Digital Brands Group, Inc 10-K/A for FY2023
Digital Brands Group, Inc. (DBGI)
About this 10-K/A
Digital Brands Group, Inc filed this 10-K/A on June 3, 2024, covering the fiscal year ended December 31, 2023 (FY2023).
Headline figures
Fiscal year ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $14.92M
- up 44.3% from $10.33M a year earlier
- Net loss
- $10.25M
- compared with a net loss of $38.04M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Amendment No. 1)
For
the fiscal year ended
For the transition period from to
Commission
file number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The Stock Market LLC | ||||
| The Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☐ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if this registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The
aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing price of the shares of common
stock on June 30, 2023 as reported by The Nasdaq Stock Market LLC on such date was approximately $
As of April 15, 2024, the Company had shares of common stock, $0.0001 par value, issued and outstanding.
Documents Incorporated by Reference: None.
Explanatory Note
As previously disclosed, on June 21, 2023, the Company and the former owners of Harper & Jones, LLC (“H&J”) executed a Settlement Agreement and Release (the “Settlement Agreement”) whereby contemporaneously with the parties’ execution of the Settlement Agreement (i) the Company agreed to make an aggregate cash payment of $229,000 to D. Jones Tailored Collection, Ltd. (“D. Jones”), (ii) the Company issued 1,952,580 shares of common stock to D. Jones, and (iii) the Company assigned and transferred 100% of the Company’s membership interest in H&J to D. Jones. This transaction is known as the “H&J Settlement.”
The H&J Settlement was accounted for a business disposition in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification 810-40-40-3A. As of June 21, 2023, the Company no longer consolidated the assets, liabilities, revenues and expenses of H&J. Accordingly, certain prior year accounts have been reclassified to conform with current year presentation regarding income (loss) from discontinued operations. H&J’s assets and liabilities as of December 31, 2022 have also been reclassified on the Company’s consolidated balance sheet.
The retrospective adjustments to account of the discontinued operations classification of H&J had the following impacts: (i) revenue decreased from $14.0 million to $10.3 million, (ii) gross profit decreased from $5.9 million to $3.5 million, (iii) operating expenses decreased from $38.0 million to $24.8 million, (iv) loss from continuing operations decreased from $38.0 million to $2.1 million, and (v) loss from discontinued operations increased from $0.0 million to $10.9 million. Net loss of $38.0 million was unaffected by the adjustments. See Note 5 to the Company’s consolidated financial statements included herein.
| ● | Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and | |
| ● | Part II — Item 8. Financial Statements. |
In addition, Part IV – Item 15. Exhibits and Financial Statement Schedules has been amended to provide (i) certifications of the Company’s principal executive officer and principal financial officer dated as of the date of this Amendment No. 1, (ii) consents of the Company’s independent auditors for the fiscal years ended December 31, 2023 and 2022, respectively, and (iii) a description of the capital stock of the Company.
Amendment No. 1 speaks as of the filing date of the Original Filing, and does not reflect events that may have occurred subsequent to the filing date of the Original Filing. Except as described above, no other changes have been made to the Original Filing. Amendment No. 1 should be read in conjunction with the Original Filing and the Company’s other filings with the SEC. The filing of this Amendment No. 1 is not an admission that the Original Filing, when filed, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the historical financial statements of the relevant entities and the pro forma financial statements and the notes thereto included elsewhere in this Form 10-K. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”
Unless otherwise indicated by the context, references to “DBG” refer to Digital Brands Group, Inc. solely, and references to the “Company,” “our,” “we,” “us” and similar terms refer to Digital Brands Group, Inc., together with its wholly-owned subsidiaries Bailey 44, LLC (“Bailey”), Harper & Jones LLC (“H&J”), MOSBEST, LLC (“Stateside”) and Sunnyside (“Sundry”).
Business Overview
Recent Developments
We entered into a license deal for Bailey 44 in January 2023 that is paid quarterly based on the results. We have received two license payouts since November 2023 for approximately $124,000 in total. The licensee has asked to add additional categories to their current offering, which we agreed to.
We entered into a retail store sublease for approximately 3.5 years at the Simon Premium Outlet in Allen, TX, a suburb of Dallas. We plan to open the store in April 2024. We expect the store to generate meaningful cash flow as we already have excess product that we can sell, which means we will not have to use cash to create inventory for sale. We expect the store to generate over $1.5 million in annual revenue and over $500,000 in free cash flow.
We have been involved in a dispute with the former owners of Haper & Jones, LLC (“H&J”) regarding our obligation to “true up” their ownership interest in our company further to that membership interest purchase agreement dated May 10, 2021 whereby we acquired all of the outstanding membership interests of H&J (as amended, the “H&J Purchase Agreement”). Further to the H&J Purchase Agreement, we agreed that if, at May 18, 2022, the one year anniversary of the closing date of our initial public offering, the product of the number of shares of our common stock issued at the closing of such acquisition multiplied by the average closing price per share of our shares of common stock as quoted on the NasdaqCM for the thirty (30) day trading period immediately preceding such date plus the gross proceeds, if any, of shares of our stock issued to such sellers and sold by them during the one year period from the closing date of the offering does not exceed the sum of $9.1 million, less the value of any shares of common stock cancelled further to any indemnification claims or post-closing adjustments under the H&J Purchase Agreement, then we shall issue to the subject sellers an additional aggregate number of shares of common stock equal to any such valuation shortfall at a per share price equal to the then closing price per share of our common stock as quoted on the NasdaqCM. We did not honor our obligation to issue such shares and the former owner of H&J have claimed that they were damaged as a result.
On June 21, 2023, the Company and the former owners of H&J executed a Settlement Agreement and Release (the “Settlement Agreement”) whereby contemporaneously with the parties’ execution of the Settlement Agreement (i) the Company made aggregate cash payment of $229,000 to D. Jones Tailored Collection, Ltd. (“D. Jones”), (ii) the Company issued 78,103 shares of common stock to D. Jones at a per share purchase price of $17.925 which represented the lower of (i) the closing price per share of the Common Stock as reported on Nasdaq on June 20, 2023, and
(ii) the average closing price per share of Common Stock as reported on the Nasdaq for the five trading days preceding June 21, 2023, and (iii) the Company assigned and transferred one hundred percent (100%) of the Company’s membership interest in H&J to D. Jones. This transaction is known as the “H&J Settlement”.
Our Company
Digital Brands Group is a curated collection of lifestyle brands, including Bailey 44, DSTLD, Stateside, Sundry and ACE Studios, that offers a variety of apparel products through direct-to-consumer and wholesale distribution. Our complementary brand portfolio provides us with the unique opportunity to cross merchandise our brands. We aim for our customers to wear our brands head to toe and to capture what we call “closet share” by gaining insight into their preferences to create targeted and personalized content specific to their cohort. Operating our brands under one portfolio provides us with the ability to better utilize our technological, human capital and operational capabilities across all brands. As a result, we have been able to realize operational efficiencies and continue to identify additional cost saving opportunities to scale our brands and overall portfolio.
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Our portfolio consists of four significant brands that leverage our three channels: our websites, wholesale and our own stores.
| ● | Bailey 44 combines beautiful, luxe fabrics and on-trend designs to create sophisticated ready-to-wear capsules for women on-the-go. Designing for real life, this brand focuses on feeling and comfort rather than how it looks on a runway. Bailey 44 is primarily a wholesale brand, which we are transitioning to a digital, direct-to-consumer brand. | |
| ● | DSTLD offers stylish high-quality garments without the luxury retail markup valuing customer experience over labels. DSTLD is primarily a digital direct-to-consumer brand, to which we recently added select wholesale retailers to generate brand awareness. | |
| ● | Stateside is an elevated, America first brand with all knitting, dyeing, cutting and sewing sourced and manufactured locally in Los Angeles. The collection is influenced by the evolution of the classic T-shirt offering a simple yet elegant look. Stateside is primarily a wholesale brand that we will be transitioning to a digital, direct-to-consumer brand. | |
| ● | Sundry offers distinct collections of women’s clothing, including dresses, shirts, sweaters, skirts, shorts, athleisure bottoms and other accessory products. Sundry’s products are coastal casual and consist of soft, relaxed and colorful designs that feature a distinct French chic, resembling the spirits of the French Mediterranean and the energy of Venice Beach in Southern California. Sundry is primarily a wholesale brand that we will be transitioning to a digital, direct-to-consumer brand. |
We believe that successful apparel brands sell in all revenue channels. However, each channel offers different margin structures and requires different customer acquisition and retention strategies. We were founded as a digital-first retailer that has strategically expanded into select wholesale and direct retail channels. We strive to strategically create omnichannel strategies for each of our brands that blend physical and online channels to engage consumers in the channel of their choosing. Our products are sold direct-to- consumers principally through our websites and our own showrooms, but also through our wholesale channel, primarily in specialty stores and select department stores. With the continued expansion of our wholesale distribution, we believe developing an omnichannel solution further strengthens our ability to efficiently acquire and retain customers while also driving high customer lifetime value.
We believe that by leveraging a physical footprint to acquire customers and increase brand awareness, we can use digital marketing to focus on retention and a very tight, disciplined high value new customer acquisition strategy, especially targeting potential customers lower in the sales funnel. Building a direct relationship with the customer as the customer transacts directly with us allows us to better understand our customer’s preferences and shopping habits. Our substantial experience as a company originally founded as a digitally native-first retailer gives us the ability to strategically review and analyze the customer’s data, including contact information, browsing and shopping cart data, purchase history and style preferences. This in turn has the effect of lowering our inventory risk and cash needs since we can order and replenish product based on the data from our online sales history, replenish specific inventory by size, color and SKU based on real times sales data, and control our mark-down and promotional strategies versus being told what mark downs and promotions we have to offer by the department stores and boutique retailers.
We define “closet share” as the percentage (“share”) of a customer’s clothing units that (“of closet”) she or he owns in her or his closet and the amount of those units that go to the brands that are selling these units. For example, if a customer buys 20 units of clothing a year and the brands that we own represent 10 of those units purchased, then our closet share is 50% of that customer’s closet, or 10 of our branded units divided by 20 units they purchased in entirety. Closet share is a similar concept to the widely used term wallet share, it is just specific to the customer’s closet. The higher our closet share, the higher our revenue as higher closet share suggests the customer is purchasing more of our brands than our competitors.
We have strategically expanded into an omnichannel brand offering these styles and content not only on-line but at selected wholesale and retail storefronts. We believe this approach allows us opportunities to successfully drive Lifetime Value (“LTV”) while increasing new customer growth. We define Lifetime Value or LTV as an estimate of the average revenue that a customer will generate throughout their lifespan as our customer. This value/revenue of a customer helps us determine many economic decisions, such as marketing budgets per marketing channel, retention versus acquisition decisions, unit level economics, profitability and revenue forecasting.
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We acquired Bailey in February 2020, Stateside in August 2021 and Sundry in December 2022. We agreed on the consideration that we paid in each acquisition in the course of arm’s length negotiations with the holders of the membership interests in each of Bailey, H&J, Stateside and Sundry. In determining and negotiating this consideration, we relied on the experience and judgment of our management and our evaluation of the potential synergies that could be achieved in combining the operations of Bailey, Stateside and Sundry. We did not obtain independent valuations, appraisals or fairness opinions to support the consideration that we paid/agreed to pay.
Material Trends, Events and Uncertainties
COVID-19
After the impact of COVID-19, we have implemented cost controls to reduce discretionary spending to help mitigate the loss of sales and to conserve cash while continuing to support employees. We are also assessing our forward inventory purchase commitments to ensure proper matching of supply and demand, which will result in an overall reduction in future commitments. As we continue to actively monitor the situation, we may take further actions that affect our operations.
Supply Chain Disruptions
We are subject to global supply chain disruptions, which may include longer lead times for raw fabrics, inbound shipping and longer production times. Supply chain issues have specifically impacted the following for our brands:
| ● | Increased costs in raw materials from fabric prices, which have increased 10% to 100% depending on the fabric, the time of year, and the origin of the fabric, as well as where the fabric is being shipped; | |
| ● | Increased cost per kilo to ship via sea or air, which has increased from 25% to 300% depending on the time of year and from the country we are shipping from; | |
| ● | Increased transit time via sea or air, which have increased by two weeks to two months; and | |
| ● | Increased labor costs for producing the finished goods, which have increased 5% to 25% depending on the country and the labor skill required to produce the goods. We have been able to pass along some of these increased costs and also offset some of these increased costs with higher gross margin online revenue. |
Seasonality
Our quarterly operating results vary due to the seasonality of our individual brands, and are historically stronger in the second half of the calendar year
Substantial Indebtedness
As of December 31, 2023, we had an aggregate principal amount of debt outstanding of approximately $9.7 million.
We believe this is an amount of indebtedness which may be considered significant for a company of our size and current revenue base. Our substantial debt could have important consequences to us. For example, it could:
| ● | make it more difficult for us to satisfy our obligations to the holders of our outstanding debt, resulting in possible defaults on and acceleration of such indebtedness; | |
| ● | require us to dedicate a substantial portion of our cash flows from operations to make payments on our debt, which would reduce the availability of our cash flows from operations to fund working capital, capital expenditures or other general corporate purposes; |
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| ● | increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations; | |
| ● | place us at a competitive disadvantage to our competitors with proportionately less debt for their size; | |
| ● | limit our ability to refinance our existing indebtedness or borrow additional funds in the future; | |
| ● | limit our flexibility in planning for, or reacting to, changing conditions in our business; and | |
| ● | limit our ability to react to competitive pressures or make it difficult for us to carry out capital spending that is necessary or important to our growth strategy. |
Any of the foregoing impacts of our substantial indebtedness could have a material adverse effect on our business, financial condition and results of operations.
We currently have $3.5 million in notes outstanding pursuant to our Bailey acquisition. We are currently unable to repay or refinance borrowings so any such action by these lenders could force us into bankruptcy or liquidation.
In addition, our ability to make scheduled payments on our indebtedness or to refinance our obligations under our debt agreements, will depend on our financial and operating performance, which, in turn, will be subject to prevailing economic and competitive conditions and to the financial and business risk factors we face as described in this section, many of which may be beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures or planned growth objectives, seek to obtain additional equity capital or restructure our indebtedness. In the future, our cash flows and capital resources may not be sufficient for payments of interest on and principal of our debt, and such alternative measures may not be successful and may not permit us to meet scheduled debt service obligations. In addition, the recent worldwide credit crisis could make it more difficult for us to refinance our indebtedness on favorable terms, or at all.
In the absence of such operating results and resources, we may be required to dispose of material assets to meet our debt service obligations. We may not be able to consummate those sales, or, if we do, we will not control the timing of the sales or whether the proceeds that we realize will be adequate to meet debt service obligations when due.
Performance Factors
We believe that our future performance will depend on many factors, including the following:
Ability to Increase Our Customer Base in both Online and Traditional Wholesale Distribution Channels
We are currently growing our customer base through both paid and organic online channels, as well as by expanding our presence in a variety of physical retail distribution channels. Online customer acquisitions typically occur at our direct websites for each brand. Our online customer acquisition strategies include paid and unpaid social media, search, display and traditional media. Our products for Bailey, DSTLD and Stateside are also sold through a growing number of physical retail channels, including specialty stores, department stores and online multi-brand platforms.
Ability to Acquire Customers at a Reasonable Cost
We believe an ability to consistently acquire customers at a reasonable cost relative to customer retention rates, contribution margins and projected life-time value will be a key factor affecting future performance. To accomplish this goal, we intend to balance advertising spend between online and offline channels, as well as cross marketing and cross merchandising our portfolio brands and their respective products. We believe the ability to cross merchandise products and cross market brands, will decrease our customer acquisition costs while increasing the customer’s lifetime value and contribution margin. We will also balance marketing spend with advertising focused on creating emotional brand recognition, which we believe will represent a lower percentage of our spend.
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Ability to Drive Repeat Purchases and Customer Retention
We accrue substantial economic value and margin expansion from customer cohort retention and repeat purchases of our products on an annual basis. Our revenue growth rate and operating margin expansion will be affected by our customer cohort retention rates and the cohorts annual spend for both existing and newly acquired customers.
Ability to Expand Our Product Lines
Our goal is to expand our product lines over time to increase our growth opportunity. Our customer’s annual spend and brand relevance will be driven by the cadence and success of new product launches.
Ability to Expand Gross Margins
Our overall profitability will be impacted by our ability to expand gross margins through effective sourcing and leveraging buying power of finished goods and shipping costs, as well as pricing power over time.
Ability to Expand Operating Margins
Our ability to expand operating margins will be impacted by our ability to leverage (1) fixed general and administrative costs, (2) variable sales and marketing costs, (3) elimination of redundant costs as we acquire and integrate brands, (4) cross marketing and cross merchandising brands in our portfolio, and (4) drive customer retention and customer lifetime value. Our ability to expand operating margins will result from increasing revenue growth above our operating expense growth, as well as increasing gross margins. For example, we anticipate that our operating expenses will increase substantially in the foreseeable future as we undertake the acquisition and integration of different brands, incur expenses associated with maintaining compliance as a public company, and increased marketing and sales efforts to increase our customer base. While we anticipate that the operating expenses in absolute dollars will increase, we do not anticipate that the operating expenses as a percentage of revenue will increase. We anticipate that the operating expenses as a percentage of revenue will decrease as we eliminate duplicative costs across brands including a reduction in similar labor roles, contracts for technologies and operating systems and creating lower costs from higher purchasing power from shipping expenses to purchase orders of products. This reduction of expenses and lower cost per unit due to purchasing power should create meaningful savings in both dollars and as a percentage of revenue.
As an example, we were able to eliminate several million in expenses within six months of acquiring Bailey. Examples of these savings include eliminating several Bailey teams, which our teams took over.
