation expense for options was $101,417 and $110,092 for the three months ended September 30, 2023 and 2022, respectively - As of September 30, 2023, **1,558** stock options were outstanding with a weighted average exercise price of **$9,055.50** per share[110](index=110&type=chunk) - **1,463** options were exercisable as of September 30, 2023[110](index=110&type=chunk) - Stock-based compensation expense was **$101,417** and **$110,092** for the three months ended September 30, 2023 and 2022, respectively[111](index=111&type=chunk) - Total unrecognized compensation cost related to non-vested stock option awards was **$269,490** as of September 30, 2023, to be recognized over **0.77 years**[111](index=111&type=chunk) [NOTE 11: LEASE OBLIGATIONS](index=32&type=section&id=NOTE%2011%3A%20LEASE%20OBLIGATIONS) The Company extended lease agreements for its corporate office/distribution center and a showroom in Los Angeles in 2023, recognizing new right-of-use assets and liabilities. Total rent expense for the three and nine months ended September 30, 2023, was $140,304 and $401,444, respectively - In January 2023, the Company extended its corporate office and distribution center lease in Vernon, California, recognizing a right-of-use asset and liability of **$467,738**[113](index=113&type=chunk) - In May 2023, a showroom lease in Los Angeles was extended, recognizing a right-of-use asset and liability of **$125,397**[114](index=114&type=chunk) | Metric | 3 Months Ended Sep 30, 2023 ($) | 3 Months Ended Sep 30, 2022 ($) | 9 Months Ended Sep 30, 2023 ($) | 9 Months Ended Sep 30, 2022 ($) | | :----------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total rent expense | $140,304 | $267,041 | $401,444 | $736,523 | - As of September 30, 2023, the Company had **$980,322** and **$248,734** in accounts payable for past rents due for the Vernon and Los Angeles leases, respectively[113](index=113&type=chunk)[114](index=114&type=chunk) [NOTE 12: CONTINGENCIES](index=32&type=section&id=NOTE%2012%3A%20CONTINGENCIES) The Company is involved in several legal proceedings, primarily vendor lawsuits related to trade payables and a retail store lease dispute. While some matters have been settled or are on payment plans, a $1.5 million retail lease claim against Bailey 44 (updated to $450,968) remains ongoing and disputed. Management believes losses in excess of accrued amounts are not probable - Lawsuits filed by vendors in March and February 2023 for trade payables totaling approximately **$43,501** and **$182,400**, respectively, are included in accounts payable[116](index=116&type=chunk)[117](index=117&type=chunk) - A November 2022 vendor lawsuit for **$50,190** was settled in January 2023 and is on payment plans[118](index=118&type=chunk) - Two lawsuits against Bailey's from 2020 and 2021 totaling **$96,900** were settled in February 2022 and are on payment plans[119](index=119&type=chunk) - A lawsuit against DBG by an investor for **$100,000** reimbursement is ongoing and included in short-term convertible note payable[120](index=120&type=chunk) - A vendor lawsuit against Bailey 44 for a retail store lease, initially **$1.5 million**, was updated to **$450,968** and is being disputed by the Company[121](index=121&type=chunk) [NOTE 13: INCOME TAXES](index=34&type=section&id=NOTE%2013%3A%20INCOME%20TAXES) The Company uses a discrete effective tax rate method for interim periods due to the unreliability of an annual effective tax rate. A full valuation allowance is required against net deferred tax assets due to cumulative losses and no history of generating taxable income - Uses a discrete effective tax rate method for interim reporting periods due to significant changes in estimated ordinary income affecting the annual effective tax rate[125](index=125&type=chunk) - A full valuation allowance is required against net deferred tax assets due to cumulative losses and no history of generating taxable income[126](index=126&type=chunk) [NOTE 14: SUBSEQUENT EVENTS](index=34&type=section&id=NOTE%2014%3A%20SUBSEQUENT%20EVENTS) Subsequent to September 30, 2023, the Company exercised 225,375 pre-funded warrants from the August Private Placement into shares of common stock - Through the issuance date, **225,375** pre-funded warrants from the August Private Placement were exercised into common stock[127](index=127&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=35&type=section&id=ITEM%202%2E%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial condition and results of operations, highlighting recent developments, business overview, material trends, and a detailed comparison of financial performance for the three and nine months ended September 30, 2023 and 2022. It also discusses liquidity, capital resources, and critical accounting policies [Business Overview](index=35&type=section&id=Business%20Overview) Digital Brands Group is a curated collection of lifestyle apparel brands, including Bailey 44, DSTLD, Stateside, Sundry, and ACE Studios, operating through direct-to-consumer and wholesale channels. The Company focuses on an omnichannel strategy to acquire and retain customers, leveraging data to optimize inventory and marketing. Recent developments include a reverse stock split to maintain Nasdaq compliance and the disposition of Harper & Jones [Recent Developments](index=35&type=section&id=Recent%20Developments) Recent developments include seeking stockholder approval for a reverse stock split to maintain Nasdaq listing compliance and the disposition of Harper & Jones (H&J) on June 21, 2023, through a settlement agreement involving cash and common stock - The Company filed a definitive proxy statement for a special meeting on August 21, 2023, to seek stockholder approval for a reverse stock split (1-for-2.5 to 1-for-50) to comply with Nasdaq's minimum bid price requirement[133](index=133&type=chunk) - On June 21, 2023, the Company disposed of Harper & Jones (H&J) through a Settlement Agreement, making a **$229,000** cash payment and issuing **1,952,580** shares of common stock to D. Jones[134](index=134&type=chunk) [Our Company](index=37&type=section&id=Our%20Company) Digital Brands Group manages a portfolio of lifestyle apparel brands (Bailey 44, DSTLD, Stateside, Sundry, ACE Studios) across direct-to-consumer, wholesale, and retail channels. The Company emphasizes an omnichannel strategy, leveraging digital data for customer insights, inventory management, and marketing to increase 'closet share' and Lifetime Value (LTV) - Digital Brands Group is a curated collection of lifestyle brands (Bailey 44, DSTLD, Stateside, Sundry, ACE Studios) offering apparel through direct-to-consumer and wholesale distribution[136](index=136&type=chunk) - The Company employs an omnichannel strategy, blending physical and online channels, to acquire and retain customers and drive high customer lifetime value (LTV)[138](index=138&type=chunk)[141](index=141&type=chunk) - Leverages customer data (contact, browsing, purchase history) to understand preferences, lower inventory risk, and control markdown strategies[139](index=139&type=chunk) - Acquired Bailey (Feb 2020), H&J (May 2021), Stateside (Aug 2021), and Sundry (Dec 2022)[142](index=142&type=chunk) [Material Trends, Events and Uncertainties](index=38&type=section&id=Material%20Trends%2C%20Events%20and%20Uncertainties) The Company faces ongoing global supply chain disruptions, leading to increased costs for raw materials, shipping, and labor, as well as extended transit and production times. Its operating results are also subject to seasonality, with stronger performance typically in the second half of the calendar year - Global supply chain disruptions have led to increased costs for raw materials (**10-100%**), sea/air shipping (**25-300%**), and labor (**5-25%**)[143](index=143&type=chunk) - Increased transit times via sea or air (two weeks to two months) and longer production times are also impacts[143](index=143&type=chunk) - Quarterly operating results vary due to seasonality, with stronger performance historically in the second half of the calendar year[143](index=143&type=chunk) [Components of Our Results of Operations](index=38&type=section&id=Components%20of%20Our%20Results%20of%20Operations) This section defines the key components of the Company's financial results: Net Revenue (sales less returns/promotions across direct-to-consumer and wholesale channels), Cost of Net Revenue (direct merchandise costs, inventory adjustments, duties, inbound freight), Operating Expenses (general & administrative, sales & marketing, distribution, and changes in contingent consideration fair value), and Interest Expense (from various debt instruments) [Net Revenue](index=38&type=section&id=Net%20Revenue) Net revenue for DSTLD, Bailey, Stateside, and Sundry represents total sales less returns, promotions, and discounts, generated through direct-to-consumer websites, showrooms, and wholesale channels including specialty and department stores - Net revenue for DSTLD, Bailey, Stateside, and Sundry includes sales less returns, promotions, and discounts[144](index=144&type=chunk)[145](index=145&type=chunk) - Products are sold direct-to-consumer via websites and showrooms, and indirectly through wholesale channels (specialty retailers, department