Digital Brands Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. The company operates apparel brands through direct-to-consumer and wholesale channels. Results exclude Harper & Jones (H&J) from June 21, 2023, following its disposition; prior periods were recast for discontinued operations.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $4.49 million | $2.65 million | $8.87 million | $5.28 million |
| Gross profit / margin | $2.34 million / 52.0% | $1.11 million / 42.0% | $4.33 million / 48.8% | $1.73 million / 32.7% |
| Income (loss) from continuing operations | $6.54 million | $(9.48) million | $0.47 million | $(17.20) million |
| Net income (loss), including discontinued operations | $5.04 million | $(9.53) million | $(1.09) million | $(17.37) million |
| Net cash used in operating activities | Not separately reported for the quarter | $(2.98) million | $(6.61) million |
- Revenue rose about 70% in Q2 and 68% in the first half, primarily because 2023 includes a full period of Sundry, acquired in December 2022. Management also attributed improved gross margin to a sales mix shift toward e-commerce and less discounting than in early 2022.
- Q2 operating income of $7.62 million and first-half operating income of $4.10 million were materially affected by a $10.70 million gain from waiving Bailey acquisition contingent-consideration rights. This noncash gain is not indicative of ordinary operating performance.
- First-half interest expense was $2.95 million. Cash declined to $335,470 from $1.28 million at year-end 2022. Net cash used in operations was partly offset by $2.00 million of financing cash flow; investing activities provided $41,331.
Financial position, debt and liquidity
- At June 30, 2023, cash was $335,470, current assets were $6.61 million, and current liabilities were $22.65 million, resulting in a $16.04 million working-capital deficit. Total liabilities were $23.13 million; stockholders’ equity was $4.42 million, compared with a $7.45 million deficit at December 31, 2022.
- Management disclosed approximately $7.6 million of outstanding debt principal. The balance sheet reports $5.61 million of promissory notes, $100,000 of convertible debt, and current and noncurrent loans totaling approximately $1.63 million. The company’s liquidity discussion cites substantial doubt about its ability to continue as a going concern.
- The $4.0 million principal December 2022 notes were repaid in February 2023. In June, $5.5 million of Sundry note principal and $259,177 of accrued interest were exchanged for Series C convertible preferred stock. March 2023 notes, with $2.46 million principal before unamortized discount, were due September 30, 2023. The Bailey sellers’ $3.5 million note maturity was extended to June 30, 2024 after quarter-end.
- The company raised $5.0 million gross in a January private placement and received about $4.3 million net, but also issued common shares and warrants. Common shares outstanding increased from 4,468,939 at year-end to 7,927,549 at June 30; Series C preferred stock is convertible into approximately 8.03 million common shares at the stated initial conversion price, subject to its terms and limitations.
Material changes, outlook and risks
- H&J was transferred to its former owner under a June settlement: the company paid $229,000, issued 1,952,580 common shares, and recorded a $1.52 million loss on disposition. H&J’s results are classified as discontinued operations.
- Management expects operating losses to continue and says the company will need operating cash flow and/or additional debt or equity financing. It plans to seek financing, but gives no quantified revenue or earnings guidance and provides no assurance funding will be available on acceptable terms.
- Nasdaq continued listing was conditional on demonstrating a $1 minimum bid price for ten consecutive trading sessions by September 6, 2023 and at least $2.5 million of stockholders’ equity by September 15, 2023. A proposed reverse split required stockholder approval. Failure to meet listing requirements could result in delisting.
- Management concluded disclosure controls were not effective as of June 30 due to material weaknesses in internal control over financial reporting. Remediation efforts, including adding financial expertise and improving accounting systems, were ongoing.
- Other notable exposures include $1.29 million of payroll taxes payable, subject to potential penalties and interest; $1.16 million of past-due rent payables for two locations; and a disputed Bailey 44 lease claim recently reduced by the claimant to $450,968. The filing also describes vendor lawsuits and other proceedings, with amounts generally included in payables or accruals where management believes liability is likely.
- Management cited supply-chain risks, including increased fabric, shipping and labor costs and longer transit times. Results are seasonal and historically stronger in the second half.
Key investor verification points
- Separate recurring operating results from the $10.70 million contingent-consideration gain and the H&J disposition effects.
- Confirm subsequent financing, debt repayments and extensions, and the company’s ability to meet near-term obligations given its cash balance and working-capital deficit.
- Check whether the company met the Nasdaq bid-price and stockholders’ equity conditions, and whether the proposed reverse split was approved and implemented.
- Review potential dilution from warrants, preferred-stock conversions and additional capital raises, alongside the rise in common shares outstanding.
- Track remediation of internal-control weaknesses and developments in payroll taxes, overdue rent and disputed legal claims.