We merged over half of the technology contracts and operating systems contracts from two brands into one brand contract at significant savings. We also eliminated our office space and rent and moved everyone into the Bailey office space. Finally, we eliminated DSTLD’s third- party logistics company and started using Bailey’s internal logistics. This resulted in an increase in our operating expenses in absolute dollars as there were now two brands versus one brand. However, the operating expenses as a percentage of pre-COVID revenue declined meaningfully and as we increase revenue for each brand, we expect to experience higher margins.
Ability to Create Free Cash Flow
Our goal is to achieve near term free cash flow through cash flow positive acquisitions, elimination of redundant expenses in acquired companies, increasing customer annual spend and lowering customer acquisition costs through cross merchandising across our brand portfolio.
Critical Accounting Policies and Estimates
Basis of Presentation and Principles of Consolidation
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”).
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Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Business Acquisitions
We record our acquisitions under the acquisition method of accounting, under which most of the assets acquired and liabilities assumed are initially recorded at their respective fair values and any excess purchase price is reflected as goodwill. We utilize management estimates and, in some instances, independent third-party valuation firms to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration, if any. Such estimates and valuations require us to make significant assumptions, including projections of future events and operating performance.
The fair value of customer relationships, backlog and trade names/trademarks acquired in our acquisitions are determined using various valuation methods, based on a number of significant assumptions.
We determine which assets have finite lives and then determine the estimated useful life of finite assets.
The expected useful life of customer relationships is established as three years, which is the period over which these assets are expected to reasonably contribute to future cash flows. We expect to amortize such customer relationships using the straight-line method.
The estimated fair values are subject to change during the measurement period, which is limited to one year subsequent to the acquisition date.
Revenue Recognition
Revenues are recognized when performance obligations are satisfied through the transfer of promised goods to our customers. Control transfers upon shipment of product and when the title has been passed to the customers. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance. We provide the customer the right of return on the product and revenue is adjusted based on an estimate of the expected returns based on historical rates. We consider the sale of products as a single performance obligation. Sales tax collected from customers and remitted to taxing authorities is excluded from revenue and is included in accrued expenses. Revenue is deferred for orders received for which associated shipments have not occurred.
Accounts Receivable and Expected Credit Loss
We carry our accounts receivable at invoiced amounts less allowances for customer credit losses and other deductions to present the net amount expected to be collected on the financial asset. All receivables are expected to be collected within one year of the consolidated balance sheet. We do not accrue interest on the trade receivables. Management evaluates the ability to collect accounts receivable based on a combination of factors. Receivables are determined to be past due based on individual credit terms. An allowance for credit losses is maintained based on the length of time receivables are past due, historical collections, or the status of a customer’s financial position. Receivables are written off in the year deemed uncollectible after efforts to collect the receivables have proven unsuccessful. We do not have any off balance sheet cried exposure related to our customers.
We periodically review accounts receivable, estimate an allowance for bad debts, and simultaneously record the appropriate expense in the statement of operations. Such estimates are based on general economic conditions, the financial conditions of customers, and the amount and age of past due accounts. Past due accounts are written off against that allowance only after all collection attempts have been exhausted and the prospects for recovery are remote. Recovering of accounts receivable previously written off are recorded as income when received. The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk.
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Goodwill Impairment
We are required to assess our goodwill for impairment at least annually for each reporting unit that carries goodwill. We may elect to first do a qualitative assessment to determine whether it is more likely than not that a reporting unit’s fair value is in excess of its carrying value. If the qualitative assessment concludes that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment is performed. If the fair value is determined to be less than its carrying value, we record goodwill impairment equal to the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
Intangible Assets Impairment
We evaluate the carrying amount of intangible assets and other long-lived assets for impairment whenever indicators of impairment exist. We test these assets for recoverability by comparing the net carrying amount of the asset or asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset or asset group. If the assets are recoverable, an impairment loss does not exist, and no loss is recorded. If the carrying amounts of the assets are not recoverable, an impairment loss is recognized for any deficiency of the asset or asset group’s fair value compared to their carrying amount. Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage our business, there is significant judgment in determining the cash flows attributable to these assets, including markets and market share, sales volumes and mix, and working capital changes.
Financial Statement Components
Bailey
Net Revenue
Bailey sells its products directly to customers. Bailey also sells its products indirectly through wholesale channels that include third-party online channels and physical channels such as specialty retailers and department stores.
Cost of Net Revenue
Bailey’s cost of net revenue includes the direct cost of purchased and manufactured merchandise; inventory shrinkage; inventory adjustments due to obsolescence including excess and slow-moving inventory and lower of cost and net realizable reserves; duties; and inbound freight. Cost of net revenue also includes direct labor to production activities such as pattern makers, cutters and sewers. Cost of net revenue includes an allocation of overheard costs such as rent, utilities and commercial insurance pertaining to direct inventory activities.
Operating Expenses
Bailey’s operating expenses include all operating costs not included in cost of net revenues and sales and marketing. These costs consist of general and administrative, fulfillment and shipping expense to the customer.
General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, occupancy expenses related to Bailey’s operations at its headquarters, including utilities, depreciation and amortization, and other costs related to the administration of its business.
Bailey’s fulfillment and shipping expenses include the cost to operate its warehouse including occupancy and labor costs to pick and pack customer orders and any return orders; packaging; and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse.
Sales & Marketing
Bailey’s sales and marketing expense primarily includes digital advertising; photo shoots for wholesale and direct-to-consumer communications, including email, social media and digital advertisements; and commission expenses associated with sales representatives.
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Interest Expense
Bailey’s interest expense consists primarily of interest related to its outstanding debt to our senior lender.
DBG
Net Revenue
We sell our products to our customers directly through our website. In those cases, sales, net represents total sales less returns, promotions and discounts.
Cost of Net Revenue
Cost of net revenue include direct cost of purchased merchandise; inventory shrinkage; inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost and net realizable reserves.
Operating Expenses
Our operating expenses include all operating costs not included in cost of net revenues. These costs consist of general and administrative, sales and marketing, and fulfillment and shipping expense to the customer.
General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, and expenses related to our operations at our headquarters, including utilities, depreciation and amortization, and other costs related to the administration of our business.
We expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC and higher expenses for insurance, investor relations and professional services. We expect these costs will increase our operating costs.
Fulfillment and shipping expenses include the cost to operate our warehouse — or prior to Bailey 44 acquisition, costs paid to our third-party logistics provider — including occupancy and labor costs to pick and pack customer orders and any return orders; packaging; and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse.
In addition, going forward, the amortization of the identifiable intangibles acquired in the acquisitions will be included in operating expenses.
Interest Expense
Interest expense consists primarily of interest related to our debt outstanding to our senior lender, convertible debt, and other interest bearing liabilities.
Stateside
Net Revenue
Stateside sells its products directly to customers. Stateside also sells its products indirectly through wholesale channels that include third-party online channels and physical channels such as specialty retailers and department stores.
Cost of Net Revenue
Stateside’s cost of net revenue includes the direct cost of purchased and manufactured merchandise; inventory shrinkage; inventory adjustments due to obsolescence including excess and slow-moving inventory and lower of cost and net realizable reserves; duties; and inbound freight. Cost of net revenue also includes direct labor to production activities such as pattern makers, cutters and sewers. Cost of net revenue includes an allocation of overheard costs such as rent, utilities and commercial insurance pertaining to direct inventory activities.
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Operating Expenses
Stateside’s operating expenses include all operating costs not included in cost of net revenues and sales and marketing. These costs consist of general and administrative, fulfillment and shipping expense to the customer.
General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, occupancy expenses related to Stateside’s stores and to Stateside’s operations at its headquarters, including utilities, depreciation and amortization, and other costs related to the administration of its business.
Stateside’s fulfillment and shipping expenses include the cost to operate its warehouse including occupancy and labor costs to pick and pack customer orders and any return orders; packaging; and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse.
Sales & Marketing
Stateside’s sales and marketing expense primarily includes digital advertising; photo shoots for wholesale and direct-to-consumer communications, including email, social media and digital advertisements; and commission expenses associated with sales representatives.
Sundry
Net Revenue
Sundry sells its products directly to customers. Sundry also sells its products indirectly through wholesale channels that include third-party online channels and physical channels such as specialty retailers and department stores.
Cost of Net Revenue
Sundry’s cost of net revenue includes the direct cost of purchased and manufactured merchandise; inventory shrinkage; inventory adjustments due to obsolescence including excess and slow-moving inventory and lower of cost and net realizable reserves; duties; and inbound freight. Cost of net revenue also includes direct labor to production activities such as pattern makers, cutters and sewers. Cost of net revenue includes an allocation of overheard costs such as rent, utilities and commercial insurance pertaining to direct inventory activities.
Operating Expenses
Sundry’s operating expenses include all operating costs not included in cost of net revenues and sales and marketing. These costs consist of general and administrative, fulfillment and shipping expense to the customer.
General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, occupancy expenses related to Sundry’s stores and to Sundry’s operations at its headquarters, including utilities, depreciation and amortization, and other costs related to the administration of its business.
Sundry’s fulfillment and shipping expenses include the cost to operate its warehouse including occupancy and labor costs to pick and pack customer orders and any return orders; packaging; and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse.
| 10 |
Sales and Marketing
Sundry’s sales and marketing expense primarily includes digital advertising; photo shoots for wholesale and direct-to-consumer communications, including email, social media and digital advertisements; and commission expenses associated with sales representatives.
Results of Operations
Year ended December 31, 2023 compared to year ended December 31, 2022
The following table presents our results of operations for the years ended December 31, 2023 and 2022:
| Year
Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Net revenues | $ | 14,916,422 | $ | 10,333,558 | ||||
| Cost of net revenues | 8,372,642 | 6,789,314 | ||||||
| Gross profit | 6,543,780 | 3,544,244 | ||||||
| General and administrative | 14,299,389 | 14,067,681 | ||||||
| Sales and marketing | 4,035,835 | 4,018,985 | ||||||
| Other operating expenses | (9,696,132 | ) | 6,678,966 | |||||
| Loss from operations | (2,095,312 | ) | (21,221,389 | ) | ||||
| Other expenses | (6,221,284 | ) | (5,893,330 | ) | ||||
| Loss before provision for income taxes | (8,316,596 | ) | (27,114,719 | ) | ||||
| Provision for income taxes | (368,034 | ) | — | |||||
| Net loss from continuing operations | (8,684,630 | ) | (27,114,719 | ) | ||||
| (Loss) income from discontinued operations, net of tax | (1,562,503 | ) | (10,928,643 | ) | ||||
| Net loss | $ | (10,247,133 | ) | $ | (38,043,362 | ) | ||
Net Revenues
Net revenues increased by $4.6 million to $14.9 million for the year ended December 31, 2023, compared to $10.3 million in the corresponding fiscal period in 2022. The increase was primarily due to full results in 2023 pertaining to the acquisition of Sundry in December 2022.
Gross Profit
Our gross profit increased by $3.0 million for the year ended December 31, 2023 to $6.5 million from $3.5 million for the corresponding fiscal period in 2022. The increase in gross margin was primarily attributable to increased revenue in 2023 and the gross profit achieved by Sundry since the acquisition.
Our gross margin was 43.9% for the year ended December 31, 2023 compared to 34.3% for year ended December 31, 2022. The increase in gross margin was due to a shift in sales mix towards e-commerce, led by the Sundry business, which is able to achieve higher margins than wholesale.
General and Administrative Expenses
General and administrative expenses decreased by $0.2 million for the year ended December 31, 2023 to $14.3 million compared to $14.1 million in 2022. The decrease in general and administrative expenses was primarily due to lower consulting and professional fees, as well as other cost cutting measures across our company, as all brands achieved operational synergies in 2023.
General and administrative expenses as a percentage of revenue was 95% in 2023 as compared to 136% in 2022.
| 11 |
Sales and Marketing Expenses
Sales and marketing expenses was $4.0 million for both years ended December 31, 2023 and 2022. Sales and marketing expenses as a percentage of revenue was 27% in 2023 as compared to 39% in 2022.
Other Operating Expenses
Other operating expenses included distribution expenses, impairment and change in fair value of contingent consideration. Other operating expenses represented a gain of $9.7 million in 2023 as compared to $0.6 million in 2022, a decrease in expenses of $11.3 million. In 2022, there were $5.5 million in impairment charges on Bailey’s goodwill and intangible assets. In 2023, the Company recorded a $10.7 million increase in the change in fair value of contingent consideration pertaining to the Norwest waiver for Bailey.
Other Expenses
Other expenses increased by $0.3 million to $6.2 million in the year ended December 31, 2023 compared to $5.9 million in the corresponding fiscal period in 2022. The increase in other expenses in 2023 was primarily due to $1.4 million on loss on extinguishment of debt in 2023 and the change in fair value of derivative liability, partially offset by PPP forgiveness.
Net Loss from Continuing Operations
Our net loss from continuing operations decreased by $18.4 million to a loss of $8.7 million for the year ended December 31, 2023 compared to a loss of $27.1 million for the corresponding fiscal period in 2022 primarily due to the impairment, change in fair value of contingent consideration and higher gross profit.
Liquidity and Capital Resources
Each of DBG, Bailey, Stateside and Sundry has historically satisfied our liquidity needs and funded operations with borrowings capital raises and internally generated cash flow, Changes in working capital, most notably accounts receivable, are driven primarily by levels of business activity. Historically each of DBG, Bailey, Stateside and Sundry has maintained credit line facilities to support such working capital needs and makes repayments on that facility with excess cash flow from operations.
As of December 31, 2023, we had cash of $20,773, but we had a working capital deficit of $17,655,720. The Company requires significant capital to meet its obligations as they become due. These factors raise substantial doubt about our Company’s ability to continue as a going concern. Throughout the next twelve months, the Company intends to fund its operations primarily from the funds raised through the equity line of credit agreement. The Company may pursue secondary offerings or debt financings to provide working capital and satisfy debt obligations. There can be no assurance as to the availability or terms upon which such financing and capital might be available in the future. If the Company is unable to secure additional funding, it may be forced to curtail or suspend its business plans. The report of our independent registered public accounting firm for the year ended December 31, 2023 included herein contains an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a going concern as a result of recurring losses from operations.
| 12 |
Cash Flow Activities
The following table presents selected captions from our condensed statement of cash flows for the years ended December 31, 2023 and 2022:
| Year
Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Net loss | $ | (10,247,133 | ) | $ | (38,043,362 | ) | ||
| Non-cash adjustments | $ | 1,364,216 | $ | 23,441,875 | ||||
| Change in operating assets and liabilities | $ | 2,869,975 | $ | 3,833,781 | ||||
| Net cash used in operating activities | $ | (6,012,942 | ) | $ | (10,767,706 | ) | ||
| Net cash provided by investing activities | $ | 88,819 | $ | (7,369,137 | ) | |||
| Net cash provided by financing activities | $ | 4,661,614 | $ | 18,896,664 | ||||
| Net change in cash | $ | (1,254,843 | ) | $ | 759,820 | |||
Cash Flows Used In Operating Activities
Our cash used in operating activities decreased by $4.8 million to $6.0 million to cash used for the year ended December 31, 2023 as compared to cash used of $10.8 million for the corresponding fiscal period in 2022. The decrease in net cash used in operating activities was primarily driven by a lower net loss in 2023, partially offset by a decrease in non-cash adjustments of $22.1 million and more cash provided by changes in our operating assets and liabilities in 2022.
Cash Flows Used in Investing Activities
Our cash provided by investing activities was $0.1 million in the year ended December 31, 2023 as compared to cash used of $7.4 million for the corresponding fiscal period in 2022. Cash provided in 2023 was primarily due to a reduction of deposits, partially offset by purchase of property.
Cash Flows Provided by Financing Activities
Cash provided by financing activities was $4.7 million for the year ended December 31, 2023 compared to cash provided of $18.6 million for the corresponding fiscal period in 2022. Cash inflows in 2023 included $8.1 million in equity proceeds after offering costs, $1.2 million in proceeds from the exercise of warrants, $5.4 million from the issuance of notes, loans and merchant advances, partially offset by note, loan and merchant advance repayments of 10.1 million. Cash inflows in 2022 were primarily related to $16.4 million in equity proceeds after offering costs,
$10.2 million from convertible notes and loans, partially offset by note repayments of $7.4 million.
Contractual Obligations and Commitments
As of December 31, 2023, we have $9.7 million in outstanding principal on debt, primarily our promissory notes due to the Bailey44 Sellers, the March 2023 Notes, PPP and merchant advances. Aside from our remaining non-current SBA obligations, all outstanding loans have maturity dates through 2024.
Off-Balance Sheet Arrangements and Future Commitments
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required by this item may be found on pages F-1 through F-36 of this annual report on Form 10-K.
PART IV
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(1) Financial Statements
For a list of the financial information included herein, see Index to the Financial Statements on page F-1.
(2) Financial Statement Schedules
Schedules have been omitted because they are not applicable, not material or because the information is included in the consolidated financial statements or the notes thereto.
| 13 |
(3) Exhibits
The following is a list of exhibits filed as part of this Annual Report on Form 10-K.
Exhibits
| 14 |
| 15 |
| 16 |
| 17 |
* Filed herewith.