stores)[144](index=144&type=chunk)[145](index=145&type=chunk) [Cost of Net Revenue](index=39&type=section&id=Cost%20of%20Net%20Revenue) Cost of net revenue for all brands includes direct costs of purchased merchandise, inventory shrinkage, adjustments for obsolescence (excess, slow-moving, lower of cost and net realizable value reserves), duties, and inbound freight - Cost of net revenue includes direct cost of purchased merchandise, inventory shrinkage, and inventory adjustments (obsolescence, excess/slow-moving, lower of cost and net realizable reserves)[146](index=146&type=chunk) - Also includes duties and inbound freight[146](index=146&type=chunk) [Operating Expenses](index=39&type=section&id=Operating%20Expenses) Operating expenses encompass general and administrative costs (payroll, professional fees, software, depreciation), sales and marketing (digital advertising, photoshoots, commissions), distribution (third-party logistics, packaging, shipping), and changes in the fair value of contingent consideration. The Company anticipates increased expenses as a public company - General and administrative expenses include payroll, professional fees, insurance, software, and headquarters-related costs[148](index=148&type=chunk) - Sales and marketing expenses cover digital advertising, photoshoots, and sales commissions[149](index=149&type=chunk) - Distribution expenses include costs for third-party logistics, packaging, and shipping to/from customers[151](index=151&type=chunk) - Changes in the fair value of contingent consideration and amortization of identifiable intangibles are also included in operating expenses[152](index=152&type=chunk) - Additional expenses are expected due to operating as a public company, including compliance, reporting, insurance, investor relations, and professional services[150](index=150&type=chunk) [Interest Expense](index=39&type=section&id=Interest%20Expense) Interest expense primarily arises from the Company's outstanding promissory notes, convertible debt, and other interest-bearing liabilities - Interest expense primarily relates to promissory notes, convertible debt, and other interest-bearing liabilities[153](index=153&type=chunk) [Results of Operations](index=40&type=section&id=Results%20of%20Operations) This section provides a comparative analysis of the Company's financial performance for the three and nine months ended September 30, 2023, versus 2022, detailing changes in net revenues, gross profit, operating expenses, other income/expenses, and net loss from continuing operations [Three Months Ended September 30, 2023 compared to Three Months Ended September 30, 2022](index=40&type=section&id=Three%20Months%20Ended%20September%2030%2C%202023%20compared%20to%20Three%20Months%20Ended%20September%2030%2C%202022) For the three months ended September 30, 2023, net revenues increased by $0.6 million to $3.3 million, and gross profit rose by $0.7 million to $1.7 million, with gross margin improving to 52.3%. However, operating expenses increased by $1.7 million, primarily due to stock-based compensation and changes in contingent consideration fair value, leading to an increased net loss from continuing operations of $5.4 million | Metric | 3 Months Ended Sep 30, 2023 ($) | 3 Months Ended Sep 30, 2022 ($) | Change ($) | Change (%) | | :----------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Net revenues | $3,257,332 | $2,658,444 | $598,888 | 22.5% | | Gross profit | $1,703,288 | $958,298 | $744,990 | 77.7% | | Gross margin (%) | 52.3% | 36.0% | 16.3% | 45.3% | | Operating expenses | $5,125,450 | $3,397,098 | $1,728,352 | 50.9% | | Net loss from continuing operations | $(5,435,994) | $(4,734,038) | $(701,956) | 14.8% | - Revenue increase primarily due to full results from the Sundry acquisition in December 2022[156](index=156&type=chunk) - Increase in gross margin due to a shift in sales mix towards higher-margin e-commerce, led by Sundry[159](index=159&type=chunk) - Operating expenses increased due to stock-based compensation and change in fair value of contingent consideration[160](index=160&type=chunk) [Nine Months Ended September 30, 2023 compared to Nine Months Ended September 30, 2022](index=41&type=section&id=Nine%20Months%20Ended%20September%2030%2C%202023%20compared%20to%20Nine%20Months%20Ended%20September%2030%2C%202022) For the nine months ended September 30, 2023, net revenues increased by $4.2 million to $12.1 million, and gross profit surged by $3.3 million to $6.0 million, with gross margin improving to 49.7%. Operating expenses decreased significantly by $15.9 million, primarily due to a $17.1 million change in fair value of contingent consideration. These factors led to a substantial reduction in net loss from continuing operations, decreasing by $17.0 million to $5.0 million | Metric | 9 Months Ended Sep 30, 2023 ($) | 9 Months Ended Sep 30, 2022 ($) | Change ($) | Change (%) | | :----------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Net revenues | $12,127,135 | $7,937,406 | $4,189,729 | 52.8% | | Gross profit | $6,032,603 | $2,684,464 | $3,348,139 | 124.7% | | Gross margin (%) | 49.7% | 33.8% | 15.9% | 47.0% | | Operating expenses | $5,356,114 | $21,246,820 | $(15,890,706) | -74.8% | | Net loss from continuing operations | $(4,965,579) | $(21,934,830) | $16,969,251 | -77.4% | - Revenue increase primarily due to full results from the Sundry acquisition in December 2022[164](index=164&type=chunk) - Increase in gross margin due to a shift in sales mix towards higher-margin e-commerce, led by Sundry, and less discounting compared to 2022[167](index=167&type=chunk) - Operating expenses decreased primarily due to a **$17.1 million** change in fair value of contingent consideration[168](index=168&type=chunk) [Liquidity and Capital Resources](index=43&type=section&id=Liquidity%20and%20Capital%20Resources) As of September 30, 2023, the Company had $1.1 million in cash but a working capital deficit of $14.7 million, raising substantial doubt about its ability to continue as a going concern. Future funding needs are expected to be met through equity offerings, debt financings, or other sources, with no assurance of availability or favorable terms - As of September 30, 2023, the Company had cash of **$1.1 million** and a working capital deficit of **$14.7 million**[172](index=172&type=chunk) - These factors raise substantial doubt about the Company's ability to continue as a going concern[172](index=172&type=chunk) - Future capital funding needs are planned to be met through public/private equity offerings, debt financings, or other sources[172](index=172&type=chunk) - No assurance can be given regarding the availability or terms of future financing[172](index=172&type=chunk) [Cash Flow Activities](index=43&type=section&id=Cash%20Flow%20Activities) For the nine months ended September 30, 2023, net cash used in operating activities decreased to $6.5 million, while investing activities provided $41,331. Financing activities provided $6.2 million, primarily from equity offerings and new loans, offset by debt repayments | Metric | 9 Months Ended Sep 30, 2023 ($) | 9 Months Ended Sep 30, 2022 ($) | | :----------------------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(6,457,638) | $(8,689,857) | | Net cash provided by (used in) investing activities | $41,331 | $(5,533) | | Net cash provided by financing activities | $6,207,950 | $8,362,395 | | Net change in cash | $(208,357) | $(332,995) | [Cash Flows Used In Operating Activities](index=45&type=section&id=Cash%20Flows%20Used%20In%20Operating%20Activities) Net cash used in operating activities decreased by $2.2 million to $6.5 million for the nine months ended September 30, 2023, primarily due to a lower net loss, partially offset by non-cash adjustments - Cash used in operating activities decreased by **$2.2 million** to **$6.5 million** for the nine months ended September 30, 2023[175](index=175&type=chunk) - The decrease was primarily driven by a lower net loss, partially offset by non-cash adjustments[175](index=175&type=chunk) [Cash Flows Provided By (Used in) Investing Activities](index=45&type=section&id=Cash%20Flows%20Provided%20By%20%28Used%20in%29%20Investing%20Activities) Cash provided by investing activities was $41,331 for the nine months ended September 30, 2023, primarily due to a reduction of deposits, partially offset by property purchases and cash disposed in the H&J disposition - Cash provided by investing activities was **$41,331** in 2023[176](index=176&type=chunk) - Primarily due to a reduction of deposits, partially offset by purchase of property and cash sold in the H&J disposition[176](index=176&type=chunk) [Cash Flows Provided by Financing Activities](index=45&type=section&id=Cash%20Flows%20Provided%20by%20Financing%20Activities) Cash provided by financing activities was $6.2 million for the nine months ended September 30, 2023, mainly from $8.1 million in net proceeds from private placements and $5.8 million from loans, offset by $8.8 million in note repayments. This is a decrease from $8.4 million in 2022 - Cash provided by financing activities was **$6.2 million** for the nine months ended September 30, 2023[177](index=177&type=chunk) - Cash inflows included **$8.1 million** from private placements and **$5.8 million** from loans