Digital Brands Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Digital Brands Group operates apparel brands through direct-to-consumer and wholesale channels. The statements are unaudited. Harper & Jones (H&J) was disposed of on June 21, 2023, and is reported as discontinued operations; comparisons therefore reflect a change in business scope.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue from continuing operations | $3.26 million | $2.66 million | $12.13 million | $7.94 million |
| Gross profit | $1.70 million | $0.96 million | $6.03 million | $2.68 million |
| Gross margin | 52.3% | 36.0% | 49.7% | 33.8% |
| Operating income (loss) | $(3.42) million | $(2.44) million | $0.68 million | $(18.56) million |
| Net loss | $(5.44) million | $(4.89) million | $(6.53) million | $(22.26) million |
| Cash used in operating activities | Not provided quarterly | Not provided quarterly | $(6.46) million | $(8.69) million |
- Management attributed revenue growth primarily to Sundry, acquired in December 2022. It attributed higher gross margins to a shift toward e-commerce, Sundry’s mix, and, for the nine-month comparison, heavy discounting in Q1 2022.
- The nine-month operating result included a $10.70 million gain from eliminating Bailey acquisition contingent consideration after a Norwest waiver. This noncash gain substantially affects the comparison; operating expenses before this gain were not lower on a like-for-like basis.
- At September 30, cash was $1.07 million; current assets were $7.65 million and current liabilities were $22.36 million, producing a $14.71 million working capital deficit. Total liabilities were $22.52 million and stockholders’ equity was $5.22 million.
- Debt principal was reported by management at approximately $7.0 million. Promissory notes payable, net, were $4.90 million; the balance sheet also included a $100,000 convertible note, $1.88 million current loan payable, and $150,000 noncurrent loan payable. Interest expense was $4.91 million for the nine months.
- Cash fell by $0.21 million over the nine months, despite $6.21 million of financing cash inflows, including equity proceeds and new borrowing. The company raised approximately $8.1 million net through January and August private placements and repaid $8.84 million of convertible and promissory notes.
Material changes and unusual items
- H&J was transferred to its former owners for $229,000 cash and 1,952,580 common shares; the company recorded a $1.52 million loss on disposition. H&J had contributed $1.41 million of revenue and a $1.56 million net loss in the nine months through disposal.
- Sundry-related debt was exchanged for 5,761 shares of Series C convertible preferred stock. The filing also reports a second 1-for-25 reverse stock split effective August 22, 2023, following a 1-for-100 split in November 2022.
- The March 2023 notes were in default at September 30; the company said it was working on a maturity extension. The $3.5 million Bailey seller note was extended to June 30, 2024. Most debt maturities fall by the end of 2024.
- The company reported 578,090 common shares outstanding at September 30 and 857,859 as of November 14. It also disclosed 1,662,096 outstanding warrants at September 30 and Series C preferred shares convertible into common stock, representing potential dilution.
Outlook, risks and contingencies
- Going concern: Management stated that recurring losses, operating cash outflows, limited liquidity, and the working capital deficit raise substantial doubt about the company’s ability to continue as a going concern. It expects operating losses to continue and depends on improved operating cash flows and/or additional financing. No assurance of financing is given; equity financing may dilute shareholders.
- Outlook: The filing provides no specific revenue or earnings guidance. Management plans to fund the next 12 months through potential equity offerings, debt financing, or other sources, and may need to reduce expenses or curtail plans if funds are unavailable.
- Debt and liquidity risks: The March notes were in default, and the company had substantial short-term obligations. It also reported $1.41 million of payroll taxes due, subject to further penalties and interest, and $1.23 million in past-due rent across two leases.
- Legal matters: Vendor suits include claims of approximately $43,500 and $182,400, which management says are included in payables. A Bailey lease-related claim was revised to $450,968 and is disputed. The filing describes additional settled or ongoing matters.
- Listing and controls: Nasdaq confirmed listing compliance on September 20, 2023, but the company remains under a Panel Monitor through September 20, 2024. Management concluded disclosure controls were ineffective and material weaknesses had not been fully remediated; remediation efforts include additional financial expertise and system improvements.
- Operating risks: Management cited supply-chain pressures, including higher material, freight, and labor costs and longer transit times. Results are seasonal and historically stronger in the second half of the year.
Most important facts for investors to verify
- Whether the company can secure sufficient financing and meet near-term obligations, including the defaulted March notes, payroll taxes, and overdue rent.
- How much of the reported nine-month operating improvement reflects the one-time contingent-consideration gain rather than recurring operations.
- The current common-share count and potential dilution from warrants, preferred stock conversions, and other equity issuances.
- Whether internal-control weaknesses are remediated and Nasdaq listing requirements remain satisfied during the Panel Monitor period.
- The exact comparability of revenue and margins given Sundry’s acquisition and H&J’s disposal; the filing’s MD&A contains some figures that differ from the financial statements, so the statements are used above.