** Furnished herewith
*** Previously filed with Annual Report on Form 10-K, as filed on April 15, 2024.
# Indicates management contract or compensatory plan or arrangement.
| 18 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DIGITAL BRANDS GROUP, INC. | ||
| By: | /s/ John Hilburn Davis IV | |
| June 3, 2024 | Name: | John Hilburn Davis IV |
| Title: | President and Chief Executive Officer | |
| Name | Position | Date | ||
| /s/ John Hilburn Davis IV | Director, President and Chief Executive Officer | June 3, 2024 | ||
| John Hilburn Davis IV | (Principal Executive Officer) | |||
| /s/ Reid Yeoman | Chief Financial Officer | June 3, 2024 | ||
| Reid Yeoman | (Principal Financial and Accounting Officer) | |||
| /s/ Mark T. Lynn | Director | June 3, 2024 | ||
| Mark T. Lynn | ||||
| /s/ Trevor Pettennude | Director | June 3, 2024 | ||
| Trevor Pettennude | ||||
| /s/ Jameeka Aaron Green | Director | June 3, 2024 | ||
| Jameeka Aaron Green | ||||
| /s/ Huong “Lucy” Doan | Director | June 3, 2024 | ||
| Huong “Lucy” Doan |
| 19 |
DIGITAL BRANDS GROUP, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| F-1 |
Report of Independent Registered Public Accounting Firm
(PCAOB ID 324)
To the Board of Directors and Shareholders of Digital Brands Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Digital Brands Group, Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 2023, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2023, and the related consolidated notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 2 to the financial statements, the Company’s recurring net losses since inception, negative cash flow from operations and lack of liquidity raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
We have served as the Company’s auditor since 2023.
April 15, 2024
| F-2 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Digital Brands Group, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Digital Brands Group, Inc. and subsidiaries (collectively, the “Company”) as of December 31, 2022, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of Matter – Correction of Error
As described in Note 1 to the consolidated financial statements, the Company corrected its consolidated statement of operations for the year ended December 31, 2022 to properly reflect discontinued operations.
Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s net losses from inception, negative cash flow from operations, and lack of liquidity raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/
April 17, 2023, except for the effects of the stock split and discontinued operations as described in Note 1 for which the date is August 24, 2023
We served as the Company’s auditor from 2018 to 2023.
| F-3 |
DIGITAL BRANDS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
| 2023 | 2022 | |||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net
of allowance for credit losses of $ | ||||||||
| Due from factor, net | ||||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Assets per discontinued operations, current | ||||||||
| Total current assets | ||||||||
| Property, equipment and software, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Deposits | ||||||||
| Right of use asset | ||||||||
| Assets per discontinued operations | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other liabilities | ||||||||
| Due to related parties | ||||||||
| Contingent consideration liability | ||||||||
| Convertible note payable, net | ||||||||
| Accrued interest payable | ||||||||
| Loan payable, current | ||||||||
| Promissory note payable, net | ||||||||
| Operating lease liability | ||||||||
| Liabilities per discontinued operations, current | ||||||||
| Total current liabilities | ||||||||
| Loan payable | ||||||||
| Deferred tax liability | ||||||||
| Liabilities per discontinued operations | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Undesignated preferred stock, $ par, shares authorized, shares issued and outstanding as of both December 31, 2023 and 2022, respectively | ||||||||
| Series A convertible preferred stock, $ par, shares designated, shares issued and outstanding as of both December 31, 2023 and 2022, respectively | ||||||||
| Series C convertible preferred stock, $ par, and shares outstanding as of December 31, 2023 and 2022, respectively | ||||||||
| Preferred stock, value | ||||||||
| Common stock, $ par, shares authorized, and shares issued and outstanding as of December 31, 2023 and 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | ||||||
See the accompanying notes to the consolidated financial statements.
| F-4 |
DIGITAL BRANDS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| 2023 | 2022 | |||||||
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| As Restated | ||||||||
| Net revenues | $ | $ | ||||||
| Cost of net revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| General and administrative | ||||||||
| Sales and marketing | ||||||||
| Distribution | ||||||||
| Impairment | ||||||||
| Change in fair value of contingent consideration | ( | ) | ||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other (expense) income: | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other non-operating (expenses) income | ( | ) | ||||||
| Total other expense, net | ( | ) | ( | ) | ||||
| Income tax benefit (provision) | ( | ) | ||||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| (Loss) income from discontinued operations, net of tax | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding - basic and diluted | ||||||||
| Net loss from continuing per common share - basic and diluted | $ | ) | $ | ) | ||||
See the accompanying notes to the consolidated financial statements.
| F-5 |
DIGITAL BRANDS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
| Series A Convertible | Series B | Series C Convertible | Additional | Total | ||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock in public offering | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and exercise of pre-funded warrants in public offering | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Offering costs | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued in connection with business combination | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to consulting agreement | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Warrant and common shares issued with notes | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Conversion of notes and derivative liability into common stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Conversion of venture debt into Series A convertible preferred stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to private placement, net of offering costs | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Shares and warrants issued with notes | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Conversion of notes into preferred stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of Series B preferred stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to disposition | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Cancellation of Series B preferred stock | — | ( | ) | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Common stock issued for services | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to private placement, net of offering costs | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Conversion of preference shares into common stock | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||
| Balance | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||
See the accompanying notes to the consolidated financial statements.
| F-6 |
DIGITAL BRANDS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| 2023 | 2022 | |||||||
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of loan discount and fees | ||||||||
| Loss on extinguishment of debt | ||||||||
| Loss on disposition of business | ||||||||
| Stock-based compensation | ||||||||
| Shares issued for services | ||||||||
| Change in credit reserve | ( | ) | ||||||
| Change in fair value of contingent consideration | ( | ) | ||||||
| Deferred tax expense | ||||||||
Deferred offering costs | ||||||||
| Fees incurred in connection with debt financings | ||||||||
| Change in fair value of warrant liability | ( | ) | ||||||
| Change in fair value of derivative liability | ( | ) | ||||||
| Impairment of goodwill and intangible assets | ||||||||
| Loss from discontinued operations, net of tax | ||||||||
| Forgiveness of Payroll Protection Program | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Due from factor, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued expenses and other liabilities | ||||||||
| Deferred revenue | ( | ) | ||||||
| Due to related parties | ||||||||
| Accrued interest | ||||||||
Assets and liabilities of discontinued operations | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Cash acquired (consideration) pursuant to business combination | ( | ) | ||||||
| Purchase of property, equipment and software | ( | ) | ( | ) | ||||
| Deposits | ( | ) | ||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Repayments of elated party advances | ( | ) | ||||||
| Advances (repayments) from factor | ( | ) | ||||||
| Repayment of contingent consideration | ( | ) | ||||||
| Proceeds from venture debt | ||||||||
| Issuance of loans and note payable | ||||||||
| Repayments of convertible and promissory notes | ( | ) | ( | ) | ||||
| Issuance of convertible notes payable | ||||||||
| Proceeds from public offering | ||||||||
| Offering costs | ( | ) | ||||||
| Issuance of common stock, net of offering costs | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of year | ||||||||
| Cash and cash equivalents at end of year | $ | $ | ||||||
| Less: cash of discontinued operations | ||||||||
| Cash of continuing operations at end of year | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Conversion of notes into preferred stock | $ | $ | ||||||
| Conversion of notes into common stock | $ | $ | ||||||
| Right of use asset | $ | $ | ||||||
| Warrants issued in connection with note | $ | $ | ||||||
| Derivative liability in connection with convertible note | $ | $ | ||||||
| Conversion of related party notes and payables into preferred and common stock | $ | $ | ||||||
| Conversion of venture debt into preferred stock | $ | $ | ||||||
See the accompanying notes to the consolidated financial statements.
| F-7 |
DIGITAL BRANDS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS
Digital Brands Group, Inc. (the “Company” or “DBG”), was organized on September 17, 2012 under the laws of Delaware as a limited liability company under the name Denim.LA LLC. The Company converted to a Delaware corporation on January 30, 2013 and changed its name to Denim.LA, Inc. Effective December 31, 2020, the Company changed its name to Digital Brands Group, Inc. (DBG).
On February 12, 2020, Denim.LA, Inc. entered into an Agreement and Plan of Merger with Bailey 44, LLC (“Bailey”), a Delaware limited liability company. On the acquisition date, Bailey 44 , LLC became a wholly owned subsidiary of the Company. See Note 4.
On
May 18, 2021, the Company closed its acquisition of Harper & Jones, LLC (“H&J”) pursuant to its Membership Interest
Stock Purchase Agreement with D. Jones Tailored Collection, Ltd. to purchase
On
August 30, 2021, the Company closed its acquisition of Mosbest, LLC dba Stateside (“Stateside”) pursuant to its Membership
Interest Purchase Agreement with Moise Emquies to purchase
On
December 30, 2022, the Company closed its previously announced acquisition of Sunnyside, LLC dba Sundry (“Sundry”) pursuant
to its Second Amended and Restated Membership Interest Purchase Agreement with Moise Emquies to purchase
On
June 21, 2023, the Company and the former owners of H&J executed a Settlement Agreement and Release (the “Settlement Agreement”)
whereby contemporaneously with the parties’ execution of the Settlement Agreement (i) the Company agreed to make an aggregate cash
payment of $
Reverse Stock Split
On
October 21, 2022, the Board of Directors approved a
On
August 21, 2023, the Board of Directors approved a
Correction of Error
The Company incorrectly reported its previously reported statement of operations for the year ended December 31, 2022 in lieu of previously reported statement of operations which was presented to report discontinued operations of H&J.
| F-8 |
NOTE 2: GOING CONCERN
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The Company has not generated profits since inception, has sustained
net losses of $
The Company’s ability to continue as a going concern for the next 12 months from the date the financial statements were available to be issued is dependent upon its ability to generate sufficient cash flows from operations to meet its obligations, which it has not been able to accomplish to date, and/or to obtain additional capital financing. Through the date the financial statements were available to be issued, the Company has been primarily financed through the issuance of capital stock and debt. In the event that the Company cannot generate sufficient revenue to sustain its operations, the Company will need to reduce expenses or obtain financing through the sale of debt and/or equity securities. The issuance of additional equity would result in dilution to existing shareholders. If the Company is unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable to the Company, the Company would be unable to execute upon the business plan or pay costs and expenses as they are incurred, which would have a material, adverse effect on the business, financial condition and results of operations. No assurance can be given that the Company will be successful in these efforts.
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Bailey, H&J, Stateside and Sundry from the dates of acquisition. All inter-company transactions and balances have been eliminated on consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Discontinued Operations
Certain prior year accounts have been reclassified to conform with current year presentation regarding income (loss) from discontinued operations. H&J’s assets and liabilities as of December 31, 2022 have also been reclassified on the consolidated balance sheet. See Note 5.
Cash and Equivalents and Concentration of Credit Risk
The
Company considers all highly liquid securities with an original maturity of less than three months to be cash equivalents. As of December
31, 2023 and 2022, the Company did not hold any cash equivalents. The Company’s cash and cash equivalents in bank deposit accounts,
at times, may exceed federally insured limits of $
| F-9 |
Fair Value of Financial Instruments
FASB guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active).
Level 3 — Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, due from factor, prepaid expenses, accounts payable, accrued expenses, deferred revenue, due to related parties, related party note payable, accrued interest, loan payable and convertible debt. The carrying value of these assets and liabilities is representative of their fair market value, due to the short maturity of these instruments.
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value hierarchy used to determine such fair values:
SCHEDULE OF FINANCIAL ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON RECURRING BASIS
| Fair Value Measurements | ||||||||||||||||
| as of December 31, 2023 Using: | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Fair Value Measurements | ||||||||||||||||
| as of December 31, 2022 Using: | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Contingent Consideration
The Company records a contingent consideration liability relating to stock price guarantees included in its acquisition and consulting agreements. The estimated fair value of the contingent consideration is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.
The Company estimates and records the acquisition date fair value of contingent consideration as part of purchase price consideration for acquisitions. Additionally, each reporting period, the Company estimates changes in the fair value of contingent consideration and recognizes any change in fair in the consolidated statement of operations. The estimate of the fair value of contingent consideration requires very subjective assumptions to be made of future operating results, discount rates and probabilities assigned to various potential operating result scenarios. Future revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and, therefore, materially affect the Company’s future financial results. The contingent consideration liability is to be settled with the issuance of shares of common stock once contingent provisions set forth in respective acquisition agreements have been achieved. Upon achievement of contingent provisions, respective liabilities are relieved and offset by increases to common stock and additional paid-in capital in the stockholders’ equity section of the Company’s consolidated balance sheets.
| F-10 |
The fair value of the contingent consideration liability related to the Company’s business combinations is valued using the Monte Carlo simulation model. The Monte Carlo simulation inputs include the stock price, volatility of common stock, timing of settlement and resale restrictions and limits. The fair value of the contingent consideration is then calculated based on guaranteed equity values at settlement as defined in the acquisition agreements. Changes in contingent consideration liability during the years ended December 31, 2023 and 2022 are as follows:
SCHEDULE OF CHANGES IN ACQUISITION-RELATED CONTINGENT CONSIDERATION
| Contingent | ||||
| Consideration | ||||
| Liability | ||||
| Balance as of December 31, 2022 | $ | |||
| Norwest Waiver - settlement of Bailey44 contingent consideration | ( | ) | ||
| H&J Settlement Agreement - settlement of H&J contingent consideration | ( | ) | ||
| Outstanding as of December 31, 2023 | $ | |||
Norwest Waiver
On
June 21, 2023, the Company, on the one hand, and Norwest Venture Partners XI, LP and Norwest Venture Partners XII, LP (together, the
“Norwest Investors”), on the other hand, executed a Waiver and Amendment (the “Norwest Amendment”) whereby the
Norwest Investors agreed to waive and terminate certain true up rights of the Norwest Investors under the Agreement and Plan of Merger,
dated February 12, 2020 (the “Bailey Merger Agreement”), among the Company, Bailey 44, LLC, Norwest Venture Partners XI,
LP, and Norwest Venture Partners XII, LP and Denim.LA Acquisition Corp. This transaction is known as the “Norwest Waiver”.
As a result of the Norwest Waiver, the Company recorded a fair value of $
H&J Settlement Agreement
On
June 21, 2023, the Company and the former owners of H&J executed a Settlement Agreement and Release (the “Settlement Agreement”)
whereby the Company transferred
The detail of contingent consideration by company is as follows:
SCHEDULE OF CONTINGENT CONSIDERATION
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Bailey | $ | |||||||
| Harper & Jones | ||||||||
| $ | $ | |||||||
Derivative Liability
In connection with the Company’s convertible notes, the Company recorded a derivative liability (see Note 7). The estimated fair value of the derivative liability is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.
| F-11 |
The fair value of the derivative liability is valued using a multinomial lattice model. The multinomial lattice inputs include the underlying stock price, volatility of common stock and remaining term of the convertible note. Changes in derivative liability during the years ended December 31, 2023 and 2022 are as follows:
SCHEDULE OF CHANGES IN DERIVATIVE LIABILITY
| Derivative | ||||
| Liability | ||||
| Outstanding as of December 31, 2021 | $ | |||
| Initial fair value on issuance of convertible note | ||||
| Conversion of underlying notes into common stock | ( | ) | ||
| Change in fair value | ( | ) | ||
| Outstanding as of December 31, 2022 | ||||
| Initial fair value on issuance of convertible note | ||||
| Change in fair value | ||||
| Outstanding as of December 31, 2023 | $ | |||
During
the year ended December 31, 2022, the Company utilized the following inputs for the fair value of the derivative liability: volatility
of
The change in fair value of the derivative liability is included in other non-operating income (expense), net in the consolidated statements of operations.
Accounts Receivable and Expected Credit Loss
We carry our accounts receivable at invoiced amounts less allowances for customer credit losses and other deductions to present the net amount expected to be collected on the financial asset. All receivables are expected to be collected within one year of the consolidated balance sheet. We do not accrue interest on the trade receivables. Management evaluates the ability to collect accounts receivable based on a combination of factors. Receivables are determined to be past due based on individual credit terms. An allowance for credit losses is maintained based on the length of time receivables are past due, historical collections, or the status of a customer’s financial position. Receivables are written off in the year deemed uncollectible after efforts to collect the receivables have proven unsuccessful. We do not have any off-balance sheet credit exposure related to our customers.
We periodically review accounts receivable, estimate an allowance for bad debts, and simultaneously record the appropriate expense in the statement of operations. Such estimates are based on general economic conditions, the financial conditions of customers, and the amount and age of past due accounts. Past due accounts are written off against that allowance only after all collection attempts have been exhausted and the prospects for recovery are remote. Recoveries of accounts receivable previously written off are recorded as income when received. The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk.
As
of December 31, 2023, the Company determined an allowance for credit losses of $
Inventory
Inventory is stated at the lower of cost or net realizable value and accounted for using the weighted average cost method for DSTLD and H&J and first-in, first-out method for Bailey, Stateside and Sundry. The inventory balances as of December 31, 2023 and 2022 consist substantially of finished good products purchased or produced for resale, as well as any raw materials the Company purchased to modify the products and work in progress.
| F-12 |
Inventory consisted of the following:
SCHEDULE OF INVENTORY
| 2023 | 2022 | |||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Inventory | $ | $ | ||||||
Property, Equipment, and Software
Property,
equipment, and software are recorded at cost. Depreciation/amortization is recorded for property, equipment, and software using the straight-line
method over the estimated useful lives of assets. The Company reviews the recoverability of all long-lived assets, including the related
useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable.
The balances at December 31, 2023 and 2022 consist of software with three (
Depreciation
and amortization charges on property, equipment, and software are included in general and administrative expenses and amounted to $
Business Combinations
The Company accounts for acquisitions in which it obtains control of one or more businesses as a business combination. The purchase price of the acquired businesses is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the purchase price over those fair values is recognized as goodwill. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments, in the period in which they are determined, to the assets acquired and liabilities assumed with the corresponding offset to goodwill. If the assets acquired are not a business, the Company accounts for the transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase.
Goodwill represents the excess of the purchase price of an acquired entity over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination.
Intangible assets are established with business combinations and consist of brand names and customer relationships. Intangible assets with finite lives are recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives using the straight- line method. The estimated useful lives of amortizable intangible assets are as follows:
SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS ACQUIRED AS PART OF BUSINESS COMBINATION
| Customer relationships |
Impairment
Long-Lived Assets
The Company reviews its long-lived assets (property and equipment and amortizable intangible assets) for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.