and notes[177](index=177&type=chunk) - Cash outflows were primarily due to **$8.8 million** in repayments of notes[177](index=177&type=chunk) - In 2022, cash provided by financing activities was **$8.4 million**, including **$7.3 million** in equity proceeds and **$3.8 million** from convertible notes and loans[178](index=178&type=chunk) [Contractual Obligations and Commitments](index=45&type=section&id=Contractual%20Obligations%20and%20Commitments) As of September 30, 2023, the Company had $7.0 million in outstanding principal on debt, primarily from promissory notes (Bailey44 Sellers, March 2023 Notes), PPP, and merchant advances. All outstanding loans, excluding non-current SBA obligations, have maturity dates through 2024 - As of September 30, 2023, the Company had **$7.0 million** in outstanding principal on debt[179](index=179&type=chunk) - Debt primarily includes promissory notes (Bailey44 Sellers, March 2023 Notes), PPP, and merchant advances[179](index=179&type=chunk) - All outstanding loans, except non-current SBA obligations, have maturity dates through **2024**[179](index=179&type=chunk) [Critical Accounting Policies and Estimates](index=45&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The Company's financial statements rely on management's estimates and assumptions, particularly for assets, liabilities, costs, and contingent items. These estimates are based on historical experience and market factors, and actual results may differ from these assumptions - Preparation of financial statements requires estimates and assumptions affecting reported amounts of assets, liabilities, costs, and contingent items[180](index=180&type=chunk) - Estimates are based on historical experience, known trends, and market factors, and are evaluated continuously[180](index=180&type=chunk) - Actual results may differ from these estimates under different assumptions or conditions[180](index=180&type=chunk) [Emerging Growth Company Status](index=45&type=section&id=Emerging%20Growth%20Company%20Status) The Company is an emerging growth company and has elected to use the extended transition period for complying with new or revised accounting standards, which may result in financial statements not being comparable to those of other companies - The Company is an emerging growth company under the JOBS Act of 2012[181](index=181&type=chunk) - Elected to use the extended transition period for complying with new or revised accounting standards[182](index=182&type=chunk) - Financial statements may not be comparable to those of companies that comply with new accounting standards earlier[182](index=182&type=chunk) [Off-Balance Sheet Arrangements](index=45&type=section&id=Off-Balance%20Sheet%20Arrangements) The Company did not have any off-balance sheet arrangements during the periods presented and does not currently have any, as defined by SEC rules and regulations - The Company did not have any off-balance sheet arrangements during the periods presented[183](index=183&type=chunk) - Currently, the Company does not have any off-balance sheet arrangements as defined by SEC rules[183](index=183&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosures about Market Risk](index=47&type=section&id=ITEM%203%2E%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) As a smaller reporting company, Digital Brands Group, Inc. is not required to provide quantitative and qualitative disclosures about market risk - The Company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[184](index=184&type=chunk) [ITEM 4. Controls and Procedures](index=47&type=section&id=ITEM%204%2E%20Controls%20and%20Procedures) This section addresses the effectiveness of the Company's disclosure controls and procedures and internal control over financial reporting. Management concluded that disclosure controls were not effective as of September 30, 2023, due to material weaknesses, but has initiated remediation efforts. No material changes in internal control over financial reporting occurred during the nine months ended September 30, 2023 [Evaluation of Disclosure Controls and Procedures](index=47&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were not effective as of September 30, 2023, due to material weaknesses in internal control over financial reporting. Remediation efforts are ongoing, including hiring financial personnel/consultants, assessing accounting policies, and identifying a unified accounting system - Disclosure controls and procedures were not effective as of September 30, 2023, due to material weaknesses in internal control over financial reporting[186](index=186&type=chunk) - Remediation efforts include hiring additional financial personnel/consultants with public company and technical accounting expertise[187](index=187&type=chunk) - Assessment of accounting basis, revenue recognition, and cutoff procedures led to necessary adjustments to convert from cash to accrual basis[189](index=189&type=chunk) - The Company is in the process of identifying a single, unified accounting and reporting system[189](index=189&type=chunk) - Despite ineffective controls, supplementary procedures were employed to ensure fair presentation of financial statements[188](index=188&type=chunk) [Limitations on Effectiveness of Controls and Procedures](index=49&type=section&id=Limitations%20on%20Effectiveness%20of%20Controls%20and%20Procedures) Management acknowledges that control systems provide only reasonable assurance and can be subject to inherent limitations, such as faulty judgments, simple errors, circumvention by individuals or collusion, and management override. Despite material weaknesses, management believes they did not affect financial results - Control systems provide only reasonable, not absolute, assurance and are subject to inherent limitations[191](index=191&type=chunk) - Limitations include faulty judgments, simple errors, circumvention by individuals or collusion, and management override[191](index=191&type=chunk) - Management believes the material weaknesses did not have an effect on financial results[192](index=192&type=chunk) [Changes in Internal Control over Financial Reporting](index=49&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) No change in the Company's internal control over financial reporting occurred during the nine months ended September 30, 2023, that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting - No material changes in internal control over financial reporting occurred during the nine months ended September 30, 2023[193](index=193&type=chunk) [PART II. OTHER INFORMATION](index=50&type=section&id=PART%20II%2E%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, and other regulatory disclosures [ITEM 1. Legal Proceedings](index=50&type=section&id=ITEM%201%2E%20Legal%20Proceedings) The Company is involved in several legal proceedings, primarily vendor lawsuits for trade payables and a retail lease dispute against Bailey 44. While some claims have been settled or are on payment plans, a $450,968 retail lease claim remains ongoing and disputed. Management believes losses in excess of accrued amounts are not probable - Lawsuits filed by vendors in March and February 2023 for trade payables totaling approximately **$43,501** and **$182,400**, respectively, are included in accounts payable[196](index=196&type=chunk)[197](index=197&type=chunk) - A November 2022 vendor lawsuit for **$50,190** was settled in January 2023 and is on payment plans[198](index=198&type=chunk) - Two lawsuits against Bailey's from 2020 and 2021 totaling **$96,900** were settled in February 2022 and are on payment plans[199](index=199&type=chunk) - A vendor lawsuit against Bailey 44 related to a retail store lease, initially **$1.5 million**, was updated to **$450,968** and is being disputed by

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [ITEM 1. Condensed Consolidated Financial Statements – Unaudited](index=3&type=section&id=ITEM%201.