DBGI

Business Context and Reporting Period

Digital Brands Group, Inc. (DBG) is a portfolio company of apparel brands including Bailey 44, Stateside, and Sundry. The company operates as a single reportable segment focused on direct-to-consumer and wholesale fashion. This Form 10-Q covers the quarterly period ended March 31, 2026. The company is classified as a non-accelerated filer, a smaller reporting company, and an emerging growth company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased by approximately 30% ($0.6 million) compared to Q1 2025, primarily due to lower wholesale activity.
• Gross Margin Compression: Gross margin collapsed from 46.6% to 3.5% due to a lower revenue base relative to cost of goods sold and product mix shifts.
• Operating Expense Surge: Operating expenses increased by $4.6 million to $7.5 million. This was driven by a $3.9 million increase in Sales and Marketing expenses, largely due to the amortization of prepaid marketing assets from new collegiate apparel (NIL) agreements.
• Non-Cash Fair Value Loss: A significant non-cash charge of $3.9 million was recorded for the change in fair value of share-based payment liabilities related to make-whole provisions in collegiate apparel agreements.
• Liquidity Position: Cash and cash equivalents increased to $5.1 million from $1.9 million, supported by $2.6 million in proceeds from warrant exercises, despite a net cash burn of $4.7 million from operations.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management expects to fund operations for the next twelve months through existing cash balances, anticipated proceeds from future financing (including a new At-the-Market facility), and operational improvements. The company is actively pursuing revenue growth through expanded NIL and licensing partnerships (e.g., University of Alabama, University of Colorado, Florida State University) and cost-cutting measures.

Unusual Items

• Share-Based Payment Liability: The $3.9 million loss in Q1 2026 is an unusual, non-cash item resulting from the remeasurement of liability-classified share-based awards (make-whole provisions) using a Monte Carlo simulation model.
• Debt Default: The $3.5 million promissory note to Bailey 44 sellers matured on December 8, 2025, and remains in technical default. Management is in discussions regarding repayment or extension.

Risks and Contingencies

• Liquidity Risk: The company has a working capital deficit of $7.5 million and has not generated profits since inception. Continued losses and the need for additional financing pose a going concern risk.
• Legal Proceedings: Significant litigation includes a $1.4 million judgment against subsidiary Bailey 44 LLC (Century City Mall) where the parent company is being sued as an "alter ego," with trial set for July 2026. Other pending matters include wrongful termination claims and vendor disputes.
• Internal Controls: Management concluded that disclosure controls and procedures were not effective as of March 31, 2026, citing material weaknesses in accounting personnel, systems, and revenue recognition policies.

Investor Verification Checklist

• Verify the status of the $3.5 million Bailey 44 promissory note default and the terms of any potential extension or refinancing.
• Confirm the details of the $1.4 million Century City Mall judgment and the likelihood of the "alter ego" claim succeeding against the parent company.
• Review the valuation assumptions (volatility, stock price) used in the Monte Carlo model for the $12.5 million share-based payment liability.
• Assess the progress of remediation efforts regarding the material weaknesses in internal controls over financial reporting.
• Monitor the execution of the new At-the-Market (ATM) offering agreement with Aegis Capital Corp. for future liquidity.