Goodwill
Goodwill and identifiable intangible assets that have indefinite useful lives are not amortized, but instead are tested annually for impairment and upon the occurrence of certain events or substantive changes in circumstances. The annual goodwill impairment test allows for the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An entity may choose to perform the qualitative assessment on none, some or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit and proceed directly to step one of the quantitative impairment test. If it is determined, on the basis of qualitative factors, that the fair value of a reporting unit is, more likely than not, less than its carrying value, the quantitative impairment test is required.
| F-13 |
The quantitative impairment test calculates any goodwill impairment as the difference between the carrying amount of a reporting unit and its fair value, but not to exceed the carrying amount of goodwill. It is our practice, at a minimum, to perform a qualitative or quantitative goodwill impairment test in the fourth quarter every year.
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets established in connection with business combinations consist of the brand name. The impairment test for identifiable indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Annual Impairment Tests
At
December 31, 2023, management determined that certain events and circumstances occurred that indicated that the carrying value of the
Company’s brand name assets, and the carrying amount of the reporting units, pertaining to Bailey44, Stateside and Sundry may not
be recoverable. The qualitative assessment was primarily due to reduced or stagnant revenues of both entities as compared to the Company’s
initial projections at the time of each respective acquisition, as well as the entities’ liabilities in excess of assets. Upon
the quantitative analysis performed, the Company determined that the fair value of the intangible assets and reporting units were greater
than the respective carrying values. As such,
At
December 31, 2022, management determined that certain events and circumstances occurred that indicated that the carrying value of the
Company’s brand name assets, and the carrying amount of the reporting units, pertaining to Bailey44 and Harper & Jones may
not be recoverable. The qualitative assessment was primarily due to reduced or stagnant revenues of both entities as compared to the
Company’s initial projections at the time of each respective acquisition, as well as the entities’ liabilities in excess
of assets. As such, the Company compared the estimated fair value of the brand names with its carrying value and recorded an impairment
loss of $
The following is a summary of goodwill and intangible impairment recorded pertaining to each entity:
SCHEDULE OF GOODWILL AND INTANGIBLE IMPAIRMENT
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Bailey brand name | $ | $ | ||||||
| Harper & Jones brand name | ||||||||
| Total impairment of intangibles | ||||||||
| Bailey goodwill | ||||||||
| Harper & Jones goodwill | ||||||||
| Total impairment of goodwill | ||||||||
| Total impairment | $ | $ | ||||||
In determining the fair value of the respective reporting units, management estimated the price that would be received to sell the reporting unit as a whole in an orderly transaction between market participants at the measurement date. This includes reviewing market comparables such as revenue multipliers and assigning certain assets and liabilities to the reporting units, such as the respective working capital deficits of each entity and debt obligations that would need to be assumed by a market participant buyer in an orderly transaction. The Company calculated the carrying amounts of each reporting unit by utilizing the entities’ assets and liabilities at December 31, 2023, including the carrying value of the identifiable intangible assets and goodwill assigned to the respective reporting units.
| F-14 |
Convertible Instruments
U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional as that term is described under applicable U.S. GAAP.
When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. The Company also records, when necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares.
Accounting for Preferred Stock
ASC 480, Distinguishing Liabilities from Equity, includes standards for how an issuer of equity (including equity shares issued by consolidated entities) classifies and measures on its balance sheet certain financial instruments with characteristics of both liabilities and equity.
Management is required to determine the presentation for the preferred stock as a result of the redemption and conversion provisions, among other provisions in the agreement. Specifically, management is required to determine whether the embedded conversion feature in the preferred stock is clearly and closely related to the host instrument, and whether the bifurcation of the conversion feature is required and whether the conversion feature should be accounted for as a derivative instrument.
If the host instrument and conversion feature are determined to be clearly and closely related (both more akin to equity), derivative liability accounting under ASC 815, Derivatives and Hedging, is not required. Management determined that the host contract of the preferred stock is more akin to equity, and accordingly, liability accounting is not required by the Company. The Company has presented preferred stock within stockholders’ equity.
Costs incurred directly for the issuance of the preferred stock are recorded as a reduction of gross proceeds received by the Company, resulting in a discount to the preferred stock. The discount is not amortized.
Revenue Recognition
In accordance with FASB ASC 606, Revenue from Contracts with Customers¸ the Company determines revenue recognition through the following steps:
| ● | Identification of a contract with a customer; | |
| ● | Identification of the performance obligations in the contract | |
| ● | Determination of the transaction price | |
| ● | Allocation of the transaction price to the performance obligations in the contract, and | |
| ● | Recognition of revenue when or as the performance obligations are satisfied |
Revenue is recognized when performance obligations are satisfied through the transfer of control of promised goods to the Company’s customers in an amount that reflects the consideration expected to be received in exchange for transferring goods or services to customers. Control transfers once a customer has the ability to direct the use of, and obtain substantially all of the benefits from, the product, upon shipment of product. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance.
| F-15 |
The Company derives its revenue primarily from wholesale and e-commerce transactions. For both channels, revenue is recognized at the time the product is shipped to the customer, which is the point in time when control is transferred. The Company considers the sale of products as a single performance obligation.
The Company provides the customer the right of return on the product and revenue is adjusted based on an estimate of the expected returns based on historical rates.
The Company deducts discounts, sales tax, and estimated refunds to arrive at net revenue. Sales tax collected from clients is not considered revenue and is included in accrued expenses until remitted to the taxing authorities. Shipping and handling fees charged to customers are included in net revenues. All shipping and handling costs are accounted for as distribution expenses, and are therefore not evaluated as a separate performance obligation.
Cost of Revenues
Cost of revenues consists primarily of inventory sold and related freight-in. Cost of revenues includes direct labor pertaining to our inventory production activities and an allocation of overhead costs including rent and insurance. Cost of revenues also includes inventory write-offs and reserves.
Shipping and Handling
The
Company recognizes shipping and handling billed to customers as a component of net revenues, and the cost of shipping and handling as
distribution costs. Total shipping and handling billed to customers as a component of net revenues was approximately $
Advertising and Promotion
Advertising
and promotional costs are expensed as incurred. Advertising and promotional expense for the years ended December 31, 2023 and 2022 amounted
to approximately $
General and Administrative
General and administrative expenses consist primarily of compensation and benefits costs, professional services and information technology. General and administrative expenses also include payment processing fees, design and warehousing fees.
Common Stock Purchase Warrants and Other Derivative Financial Instruments
The Company accounts for derivative instruments in accordance with ASC 815, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedging relationships and the types of relationships designated are based on the exposures hedged. At December 31, 2023 and 2022, the Company did not have any derivative instruments that were designated as hedges.
Stock Option and Warrant Valuation
Stock option and warrant valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model. For warrants and stock options issued to non- employees, the Company accounts for the expected life based on the contractual life of the warrants and stock options. For employees, the Company accounts for the expected life of options in accordance with the “simplified” method, which is used for “plain-vanilla” options, as defined in the accounting standards codification. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of options grants. The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options. The number of stock award forfeitures are recognized as incurred.
| F-16 |
The Company accounts for stock-based compensation costs under the provisions of ASC 718, Compensation — Stock Compensation, which requires the measurement and recognition of compensation expense related to the fair value of stock-based compensation awards that are ultimately expected to vest. Stock based compensation expense recognized includes the compensation cost for all stock-based payments granted to employees, officers, and directors based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also applied to awards modified, repurchased, or cancelled during the periods reported. Stock-based compensation is recognized as an expense over the employee’s requisite vesting period and over the nonemployee’s period of providing goods or services.
The Company measures employee stock-based awards at grant-date fair value and recognizes employee compensation expense on a straight- line basis over the vesting period of the award. Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for stock options, the expected life of the option, and expected stock price volatility. The Company used the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.
Deferred Offering Costs
The
Company complies with the requirements of ASC 340, Other Assets and Deferred Costs, with regards to offering costs. Prior to the completion
of an offering, offering costs are capitalized. The deferred offering costs are charged to additional paid-in capital or as a discount
to debt, as applicable, upon the completion of an offering or to expense if the offering is not completed. As of December 31, 2020, the
Company had capitalized $
Segment Information
In
accordance with ASC 280, Segment Reporting (“ASC 280”), we identify our operating segments according to how our business
activities are managed and evaluated. As of December 31, 2023 our operating segments included: DSTLD, Bailey, Stateside and Sundry. Each
operating segment currently reports to the Chief Executive Officer. Each of our brands serve or are expected to serve customers through
our wholesale, in store and online channels, allowing us to execute on our omni-channel strategy. We have determined that each of our
operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments
are aggregated into
Income Taxes
The Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is unlikely that the deferred tax assets will not be realized. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. In accordance with ASC 740-10, for those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements.
| F-17 |
Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of the diluted net loss per share if their inclusion would be anti-dilutive. As all potentially dilutive securities are anti-dilutive as of December 31, 2023 and 2022, diluted net loss per share is the same as basic net loss per share for each year. Potentially dilutive items outstanding as of December 31, 2023 and 2022 are as follows:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Convertible notes | ||||||||
| Series A convertible preferred stock | ||||||||
| Series C convertible preferred stock | ||||||||
| Common stock warrants | ||||||||
| Stock options | ||||||||
| Total potentially dilutive shares | ||||||||
The stock options and warrants above are out-of-the-money as of December 31, 2023 and 2022.
Leases
On January 1, 2022, the Company adopted ASC 842, Leases, as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and finance lease liabilities and corresponding right-of-use (ROU) assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from lease arrangements. The Company adopted the new guidance using a modified retrospective method. Under this method, the Company elected to apply the new accounting standard only to the most recent period presented, recognizing the cumulative effect of the accounting change, if any, as an adjustment to the beginning balance of retained earnings. Accordingly, prior periods have not been recast to reflect the new accounting standard. The cumulative effect of applying the provisions of ASC 842 had no material impact on accumulated deficit.
The
Company elected transitional practical expedients for existing leases which eliminated the requirements to reassess existing lease classification,
initial direct costs, and whether contracts contain leases. Also, the Company elected to present the payments associated with short-
term leases as an expense in statements of operations. Short-term leases are leases with a lease term of
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02: Leases (Topic 842). The new guidance generally requires an entity to recognize on its balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The new standard requires a modified retrospective transition for existing leases to each prior reporting period presented. The Company elected to utilize the extended adoption period available to the Company as an emerging growth company. The Company has adopted ASU 2016-02 as of January 1, 2022. See Note 11.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instrument – Credit Losses”. This ASU, and the related ASUs issued subsequently by the FASB introduce a new model for recognizing credit loss on financial assets not accounted for at fair values through net income, including loans, debt securities, trade receivables, net investment in leases and available-for-sale debt securities. The new ASU broadens the information that an entity must consider in developing estimates of expected credit losses and requires an entity to estimate credit losses over the life of an exposure based on historical information, current information and reasonable supportable forecasts.
The
Company adopted this ASU on January 1, 2023, using the modified retrospective approach. The adoption of this ASU did not have a material
impact on financial statements as Company’s customers are direct consumers and pay at the time of purchase. As of December 31,
2023, the Company determined an allowance for expected credit loss of $
| F-18 |
Management does not believe that any other recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
The following accounting pronouncements have been issued as of April 15, 2024 but are not yet effective and may affect the future financial reporting by the Company:
| ● | ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity: This ASU addresses the complexity of certain guidance for convertible instruments and contracts in an entity’s own equity. The ASU is effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the ASU will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. |
| ● | ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions: The ASU is intended to clarify the guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of the security. For public business entities, the amendments in ASU 2022- 03 are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2024, and interim periods within those fiscal years. |
NOTE 4: BUSINESS COMBINATIONS
2022 Acquisition
Sundry
On December 30, 2022, the Company completed its previously announced acquisition (the “ Sundry Acquisition”) of all of the issued and outstanding membership interests of Sunnyside, LLC, a California limited liability company (“Sundry”), pursuant to that certain Second Amended and Restated Membership Interest Purchase Agreement (the “ Sundry Agreement”), dated October 13, 2022, by and among Moise Emquies, George Levy, Matthieu Leblan and Carol Ann Emquies (“ Sundry Sellers”), George Levy as the Sundry Sellers’ representative, the Company as Buyer, and Sundry.
Pursuant
to the Agreement, Sellers, as the holders of all of the outstanding membership interests of Sundry, exchanged all of such membership
interests for (i) $
The Company evaluated the acquisition of Sundry pursuant to ASC 805 and ASU 2017-01, Topic 805, Business Combinations. The acquisition method of accounting requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at their estimated respective fair values as of the closing date of the acquisition. Goodwill recognized in connection with this transaction represents primarily the potential economic benefits that the Company believes may arise from the acquisition.
Total fair value of the purchase price consideration was determined as follows:
SCHEDULE OF COMPONENTS OF PURCHASE PRICE CONSIDERATION
| Cash | $ | |||
| Promissory notes payable | ||||
| Common stock | ||||
| Purchase price consideration | $ |
| F-19 |
The Company has made an allocation of the purchase price in regard to the acquisition related to the assets acquired and the liabilities assumed as of the purchase date. The following table summarizes the purchase price allocation:
SCHEDULE OF ASSETS AND LIABILITIES ACQUIRED IN BUSINESS COMBINATION
| Purchase Price | ||||
| Allocation | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable, net | ||||
| Due from factor, net | ||||
| Inventory | ||||
| Prepaid expenses and other current assets | ||||
| Property, equipment and software, net | ||||
| Goodwill | ||||
| Intangible assets | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses and other liabilities | ( | ) | ||
| Purchase price consideration | $ | |||
The
customer relationships and will be amortized on a straight-line basis over their estimated useful lives of
Goodwill is primarily attributable to the go-to-market synergies that are expected to arise as a result of the acquisition and other intangible assets that do not qualify for separate recognition. The goodwill is not deductible for tax purposes. The results of Sundry have been included in the consolidated financial statements since the date of acquisition.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents the Company’s financial results as if the Sundry acquisition had occurred as of January 1, 2022. The unaudited pro forma financial information is not necessarily indicative of what the financial results actually would have been had the acquisitions been completed on this date. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the Company’s future financial results. The following unaudited pro forma financial information includes incremental property and equipment depreciation and intangible asset amortization as a result of the acquisitions. The pro forma information does not give effect to any estimated and potential cost savings or other operating efficiencies that could result from the acquisition:
SCHEDULE OF BUSINESS ACQUISITION PRO FORMA INFORMATION
| Year Ended | ||||
| December 31, 2022 | ||||
| Net revenues | $ | |||
| Net loss | $ | ( | ) | |
| Net loss per common share | $ | ( | ) | |
Previous Acquisitions
Bailey 44
On
February 12, 2020, the Company acquired
| F-20 |
DBG
agreed that if at that date which is one year from the closing date of the IPO, the product of the number of shares of Parent Stock issued
under the Merger multiplied by the sum of the closing price per share of the common stock of the Company on such date, plus Sold Parent
Stock Gross Proceeds (as that term is defined in the Merger Agreement), does not exceed the sum of $
As
of December 31, 2023 and 2022, the Company has a contingent consideration liability of $
Stateside
On
August 30, 2021, the Company entered into a Membership Interest Purchase Agreement (the “MIPA”) with Moise Emquies pursuant
to which the Company acquired all of the issued and outstanding membership interests of MOSBEST, LLC, a California limited liability
company (“Stateside” and such transaction, the “Stateside Acquisition”). Pursuant to the MIPA, Moise Emquies,
as the holder of all of the outstanding membership interests of Stateside, exchanged all of such membership interests for $
The Company evaluated the acquisition of Stateside pursuant to ASC 805 and ASU 2017-01, Topic 805, Business Combinations. The acquisition method of accounting requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at their estimated respective fair values as of the closing date of the acquisition. Goodwill recognized in connection with this transaction represents primarily the potential economic benefits that the Company believes may arise from the acquisition.
Total fair value of the purchase price consideration was determined as follows:
SCHEDULE OF FAIR VALUE OF PURCHASE PRICE CONSIDERATION
| Cash | $ | |||
| Common stock | ||||
| Purchase price consideration | $ |
The Company has made an allocation of the purchase price in regard to the acquisition related to the assets acquired and the liabilities assumed as of the purchase date. The following table summarizes the purchase price allocation:
SCHEDULE OF ALLOCATION OF PURCHASE PRICE IN REGARD TO ACQUISITION
Purchase Price Allocation | ||||
| Cash and cash equivalents | ||||
| Accounts receivable, net | ||||
| Due from factor, net | ||||
| Inventory | ||||
| Prepaid expenses and other current assets | ||||
| Deposits | ||||
| Property, equipment and software, net | ||||
| Goodwill | ||||
| Intangible assets | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses and other liabilities | ( | ) | ||
| Purchase price consideration | $ | |||
The
customer relationships and will be amortized on a straight-line basis over their estimated useful lives of
| F-21 |
Goodwill is primarily attributable to the go-to-market synergies that are expected to arise as a result of the acquisition and other intangible assets that do not qualify for separate recognition. The goodwill is not deductible for tax purposes.