%20Condensed%20Consolidated%20Financial%20Statements%20%E2%80%93%20Unaudited) This section presents the unaudited condensed consolidated financial statements and accompanying notes for the periods ended June 30, 2023 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20as%20of%20June%2030%2C%202023%2C%20and%20December%2031%2C%202022) Balance Sheet Summary | Metric | June 30, 2023 | December 31, 2022 | Change (Absolute) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :---------------- | :--------- | | **Assets** | | | | | | Total current assets | $6,613,944 | $8,829,393 | $(2,215,449) | -25.1% | | Total assets | $27,552,558 | $33,738,055 | $(6,185,497) | -18.3% | | **Liabilities** | | | | | | Total current liabilities | $22,651,462 | $40,893,791 | $(18,242,329) | -44.6% | | Total liabilities | $23,128,598 | $41,191,229 | $(18,062,631) | -43.8% | | **Stockholders' Equity (Deficit)** | | | | | | Total stockholders' equity (deficit) | $4,423,960 | $(7,453,174) | $11,877,134 | 159.4% | - The company's **working capital deficit improved** from $(32,064,398) as of December 31, 2022, to **$(16,037,518)** as of June 30, 2023, primarily due to a significant reduction in current liabilities[8](index=8&type=chunk)[19](index=19&type=chunk) [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20for%20the%20Three%20and%20Six%20Months%20Ended%20June%2030%2C%202023%2C%20and%202022) Three Months Ended June 30 | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change (Absolute) | Change (%) | | :----------------------------------- | :--------------------------- | :--------------------------- | :---------------- | :--------- | | Net revenues | $4,493,424 | $2,649,432 | $1,843,992 | 69.6% | | Gross profit | $2,336,075 | $1,112,729 | $1,223,346 | 109.9% | | Gross margin | 52.0% | 42.0% | 10.0% | 23.8% | | Income (loss) from operations | $7,620,959 | $(10,645,714) | $18,266,673 | 171.6% | | Net income (loss) from continuing operations | $6,536,311 | $(9,482,520) | $16,018,831 | 168.9% | | Net income (loss) | $5,044,261 | $(9,533,924) | $14,578,185 | 152.9% | | Basic EPS from continuing operations | $1.06 | $(26.47) | $27.53 | 104.0% | | Diluted EPS from continuing operations | $0.31 | $(26.47) | $26.78 | 101.2% | Six Months Ended June 30 | Metric | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change (Absolute) | Change (%) | | :----------------------------------- | :--------------------------- | :--------------------------- | :---------------- | :--------- | | Net revenues | $8,869,803 | $5,278,562 | $3,591,241 | 68.0% | | Cost of net revenues | $4,540,488 | $3,552,396 | $988,092 | 27.8% | | Gross profit | $4,329,315 | $1,726,166 | $2,603,149 | 150.8% | | Gross margin | 48.8% | 32.7% | 16.1% | 49.2% | | Income (loss) from operations | $4,098,651 | $(16,123,555) | $20,222,206 | 125.4% | | Net income (loss) from continuing operations | $470,415 | $(17,200,792) | $17,671,207 | 102.7% | | Net income (loss) | $(1,092,088) | $(17,366,866) | $16,274,778 | 93.7% | | Basic EPS from continuing operations | $0.08 | $(69.95) | $70.03 | 100.1% | | Diluted EPS from continuing operations | $0.02 | $(69.95) | $69.97 | 100.0% | [Condensed Consolidated Statements of Stockholders' Deficit](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Deficit%20for%20the%20Three%20and%20Six%20Months%20Ended%20June%2030%2C%202023%2C%20and%202022) Stockholders' Equity (Deficit) Summary | Metric | June 30, 2023 | December 31, 2022 | Change (Absolute) | Change (%) | | :--------------------------- | :------------ | :---------------- | :---------------- | :--------- | | Common Stock Shares | 7,927,549 | 4,468,939 | 3,458,610 | 77.4% | | Common Stock Amount | $793 | $447 | $346 | 77.4% | | Additional Paid-in Capital | $109,262,570 | $96,293,694 | $12,968,876 | 13.5% | | Accumulated Deficit | $(104,839,404) | $(103,747,316) | $(1,092,088) | 1.1% | | Total Stockholders' Equity (Deficit) | $4,423,960 | $(7,453,174) | $11,877,134 | 159.4% | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20Six%20Months%20Ended%20June%2030%2C%202023%2C%20and%202022) Cash Flow Summary | Cash Flow Activity | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change (Absolute) | Change (%) | | :-------------------------------- | :--------------------------- | :--------------------------- | :---------------- | :--------- | | Net cash used in operating activities | $(2,981,446) | $(6,609,470) | $3,628,024 | 54.9% | | Net cash provided by investing activities | $41,331 | $0 | $41,331 | N/A | | Net cash provided by financing activities | $1,999,969 | $6,883,800 | $(4,883,831) | -70.9% | | Net change in cash and cash equivalents | $(940,146) | $274,330 | $(1,214,476) | -442.7% | | Cash and cash equivalents at end of period | $335,470 | $802,724 | $(467,254) | -58.2% | [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) [NOTE 1: NATURE OF OPERATIONS](index=8&type=section&id=NOTE%201%3A%20NATURE%20OF%20OPERATIONS) DBG operates a collection of lifestyle apparel brands and recently disposed of its Harper & Jones (H&J) brand - DBG operates as a curated collection of lifestyle apparel brands, including Bailey 44, DSTLD, Harper & Jones, Stateside, and ACE Studios, utilizing direct-to-consumer and wholesale distribution[14](index=14&type=chunk) - The company completed the acquisition of Sundry on December 30, 2022[17](index=17&type=chunk) - On June 21, 2023, DBG disposed of Harper & Jones (H&J) through a settlement agreement, transferring 100% membership interest to D Jones Tailored Collection, Ltd in exchange for a cash payment and common stock[18](index=18&type=chunk) [NOTE 2: GOING CONCERN](index=8&type=section&id=NOTE%202%3A%20GOING%20CONCERN) Substantial doubt exists about the company's ability to continue as a going concern due to recurring losses and a significant working capital deficit - The company has sustained net losses of **$1,092,088** and **$17,366,866** for the six months ended June 30, 2023 and 2022, respectively[19](index=19&type=chunk) - As of June 30, 2023, the company had a **working capital deficit of $16,037,518**[19](index=19&type=chunk) - The company's ability to continue as a going concern is dependent on generating sufficient cash flows from operations or obtaining additional capital financing, with no assurance of success[20](index=20&type=chunk) [NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=10&type=section&id=NOTE%203%3A%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note details key accounting policies, including consolidation principles, fair value measurements, and goodwill impairment - A **one-for-100 reverse stock split** became effective on November 3, 2022, retroactively adjusting all share and per share amounts[23](index=23&type=chunk) - The company ceased consolidating H&J's accounts as of June 21, 2023, following its disposition[26](index=26&type=chunk) Contingent Consideration | Item | June 30, 2023 | December 31, 2022 | | :------------------------ | :------------ | :---------------- | | Contingent consideration | $0 | $12,098,475 | | - Bailey | $0 | $10,698,475 | | - Harper & Jones | $0 | $1,400,000 | - The company recorded a **gain of $10,698,475** from the Norwest Waiver and **$1,400,000** from the H&J Settlement due to the fair value of contingent consideration becoming $0[39](index=39&type=chunk)[40](index=40&type=chunk) Inventory | Inventory Category | June 30, 2023 | December 31, 2022 | | :----------------- | :------------ | :---------------- | | Raw materials | $1,508,416 | $1,611,134 | | Work in process | $653,412 | $888,643 | | Finished goods | $2,609,443 | $2,622,787 | | Total Inventory | $4,771,271 | $5,122,564 | - In 2022, the company recorded an **impairment loss of $3,667,000** for brand name assets and **$11,872,332 for goodwill**, primarily due to reduced revenues and liabilities exceeding assets for Bailey44 and H&J[46](index=46&type=chunk) [NOTE 4: DISCONTINUED OPERATIONS](index=19&type=section&id=NOTE%204%3A%20DISCONTINUED%20OPERATIONS) The disposition of Harper & Jones (H&J) on June 21, 2023, resulted in a loss on disposition of $1,523,940 - The H&J Settlement on June 21, 2023, involved a **$229,000 cash payment** and the issuance of **1,952,580 common shares** (fair value $1,357,043) to D Jones Tailored Collection, Ltd for 100% of H&J's membership interest[53](index=53&type=chunk)[54](index=54&type=chunk) - The disposition of H&J resulted in a **loss of $1,523,940**, recorded in income (loss) from discontinued operations[54](index=54&type=chunk)[55](index=55&type=chunk) H&J Discontinued Operations Summary | Metric (H&J Discontinued Operations) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net revenues | $686,627 | $1,089,569 | $1,405,482 | $1,892,849 | | Gross profit | $394,520 | $760,654 | $839,861 | $1,287,436 | | Net income (loss) | $(1,492,050) | $(51,404) | $(1,562,503) | $(166,074) | [NOTE 5: DUE FROM FACTOR](index=20&type=section&id=NOTE%205%3A%20DUE%20FROM%20FACTOR) The net amount due from factor decreased to $438,142 as of June 30, 2023, from $839,400 at year-end 2022 Due from Factor, Net | Item | June 30, 2023 | December 31, 2022 | | :------------------------ | :------------ | :---------------- | | Outstanding receivables: Without recourse | $774,264 | $1,680,042 | | Outstanding receivables: With recourse | $50,979 | $65,411 | | Matured funds and deposits | $92,399 | $81,055 | | Advances | $(411,753) | $(632,826) | | Credits due customers | $(67,747) | $(354,282) | | Total Due from factor, net | $438,142 | $839,400 | [NOTE 6: GOODWILL AND INTANGIBLE ASSETS](index=21&type=section&id=NOTE%206%3A%20GOODWILL%20AND%20INTANGIBLE%20ASSETS) Goodwill remained stable at $9.0 million, while net intangible assets decreased to $11.4 million due to amortization and the H&J disposition Goodwill by Business Combination | Goodwill by Business Combination | June 30, 2023 | December 31, 2022 | | :------------------------------- | :------------ | :---------------- | | Bailey | $3,158,123 | $3,158,123 | | Stateside | $2,104,056 | $2,104,056 | | Sundry | $3,711,322 | $3,711,322 | | Total Goodwill | $8,973,501 | $8,973,501 | - The company derecognized **$1,130,311 in goodwill** and **$1,246,915 in intangible assets** due to the H&J disposition[59](index=59&type=chunk)[60](index=60&type=chunk) Intangible Assets Summary (June 30, 2023) | Intangible Assets (June 30, 2023) | Gross Amount | Accumulated Amortization | Carrying Value | | :-------------------------------- | :----------- | :----------------------- | :------------- | | Customer relationships (Amortized) | $9,734,560 | $(4,155,129) | $5,579,431 | | Brand name (Indefinite-lived) | $5,841,880 | — | $5,841,880 | | Total Intangible Assets, net | $15,576,440 | $(4,155,129) | $11,421,311 | - Amortization expense for intangible assets was **$804,924 for Q2 2023** (vs $537,812 in 2022) and **$1,759,277 for H1 2023** (vs $1,075,625 in 2022)[61](index=61&type=chunk) [NOTE 7: LIABILITIES AND DEBT](index=21&type=section&id=NOTE%207%3A%20LIABILITIES%20AND%20DEBT) This note details changes in liabilities, including debt repayments, conversions, and new promissory note issuances Accrued Expenses and Other Liabilities | Accrued Expenses and Other Liabilities | June 30, 2023 | December 31, 2022 | | :------------------------------------- | :------------ | :---------------- | | Accrued expenses | $503,927 | $668,714 | | Reserve for returns | — | $307,725 | | Payroll related liabilities | $4,009,812 | $2,618,870 | | Sales tax liability | $277,800 | $262,765 | | Other liabilities | $247,398 | $78,845 | | Total | $5,038,937 | $3,936,920 | - Payroll liabilities as of June 30, 2023, included **$1,288,048 in payroll taxes** due to federal and state authorities, subject to penalties and interest[62](index=62&type=chunk) - The **$4,000,000 principal of the December Notes was fully repaid** in February 2023, resulting in a $689,100 loss on extinguishment of debt[68](index=68&type=chunk)[69](index=69&type=chunk) - The **$5,500,000 Sundry Promissory Note** and accrued interest of $259,177 were cancelled on June 21, 2023, in exchange for 5,761 shares of Series C Convertible Preferred Stock[75](index=75&type=chunk) - In March 2023, the company issued **$2,458,750 in new promissory notes** (March 2023 Notes) with an original issue discount of $608,750, receiving net proceeds of $1,850,000[76](index=76&type=chunk) Promissory Notes Payable, Net | Promissory Notes Payable, Net | June 30, 2023 | December 31, 2022 | | :---------------------------- | :------------ | :---------------- | | Bailey Note | $3,500,000 | $3,500,000 | | Sundry Note | — | $5,500,000 | | March 2023 Notes - principal | $2,458,750 | — | | March 2023 Notes - unamortized debt discount | $(344,911) | — | | Total Promissory note payable, net | $5,613,839 | $9,000,000 | [NOTE 8: STOCKHOLDERS' DEFICIT](index=25&type=section&id=NOTE%208%3A%20STOCKHOLDERS%27%20DEFICIT) This section details changes in stockholders' equity, including common and preferred stock issuances and warrant activity - In January 2023, the company completed a private placement, issuing 1,277,140 shares of common stock and warrants, generating **gross proceeds of $5.0 million** and **net proceeds of $4.3 million**[78](index=78&type=chunk)[80](index=80&type=chunk) - The company issued 1 share of Series B Preferred Stock to its CEO for $25,000, granting **250,000,000 votes per share** exclusively for reverse stock split proposals[84](index=84&type=chunk)[85](index=85&type=chunk) - On June 21, 2023, **5,761 shares of Series C Convertible Preferred Stock** were issued to Sundry Investors at $1,000 per share, in consideration for the cancellation of $5,500,000 in promissory notes and accrued interest[88](index=88&type=chunk)[90](index=90&type=chunk) - Each Series C Preferred Stock share is convertible into common stock at a **conversion price of $0.717**[96](index=96&type=chunk) [NOTE 9: RELATED PARTY TRANSACTIONS](index=29&type=section&id=NOTE%209%3A%20RELATED%20PARTY%20TRANSACTIONS) Net repayments to related parties totaled $57,427 for the first half of 2023, reducing the outstanding balance to $472,790 - Net repayments for amounts due to related parties were **$57,427 for the six months ended June 30, 2023**, compared to $172,036 in the prior year[98](index=98&type=chunk) - As of June 30, 2023, amounts due to related parties were **$472,790**, down from $556,225 at December 31, 2022[99](index=99&type=chunk) [NOTE 10: SHARE-BASED PAYMENTS](index=31&type=section&id=NOTE%2010%3A%20SHARE-BASED%20PAYMENTS) Warrant and stock option activity resulted in a stock-based compensation expense of $207,094 for the first half of 2023 Warrant Activity | Warrant Activity | Common Stock Warrants | Weighted Average Exercise Price | | :----------------------- | :-------------------- | :------------------------------ | | Outstanding - Dec 31, 2022 | 4,418,320 | $8.37 | | Granted | 2,327,446 | $3.98 | | Exercised | (802,140) | $3.92 | | Outstanding - June 30, 2023 | 5,943,626 | $7.25 | - Stock-based compensation expense was **$101,500 for Q2 2023** (vs $119,759 in 2022) and **$207,094 for H1 2023** (vs $258,852 in 2022)[105](index=105&type=chunk) - Total unrecognized compensation cost related to non-vested stock option awards was **$370,907** as of June 30, 2023, to be recognized over a weighted average period of 0.9 years[105](index=105&type=chunk) [NOTE 11: LEASE OBLIGATIONS](index=31&type=section&id=NOTE%2011%3A%20LEASE%20OBLIGATIONS) The company extended two lease agreements, recognizing new right-of-use assets and liabilities, while total rent expense decreased significantly - In January 2023, the company extended its corporate office and distribution center lease, recognizing a **right-of-use asset and liability of $467,738**[106](index=106&type=chunk) - In May 2023, a showroom lease extension resulted in a **right-of-use asset and liability of $125,397**[107](index=107&type=chunk) - Total rent expense for the six months ended June 30, 2023, was **$210,265**, a significant decrease from $469,482 in 2022[110](index=110&type=chunk) [NOTE 12: CONTINGENCIES](index=33&type=section&id=NOTE%2012%3A%20CONTINGENCIES) The company is involved in several legal proceedings, primarily related to vendor trade payables and a disputed retail lease - The company faces vendor lawsuits totaling approximately **$43,501** (March 2023) and **$182,400** (February 2023) related to trade payables[111](index=111&type=chunk)[112](index=112&type=chunk) - A lawsuit against Bailey 44 regarding a retail store lease, initially $1.5 million, has been updated to **$450,968**, which the company is disputing[116](index=116&type=chunk) - All claims where management believes liability is probable are included in accounts payable and accrued expenses[117](index=117&type=chunk) [NOTE 13: INCOME TAXES](index=33&type=section&id=NOTE%2013%3A%20INCOME%20TAXES) A full valuation allowance is required against net deferred tax assets due to a history of cumulative losses - The company uses a discrete effective tax rate method for interim periods due to potential significant changes in the estimated annual effective tax rate[119](index=119&type=chunk) - A **full valuation allowance** is required against net deferred tax assets due to cumulative losses and no history of generating taxable income[120](index=120&type=chunk) [NOTE 14: SUBSEQUENT EVENTS](index=35&type=section&id=NOTE%2014%3A%20SUBSEQUENT%20EVENTS) The maturity date of the Bailey Note was extended subsequent to the reporting period - On July 5, 2023, the maturity date of the Bailey Note was **extended to June 30, 2024**[121](index=121&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=ITEM%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial results, highlighting revenue growth from the Sundry acquisition, liquidity challenges, and operational trends [Business Overview](index=36&type=section&id=Business%20Overview) The company operates an omnichannel apparel business and is addressing Nasdaq listing requirements through a proposed reverse stock split - The company is seeking stockholder approval for a **reverse stock split (1-for-2.5 to 1-for-50)** to comply with Nasdaq's minimum bid price requirement, with potential delisting if not approved[127](index=127&type=chunk)[211](index=211&type=chunk) - On June 21, 2023, the company disposed of Harper & Jones (H&J) by transferring 100% membership interest to D Jones Tailored Collection, Ltd in exchange for a cash payment of $229,000 and 1,952,580 shares of common stock[128](index=128&type=chunk) - Digital Brands Group operates a curated collection of lifestyle brands (Bailey 44, DSTLD, Stateside, Sundry, ACE Studios) through direct-to-consumer and wholesale distribution, aiming for 'closet share' and operational efficiencies[130](index=130&type=chunk)[134](index=134&type=chunk) - The company's strategy involves leveraging a physical footprint for customer acquisition and brand awareness, while using digital marketing for retention and targeted new customer acquisition, supported by data analysis to manage inventory and promotions[132](index=132&type=chunk)[133](index=133&type=chunk) [Material Trends, Events and Uncertainties](index=39&type=section&id=Material%20Trends%2C%20Events%20and%20Uncertainties) The company is subject to global supply chain disruptions and seasonal fluctuations, with stronger performance typically in the second half of the year - Global supply chain disruptions have led to increased costs for **raw materials (10-100%)**, **shipping (25-300%)**, and **labor (5-25%)**, along with extended transit times (two weeks to two months)[137](index=137&type=chunk)[138](index=138&type=chunk) - The company's operating results are subject to seasonality, with stronger performance historically in the second half of the calendar year[137](index=137&type=chunk) [Components of Our Results of Operations](index=39&type=section&id=Components%20of%20Our%20Results%20of%20Operations) This section defines key financial components, including revenue