NOTE 5: DISCONTINUED OPERATIONS
On
June 21, 2023, the Company and the former owners of H&J executed a Settlement Agreement and Release (the “Settlement Agreement”)
whereby contemporaneously with the parties’ execution of the Settlement Agreement (i) the Company agreed to make an aggregate cash
payment of $
The H&J Settlement was accounted for a business disposition in accordance with ASC 810-40-40-3A. As of June 21, 2023, the Company no longer consolidated the assets, liabilities, revenues and expenses of H&J. The components of the disposition are as follows:
SCHEDULE OF COMPONENTS OF DISPOSITION
| Cash payment due to H&J Seller | $ | ( | ) | |
| Common shares issued to H&J Seller* | ( | ) | ||
| Total fair value of consideration received (given) | $ | ( | ) |
| Carrying amount of assets and liabilities | ||||
| Cash and cash equivalents | ||||
| Accounts receivable, net | ||||
| Prepaid expenses and other current assets | ||||
| Goodwill | ||||
| Intangible assets, net | ||||
| Deposits | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses and other liabilities | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Due to related parties | ( | ) | ||
| Contingent consideration | ( | ) | ||
| Loan payable | ( | ) | ||
| Note payable - related party | ( | ) | ||
| Total carrying amount of assets and liabilities | ( | ) | ||
| Loss on disposition of business | $ | ( | ) |
| * |
The net assets of the discontinued operations at December 31, 2022 were not materially different from the balances as of June 21, 2023.
Through
December 31, 2023, the Company has made payments to D. Jones totaling $
The
loss of disposition of business of $
| F-22 |
In accordance with the provisions of ASC 205-20, the Company has excluded the results of discontinued operations from its results of continuing operations in the accompanying consolidated statements of operations for the three and year ended December 31, 2023 and 2022. The results of the discontinued operations of HJ for the year ended December 31, 2023 and 2022 consist of the following:
| 2023 | 2022 | |||||||
Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Net revenues | $ | $ | ||||||
| Cost of net revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| General and administrative | ||||||||
| Sales and marketing | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Loss on disposition of business | ( | ) | ||||||
| Total other income (expense), net | ( | ) | ( | ) | ||||
| Income tax benefit (provision) | ||||||||
| Net loss from discontinued operations | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding - basic and diluted | ||||||||
| Net income (loss) from discontinued operations per common share - basic and diluted | $ | ) | $ | ) | ||||
NOTE 6: DUE FROM FACTOR
The
Company, via its subsidiaries, Bailey, Stateside and Sundry, assigns a portion of its trade accounts receivable to third- party factoring
companies, who assumes the credit risk with respect to the collection of non-recourse accounts receivable. The Company may request advances
on the net sales factored at any time before their maturity date. The factor charges a commission on the net sales factored for credit
and collection services. For one factoring company, interest on advances is charged as of the last day of each month at a rate equal
to the LIBOR rate plus
Advances are collateralized by a security interest in substantially all of the companies’ assets.
| F-23 |
Due to/from factor consist of the following:
SCHEDULE OF DUE TO/ FROM FACTOR
| 2023 | 2022 | |||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Outstanding receivables: | ||||||||
| Without recourse | $ | $ | ||||||
| With recourse | ||||||||
| Matured funds and deposits | ||||||||
| Advances | ( | ) | ( | ) | ||||
| Credits due customers | ( | ) | ( | ) | ||||
| Due from factor, net | $ | $ | ||||||
NOTE 7: GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company recorded goodwill from each of its business combinations. The following is a summary of goodwill by entity for the years ended December 31, 2023 and 2022:
SCHEDULE OF GOODWILL ATTRIBUTABLE TO EACH BUSINESS COMBINATION
| 2023 | 2022 | |||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Bailey | $ | $ | ||||||
| Stateside | ||||||||
| Sundry | ||||||||
| Goodwill | $ | $ | ||||||
Refer to Note 3 for discussion on the goodwill impairment recorded in 2022.
In
connection with the H&J disposition, the Company derecognized $
Intangible Assets
The following table summarizes information relating to the Company’s identifiable intangible assets as of December 31, 2023 and 2022:
SCHEDULE OF INFORMATION RELATING TO THE COMPANY’S IDENTIFIABLE INTANGIBLE ASSETS
| December 31, 2023 | Gross
Amount | Accumulated Amortization | Carrying Value | |||||||||
| Amortized: | ||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | |||||||
| $ | $ | ( | ) | $ | ||||||||
| Indefinite-lived: | ||||||||||||
| Brand name | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||
| December 31, 2022 | Gross Amount | Accumulated Amortization | Carrying Value | |||||||||
| Amortized: | ||||||||||||
| Customer relationships | $ | ( | ) | $ | ||||||||
| ( | ) | |||||||||||
| Indefinite-lived: | ||||||||||||
| Brand name | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||
| F-24 |
Refer to Note 3 for discussion on the intangible asset impairment recorded in 2022.
The
Company recorded amortization expense of $
Future amortization expense at December 31, 2023 is as follows:
SCHEDULE OF FUTURE AMORTIZATION EXPENSE
| Year Ending December 31, | ||||
| 2024 | ||||
| 2025 | ||||
| Carrying value | $ | |||
NOTE 8: LIABILITIES AND DEBT
Accrued Expenses and Other Liabilities
The Company accrued expenses and other liabilities line in the consolidated balance sheets is comprised of the following as of December 31, 2023 and 2022:
SCHEDULE OF ACCRUED EXPENSES AND OTHER LIABILITIES
| 2023 | 2022 | |||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Accrued expenses | $ | $ | ||||||
| Reserve for returns | ||||||||
| Payroll related liabilities | ||||||||
| Sales tax liability | ||||||||
| Other liabilities | ||||||||
| Accrued expenses and other liabilities | $ | $ | ||||||
Payroll related liabilities are primarily related in DBG and Bailey44 payroll taxes due to remit to federal and state authorities. The amounts are subject to further penalties and interest.
As
of December 31, 2023, accrued expenses included $
Venture Debt
As
of December 31, 2021, the gross loan balance with Black Oak Capital (“Black Oak”) pertaining to its senior credit agreement
was $
On
September 29, 2022, the Company and Black Oak executed a Securities Purchase Agreement (the “Black Oak SPA”) whereby the
Company issued shares of Series A Convertible Preferred Stock to Black Oak for $
For
the year ended December 31, 2022, $
| F-25 |
Convertible Debt
2020 Regulation CF Offering
As
of December 31, 2023 and 2022, there was $
Convertible Promissory Notes
On
April 8, 2022, the Company and various purchasers executed a Securities Purchase Agreement (“April Notes”) whereby the investors
purchased from the Company convertible promissory notes in the aggregate principal amount of $
In
connection with the April Notes, the Company issued an aggregate of
On
July 22 and July 28, 2022, the Company and various purchasers executed a Securities Purchase Agreement (“July Notes”) whereby
the investors purchased from the Company convertible promissory notes in the aggregate principal amount of $
In
connection with the July 22 and July 28 notes, the Company issued an aggregate of
If
the July Notes are not repaid in full by the maturity date or if any other event of default occurs, (1) the face value of the notes will
be automatically increased to
The
Company evaluated the terms of the conversion features of the July notes as noted above in accordance with ASC Topic No. 815 —
40, Derivatives and Hedging — Contracts in Entity’s Own Stock, and determined they are not indexed to the Company’s
common stock and that the conversion features meet the definition of a liability. The notes contain an indeterminate number of shares
to settle with conversion options outside of the Company’s control. Therefore, the Company bifurcated the conversion feature and
accounted for it as a separate derivative liability. Upon issuance of the July, the Company recognized a derivative liability at an aggregate
fair value of $
In
December 2022, the Company fully repaid the outstanding principal of $
On
December 29, 2022, the Company and various purchasers executed a Securities Purchase Agreement (“December Notes”) whereby
the investors purchased from the Company convertible promissory notes in the aggregate principal amount of $
| F-26 |
In
connection with the December Notes, the Company issued to the investors an aggregate of
In
connection with the December Notes, the Company issued to the investors an aggregate of
In
February 2023, the principal of $
The following is a summary of the convertible notes for the years ended December 31, 2023 and 2022:
SCHEDULE OF CONVERTIBLE NOTES
Principal | Unamortized Debt Discount | Convertible Note Payable, Net | ||||||||||
| Balance, December 31, 2022 | $ | $ | ( | ) | $ | |||||||
| Repayments of notes | ( | ) | — | ( | ) | |||||||
| Amortization of debt discount | — | |||||||||||
| Loss on extinguishment of debt | — | |||||||||||
| Balance, December 31, 2023 | $ | $ | $ | |||||||||
During
the years ended December 31, 2023 and 2022, the Company amortized $
Loan Payable — PPP and SBA Loan
In
April 2022, Bailey received notification of full forgiveness of its 2nd PPP Loan totaling $
Merchant Advances
Future Sales Receipts
In
2022, the Company obtained several merchant advances. These advances are, for the most part, secured by expected future sales transactions
of the Company with expected payments on a weekly basis. As of December 31, 2022, $
The following is a summary of the merchant advances as of December 31, 2023 and 2022:
SCHEDULE OF MERCHANT ADVANCES
| 2023 | 2022 | |||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Principal | $ | $ | ||||||
| Less: unamortized debt discount | ( | ) | ||||||
| Merchant cash advances, net | $ | $ | ||||||
The
unamortized debt discount of $
| F-27 |
In
2023, the Company refinanced two merchant advance agreements. The refinances were accounted for as a loss extinguishment under ASC 470-50-40,
and accordingly the Company recognized a loss on extinguishment of $
In
connection with these advances, the Company granted
Other
In
2023, the Company obtained merchant advances totaling $
In
2023, the Company obtained merchant advances totaling $
Promissory Note Payable
As
of December 31, 2023 and 2022, the outstanding principal on the note to the sellers of Bailey was $
The
note incurs interest at
As
noted in Note 4, the Company issued a promissory note in the principal amount of $
In
March 2023, the Company and various purchasers executed a Securities Purchase Agreement (“March 2023 Notes”) whereby the
investors purchased from the Company promissory notes in the aggregate principal amount of $
The
parties are currently working on an extension to the Maturity Date and have acknowledged that the default provisions have not been triggered.
It is expected that the March 2023 Notes will be fully repaid by the end of the second quarter of 2024. In connection with the amendments,
the Company increased the principal owed on the March 2023 Notes to $
| F-28 |
The following is a summary of promissory notes payable, net:
SCHEDULE OF PROMISSORY NOTES PAYABLE, NET
| 2023 | 2022 | |||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Bailey Note | $ | $ | ||||||
| Sundry Note | ||||||||
| March 2023 Notes - principal | ||||||||
| March 2023 Notes - unamortized debt discount | ( | ) | ||||||
| Promissory note payable, net | $ | $ | ||||||
NOTE 9: STOCKHOLDERS’ EQUITY (DEFICIT)
Amendments to Certificate of Incorporation
On October 13, 2022, the Company amended its Amended and Restated Certificate of Incorporation to increase to increase the number of authorized shares of the Company’s common stock from to , and in conjunction therewith, to increase the aggregate number of authorized shares to shares.
On
October 21, 2022, the Board of Directors approved a
On
August 21, 2023, the Board of Directors approved a
Common Stock
The Company had shares of common stock authorized with a par value of $ as of December 31, 2023.
Common
stockholders have voting rights of
2023 Transactions
On
January 11, 2023, the Company, entered into a Securities Purchase Agreement with a certain accredited investor, pursuant to which the
Company agreed to issue and sell, in a private placement (the “January Private Placement”), an aggregate of shares
of the Company’s common stock (“Common Stock”), and accompanying warrants to purchase
In
January 2023, the Company issued shares of common stock at a fair value of $
In
March 2023, the Company issued an aggregate of shares of common stock to Sundry executives based on their employment agreements
with the Company. The fair value of $
| F-29 |
In
June 2023, the Company issued shares of common stock to D. Jones at a fair value of $
On
August 31, 2023, the Company entered into a Securities Purchase Agreement with a certain accredited investor, pursuant to which the Company
agreed to issue and sell, in a private placement (the “August Private Placement”), an aggregate of shares of the Company’s
Common Stock and accompanying Series A warrants to purchase up to shares of Common Stock and Series B warrants to purchase up
to shares of Common Stock at a combined purchase price of $ per share and common warrants, and (ii)
In
connection with the August Private Placement, the Company entered into a warrant amendment (the “Warrant Amendment”) with
certain investors to amend certain existing warrants to purchase up to
In
September 2023, the Company issued
On September 10, 2023, the non-employee members of the board of directors adopted a 2023 Stock Purchase Plan (the “2023 Plan”) to enable the Company to attract, retain and motivate its employees. Under the 2023 Plan, qualified employees can purchase shares of the Company’s common stock at fair market value by either the delivery of cash or the delivery of a form of acceptable non-recourse promissory note. The aggregate number of common stock issuable under the 2023 Plan shall not exceed subject to certain adjustment provided under the 2023 Plan.
Pursuant
to the 2023 Plan, the Company issued an aggregate of shares of common stock to certain employees and consultants with accompanying
In October 2023, shares of Series C Convertible Preferred Stock converted into shares of common stock.
2022 Transactions
During the year ended December 31, 2022, the Company issued an aggregate of shares of common stock pursuant to the conversion of the FirstFire and Oasis Notes (see Note 7).
In
September 2022, the Company issued shares of common stock pursuant to a consultant agreement at a fair value of $
As
part of the Sundry acquisition (see Note 4), the Company issued shares of common stock to the Sundry Sellers at a fair value of
$
In
connection with the December Notes, the Company issued shares of common stock with a fair value of $
Series A Preferred Stock
On
August 31, 2022, the Company entered into a Subscription and Investment Representation Agreement with Hil Davis, its Chief Executive
Officer, pursuant to which the Company agreed to issue 1 share of the Company’s Series A Preferred Stock to for $
| F-30 |
On September 13, 2023, the Company filed a certificate of cancellation (the “Series A Certificate of Cancellation”) with the Secretary of State of the State of Delaware, effective as of the time of filing, cancelling the Series A Certificate of Designation relating to the Series A Preferred Stock.
Series A Convertible Preferred Stock
On September 29, 2022, the Company filed the Certificate of Designation designating up to shares out of the authorized but unissued shares of its preferred stock as Series A Convertible Preferred Stock.
Except for stock dividends or distributions for which adjustments are to be made pursuant to the Certificate of Designation, the holders of the Series A Preferred Stock (the “Holders”) shall be entitled to receive, and the Company shall pay, dividends on shares of the Series A Preferred Stock equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid on shares of the Common Stock. No other dividends shall be paid on shares of the Series A Preferred Stock.
With respect to any vote with the class of Common Stock, each share of the Series A Preferred Stock shall entitle the Holder thereof to cast that number of votes per share as is equal to the number of shares of Common Stock into which it is then convertible.
The Series A Preferred Stock shall rank (i) senior to all of the Common Stock; (ii) senior to any class or series of capital stock of the Company hereafter created specifically ranking by its terms junior to any Preferred Stock (“Junior Securities”); (iii) on parity with any class or series of capital stock of the Corporation created specifically ranking by its terms on parity with the Preferred Stock (“Parity Securities”); and (iv) junior to any class or series of capital stock of the Company hereafter created specifically ranking by its terms senior to any Preferred Stock (“Senior Securities”), in each case, as to dividends or distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntarily or involuntarily.
Each
share of the Series A Preferred Stock shall be convertible, at any time and from time to time from and after September 29, 2022 at the
option of the Holder thereof, into that number of shares of Common Stock determined by dividing the Stated Value of such share of the
Series A Preferred Stock ($
As of December 31, 2023 and 2022, there were shares of Series A Convertible Preferred Stock issued and outstanding.
Series B Preferred Stock
On
May 30, 2023, the Company entered into a Subscription and Investment Representation Agreement (the “Subscription Agreement”)
with John Hilburn Davis IV, its Chief Executive Officer pursuant to which the Company agreed to issue and sell 1 share of the Company’s
Series B Preferred Stock, par value $ per share (the “Series B Preferred Stock”) for $
On May 30, 2023, the Company filed a certificate of designation (the “Certificate of Designation”) with the Secretary of State of the State of Delaware, effective as of the time of filing, designating the rights, preferences, privileges and restrictions of the share of Series B Preferred Stock. The Certificate of Designation provides that the Series B Preferred Stock will have votes per share of Series B Preferred Stock and will vote together with the outstanding shares of the Company’s common stock, par value per share (the “Common Stock”) and Series A Convertible Preferred Stock, par value per share (the “Series A Convertible Preferred Stock”) as a single class exclusively with respect to any proposal to amend the Company’s Sixth Amended and Restated Certificate of Incorporation (as may be amended and/or restated from time to time, the “Restated Certificate”) to effect a reverse stock split of the Company’s common stock. The Series B Preferred Stock will be voted, without action by the holder, on any such proposal in the same proportion as shares of Common Stock and Series A Convertible Preferred Stock are voted. The Series B Preferred Stock otherwise has no voting rights.
| F-31 |
The Series B Preferred Stock is not convertible into, or exchangeable for, shares of any other class or series of stock or other securities of the Company. The Series B Preferred Stock has no rights with respect to any distribution of assets of the Company, including upon a liquidation, bankruptcy, reorganization, merger, acquisition, sale, dissolution or winding up of the Company, whether voluntarily or involuntarily. The holder of the Series B Preferred Stock will not be entitled to receive dividends of any kind.
The
outstanding share of Series B Preferred Stock shall be redeemed in whole, but not in part, at any time (i) if such redemption is ordered
by the Board of Directors in its sole discretion or (ii) automatically upon the effectiveness of the amendment to the Restated Certificate
implementing a reverse stock split. Upon such redemption, the holder of the Series B Preferred Stock will receive consideration of $
On September 13, 2023, the Company filed a certificate of cancellation (the “Series B Certificate of Cancellation”) with the Secretary of State of the State of Delaware, effective as of the time of filing, cancelling the Series B Certificate of Designation, and thereby eliminating all Series B Preferred Stock.
Series C Convertible Preferred Stock
On
June 21, 2023, the Company, on the one hand, and Moise Emquies, George Levy, Matthieu Leblan, Carol Ann Emquies, Jenny Murphy and Elodie
Crichi (collectively, the “Sundry Investors”), on the other hand, executed a Securities Purchase Agreement (the “Sundry
SPA”) whereby the Company issued shares of Series C Convertible Preferred Stock, par value $ per share (the “Series
C Preferred Stock”) to the Sundry Investors at a purchase price of $ per share. The Series C Preferred Stock is convertible
into a number of shares of the Company’s Common Stock equal to $
On June 21, 2023, the Company filed the Certificate of Designation with the Secretary of State for the State of Delaware designating up to shares out of the authorized but unissued shares of its preferred stock as Series C Convertible Preferred Stock. The following is a summary of the principal terms of the Series C Preferred Stock.
Except for stock dividends or distributions for which adjustments are to be made pursuant to the Certificate of Designation, the holders of the Series C Preferred Stock (the “Series C Holders”) shall be entitled to receive, and the Company shall pay, dividends on shares of the Series C Preferred Stock equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid on shares of the Common Stock. No other dividends shall be paid on shares of the Series C Preferred Stock.
The Series C Holders are entitled to vote as a class as expressly provided in the Certificate of Designation. The Series C Holders are also entitled to vote with the holders of shares of Common Stock, voting together as one class, on all matters in which the Series C Holders are permitted to vote with the class of shares of Common Stock.
With respect to any vote with the class of Common Stock, each share of the Series C Preferred Stock shall entitle the Holder thereof to cast that number of votes per share as is equal to the number of shares of Common Stock into which it is then convertible (subject to the ownership limitations specified in the Certificate of Designation) using the record date for determining the stockholders of the Company eligible to vote on such matters as the date as of which the conversion price is calculated.
The Series C Preferred Stock shall rank (i) senior to all of the Common Stock; (ii) senior to Junior Securities; (iii) on parity with Parity Securities; and (iv) junior to Senior Securities, in each case, as to dividends or distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntarily or involuntarily. Subject to any superior liquidation rights of the holders of any Senior Securities of the Company and the rights of the Company’s existing and future creditors, upon a Liquidation, each Holder shall be entitled to be paid out of the assets of the Company legally available for distribution to stockholders, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of the Common Stock and Junior Securities and pari passu with any distribution to the holders of Parity Securities, an amount equal to the Stated Value (as defined in the Certificate of Designation) for each share of the Series C Preferred Stock held by such Holder and an amount equal to any accrued and unpaid dividends thereon, and thereafter the Series C Holders shall be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of Common Stock would receive if the Series C Preferred Stock were fully converted (disregarding for such purposes any conversion limitations hereunder) to Common Stock which amounts shall be paid pari passu with all holders of Common Stock.
| F-32 |
Each
share of the Series C Preferred Stock shall be convertible, at any time and from time to time from and after June 21, 2023 at the option
of the Holder thereof, into that number of shares of Common Stock determined by dividing the Stated Value of such share of the Series
C Preferred Stock ($
$
The
Company has the option to redeem any or all of the then outstanding Series C Preferred Stock at
In October 2023, shares of Series C Convertible Preferred Stock converted into shares of common stock.
2022 Underwriting Agreements and Public Offerings
On May 5, 2022, the Company entered into an underwriting agreement (the “Alexander Underwriting Agreement”) with Alexander Capital, L.P., acting as representative of the several underwriters named in the Alexander Underwriting Agreement (the “ Alexander Underwriters”), relating to the Company’s underwritten the offering pursuant to which the Company agreed to issue and sell shares of the Company’s common stock. The shares were sold to the public at a combined public offering price of $ per share and were purchased by the Underwriters from the Company at a price of $ per share. The Company also granted the Alexander Underwriters a -day option to purchase up to an additional shares of Common Stock at the same price, which expired and were not purchased.
The
shares were sold in the Offering pursuant to a Registration Statement on Form S-1, as amended (File No. 333-264347) (the “Registration
Statement”), a Registration Statement on Form S-1 pursuant to 462(b) of the Securities Act of 1933, as amended (File No. 333-264775),
and a related prospectus filed with the Securities and Exchange Commission. The public offering closed on May 10, 2022 and the Company
sold shares of common stock for total gross proceeds of $
On
November 29, 2022, the Company, entered into a Securities Purchase Agreement with investors pursuant to which the Company agreed to issue
and sell, in an offering (i) an aggregate of shares (the “Shares”) of the Company’s common stock, and accompanying
Class B Warrants (the “Class B Warrants”) to purchase
NOTE 10: RELATED PARTY TRANSACTIONS
As
of December 31, 2023 and 2022, the Company made net repayments for amounts due to related parties totaling $
| F-33 |
As
of December 31, 2023 and 2022, due to related parties includes advances from the former officer, Mark Lynn, who also serves as a director,
totaling $
In
October 2022, the Company received advances from a director, Trevor Pettennude, totaling $
As
of December 31, 2023, due to related parties includes advances from the Chief Executive Officer of $
Common Stock Warrants
2023 Transactions
In connection with the January Private Placement, the Company granted pre-funded warrants which were immediately exercised for shares of common stock. The Company also granted an additional warrants as part of the offering. Each warrant has an exercise price of
$
In
connection with merchant advances (Note 6), the Company granted
In
connection with the August Private Placement, the Company granted pre-funded warrants, which had not yet been exercised for shares
of common stock as of September 30, 2023. These warrants are expected to be fully sold and exercised into shares in the fourth quarter
of 2023. The Company also granted an additional warrants as part of the offering. Each warrant has an exercise price of $
In
connection with the August Private Placement, the Company entered into a warrant amendment (the “Warrant Amendment”) with
certain investors to amend certain existing warrants to purchase up to
2022 Transactions
In
connection with the April note agreement, the Company granted warrants to acquire
On
May 10, 2022, pursuant to the Underwriting Agreement, the Company issued the Underwriters’ Warrants to purchase up to an aggregate
of
In
connection with the July 22 and July 28 notes, the Company issued an aggregate of
In
connection with the November public offering, the Company granted pre-funded warrants which were immediately exercised for
shares of common stock. The Company also granted an additional Class B Warrants and Class C Warrants as part of the
offering. Each Class B Warrant has an exercise price of $ per share, is immediately exercisable upon issuance and expires
after issuance. Each Class C Warrant has an exercise price of $ per share, is immediately exercisable upon issuance and expires after issuance. The Company also granted the placement agent warrants to purchase common stock at an exercise price of
$
| F-34 |
In
connection with the December Notes, the Company issued to the investors an aggregate of
The
Company granted
A summary of information related to common stock warrants for the years ended December 31, 2023 and 2022 is as follows:
SUMMARY OF INFORMATION RELATED TO COMMON STOCK WARRANTS
Common Stock Warrants | Weighted Average Exercise Price | |||||||
| Outstanding - December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Forfeited | ||||||||
| Outstanding - December 31, 2023 | $ | |||||||
| Exercisable at December 31, 2022 | $ | |||||||
| Exercisable at December 31, 2023 | $ | |||||||
Stock Options
2020 Incentive Stock Plan
The Company has adopted a 2020 Omnibus Incentive Stock Plan (the “2020 Plan”). An aggregate of shares of the Company’s common stock is reserved for issuance and available for awards under the 2020 Plan, including incentive stock options granted under the 2020 Plan. The 2020 Plan administrator may grant awards to any employee, director, consultant or other person providing services to us or our affiliates. During 2021, options were granted to executives and directors at an exercise price from $ to $ per share. As of December 31, 2022, options were available for future issuance.
2013 Incentive Stock Plan
The Company has adopted the 2013 Stock Plan, as amended and restated (the “Plan”), which provides for the grant of shares of stock options, stock appreciation rights, and stock awards (performance shares) to employees, non-employee directors, and non-employee consultants. The number of shares authorized by the Plan was shares as December 31, 2023 and 2022. The option exercise price generally may not be less than the underlying stock’s fair market value at the date of the grant and generally have a term often years. The amounts granted each calendar year to an employee or non-employee is limited depending on the type of award. Stock options comprise all of the awards granted since the Plan’s inception. Shares available for grant under the Plan amounted to and as of December 31, 2023. Vesting generally occurs over a period of immediately to .
| F-35 |
A summary of information related to stock options under our 2013 and 2020 Stock Plan for the years ended December 31, 2023 and 2022 is as follows:
| Options | Weighted Average Exercise Price | |||||||
| Outstanding - December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ||||||||
| Outstanding - December 31, 2023 | $ | |||||||
| Exercisable at December 31, 2022 | $ | |||||||
| Exercisable at December 31, 2023 | $ | |||||||
| Weighted average duration (years) to expiration of outstanding options at December 31, 2023 | ||||||||
Stock-based compensation expense of $ and $ was recognized during the year ended December 31, 2023 and 2022, respectively. During the year ended December 31, 2023 and 2022, $ and $ was recorded to general and administrative expenses, and $ and $ was recorded to sales and marketing expense in the consolidated statements of operations, all respectively. Total unrecognized compensation cost related to non-vested stock option awards as of December 31, 2023 amounted to $ and will be recognized over a weighted average period of years.
NOTE 12: LEASE OBLIGATIONS
Rent is classified by function on the consolidated statements of operations either as general and administrative, sales and marketing, or cost of revenue.
The Company determines whether an arrangement is or contains a lease at inception by evaluating potential lease agreements including services and operating agreements to determine whether an identified asset exists that the Company controls over the term of the arrangement. Lease commencement is determined to be when the lessor provides access to, and the right to control, the identified asset.
The rental payments for the Company’s leases are typically structured as either fixed or variable payments. Fixed rent payments include stated minimum rent and stated minimum rent with stated increases. The Company considers lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from the calculation of lease liabilities.
Management uses judgment in determining lease classification, including determination of the economic life and the fair market value of the identified asset. The fair market value of the identified asset is generally estimated based on comparable market data provided by third-party sources.
In
January 2023, the Company entered into a lease agreement extension for its corporate office and distribution center in Vernon, California
that expires on January 31, 2025. The lease has monthly base rent payments of $
In
September 2023, the Company entered into a lease agreement extension for a showroom space in Los Angeles, California that commences in
March 2023 and expires in September 2024. The lease has a monthly base rent of $
| F-36 |
The following is a summary of operating lease assets and liabilities:
SUMMARY OF OPERATING LEASE ASSETS AND LIABILITIES
| Operating leases | 2023 | 2022 | ||||||
| December 31, | ||||||||
| Operating leases | 2023 | 2022 | ||||||
| Assets | ||||||||
| ROU operating lease assets | $ | $ | ||||||
| Liabilities | ||||||||
| Current portion of operating lease | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Operating leases | 2023 | 2022 | ||||||
| December 31, | ||||||||
| Operating leases | 2023 | 2022 | ||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % | ||||||
December 31, 2023 | ||||
| Future minimum payments - 2024 | $ | |||
| Less imputed interest | ( | ) | ||
| Total lease obligations | $ | |||
NOTE 13: CONTINGENCIES
| ● | On
March 21, 2023, a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $ | |
| ● | On
February 7, 2023, a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $ | |
| ● | On
November 9, 2022, a vendor filed a lawsuit against Digital Brand’s Group related to prior services rendered. The claims (including
fines, fees, and legal expenses) total an aggregate of $ | |
| ● | In
August 2020 and March 2021, | |
| ● | On
December 21, 2020, a Company investor filed a lawsuit against DBG for reimbursement of their investment totaling $ | |
| ● | On
November 16, 2023 a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $ | |
| ● | On
November 15, 2023 a vendor filed a lawsuit against Digital Brands Group related to trade payables totaling approximately $ |
| F-37 |
| ● | On December 21, 2023, a former employee from over two years ago filed a wrongful termination lawsuit against the Company. The Company is disputing this claim. To this point, this same law firm recently sent a demand letter for another wrongful termination of a temporary worker we used from a third party placement agency. This person was not a Company employee at any time. | |
| ● | A
vendor filed a lawsuit against Bailey 44 related to a retail store lease in the amount of $ |
All claims above, to the extent management believes it will be liable, have been included in accounts payable and accrued expenses and other liabilities in the accompanying consolidated balance sheet as of December 31, 2023.
Depending on the nature of the proceeding, claim, or investigation, we may be subject to monetary damage awards, fines, penalties, or injunctive orders. Furthermore, the outcome of these matters could materially adversely affect our business, results of operations, and financial condition. The outcomes of legal proceedings, claims, and government investigations are inherently unpredictable and subject to significant judgment to determine the likelihood and amount of loss related to such matters. While it is not possible to determine the outcomes, we believe based on our current knowledge that the resolution of all such pending matters will not, either individually or in the aggregate, have a material adverse effect on our business, results of operations, cash flows, or financial condition.
Except as may be set forth above the Company is not a party to any legal proceedings, and the Company is not aware of any claims or actions pending or threatened against us. In the future, the Company might from time to time become involved in litigation relating to claims arising from its ordinary course of business, the resolution of which the Company does not anticipate would have a material adverse impact on our financial position, results of operations or cash flows.
NOTE 14: INCOME TAXES
Deferred
taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes.
The differences relate primarily to depreciable assets using accelerated depreciation methods for income tax purposes, share-based compensation
expense, and for net operating loss carryforwards. As of December 31, 2023, and 2022, the Company had net deferred tax assets before
valuation allowance of $
SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES
| 2023 | 2022 | |||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Deferred tax liabilities: | ||||||||
| Indefinite lived intangible assets | ( | ) | ||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets (liabilities) | $ | ( | ) | $ | ||||
A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:
SCHEDULE OF THE COMPANY'S EFFECTIVE TAX RATE TO THE STATUTORY FEDERAL RATE
| 2023 | 2022 | |||||||
Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Statutory federal rate | % | % | ||||||
| State income taxes net of federal income tax benefit | ||||||||
| Permanent adjustment | ( | ) | ||||||
| Change in valuation allowance | ( | ) | ( | ) | ||||
| Effective income tax rate | ( | )% | ||||||
| F-38 |
The
Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making
such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The Company assessed
the need for a valuation allowance against its net deferred tax assets and determined a full valuation allowance is required due, cumulative
losses through December 31, 2023, and no history of generating taxable income. Therefore, valuation allowances of $
The
Company’s ability to utilize net operating loss carryforwards will depend on its ability to generate adequate future taxable income.
At December 31, 2023 and 2022, the Company had net operating loss carryforwards available to offset future taxable income in the amounts
of approximately $
As
a result of prior operating losses, the Company has net operating loss, or “NOL,” carryforwards for federal income tax purposes.
The ability to utilize NOL carryforwards to reduce taxable income in future years could become subject to significant limitations under
Section 382 of the Internal Revenue Code if the Company undergoes an ownership change. The Company would undergo an ownership change
if, among other things, the stockholders who own, directly or indirectly,
The Company has evaluated its income tax positions and has determined that it does not have any uncertain tax positions. The Company will recognize interest and penalties related to any uncertain tax positions through its income tax expense.
The Company is not presently subject to any income tax audit in any taxing jurisdiction, though all tax years from 2018 on remain open to examination.
NOTE 15: SUBSEQUENT EVENTS
Through the issuance date, the Company has issued shares of common stock pursuant to an At-The-Market Offering Agreement for an at-the-market offering (the “ATM Agreement”) with H.C. Wainwright & Co., LLC, as sales agent (“Wainwright”).
Through the issuance date, the Company converted shares of Series C Preferred Stock into shares of common stock.
| F-39 |
Exhibit 4.29
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
Our authorized capital stock consists of 1,000,000,000 shares of common stock, $0.0001 par value per share, of which 578,502 shares are issued and outstanding as of September 14, 2023 (excluding the Pre-Funded Warrants) and 10,000,000 shares of preferred stock, $0.0001 par value per share, of which 6,300 shares of Series A Convertible Preferred Stock, and 5,761 shares of Series C Convertible Preferred Stock are issued and outstanding. The following description of our capital stock is only a summary and is subject to and qualified in its entirety by our Sixth Amended and Restated Certificate of Incorporation, as further amended by certificates of amendment dated October 13, 2022, October 21, 2022 (but effected on November 3, 2022), May 30, 2023, June 21, 2023, and August 21, 2023 (but effected on August 22, 2023) and Amended and Restated Bylaws, as further amended by amendments Nos. 1 and 2, and by the applicable provisions of Delaware law.
Common Stock
Holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders, including the election of directors. Such holders are not entitled to vote cumulatively for the election of directors. Holders of a majority of the shares of common stock may elect all of the directors standing for election. Subject to preferences that may be applicable to any outstanding preferred stock, common stockholders are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for that purpose. In the event of our liquidation, dissolution or winding up, the common stockholders are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. Common stockholders have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. We have never declared or paid any cash dividends on our capital stock. We currently expect to retain future earnings, if any, to finance the growth and development of our business and do not anticipate paying any cash dividends in the foreseeable future.
Preferred Stock
General
The board of directors is authorized, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the powers, preferences and rights of each series, which may be greater than the rights of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until the board of directors determines the specific rights of the holders of such preferred stock. However, the effects might include, among other things:
| ● | impairing dividend rights of the common stock; | |
| ● | diluting the voting power of the common stock; | |
| ● | impairing the liquidation rights of the common stock; and | |
| ● | delaying or preventing a change in control of us without further action by the stockholders. |
Series A Convertible Preferred Stock
On September 29, 2022, the Company filed the Certificate of Designation with the Secretary of State for the State of Delaware designating up to 6,800 shares out of the authorized but unissued shares of its preferred stock as Series A Convertible Preferred Stock. On October 4, 2022, the Company filed the Correction with the Secretary of State for the State of Delaware to correct the terms of the voting rights under the Series A Preferred Stock. The following is a summary of the principal terms of the Series A Preferred Stock.