sources, cost of revenue, and various operating expenses - Net revenues are generated through direct-to-consumer websites and wholesale channels (specialty stores, department stores) for brands like DSTLD, Bailey, Stateside, and Sundry[138](index=138&type=chunk)[139](index=139&type=chunk) - Cost of net revenue includes direct merchandise costs, inventory shrinkage, obsolescence adjustments, duties, and inbound freight[140](index=140&type=chunk) - Operating expenses encompass general and administrative (payroll, professional fees, depreciation), sales and marketing (digital advertising, commissions), distribution (logistics, packaging, shipping), and changes in fair value of contingent consideration[141](index=141&type=chunk)[142](index=142&type=chunk)[143](index=143&type=chunk)[145](index=145&type=chunk)[146](index=146&type=chunk) [Results of Operations](index=41&type=section&id=Results%20of%20Operations) The company's financial performance improved significantly, driven by the Sundry acquisition and a favorable change in contingent consideration Three Months Ended June 30, 2023 vs. 2022 | Metric | 2023 | 2022 | Change (Absolute) | Change (%) | | :----------------------------------- | :----------- | :----------- | :---------------- | :--------- | | Net revenues | $4,493,424 | $2,649,432 | $1,843,992 | 69.6% | | Gross profit | $2,336,075 | $1,112,729 | $1,223,346 | 109.9% | | Gross margin | 52.0% | 42.0% | 10.0% | 23.8% | | Operating expenses | $(5,284,884) | $11,758,443 | $(17,043,327) | -144.9% | | Net income (loss) from continuing operations | $6,536,311 | $(9,482,520) | $16,018,831 | 168.9% | Six Months Ended June 30, 2023 vs. 2022 | Metric | 2023 | 2022 | Change (Absolute) | Change (%) | | :----------------------------------- | :----------- | :----------- | :---------------- | :--------- | | Net revenues | $8,869,803 | $5,278,562 | $3,591,241 | 68.0% | | Gross profit | $4,329,315 | $1,726,166 | $2,603,149 | 150.8% | | Gross margin | 48.8% | 32.7% | 16.1% | 49.2% | | Operating expenses | $230,664 | $17,849,721 | $(17,619,057) | -98.7% | | Net income (loss) from continuing operations | $470,415 | $(17,200,792) | $17,671,207 | 102.7% | - The significant decrease in operating expenses for both periods was primarily due to a **$16.6 million (3 months)** and **$17.8 million (6 months)** favorable change in the fair value of contingent consideration[152](index=152&type=chunk)[159](index=159&type=chunk) - Other income (expenses) shifted from a gain of $1.2 million in Q2 2022 to a loss of $1.1 million in Q2 2023, and from a loss of $1.1 million in H1 2022 to a loss of $3.6 million in H1 2023, mainly due to less interest expense in 2023 and a gain from derivative liability in 2022[153](index=153&type=chunk)[160](index=160&type=chunk) [Liquidity and Capital Resources](index=44&type=section&id=Liquidity%20and%20Capital%20Resources) The company faces substantial doubt about its going concern ability, with a working capital deficit of $16.0 million as of June 30, 2023 - As of June 30, 2023, the company had **cash of $0.3 million** and a **working capital deficit of $16.0 million**, raising substantial doubt about its going concern ability[163](index=163&type=chunk) - Net cash used in operating activities **decreased by $3.6 million to $3.0 million** for the six months ended June 30, 2023, compared to $6.6 million in the prior year[165](index=165&type=chunk) - Net cash provided by financing activities **decreased to $2.0 million** for the six months ended June 30, 2023, from $6.9 million in the prior year, despite $4.3 million in net proceeds from a private placement[168](index=168&type=chunk)[169](index=169&type=chunk) - The company has **$7.6 million in outstanding principal on debt** as of June 30, 2023, with most loans maturing through 2024[170](index=170&type=chunk) - Future funding needs are expected to be met through public or private equity offerings, debt financings, or other sources, with no assurance of availability or favorable terms[163](index=163&type=chunk) [Critical Accounting Policies and Estimates](index=46&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Financial statements require significant management estimates, particularly for inventory, asset impairment, and contingent liabilities - Significant estimates and assumptions are made for **inventory, impairment of long-lived assets, contingent consideration, and derivative liabilities**[27](index=27&type=chunk)[171](index=171&type=chunk) [Emerging Growth Company Status](index=46&type=section&id=Emerging%20Growth%20Company%20Status) The company has elected to use the extended transition period for new accounting standards available to emerging growth companies - The company is an emerging growth company and has elected to use the **extended transition period** for new or revised financial accounting standards, which may affect comparability[172](index=172&type=chunk)[173](index=173&type=chunk) [Off-Balance Sheet Arrangements](index=46&type=section&id=Off-Balance%20Sheet%20Arrangements) The company did not have any off-balance sheet arrangements during the periods presented - The company has **no off-balance sheet arrangements**[174](index=174&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosures about Market Risk](index=46&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) As a smaller reporting company, these disclosures are not required - As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk[175](index=175&type=chunk) [ITEM 4. Controls and Procedures](index=47&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls were not effective as of June 30, 2023, due to material weaknesses in internal control - The company's disclosure controls and procedures were **not effective** as of June 30, 2023, due to **material weaknesses** in internal control over financial reporting[177](index=177&type=chunk) - Remediation efforts include hiring additional financial personnel/consultants with public company and technical accounting expertise, assessing accounting systems, and ensuring proper cutoff procedures[178](index=178&type=chunk)[179](index=179&type=chunk) - Despite material weaknesses, management believes supplementary procedures ensured the fair presentation of financial statements[179](index=179&type=chunk) - No change in internal control over financial reporting occurred during the six months ended June 30, 2023, that materially affected or is reasonably likely to materially affect internal control over financial reporting[182](index=182&type=chunk) [PART II. OTHER INFORMATION](index=33&type=section&id=PART%20II.%20OTHER%20INFORMATION) [ITEM 1. Legal Proceedings](index=33&type=section&id=ITEM%201.%20Legal%20Proceedings) The company is involved in several legal proceedings, primarily related to vendor trade payables and a disputed retail lease - The company is involved in vendor lawsuits for trade payables of approximately **$43,501** (March 2023) and **$182,400** (February 2023)[185](index=185&type=chunk)[186](index=186&type=chunk) - A lawsuit against Bailey 44 related to a retail store lease, initially $1.5 million, has been updated to **$450,968**, which the company is disputing[190](index=190&type=chunk) - An investor lawsuit for **$100,000** related to reimbursement of investment is ongoing and included in short-term convertible note payable[189](index=189&type=chunk) - Management does not anticipate that the resolution of these legal proceedings would have a material adverse impact on the company's financial position, results of operations, or cash flows[192](index=192&type=chunk) [ITEM 1A. Risk Factors](index=34&type=section&id=ITEM%201A.%20Risk%20Factors) Key risks include potential Nasdaq delisting, substantial liabilities, and the possibility of future asset impairments - The company is at **risk of delisting from Nasdaq** due to non-compliance with the minimum bid price ($1.00) and stockholders' equity ($2.5 million) requirements[195](index=195&type=chunk)[196](index=196&type=chunk)[209](index=209&type=chunk)[210](index=210&type=chunk) - A proposed **reverse stock split** (1-for-2.5 to 1-for-50) is intended to regain bid price compliance, but failure to approve or maintain compliance could lead to delisting and adverse effects on stock liquidity and financing[127](index=127&type=chunk)[211](index=211&type=chunk)[212](index=212&type=chunk)[216](index=216&type=chunk) - As of June 21, 2023, the company had approximately **$22.0 million in total liabilities**, including $7.9 million in outstanding debt obligations, which is considered significant for its size and revenue base[219](index=219&type=chunk) - Substantial liabilities could make it difficult to satisfy debt obligations, reduce cash flow for operations, increase vulnerability to adverse economic conditions, and limit future financing options[220](index=220&type=chunk)[224](index=224&type=chunk)[225](index=225&type=chunk) - The company has recorded significant **impairment expenses for goodwill and intangible assets** in prior periods (**$15.5 million in 2022**, $3.4 million in 2021), and future impairments could adversely affect financial condition[228](index=228&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=37&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company engaged in several unregistered sales of equity securities, including a private placement generating $5.0 million in gross proceeds - In January 2023, a private placement resulted in the issuance of 1,277,140 common shares (including pre-funded warrant exercises) and accompanying warrants, generating **$5.0 million in gross proceeds**[229](index=229&type=chunk)[232](index=232&type=chunk) - The company granted 152,380 warrants for merchant advances and issued 110,000 common shares to a former convertible noteholder due to default provisions[234](index=234&type=chunk) - 118,890 common shares were issued to Sundry executives based on employment agreements, and 1,952,580 common shares were issued for the H&J Settlement Agreement[235](index=235&type=chunk)[236](index=236&type=chunk) - 1 share of Series B Preferred Stock was issued to the CEO for $25,000, and 5,761 shares of Series C Convertible Preferred Stock were issued to Sundry Investors in exchange for debt cancellation[236](index=236&type=chunk)[237](index=237&type=chunk) [ITEM 3. Defaults upon Senior Securities](index=39&type=section&id=ITEM%203.%20Defaults%20upon%20Senior%20Securities) There were no defaults upon senior securities reported - No defaults upon senior securities were reported[239](index=239&type=chunk) [ITEM 4. Mine Safety Disclosures](index=39&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - This item is not applicable[240](index=240&type=chunk) [ITEM 5. Other Information](index=39&type=section&id=ITEM%205.%20Other%20Information) No other information is reported under this item - No other information is reported under this item[241](index=241&type=chunk) [ITEM 6. Exhibits](index=40&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed, including corporate governance documents, debt instruments, and securities purchase agreements - Exhibits include corporate governance documents (e.g., Certificates of Incorporation, Bylaws, Certificates of Designation for Series B and C Preferred Stock)[243](index=243&type=chunk) - Debt instruments (e.g., Form of Promissory Note, Fourth Amendment to Promissory Note) and warrant agreements are filed[243](index=243&type=chunk) - Securities Purchase Agreements related to recent equity issuances and settlement agreements (e.g., H&J Settlement Agreement, Sundry SPA) are included[243](index=243&type=chunk) - Certifications from the Principal Executive Officer and Principal Financial Officer are filed[244](index=244&type=chunk) [SIGNATURES](index=42&type=section&id=SIGNATURES) - The report was signed by John Hilburn Davis, IV (Chief Executive Officer) and Reid Yeoman (Chief Financial Officer) on August 21, 2023[249](index=249&type=chunk)

Financial Data and Key Metrics Changes - Net revenue increased by 69.6% in Q2 2023 to $4.5 million compared to $2.6 million a year ago [26] - Gross profit margins improved to 52% from 42% a year ago, with gross margins increasing by 40.4% to $2.2 million [26] - Net income attributable to common stockholders was $5 million or $0.38 per diluted share, compared to a loss of $9.5 million a year ago [27] Business Line Data and Key Metrics Changes - Sales and marketing expenses decreased by 20.1% to $1.1 million compared to $1.4 million a year ago, with a sales and marketing expense ratio of 50.9% compared to 89.3% a year ago [6] - General and administrative (G&A) expenses decreased by 4% to $4.1 million compared to $4.2 million a year ago, with G&A as a percent of revenue declining to 90.7% from 160.1% a year ago [16] Market Data and Key Metrics Changes - The company is experiencing strong feedback from wholesale bookings for Q3 and Q4, indicating higher revenue expectations [4][24] - The company is back in the wholesale market with Bailey 44, receiving its first license income check soon [15] Company Strategy and Development Direction - The acquisition of Sundry is viewed as a tipping point for scaling revenue faster, reducing overhead, and generating positive EBITDA and cash flow [17] - New revenue channels, including a proprietary affiliate program and multi-brand retail stores, are set to launch in the fall [4][28] Management's Comments on Operating Environment and Future Outlook - Management expressed excitement about the near and long-term future, indicating that the company has turned a corner and is experiencing significant momentum [18] - The company anticipates additional cost savings and synergies in Q3 and Q4, driven by layoffs and operational efficiencies [14] Other Important Information - The company expects to generate internal free cash flow on a weekly basis in October, which is seen as transformative [5] - The company has visibility into wholesale bookings, which are expected to drive higher revenues in the upcoming quarters [24] Q&A Session Summary Question: What are the expectations for revenue growth in the upcoming quarters? - Management indicated that based on current wholesale bookings and e-commerce trends, revenues for Q3 and Q4 will be meaningfully higher than Q2 [24] Question: How is the affiliate program performing? - The affiliate program has already created a waiting list due to its success, with past experiences showing significant revenue growth potential [25] Question: What impact has the Sundry acquisition had on the business? - The acquisition is seen as a game changer, providing the necessary scale to accelerate revenue growth and improve operational efficiencies [30]

Digital Brands Group, Inc. (NASDAQ:DBGI) Q1 2023 Earnings Conference Call May 22, 2023 10:00 AM ET Company Participants John McNamara - IR Hil Davis - CEO Operator Hello, and welcome to the Digital Brands Group, Inc. Q1 2023 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to John McNamara, Investor Relations. Please go ahead, John. John McNamara Thank you. Good morning, everyone, and welcome to the ...

Financial Performance - Net revenues increased by $1.7 million to $5.1 million for the three months ended March 31, 2023, compared to $3.4 million in the same period in 2022, primarily due to the acquisition of Sundry in December 2022 [117]. - Gross profit rose by $1.3 million to $2.4 million for the three months ended March 31, 2023, up from $1.1 million in the same period in 2022, attributed to increased revenue and gross profit from Sundry [118]. - Operating loss improved to $(3.6) million for the three months ended March 31, 2023, compared to $(5.6) million in the same period in 2022 [116]. - Gross margin increased to 47.9% for the three months ended March 31, 2023, compared to 33.2% for the same period in 2022, attributed to cost efficiencies post-Sundry acquisition and reduced discounting [119]. - Net loss decreased by $1.7 million to $6.1 million for the three months ended March 31, 2023, compared to a loss of $7.8 million in 2022, driven by higher gross profit and lower operating expenses [122]. Expenses - General and administrative expenses were $4.6 million for the three months ended March 31, 2023, compared to $4.3 million in the same period in 2022 [116]. - Sales and marketing expenses increased to $1.1 million for the three months ended March 31, 2023, from $1.0 million in the same period in 2022 [116]. - Operating expenses decreased by $0.7 million to $6.0 million for the three months ended March 31, 2023, from $6.7 million in 2022, primarily due to a $1.2 million change in fair value of contingent consideration in 2022 [120]. Cash Flow and Financing - Cash used in operating activities increased by $1.1 million to $1.7 million for the three months ended March 31, 2023, compared to $0.6 million in 2022, mainly due to changes in operating assets and liabilities [126]. - Cash provided by financing activities was $2.3 million for the three months ended March 31, 2023, including $4.3 million in net proceeds from a private transaction [128]. - Cash provided by investing activities was $87,379 in 2023 due to the return of deposits, compared to cash used of $5,576 in 2022 for property and equipment purchases [127]. - The company plans to fund its capital needs through public or private equity offerings, debt financings, or other sources over the next twelve months [124]. Debt and Working Capital - As of March 31, 2023, the company had cash of $2.0 million and a working capital deficit of $31.2 million, raising doubts about its ability to continue as a going concern [124]. - Outstanding principal on debt as of March 31, 2023, was $13.6 million, with maturity dates through 2024 [131]. Supply Chain and Costs - The company experienced increased costs in raw materials, with fabric prices rising between 10% to 100% depending on various factors [104]. - Shipping costs increased by 25% to 300% depending on the time of year and shipping origin [104]. - Supply chain disruptions have led to longer lead times for raw fabrics and increased production times [103]. Strategic Initiatives - The company aims to enhance its omnichannel strategy to drive customer acquisition and retention, leveraging both digital and physical retail channels [98]. - The company defines "closet share" as the percentage of a customer's clothing units that are from its brands, with a higher closet share indicating increased revenue potential [100]. Non-Cash Adjustments - Non-cash adjustments for the three months ended March 31, 2023, were $3.8 million, compared to $3.7 million in 2022 [125].

Digital Brands Group, Inc. (NASDAQ:DBGI) Q4 2022 Earnings Conference Call April 17, 2023 4:30 PM ET Company Participants John McNamara - Investor Relations Hil Davis - CEO Operator Greetings, and welcome to the Digital Brands Group, Inc. Q4 and Full Year 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, John McNamara of Investor Relations. Thank you, Mr. McNamara. You may begin. John McNamara Thank you, Kimora. Good ...

Financial Settlement - The company has tentatively agreed to pay $229,000 and issue $1,400,000 worth of common stock to former owners of H&J as part of a proposed settlement[19]. Revenue and Product Strategy - The company aims to increase direct-to-consumer revenue mix, which is expected to enhance margins and allow for lower price points[34]. - The company plans to launch a new product category in women's athleisure for 2024, capitalizing on a high repeat spend market[42]. - The company expects to roll out the ACE Studios brand in Q2 2023 as a digitally native first brand[47]. Brand and Market Positioning - The company operates four brands leveraging three channels: websites, wholesale, and own stores[21]. - The company identifies three ideal acquisition targets: mismanaged legacy brands, capital-constrained strong brands, and struggling wholesale brands transitioning to e-commerce[26]. - The company anticipates that pursuing acquisitions will enhance customer loyalty and increase average order value while reducing customer acquisition costs[27]. Distribution and Logistics - As of December 31, 2022, products are distributed through over 75 major department stores and more than 350 boutique stores[51]. - The company plans to review its distribution strategy in 2023, considering maintaining its own distribution centers versus using third-party solutions[62]. - The company relies on a limited number of suppliers to provide finished products, aiming to aggregate pricing power while planning to source additional factories to spread risks[60]. Marketing and Customer Engagement - The company consolidates marketing and tech contracts to achieve significant cost savings and increase operational efficiencies[29]. - The company utilizes a multi-pronged marketing strategy, with paid social media marketing as the primary customer acquisition channel, focusing on platforms like Facebook and Instagram[70]. - The company plans to develop and launch a company-wide loyalty program to engage and reward customers across all brands[87]. - The company has successfully tested retail "pop ups," resulting in higher average order value and lower customer returns[80]. Product Quality and Employee Information - The company focuses on creating high-quality, well-designed products at competitive prices, aiming to exceed consumer expectations for retention and repurchases[88]. - The company has 58 full-time employees as of December 31, 2022, with no labor-related work stoppages reported[95]. Legal and Compliance - The company’s website and related information are not considered part of the Annual Report on Form 10-K[96]. - All statements in securities filings, including forward-looking statements, are made as of the document date and are not updated unless legally required[96]. - There are no applicable quantitative and qualitative disclosures about market risk[359].

Financial Data and Key Metrics Changes - The company reported net sales of $3.4 million for Q3 2022, a 58.3% increase from $2.2 million in Q3 2021 [14] - Gross margin decreased to 48.3% from 55.9% year-over-year, impacted by deferred revenue accounting and increased production costs [18][19] - Loss from operations improved to $2.6 million from $7.9 million a year ago, indicating operational leverage [29] - Net loss attributable to common stockholders was $4.9 million, compared to $8.9 million a year ago [30] Business Line Data and Key Metrics Changes - Wholesale orders for Stateside increased over 50% for Q1 2023 compared to Q1 2022, indicating strong brand demand [6][7] - The launch of the Bailey Shop in October has shown strong consumer trends and sales, consolidating all brands into a single e-commerce platform [10][11] Market Data and Key Metrics Changes - The company is experiencing a significant increase in wholesale bookings, which is expected to positively impact cash flow and revenue recognition in Q4 [6][17] - The shift in advertising strategy to focus on the Bailey Shop has resulted in lower customer acquisition costs, with costs dropping to less than $15 per customer [25][26] Company Strategy and Development Direction - The company aims to continue growing its brand portfolio, with plans to add more brands over the next 12 to 18 months [11] - Licensing opportunities are being explored, which could provide high-margin revenue streams with limited associated costs [9] - The company is considering going private due to a significant disconnect between market valuation and operational performance [34][41] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving cash flow positivity in Q1 2023, driven by strong wholesale and e-commerce growth [13][31] - The company is optimistic about the Sundry acquisition and its potential to enhance EBITDA [31] - Management noted that the current market conditions present a unique opportunity for acquisitions, with increased interest from potential targets [45] Other Important Information - General and administrative expenses as a percentage of revenue decreased significantly, indicating improved operational efficiency [22] - The company has successfully reduced its debt, allowing for better working capital management and the ability to factor purchase orders [5][29] Q&A Session Summary Question: Consideration of Going Private - Management acknowledged the discussion around going private due to the disconnect between share price and company performance, indicating high interest in this option [34][36][41] Question: Future Acquisitions - Management confirmed active discussions regarding potential acquisitions, highlighting the influx of interest from companies seeking to be acquired [42][45] Question: Amazon Exposure - Management reported steady growth in Amazon sales and is exploring further opportunities in this channel, including potential private label businesses [47][48] Question: Debt Restructuring with Black Oak Capital - Management explained the conversion of debt to preferred equity with Black Oak Capital, which allows for improved cash flow and operational flexibility [50][52]

Financial Performance - Net revenues increased by $1.2 million to $3.4 million for the three months ended September 30, 2022, compared to $2.2 million in the same period in 2021[147]. - Gross profit rose by $0.5 million to $1.7 million for the three months ended September 30, 2022, with a gross margin of 48.3%, down from 55.9% in the same period in 2021[148][149]. - Operating loss for the three months ended September 30, 2022, was $2.6 million, an improvement from a loss of $7.9 million in the same period in 2021[146]. - Net revenues increased by $7.0 million to $10.6 million for the nine months ended September 30, 2022, compared to $3.6 million in the same period in 2021, primarily due to acquisitions of H&J and Stateside[155]. - Gross profit rose by $3.9 million to $5.3 million for the nine months ended September 30, 2022, compared to $1.4 million in the same period in 2021, with a gross margin of 50.0% compared to 39.1% in 2021[156][157]. - Net loss for the nine months ended September 30, 2022, was $22.3 million, a decrease of $0.4 million compared to a loss of $22.7 million in the same period in 2021[161]. Operating Expenses - Operating expenses decreased by $4.9 million to $4.2 million for the three months ended September 30, 2022, primarily due to a $4.0 million change in fair value of contingent consideration in 2021[151]. - Operating expenses increased by $1.6 million to $24.1 million for the nine months ended September 30, 2022, driven by higher general and administrative and marketing expenses[159]. - The company expects operating expenses to rise in total dollars and as a percentage of revenues as the revenue base increases[151]. Cash Flow and Financing - Cash used in operating activities decreased by $2.6 million to $8.7 million for the nine months ended September 30, 2022, compared to $11.5 million in 2021[167]. - Cash provided by financing activities was $8.4 million for the nine months ended September 30, 2022, down from $16.7 million in the same period in 2021[169]. - As of September 30, 2022, the company had cash of $195,399 and a working capital deficit of $40.7 million, raising doubts about its ability to continue as a going concern[163]. - The company plans to fund its capital needs through public or private equity offerings, debt financings, or other sources over the next twelve months[163]. - The company sold 373,898 shares of common stock at a public offering price of $2.50 per share, generating net proceeds of $8.1 million[164]. - The company has $9.9 million in outstanding principal related to convertible notes maturing through 2023[171]. Strategic Initiatives - The company has strategically expanded into an omnichannel brand offering, blending online and physical channels to enhance customer engagement and retention[128]. - The acquisition of Stateside in August 2021 contributed to increased revenue and gross profit in 2022[147]. - The company aims to increase "closet share," defined as the percentage of a customer's clothing units that belong to its brands, to drive higher revenue[127]. Supply Chain Challenges - Supply chain disruptions have led to increased costs in raw materials, shipping, and labor, with fabric prices rising between 10% to 100% depending on various factors[131][132].