Dividends
Except for stock dividends or distributions for which adjustments are to be made pursuant to the Certificate of Designation, the holders of the Series A Preferred Stock (the “Holders”) shall be entitled to receive, and the Company shall pay, dividends on shares of the Series A Preferred Stock equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid on shares of the Common Stock. No other dividends shall be paid on shares of the Series A Preferred Stock.
Voting Rights
The Holders are entitled to vote as a class as expressly provided in the Certificate of Designation and where required pursuant to applicable law (including, without limitation, the DGCL). The Holders are also entitled to vote with the holders of shares of Common Stock, voting together as one class, on all matters in which the Holders are permitted to vote with the class of shares of Common Stock pursuant to applicable law (including, without limitation, the DGCL.
With respect to any vote with the class of Common Stock, each share of the Series A Preferred Stock shall entitle the Holder thereof to cast that number of votes per share as is equal to the number of shares of Common Stock into which it is then convertible (subject to the ownership limitations specified in the Certificate of Designation) using the record date for determining the stockholders of the Company eligible to vote on such matters as the date as of which the conversion price is calculated. To the extent that under the DGCL the vote of the Holders, voting separately as a class or series, as applicable, is required to authorize a given action of the Company, the affirmative vote or consent of the Required Holders (as defined in the Certificate of Designation) of the shares of the Preferred Stock, voting together in the aggregate and not in separate series unless required under the DGCL, represented at a duly held meeting at which a quorum is presented or by written consent of the Required Holders (except as otherwise may be required under the DGCL), voting together in the aggregate and not in separate series unless required under the DGCL, shall constitute the approval of such action by both the class or the series, as applicable. Holders shall be entitled to written notice of all stockholder meetings or written consents (and copies of proxy materials and other information sent to stockholders) with respect to which they would be entitled to vote, which notice would be provided pursuant to the Company’s bylaws and the DGCL.
Ranking and Liquidation
The Series A Preferred Stock shall rank (i) senior to all of the Common Stock; (ii) senior to any class or series of capital stock of the Company hereafter created specifically ranking by its terms junior to any Preferred Stock (“Junior Securities”); (iii) on parity with any class or series of capital stock of the Corporation created specifically ranking by its terms on parity with the Preferred Stock (“Parity Securities”); and (iv) junior to any class or series of capital stock of the Company hereafter created specifically ranking by its terms senior to any Preferred Stock (“Senior Securities”), in each case, as to dividends or distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntarily or involuntarily. Subject to any superior liquidation rights of the holders of any Senior Securities of the Company and the rights of the Company’s existing and future creditors, upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a “Liquidation”), each Holder shall be entitled to be paid out of the assets of the Company legally available for distribution to stockholders, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of the Common Stock and Junior Securities and pari passu with any distribution to the holders of Parity Securities, an amount equal to the Stated Value (as defined in the Certificate of Designation) for each share of the Series A Preferred Stock held by such Holder and an amount equal to any accrued and unpaid dividends thereon, and thereafter the Holders shall be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of Common Stock would receive if the Series A Preferred Stock were fully converted (disregarding for such purposes any conversion limitations hereunder) to Common Stock which amounts shall be paid pari passu with all holders of Common Stock. The Company shall mail written notice of any such Liquidation, not less than sixty (60) days prior to the payment date stated therein, to each Holder.
Conversion
Each share of the Series A Preferred Stock shall be convertible, at any time and from time to time from and after September 29, 2022 at the option of the Holder thereof, into that number of shares of Common Stock (subject to the limitations set forth in Section 6(d) of the Certificate of Designation) determined by dividing the Stated Value of such share of the Series A Preferred Stock ($1,000 as of September 29, 2022) by the Conversion Price (as defined below) subject to certain terms of the beneficial ownership limitation described in this Certificate of Designation. The conversion price for each share of the Series A Preferred Stock is the Nasdaq official closing price of the Common Stock on The Nasdaq Capital Market (as reflected on Nasdaq.com) on September 29, 2022, subject to adjustment as described in the Certificate of Designation, including for stock dividends and stock splits such as the one-for-one hundred (1-for-100) reverse stock split (the “November Reverse Stock Split”) of our common stock which became effective as of the close of business on November 3, 2022 and the one-for-twenty-five (1-for-25) reverse stock split (the “August Reverse Stock Split,” together with the November Reverse Stock Split, the “Reverse Stock Splits”) of our common stock which became effective as of the close of business on August 22, 2023 (the “Conversion Price”).
Certain Adjustments
If the Company, at any time while the Series A Preferred Stock is outstanding, pays a stock dividend, issues stock splits, effects any subsequent rights offerings, or makes any dividend or other distribution of its assets, then the Conversion Price of the Series A Preferred Stock adjusts (in the case of a stock split), and the Holder can acquire the purchase rights of the Company’s securities, or participate in the distribution of the Company’s assets pursuant to Section 7 of the Certificate of Designation.
Preemptive Rights
No holders will have any preemptive rights to purchase or subscribe for the Company’s Common Stock or any of its other securities.
Redemption
The Company has the option to redeem any or all of the then outstanding Series A Preferred Stock at 112% of the then Stated Value any time after September 29, 2022 and so long as there is an effective Registration Statement covering the shares issuable upon conversion of the Series A Preferred Stock.
Trading Market
The Holders can liquidate or convert the Series A Preferred Shares according to the terms of this Certificate of Designation. However, there is no established trading market for any of the Series A Preferred Stock, and the Company does not expect a market to develop. The Company does not intend to apply for a listing for any of the Series A Preferred Stock on any securities exchange or other nationally recognized trading system.
Series C Convertible Preferred Stock
On June 21, 2023, the Company filed the Certificate of Designation with the Secretary of State for the State of Delaware designating up to 5,761 shares out of the authorized but unissued shares of its preferred stock as Series C Convertible Preferred Stock. The following is a summary of the principal terms of the Series C Preferred Stock.
Dividends
Except for stock dividends or distributions for which adjustments are to be made pursuant to the Certificate of Designation, the holders of the Series C Preferred Stock (the “Series C Holders”) shall be entitled to receive, and the Company shall pay, dividends on shares of the Series C Preferred Stock equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid on shares of the Common Stock. No other dividends shall be paid on shares of the Series C Preferred Stock.
Voting Rights
The Series C Holders are entitled to vote as a class as expressly provided in the Certificate of Designation and where required pursuant to applicable law (including, without limitation, the DGCL). The Series C Holders are also entitled to vote with the holders of shares of Common Stock, voting together as one class, on all matters in which the Series C Holders are permitted to vote with the class of shares of Common Stock pursuant to applicable law (including, without limitation, the DGCL).
With respect to any vote with the class of Common Stock, each share of the Series C Preferred Stock shall entitle the Holder thereof to cast that number of votes per share as is equal to the number of shares of Common Stock into which it is then convertible (subject to the ownership limitations specified in the Certificate of Designation) using the record date for determining the stockholders of the Company eligible to vote on such matters as the date as of which the conversion price is calculated. To the extent that under the DGCL the vote of the Series C Holders, voting separately as a class or series, as applicable, is required to authorize a given action of the Company, the affirmative vote or consent of the Required Holders (as defined in the Certificate of Designation), voting together in the aggregate and not in separate series unless required under the DGCL, represented at a duly held meeting at which a quorum is presented or by written consent of the Required Holders (except as otherwise may be required under the DGCL) shall constitute the approval of such action by both the class or the series, as applicable. Series C Holders shall be entitled to written notice of all stockholder meetings or written consents (and copies of proxy materials and other information sent to stockholders) with respect to which they would be entitled to vote, which notice would be provided pursuant to the Company’s bylaws and the DGCL.
Ranking and Liquidation
The Series C Preferred Stock shall rank (i) senior to all of the Common Stock; (ii) senior to Junior Securities; (iii) on parity with Parity Securities; and (iv) junior to Senior Securities, in each case, as to dividends or distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntarily or involuntarily. Subject to any superior liquidation rights of the holders of any Senior Securities of the Company and the rights of the Company’s existing and future creditors, upon a Liquidation, each Holder shall be entitled to be paid out of the assets of the Company legally available for distribution to stockholders, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of the Common Stock and Junior Securities and pari passu with any distribution to the holders of Parity Securities, an amount equal to the Stated Value (as defined in the Certificate of Designation) for each share of the Series C Preferred Stock held by such Holder and an amount equal to any accrued and unpaid dividends thereon, and thereafter the Series C Holders shall be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of Common Stock would receive if the Series C Preferred Stock were fully converted (disregarding for such purposes any conversion limitations hereunder) to Common Stock which amounts shall be paid pari passu with all holders of Common Stock. The Company shall mail written notice of any such Liquidation, not less than sixty (60) days prior to the payment date stated therein, to each Holder.
Conversion
Each share of the Series C Preferred Stock shall be convertible, at any time and from time to time from and after June 21, 2023 at the option of the Holder thereof, into that number of shares of Common Stock (subject to the limitations set forth in Section 6(d) of the Certificate of Designation) determined by dividing the Stated Value of such share of the Series C Preferred Stock ($1,000 as of June 21, 2023) by the Conversion Price (as defined below) subject to certain terms of the beneficial ownership limitation described in this Certificate of Designation. The conversion price for each share of the Series C Preferred Stock is $17.925, which is the lower of (a) the closing price per share of the Common Stock as reported on the Nasdaq Capital Market on June 20, 2023 (the trading day before the date of the Sundry SPA), and (b) the average closing price per share of Common Stock as reported on the Nasdaq Capital Market for the five trading days preceding the date of the Sundry SPA, subject to adjustment herein (the “Series C Conversion Price”).
Certain Adjustments
If the Company, at any time while the Series C Preferred Stock is outstanding, pays a stock dividend, issues stock splits, effects any subsequent rights offerings, or makes any dividend or other distribution of its assets, then the Holder can adjust the Conversion Price of the Series C Preferred Stock, acquire the purchase rights of the Company’s securities, or participate in the distribution of the Company’s assets pursuant to Section 7 of the Certificate of Designation.
Preemptive Rights
No holders will have any preemptive rights to purchase or subscribe for the Company’s Common Stock or any of its other securities.
Redemption
The Company has the option to redeem any or all of the then outstanding Series C Preferred Stock at 112% of the then Stated Value any time after June 21, 2023 and so long as there is an effective Registration Statement covering the shares issuable upon conversion of the Series C Preferred Stock.
Trading Market
The Series C Holders can liquidate or convert the Series C Preferred Shares according to the terms of this Certificate of Designation. However, there is no established trading market for any of the Series C Preferred Stock, and the Company does not expect a market to develop. The Company does not intend to apply for a listing for any of the Series C Preferred Stock on any securities exchange or other nationally recognized trading system.
Options
As of September 14, 2023, there were outstanding options to acquire up to 1,558 shares of our common stock at exercise prices between $2,350 and $10,375 expiring between June 2024 and May 2031.
Warrants
As of September 14, 2023, there were outstanding warrants to acquire up to 237,745 shares of our common stock at exercise prices between $95 and $19,150 expiring at various dates through January 2028.
Class B Warrants Issued to Certain Investor in December 2022 and Amended in August 2023
General
The following is a brief summary of certain terms and conditions of the Class B Warrants. The following description is subject in all respects to the provisions contained in the form of Class B Warrant.
Duration and Exercise Price
Pursuant to a Warrant Amendment Agreement dated August 31, 2023, effective as of September 5, 2023, the Class B Warrants have an exercise price of $9.43 per share. The Class B Warrants are immediately exercisable on September 5, 2023, and may be exercised at any time on or after September 5, 2023 and would expire on March 5, 2029. The exercise prices and numbers of shares of common stock issuable upon exercise are subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock.
Exercisability
The Class B Warrants are exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of such holder’s Class B Warrants to the extent that the holder would own more than 4.99% (or 9.99%, at the holder’s election) of our outstanding common stock immediately after exercise, except that upon notice from the holder to us, the holder may decrease or increase the limitation of ownership of outstanding stock after exercising the holder’s Class B Warrants up to 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Class B Warrants, provided that any increase in such limitation shall not be effective until 61 days following notice to us.
Cashless Exercise
If, at the time a holder exercises its Class B Warrants, a registration statement registering the issuance of the shares of common stock underlying the Class B Warrants under the Securities Act, is not then effective or available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a formula set forth in the Class B Warrant.
Transferability
A Class B Warrant may be transferred at the option of the holder upon surrender of the Class B Warrant to us together with the appropriate instruments of transfer.
Fractional Shares
No fractional shares of common stock will be issued upon the exercise of the Class B Warrants. Rather, the number of shares of common stock to be issued will, at our election, either be rounded up to the nearest whole number or we will pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the exercise price.
Trading Market
There is no established trading market for any of the Class B Warrants, and we do not expect a market to develop. We do not intend to apply for a listing for any of the Class B Warrants on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Class B Warrants will be limited.
Rights as a Shareholder
Except as otherwise provided in the warrants or by virtue of the holders’ ownership of shares of our common stock, the holders of Class B Warrants do not have the rights or privileges of holders of our common stock, including any voting rights, until such Class B Warrant holders exercise their Class B Warrants.
Fundamental Transaction
In the event of a fundamental transaction, as described in the Class B Warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the Class B Warrants will be entitled to receive upon exercise of the warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the Class B Warrants immediately prior to such fundamental transaction.
Waivers and Amendments
No term of the Class B Warrants may be amended or waived without the written consent of the holders of such Class B Warrants.
Series A Warrants issued to Certain Investor in September 2023
General
The following is a brief summary of certain terms and conditions of the Series A Warrants. The following description is subject in all respects to the provisions contained in the form of Series A Warrant.
Duration and Exercise Price
The Series A Warrants have an exercise price of $9.43 per share. The Series A Warrants were immediately exercisable on September 5, 2023, and may be exercised at any time on or after the initial exercise date and would expire on March 5, 2029. The exercise prices and numbers of shares of common stock issuable upon exercise are subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock.
Exercisability
The Series A Warrants are exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of such holder’s Series A Warrants to the extent that the holder would own more than 4.99% (or 9.99%, at the holder’s election) of our outstanding common stock immediately after exercise, except that upon notice from the holder to us, the holder may decrease or increase the limitation of ownership of outstanding stock after exercising the holder’s Series A Warrants up to 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Series A Warrants, provided that any increase in such limitation shall not be effective until 61 days following notice to us.
Cashless Exercise
If, at the time a holder exercises its Series A Warrants, a registration statement registering the issuance of the shares of common stock underlying the Series A Warrants under the Securities Act, is not then effective or available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a formula set forth in the Series A Warrant.
Transferability
A Series A Warrant may be transferred at the option of the holder upon surrender of the Series A Warrant to us together with the appropriate instruments of transfer.
Fractional Shares
No fractional shares of common stock will be issued upon the exercise of the Series A Warrants. Rather, the number of shares of common stock to be issued will, at our election, either be rounded up to the nearest whole number or we will pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the exercise price.
Trading Market
There is no established trading market for any of the Series A Warrants, and we do not expect a market to develop. We do not intend to apply for a listing for any of the Series A Warrants on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Series A Warrants will be limited.
Rights as a Shareholder
Except as otherwise provided in the warrants or by virtue of the holders’ ownership of shares of our common stock, the holders of Series A Warrants do not have the rights or privileges of holders of our common stock, including any voting rights, until such Series A Warrant holders exercise their Series A Warrants
Fundamental Transaction
In the event of a fundamental transaction, as described in the Series A Warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the Series A Warrants will be entitled to receive upon exercise of the warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the Series A Warrants immediately prior to such fundamental transaction.
Waivers and Amendments
No term of the Series A Warrants may be amended or waived without the written consent of the holders of such Series A Warrants.
Series B Warrants issued to Certain Investor in September 2023
General
The following is a brief summary of certain terms and conditions of the Series B Warrants. The following description is subject in all respects to the provisions contained in the form of Series B Warrant.
Duration and Exercise Price
The Series B Warrants have an exercise price of $9.43 per share. The Series B Warrants were immediately exercisable on September 5, 2023, and may be exercised at any time on or after the initial exercise date and would expire on December 5, 2024. The exercise prices and numbers of shares of common stock issuable upon exercise are subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock.
Exercisability
The Series B Warrants are exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of such holder’s Series B Warrants to the extent that the holder would own more than 4.99% (or 9.99%, at the holder’s election) of our outstanding common stock immediately after exercise, except that upon notice from the holder to us, the holder may decrease or increase the limitation of ownership of outstanding stock after exercising the holder’s Series B Warrants up to 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Series B Warrants, provided that any increase in such limitation shall not be effective until 61 days following notice to us.
Cashless Exercise
If, at the time a holder exercises its Series B Warrants, a registration statement registering the issuance of the shares of common stock underlying the Series B Warrants under the Securities Act, is not then effective or available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a formula set forth in the Series B Warrant.
Transferability
A Series B Warrant may be transferred at the option of the holder upon surrender of the Series B Warrant to us together with the appropriate instruments of transfer.
Fractional Shares
No fractional shares of common stock will be issued upon the exercise of the Series B Warrants. Rather, the number of shares of common stock to be issued will, at our election, either be rounded up to the nearest whole number or we will pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the exercise price.
Trading Market
There is no established trading market for any of the Series B Warrants, and we do not expect a market to develop. We do not intend to apply for a listing for any of the Series B Warrants on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Series B Warrants will be limited.
Rights as a Shareholder
Except as otherwise provided in the warrants or by virtue of the holders’ ownership of shares of our common stock, the holders of Series B Warrants do not have the rights or privileges of holders of our common stock, including any voting rights, until such Series B Warrant holders exercise their Series B Warrants
Fundamental Transaction
In the event of a fundamental transaction, as described in the Series B Warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the Series B Warrants will be entitled to receive upon exercise of the warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the Series B Warrants immediately prior to such fundamental transaction.
Waivers and Amendments
No term of the Series B Warrants may be amended or waived without the written consent of the holders of such Series B Warrants.
Placement Agent Warrants Issued in November 2022, January 2023 and September 2023
General
The following is a brief summary of certain terms and conditions of our outstanding Placement Agent Warrants (the “Placement Agent Warrants”) that were issued to H.C. Wainwright & Co., LLC in a Best Efforts Offering in November 2022, in a Private Placement Transaction in January 2023 and in another Private Placement Transaction in September 2023. The following description is subject in all respects to the provisions contained in the form of Placement Agent Warrant.
Duration and Exercise Price
The Placement Agent Warrants that were issued to H.C. Wainwright & Co., LLC in the Best Efforts Offering in November 2022 have an exercise price of $172 per share. The Placement Agent Warrants issued in the Private Placement Transaction in January 2023 have an exercise price of $123 per share. The Placement Agent Warrants issued in the Private Placement Transaction in September 2023 have an exercise price of $12.16 per share. The Placement Agent Warrants were immediately exercisable and may be exercised at any time on or after the initial exercise date and on or before the five-year anniversary of the date of issuance. The exercise prices and numbers of shares of common stock issuable upon exercise are subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock.
Exercisability
The Placement Agent Warrants are exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of such holder’s Placement Agent Warrants to the extent that the holder would own more than 4.99% (or 9.99%, at the holder’s election) of our outstanding common stock immediately after exercise, except that upon notice from the holder to us, the holder may decrease or increase the limitation of ownership of outstanding stock after exercising the holder’s Placement Agent Warrants up to 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Placement Agent Warrants, provided that any increase in such limitation shall not be effective until 61 days following notice to us.
Cashless Exercise
If, at the time a holder exercises its Placement Agent Warrants, a registration statement registering the issuance of the shares of common stock underlying the Placement Agent Warrants under the Securities Act, is not then effective or available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a formula set forth in the Placement Agent Warrant.
Transferability
The Placement Agent Warrant may be transferred at the option of the holder upon surrender of the Placement Agent Warrant to us together with the appropriate instruments of transfer.
Fractional Shares
No fractional shares of common stock will be issued upon the exercise of the Placement Agent Warrants. Rather, the number of shares of common stock to be issued will, at our election, either be rounded up to the nearest whole number or we will pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the exercise price.
Rights as a Shareholder
Except as otherwise provided in the warrants or by virtue of the holders’ ownership of shares of our common stock, the holders of Placement Agent Warrants do not have the rights or privileges of holders of our common stock, including any voting rights, until such Placement Agent Warrant holders exercise their Placement Agent Warrants.
Fundamental Transaction
In the event of a fundamental transaction, as described in the Placement Agent Warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the Placement Agent Warrants will be entitled to receive upon exercise of the warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the Placement Agent Warrants immediately prior to such fundamental transaction.
Waivers and Amendments
No term of the Placement Agent Warrants may be amended or waived without the written consent of the holders of such Placement Agent Warrants.
Hudson Global Common Stock Purchase Warrants
Hudson Global Ventures, LLC, a New York limited liability company (the “Investor”) entered into a fee agreement dated as of November 14, 2022.
The Common Stock Purchase Warrants have an exercise price of $125 per share. The Common Stock Purchase Warrants are immediately exercisable and may be exercised at any time on or after the initial exercise date and on or before the five-year anniversary of the date of issuance.
OID Notes and Warrants
December Notes
On December 29, 2022, the Company and various purchasers (the “December Investors”) executed a Securities Purchase Agreement (the “December SPA”) whereby the December Investors purchased from the Company 20% OID promissory notes (the “December Notes”) in the aggregate principal amount of $4,000,000 (with an aggregate subscription amount of $3,200,000). The December Notes were repaid in full in March 2023.
In connection with the December SPA, the Company issued to the December Investors an aggregate of 18,779 five-year warrants exercisable for shares of common stock at an exercise price equal to $106.50, and 2,400 shares of our common stock. In addition, the Company entered into a Registration Rights Agreement with the investors, dated December 29, 2022(the “December Registration Rights Agreement”). The December Registration Rights Agreement requires the Company to file a registration statement within 30 days of closing to register the incentive shares and the shares issuable upon exercise of the warrants.
April Notes
On April 7, 2023, the Company and various purchasers (the “April Investors”) executed a Securities Purchase Agreement (the “April SPA”) whereby the April Investors purchased from the Company 20% Original Issue Discount promissory notes (the “April Notes”) in the aggregate principal amount of $2,208,750 (with an aggregate subscription amount of $1,800,000). The April Notes are due and payable on September 30, 2023 (the “Maturity Date”). The Company will also have the option to prepay the April Notes with no penalties at any time prior to the Maturity Date. If the Company or any subsidiary of the Company completes a debt or equity financing of less than $7,500,000, the Company is required to repay 50% of the remaining balance of the April Notes. Following such 50% repayment, the Company must also use any proceeds from any subsequent debt or equity financing to repay the April Notes. Upon the closing of any debt or equity financing of $7,500,000 or greater, the Company is required to repay 100% of the April Notes with no penalties. If the April Notes are not repaid in full by the Maturity Date or if any other event of default occurs, (1) the face value of the April Notes will be automatically increased to 120%; (2) the April Notes will begin generating an annual interest rate of 20%, which will be paid in cash monthly until the default is cured; and (3) if such default continues for 14 or more calendar days, at the April Investors’ discretion, the April Notes shall become convertible at the option of the April Investors into shares of the Company’s Common Stock (“Conversion Shares”) at a conversion price (the “Conversion Price”) equal to the Nasdaq closing price of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), on the Nasdaq Capital Market (as reflected on Nasdaq.com) on the date of the note conversion (the “Default Conversion Election”). If the April Investors elect such Default Conversion Election, (1) the Company shall use commercially reasonable efforts to submit to its stockholders as soon as practicable in order to obtain as soon as practicable stockholder approval for the Company to issue the number of Conversion Shares necessary to complete such conversion (inclusive of the OID) at the Conversion Price in accordance with Nasdaq Rule 5635(a)(1) and/or 5635(d) (as applicable, the “20% Rule”), Delaware corporate law and the Securities Exchange Act of 1934, as amended; (2) if such stockholder approval is obtained, such conversion shall be effected within one business day of such approval at the Conversion Price; (3) to the extent that, prior to obtaining such stockholder approval, the Company may then issue Conversion Shares at the Conversion Price without violating the 20% Rule (the “Maximum Amount”), the Company shall issue to the Investor the Maximum Amount of Conversion Shares at the Conversion Price; and (4) if such stockholder approval is not obtained within 14 calendar days of the conversion date, then the Company shall cause (i) all members of its management team to pledge their shares of common stock to the Investor to secure the repayment of amounts due under the Note, and (ii) the Chief Executive Officer to personally guarantee the repayment of all amounts due thereunder.
ELOC
On August 27, 2021, the Company entered into what is sometimes termed an equity line of credit arrangement with Oasis Capital. Specifically, the Company entered into an equity purchase agreement (the “EPA”), pursuant to which Oasis Capital is committed to purchase up to $17,500,000 of the Company’s common stock over the 24-month term of the EPA. The Company is not obligated to request any portion of the $17,500,000.
In connection with the execution of the EPA, the Company issued Oasis Capital $350,000 of its shares of common stock, or 51 shares (the “Commitment Shares”) at a per share price which was based on the closing sale price per share on the Nasdaq Capital Market on the trading date prior to issuance (the “Issuance Reference Date”), as adjusted for the reverse stock split. On the earlier of (i) the date that is nine months from the Execution Date, and (ii) the date that the EPA is terminated in accordance with its terms (the “Reference Date”), if the closing sale price per share on the Nasdaq Capital Market on the trading date preceding the Reference Date is higher than the closing sale price on the Issuance Reference Date, then Oasis Capital shall return to the Company a portion of the Commitment Shares equal to the amount of Commitment Shares required to be issued on the Execution Date minus the amount of Commitment Shares that would have been required to have been issued if the closing sale price per share on the Nasdaq Capital Market on the trading date preceding the Reference Date had been used to calculate the amount of Commitment Shares issuable on the Execution Date.
As of the date of this report, the Company has not drawn down any portion of this commitment, leaving the entire $17,500,000 available under the equity line of credit, and for which the Company has agreed, pursuant to a registration rights agreement (the “Oasis Equity RRA”), to register the shares of common stock issuable further to the equity line of credit with the Securities and Exchange Commission (the “SEC”), before any such issuances. The actual number of shares that the Company may issue pursuant to the equity line of credit is not determinable as it is based on the market price of our common stock from time to time and the number of shares we desire to put to Oasis Capital.
During the 24-month term of the investment agreement, the Company may request a drawdown on the equity line of credit by delivering a “put notice” to Oasis Capital stating the dollar amount of shares the Company intends to sell to Oasis Capital. The Company may make either an Option 1 or Option 2 request to Oasis Capital. Under Option 1, the purchase price Oasis Capital is required to pay for the shares is the lesser of (i) the lowest traded price of our Common Stock on the Nasdaq Capital Market on the Clearing Date, which is the date on which Oasis Capital receives the put shares as DWAC shares in its brokerage account, or the average of the three lowest closing sale prices of our Common Stock on the Nasdaq Capital Market during the period of twelve consecutive trading days immediately preceding the Clearing Date. The maximum amount the Company may request in an Option 1 request is $500,000. Under Option 2, the purchase price Oasis Capital is required to pay for the shares is the lesser of (i) 93% of the one (1) lowest traded price of our common stock on the Nasdaq Capital Market during the period of five (5) consecutive trading days immediately preceding the put date, or (ii) 93% of the VWAP on the Clearing Date, or (iii) 93% of the closing bid price of the Company’s common stock on the Nasdaq Capital Market on the Clearing Date. The maximum amount the Company may request in an Option 2 request is $2,000,000.
Anti-Takeover Provisions and Choice of Forum
Certain provisions of Delaware law and our Sixth Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws could make the following more difficult:
| ● | the acquisition of us by means of a tender offer; | |
| ● | acquisition of control of us by means of a proxy contest or otherwise; and | |
| ● | the removal of our incumbent officers and directors. |
These provisions, summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and are designed to encourage persons seeking to acquire control of us to negotiate with our board of directors. We believe that the benefits of increased protection against an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging such proposals. Among other things, negotiation of such proposals could result in an improvement of their terms.
Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business acquisition “ with an “interested stockholder” for a period of three years following the date the person became an interested stockholder, unless the “business acquisition “ or the transaction in which the person became an interested stockholder is approved by our board of directors in a prescribed manner. Generally, a “business acquisition “ includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an “interested stockholder” is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation’s voting stock. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders.
Stockholder Meetings. Under our bylaws, only the board of directors, the chairman of the board, the chief executive officer and the president, and stockholders holding an aggregate of 25% of our shares of our common stock may call special meetings of stockholders.
No Cumulative Voting. Our Sixth Amended and Restated Certificate of Incorporation and bylaws do not provide for cumulative voting in the election of directors.
Action by Written Consent of Stockholders Prohibited. Our Sixth Amended and Restated Certificate of Incorporation does not allow stockholders to act by written consent in lieu of a meeting, unless approved in advance by our board of directors.
Undesignated Preferred Stock. The authorization of undesignated preferred stock makes it possible for the board of directors without stockholder approval to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to obtain control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of us.
Amendment of Provisions in the Sixth Amended and Restated Certificate of Incorporation. The Sixth Amended and Restated Certificate of Incorporation will generally require the affirmative vote of the holders of at least 662∕3% of the outstanding voting stock in order to amend any provisions of the Sixth Amended and Restated Certificate of Incorporation concerning, among other things:
| ● | the required vote to amend certain provisions of the Sixth Amended and Restated Certificate of Incorporation; | |
| ● | the reservation of the board of director’s right to amend the Amended and Restated Bylaws, with all rights granted to stockholders being subject to this reservation; | |
| ● | management of the business by the board of directors; | |
| ● | number of directors and structure of the board of directors; | |
| ● | removal and appointment of directors; | |
| ● | director nominations by stockholders; | |
| ● | prohibition of action by written consent of stockholders; | |
| ● | personal liability of directors to us and our stockholders; and | |
| ● | indemnification of our directors, officers, employees and agents. |
Choice of Forum. Our Sixth Amended and Restated Certificate of Incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) shall be the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:
| ● | any derivative action or proceeding brought on our behalf; | |
| ● | any action asserting a breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders; | |
| ● | any action asserting a claim against us or our directors, officers or other employees arising under the Delaware General Corporation Law, our Sixth Amended and Restated Certificate of Incorporation or our bylaws; | |
| ● | any action or proceeding to interpret, apply, enforce or determine the validity of our Sixth Amended and Restated Certificate of Incorporation or our bylaws; | |
| ● | any action or proceeding as to which the Delaware General Corporation Law confers jurisdiction to the Court of Chancery of the State of Delaware; or | |
| ● | any action asserting a claim against us or our directors, officers or other employees that is governed by the “internal affairs doctrine” as that term is defined in Section 115 of the Delaware General Corporation Law, in all cases to the fullest extent permitted by law and subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. |
Our Sixth Amended and Restated Certificate of Incorporation further provides that unless the Company consents in writing to the selection of an alternative forum, the U.S. federal district courts have exclusive jurisdiction of the resolution of any complaint asserting a cause of action arising under the Securities Act. The enforceability of similar exclusive federal forum provisions in other companies’ organizational documents has been challenged in legal proceedings, and while the Delaware Supreme Court has ruled that this type of exclusive federal forum provision is facially valid under Delaware law, there is uncertainty as to whether other courts would enforce such provisions and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. This exclusive forum provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction.
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and to have consented to this exclusive forum provision of our Sixth Amended and Restated Certificate of Incorporation. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find this choice of forum provision in our Sixth Amended and Restated Certificate of Incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions. Additional costs associated with resolving an action in other jurisdictions could materially adversely affect our business, financial condition and results of operations.
Limitations on Directors’ Liability and Indemnification
Our Sixth Amended and Restated Certificate of Incorporation provides that our directors will not be personally liable to us or our stockholders for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following:
| ● | any breach of their duty of loyalty to the corporation or its stockholders; | |
| ● | acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; | |
| ● | payments of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law; or | |
| ● | any transaction from which the director derived an improper personal benefit. |
This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission.
Our Sixth Amended and Restated Certificate of Incorporation provides that we shall indemnify our directors, officers, employees and other agents to the fullest extent permitted by law, and our Amended and Restated Bylaws provide that we shall indemnify our directors and officers, and may indemnify our employees and other agents, to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether Delaware law would permit indemnification.
We have entered into agreements to indemnify our directors and executive officers, in addition to the indemnification provided for in our Sixth Amended and Restated Certificate of Incorporation and bylaws. These agreements, among other things, provide for indemnification of our directors and officers for expenses, judgments, fines, penalties and settlement amounts incurred by any such person in any action or proceeding arising out of such person’s services as a director or officer or at our request.
We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. There is no pending litigation or proceeding involving any of our directors, officers, employees or agents. We are not aware of any pending or threatened litigation or proceeding that might result in a claim for indemnification by a director, officer, employee or agent.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is VStock Transfer, LLC. VStock Transfer, LLC is also acting as the warrant agent for the pre-funded warrants. The telephone number of VStock Transfer, LLC is (212) 828-8436.
NasdaqCM Listing
Our common stock and warrants are listed on the NasdaqCM under the symbols “DBGI” and “DBGIW”, respectively.
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Digital Brands Group, Inc.
Austin, Texas
We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-256261) and on Form S-3 (Nos. 333-266486 and 333-268045) of Digital Brands Group, Inc. (the “Company”) of our report dated April 15, 2024 with respect to the consolidated balances sheets of the Company as of December 31, 2023, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended, included in this Amendment No. 1 to Annual Report on Form 10-K/A. Our report includes an explanatory paragraph regarding substantial doubt about the Company’s ability to continue as a going concern.
/s/ Macias, Gini and O’Connell LLP
Irvine, California
June 3, 2024
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-256261) and on Form S-3 (Nos. 333- 266486 and 333-268045) of Digital Brands Group, Inc. (the “Company”) of our report dated April 17, 2023, except for the effects of the stock split and discontinued operations as described in Note 1, for which the date is August 24, 2023, with respect to the consolidated balance sheet of the Company as of December 31, 2022, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended, included in this Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2023. Our report includes an explanatory paragraph regarding substantial doubt about the Company’s ability to continue as a going concern.
 |
|
| Newport Beach, California | |
| June 3, 2024 |
EXHIBIT 31.1
Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, John Hilburn Davis, certify that:
| 1. | I have reviewed this Amendment No. 1 to Annual Report on Form 10-K/A of Digital Brands Group, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: June 3, 2024 | By: | /s/ John Hilburn Davis |
| John Hilburn Davis | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) |
EXHIBIT 31.2
Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Reid Yeoman, certify that:
| 1. | I have reviewed this Amendment No. 1 to Annual Report on Form 10-K/A of Digital Brands Group, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: June 3, 2024 | By: | /s/ Reid Yeoman |
| Reid Yeoman | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with Amendment No. 1 to the Annual Report of Digital Brands Group, Inc. (the “Company”) on Form 10-K/A, for the fiscal year ended December 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Hilburn Davis, Chief Executive Officer of Digital Brands Group, Inc., certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
| Date: June 3, 2024 | By: | /s/ John Hilburn Davis |
| John Hilburn Davis | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with Amendment No. 1 to the Annual Report of Digital Brands Group, Inc. (the “Company”) on Form 10-K/A, for the fiscal year ended December 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Reid Yeoman, Chief Financial Officer of Digital Brands Group, Inc., certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
| Date: June 3, 2024 | By: | /s/ Reid Yeoman |
| Reid Yeoman | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |