ITEM 1A. RISK FACTORS
Investing
in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, as well
as our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K, before making an investment
decision. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be
materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all
your investment.
Below
is a summary of material risks, uncertainties and other factors that could have a material effect on the Company and its operations:
● Merchandise returns could harm our business.
● Our sales and gross margins may decline because of increasing freight costs.
● Organizations face growing regulatory and compliance requirements.
● Our business is affected by seasonality.
● We do not expect to pay any dividends in the foreseeable future.
Risks
related to our financial condition and business.
We
have incurred significant net losses since our inception and cannot assure you that we will achieve or maintain profitable operations.
We have incurred significant net losses since inception. Our net loss was
approximately $28.3 and $13.1 million for the years ended December 31, 2025 and 2024, respectively. As of December 31, 2025, we had an
accumulated deficit of $155.35 million. We may continue to incur significant losses in the future for a number of reasons, including unforeseen
expenses, difficulties, complications, delays, and other unknown events, as well as the inflationary and potentially recessive economic
environment.
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 incur increased marketing and sales
expenses in an effort to grow our customer base. These increased expenditures may make it more difficult to achieve and maintain profitability.
In addition, our efforts to grow our business may be more expensive than we expect, and we may not be able to generate sufficient revenue
to offset increased operating expenses. If we are required to reduce our expenses, our growth strategy could be materially affected.
We will need to generate and sustain significant revenue levels in future periods in order to become profitable, and, even if we do,
we may not be able to maintain or increase our level of profitability.
Accordingly,
we cannot assure you that we will achieve sustainable operating profits as we continue to expand our product offerings and infrastructure,
further develop our marketing efforts, and otherwise implement our growth initiatives. Any failure to achieve and maintain profitability
would have a materially adverse effect on our ability to implement our business plan, our results and operations, and our financial condition.
We
have received capital funding to continue the business operations
The
Company has historically incurred net losses and experienced negative cash flows from operations. As of December 31, 2025, we had a working
capital deficit of $5.45 million. However, the Company has successfully obtained substantial capital funding, which provides the necessary
liquidity to support its ongoing operations and allows it to continue as a going concern.
With
this funding, we are positioned to execute our business strategy, invest in growth initiatives, and enhance our financial performance.
While additional funding may be required in the future to support expansion, we are confident in our ability to secure capital on acceptable
terms as needed.
The
amount and timing of our future funding requirements will depend on various factors, including:
● The timing and cost of potential future acquisitions;
● Integration of businesses we have acquired or may acquire in the future;
● Hiring additional management and personnel to support our growth; and
While
we continue to monitor our financial position and capital needs, our recent funding strengthens our ability to operate effectively, respond
to competitive pressures, and achieve long-term profitability. Additionally, we remain mindful of any debt financing covenants that may
restrict our ability to incur additional debt, pay dividends, or engage in certain transactions.
If
our efforts to locate desirable targets are unsuccessful or if we are unable to acquire desirable companies on commercially reasonable
terms, we may not be able to grow the business and our revenues and operating results will be adversely affected.
One
of our principal growth strategies has been and continues to be is to grow our business and increase our revenue through the acquisition
of additional businesses within our industry. It may be difficult for us to identify desirable companies to acquire. We may face competition
in our pursuit to acquire additional businesses, which could limit the number of available companies for sale and may lead to higher
acquisition prices. When we identify desirable companies, their owners may not be willing to sell their companies at all or on terms
that we have determined to be commercially reasonable. If our efforts to locate and acquire desirable companies on terms that are acceptable
to us are not successful, our revenues and operating results may be adversely affected.
We
may not be able to successfully integrate future acquisitions or generate sufficient revenues from future acquisitions, which could cause
our business to suffer.
A
significant part of our grown strategy is acquiring additional businesses. If we buy a company or a division of a company in the future,
there can be no assurance that we will be able to profitably manage such business or successfully integrate such business without substantial
costs, delays or other operational or financial problems. Acquisitions also may require us to spend a substantial portion of our available
cash, incur debt or other liabilities, amortize expenses related to intangible assets, incur write-offs of goodwill or other assets or
obligate us to issue a substantial number of shares of our capital stock, which would result in dilution for our existing stockholders.
There can be no assurance that the businesses we acquire in the future will achieve anticipated revenues or earnings. Additionally:
● the key personnel of the acquired business may decide not to work for us;
● we may be unable to successfully scale an acquired business; and
Some
or all of these factors could have a material adverse effect on our business, financial condition and results of operations. Moreover,
we may not benefit from our acquisitions as we expect, or in the time frame we expect. In the apparel industry, differing brands are
used to reach different market segments and capture new market share. However, not every brand deployment is successful. In addition,
integrating an acquired business or technology is risky. We may incur significant costs acquiring, developing, and promoting new brands
only to have limited market acceptance and limited resulting sales. If this occurs, our financial results may be negatively impacted
and we may determine it is in the best interest of the company to no longer support that brand. If a new brand does not generate sufficient
revenues or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected. Finally,
acquisitions could be viewed negatively by analysts, investors or our customers.
In
addition, we may not be successful in acquiring businesses and may expend time and expenses in connection with failed acquisitions. In
addition to such time and expenses, public announcement of a failed acquisition could also negatively impact the trading price of our
common stock.
We
may be subject to claims arising from the operations of our various businesses for periods prior to the dates we acquired them.
We
may be subject to claims or liabilities arising from the ownership or operation of acquired businesses for the periods prior to our acquisition
of them, including environmental, warranty, workers’ compensation and other employee-related and other liabilities and claims not
covered by insurance. These claims or liabilities could be significant. Our ability to seek indemnification from the former owners of
our acquired businesses for these claims or liabilities may be limited by various factors, including the specific time, monetary or other
limitations contained in the respective acquisition agreements and the financial ability of the former owners to satisfy our indemnification
claims. In addition, insurance companies may be unwilling to cover claims that have arisen from acquired businesses or locations, or
claims may exceed the coverage limits that our acquired businesses had in effect prior to the date of acquisition. If we are unable to
successfully obtain insurance coverage of third-party claims or enforce our indemnification rights against the former owners, or if the
former owners are unable to satisfy their obligations for any reason, including because of their current financial position, we could
be held liable for the costs or obligations associated with such claims or liabilities, which could adversely affect our financial condition
and results of operations.
Our
ability to acquire additional businesses may require issuances of our common stock and/or debt financing that we may be unable to obtain
on acceptable terms.
The
timing, size and success of our acquisition efforts and the associated capital commitments cannot be readily predicted. We intend to
use our common stock, cash, debt and borrowings under our credit facility, if necessary, as consideration for future acquisitions of
companies. The issuance of additional common stock in connection with future acquisitions may be dilutive to holders of shares of common
stock. In addition, if our common stock does not maintain a sufficient market value or potential acquisition candidates are unwilling
to accept common stock as part of the consideration for the sale of their businesses, we may be required to use more of our cash resources,
including obtaining additional capital through debt financing. However, there can be no assurance that we will be able to obtain financing
if and when it is needed or that it will be available on terms that we deem acceptable. As a result, we may be unable to pursue our acquisition
strategy successfully, which may prevent us from achieving our growth objectives.
We
have an amount of debt which may be considered significant for a company of our size, which could adversely affect our financial condition
and our ability to react to changes in our business.
As
of December 31, 2025, we had an aggregate principal amount of debt outstanding of approximately $6.5 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:
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
may not be able to generate sufficient cash to service all of our debt or refinance our obligations and may be forced to take other actions
to satisfy our obligations under such indebtedness, which may not be successful.
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.
Our
results of operations have been and could be in the future adversely affected as a result of asset impairments.
Our
results of operations and financial condition have been and could be in the future adversely affected by impairments to goodwill, other
intangible assets, receivables, long-lived assets or investments. For example, when we acquire a business, we record goodwill in an amount
equal to the amount we paid for the business minus the fair value of the net tangible assets and other identifiable intangible assets
of the acquired business. Goodwill and other intangible assets that have indefinite useful lives cannot be amortized, but instead must
be tested at least annually for impairment. As a result of our acquisitions of Sundry, Stateside and Bailey, our goodwill and intangible
assets as of December 31, 2025 were $5.8 and $6.1 million, respectively. During the years ended December 31, 2025, we recorded impairment
expense of $4.4 million and $1.4 million pertaining to the goodwill and intangible assets. Any future impairments, including impairments
of goodwill, intangible assets, long-lived assets or investments, could have a material adverse effect on our financial condition and
results of operations for the period in which the impairment is recognized.
If
we fail to effectively manage our growth, our business, financial condition and operating results could be harmed.
We
have grown and expect to continue to grow rapidly. To effectively manage our growth, we must continue to implement our operational plans
and strategies, improve our business processes, improve and expand our infrastructure of people and information systems, and expand,
train and manage our employee base. Since our inception and as a result of our acquisitions, we have rapidly increased our employee headcount
across our organization to support the growth of our business. To support continued growth, we must effectively integrate, develop and
motivate a large number of new employees while maintaining our corporate culture. We face significant competition for personnel. To attract
top talent, we have had to offer, and expect to continue to offer, competitive compensation and benefits packages before we can validate
the productivity of new employees. We may also need to increase our employee compensation levels to remain competitive in attracting
and retaining talented employees. The risks associated with a rapidly growing workforce will be particularly acute as we choose to expand
into new merchandise categories and internationally. Additionally, we may not be able to hire new employees quickly enough to meet our
needs. If we fail to effectively manage our hiring needs or successfully integrate new hires, our efficiency, our ability to meet forecasts
and our employee morale, productivity and retention could suffer, which may have an adverse effect on our business, financial condition
and operating results.
We
are also required to manage numerous relationships with various vendors and other third parties.
Further
growth of our operations, vendor base, fulfillment center, information technology systems or internal controls and procedures may not
be adequate to support our operations. If we are unable to manage the growth of our organization effectively, our business, financial
condition and operating results may be adversely affected.
If
we are unable to anticipate and respond to changing customer preferences and shifts in fashion and industry trends in a timely manner,
our business, financial condition and operating results could be harmed.
Our
success largely depends on our ability to consistently gauge tastes and trends and provide a diverse and balanced assortment of merchandise
that satisfies customer demands in a timely manner. Our ability to accurately forecast demand for our products could be affected by many
factors, including an increase or decrease in demand for our products or for products of our competitors, our failure to accurately forecast
acceptance of new products, product introductions by competitors, unanticipated changes in general market conditions, and weakening of
economic conditions or consumer confidence in future economic conditions. We typically enter into agreements to manufacture and purchase
our merchandise in advance of the applicable selling season and our failure to anticipate, identify or react appropriately, or in a timely
manner to changes in customer preferences, tastes and trends or economic conditions could lead to, among other things, missed opportunities,
excess inventory or inventory shortages, markdowns and write-offs, all of which could negatively impact our profitability and have a
material adverse effect on our business, financial condition and operating results. Failure to respond to changing customer preferences
and fashion trends could also negatively impact the image of our brands with our customers and result in diminished brand loyalty.
Our
business depends on our ability to maintain a strong portfolio of brands and engaged customers. We may not be able to maintain and enhance
our existing brand portfolio if we receive customer complaints, negative publicity or otherwise fail to live up to consumers’ expectations,
which could materially adversely affect our business, operating results and growth prospects.
Our
ability to acquire or offer new brands and maintain and enhance the appeal of our existing brands is critical to expanding our base of
customers. A significant portion of our customers’ experience depends on third parties outside of our control, including vendors,
suppliers and logistics providers such as FedEx, UPS and the U.S. Postal Service. If these third parties do not meet our or our customers’
expectations, including timely delivery of our products, or if they increase their rates, our business may suffer irreparable damage
or our costs may increase. Also, if we fail to promote and maintain our brands, or if we incur excessive expenses in this effort, our
business, operating results and financial condition may be materially adversely affected. We anticipate that as our market becomes increasingly
competitive, our ability to acquire or offer new brands and to maintain and enhance our existing brands may become increasingly difficult
and expensive and will depend largely on our ability to provide high quality products to our customers and a reliable, trustworthy and
profitable sales channel to our vendors, which we may not do successfully.
Customer
complaints or negative publicity about our sites, products, product delivery times, customer data handling and security practices or
customer support, especially on blogs, social media websites and our sites, could rapidly and severely diminish consumer use of our sites
and consumer and supplier confidence in us and result in harm to our brands.
An
economic downturn or economic uncertainty in the United States may adversely affect consumer discretionary spending and demand for our
products.
Our
operating results are affected by the relative condition of the United States economy, as many of our products may be considered discretionary
items for consumers. Our customers may reduce their spending and purchases due to job loss or fear of job loss, foreclosures, bankruptcies,
higher consumer debt and interest rates, reduced access to credit, falling home prices, increased taxes, and/or lower consumer confidence.
Consumer demand for our products may not reach our targets, or may decline, when there is an economic downturn or economic uncertainty.
Current, recent past, and future conditions may also adversely affect our pricing and liquidation strategy; promotional activities, product
liquidation, and decreased demand for consumer products could affect profitability and margins. Any of the foregoing factors could have
a material adverse effect on our business, results of operations, and financial condition.
Additionally,
many of the effects and consequences of U.S. and global financial and economic conditions could potentially have a material adverse effect
on our liquidity and capital resources, including the ability to raise additional capital, if needed, or could otherwise negatively affect
our business and financial results. For example, global economic conditions may also adversely affect our suppliers’ access to
capital and liquidity with which to maintain their inventory, production levels, and product quality and to operate their businesses,
all of which could adversely affect our supply chain. Market instability could make it more difficult for us and our suppliers to accurately
forecast future product demand trends, which could cause us to carry too much or too little merchandise in various product categories.
We
operate in highly competitive markets and the size and resources of some of our competitors may allow them to compete more effectively
than we can, resulting in a loss of our market share and a decrease in our net revenue.
The
markets in which we compete are highly competitive. Competition may result in pricing pressures, reduced profit margins or lost market
share, or a failure to grow or maintain our market share, any of which could substantially harm our business and results of operations.
We compete directly against wholesalers and direct retailers of apparel, including large, diversified apparel companies with substantial
market share and strong worldwide brand recognition. Many of our competitors, including Vince, James Perse, Rag & Bone, Madewell,
AG, FRAME, All Saints, Zegna and Ralph Lauren, have significant competitive advantages, including longer operating histories, larger
and broader customer bases, more established relationships with a broader set of suppliers, greater brand recognition and greater financial,
research and development, marketing, distribution, and other resources than we do.
As
a result, these competitors may be better equipped than we are to influence consumer preferences or otherwise increase their market share
by:
● quickly adapting to changes in customer requirements or consumer preferences;
● discounting excess inventory that has been written down or written off;
● engaging in lengthy and costly intellectual property and other disputes.
Our
inability to compete successfully against our competitors and maintain our gross margin could have a material adverse effect on our business,
financial condition and results of operations.
Use
of social media and influencers may materially and adversely affect our reputation or subject us to fines or other penalties.
We
use third-party social media platforms as, among other things, marketing tools. We also maintain relationships with many social media
influencers and engage in sponsorship initiatives. As existing e-commerce and social media platforms continue to rapidly evolve and new
platforms develop, we must continue to maintain a presence on these platforms and establish presences on new or emerging popular social
media platforms. If we are unable to cost-effectively use social media platforms as marketing tools or if the social media platforms
we use change their policies or algorithms, we may not be able to fully optimize such platforms, and our ability to maintain and acquire
customers and our financial condition may suffer.
Furthermore,
as laws and regulations and public opinion rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees,
our network of social media influencers, our sponsors or third parties acting at our direction to abide by applicable laws and regulations
in the use of these platforms and devices or otherwise could subject us to regulatory investigations, class action lawsuits, liability,
fines or other penalties and have a material adverse effect on our business, financial condition and operating results.
In
addition, an increase in the use of social media for product promotion and marketing may cause an increase in the burden on us to monitor
compliance of such materials, and increase the risk that such materials could contain problematic product or marketing claims in violation
of applicable regulations. For example, in some cases, the FTC has sought enforcement action where an endorsement has failed to clearly
and conspicuously disclose a financial relationship or material connection between an influencer and an advertiser.
We
do not prescribe what our influencers post, and if we were held responsible for the content of their posts or their actions, we could
be fined or forced to alter our practices, which could have an adverse impact on our business.
Negative
commentary regarding us, our products or influencers and other third parties who are affiliated with us may also be posted on social
media platforms and may be adverse to our reputation or business. Influencers with whom we maintain relationships could engage in behavior
or use their platforms to communicate directly with our customers in a manner that reflects poorly on our brand and may be attributed
to us or otherwise adversely affect us. It is not possible to prevent such behavior, and the precautions we take to detect this activity
may not be effective in all cases. Our target consumers often value readily available information and often act on such information without
further investigation and without regard to its accuracy. The harm may be immediate, without affording us an opportunity for redress
or correction.
If
we fail to retain existing customers, or fail to maintain average order value levels, we may not be able to maintain our revenue base
and margins, which would have a material adverse effect on our business and operating results.
A
significant portion of our net sales are generated from sales to existing customers. If existing customers no longer find our offerings
appealing, or if we are unable to timely update our offerings to meet current trends and customer demands, our existing customers may
make fewer or smaller purchases in the future. A decrease in the number of our customers who make repeat purchases or a decrease in their
spending on the merchandise we offer could negatively impact our operating results. Further, we believe that our future success will
depend in part on our ability to increase sales to our existing customers over time, and if we are unable to do so, our business may
suffer. If we fail to generate repeat purchases or maintain high levels of customer engagement and average order value, our growth prospects,
operating results and financial condition could be materially adversely affected.
We
purchase inventory in anticipation of sales, and if we are unable to manage our inventory effectively, our operating results could be
adversely affected.
Our
business requires us to manage a large volume of inventory effectively. We regularly add new apparel, accessories and beauty styles to
our sites, and we depend on our forecasts of demand for and popularity of various products to make purchase decisions and to manage our
inventory of stock- keeping units, or SKUs. Demand for products, however, can change significantly between the time inventory is ordered
and the date of sale. Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product
defects, promotions, changes in consumer spending patterns, changes in consumer tastes with respect to our products and other factors,
and our consumers may not purchase products in the quantities that we expect.
It
may be difficult to accurately forecast demand and determine appropriate levels of product. We generally do not have the right to return
unsold products to our suppliers. If we fail to manage our inventory effectively or negotiate favorable credit terms with third-party
suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory
write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory level or to pay higher prices
to our suppliers, our profit margins might be negatively affected. Any failure to manage owned brand expansion or accurately forecast
demand for owned brands could adversely affect growth, margins and inventory levels. In addition, our ability to meet customer demand
has been and may be in the future negatively impacted by disruptions in the supply chain from a number of factors, including, for example,
the COVID-19 coronavirus outbreak in China. The COVID-19 coronavirus has impacted our supply chain and may delay or prevent the manufacturing
or transport of product. Any of the above may materially and adversely affect our business, financial condition and operating results.
Merchandise
returns could harm our business.
We
allow our customers to return products, subject to our return policy. If the rate of merchandise returns increases significantly or if
merchandise return economics become less efficient, our business, financial condition and operating results could be harmed. Further,
we modify our policies relating to returns from time to time, which may result in customer dissatisfaction or an increase in the number
of product returns. From time to time our products are damaged in transit, which can increase return rates and harm our brands.
We
rely on third-party suppliers and manufacturers to provide raw materials for and to produce our products, and we have limited control
over these suppliers and manufacturers and may not be able to obtain quality products on a timely basis or in sufficient quantity.
We
rely on third-party suppliers primarily located outside of the United States to provide raw materials for our products. In addition,
we do not own or operate any manufacturing facilities and rely solely on unaffiliated manufacturers primarily located outside the United
States to manufacture our products. Increases in the costs of labor and other costs of doing business in these countries could significantly
increase our costs to produce our products and could have a negative impact on our operations, net revenue, and earnings. In addition,
certain of our manufacturers are subject to government regulations related to wage rates, and therefore the labor costs to produce our
products may fluctuate. Factors that could negatively affect our business include a potential significant revaluation of the currencies
used in these countries, which may result in an increase in the cost of producing products, labor shortages and stoppages and increases
in labor costs, and difficulties in moving products manufactured out of the countries in which they are manufactured and through the
ports in North America, whether due to port congestion, labor disputes, product regulations and/or inspections or other factors, and
natural disasters or health pandemics. A labor strike or other transportation disruption affecting these ports could significantly disrupt
our business. In addition, the imposition of trade sanctions or other regulations against products imported by us from, or the loss of
“normal trade relations” status with any country in which our products are manufactured, could significantly increase our
cost of products and harm our business. We may also experience increased costs in raw goods, transportation and labor. Additionally,
we are also 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:
The
operations of our suppliers can be subject to additional risks beyond our control, including shipping delays, labor disputes, trade restrictions,
tariffs and embargos, or any other change in local conditions. We may experience a significant disruption in the supply of fabrics or
raw materials from current sources or, in the event of a disruption, we may be unable to locate alternative materials suppliers of comparable
quality at an acceptable price, or at all. We do not have any long-term supply contracts in place with any of our suppliers and we compete
with other companies, including many of our competitors, for fabrics, raw materials, production and import quota capacity. We have occasionally
received, and may in the future receive, shipments of products that fail to comply with our specifications or that fail to conform to
our quality control standards. We have also received, and may in the future receive, products that are otherwise unacceptable to us or
our customers. Under these circumstances, we may incur substantial expense to remedy the problems and may be required to obtain replacement
products. If we fail to remedy any such problem in a timely manner, we risk the loss of net revenue resulting from the inability to sell
those products and related increased administrative and shipping costs. Additionally, if the unacceptability of our products is not discovered
until after such products are purchased by our customers, our customers could lose confidence in our products or we could face a product
recall. In such an event our brand reputation may be negatively impacted which could negatively impact our results of operations.
These
and other factors beyond our control could result in our third-party suppliers and manufacturers being unable to fill our orders in a
timely manner. If we experience significant increased demand, or we lose or need to replace an existing third- party supplier and manufacturer
as a result of adverse economic conditions or other reasons, we may not be able to secure additional manufacturing capacity when required
or on terms that are acceptable to us, or at all, or manufacturers may not be able to allocate sufficient capacity to us in order to
meet our requirements.
In
addition, even if we are able to find new third-party suppliers or manufacturers, we may encounter delays in production and added costs
as a result of the time it takes to train our manufacturers on our methods, products and quality control standards. Moreover, it is possible
that we will experience defects, errors, or other problems with their work that will materially affect our operations and we may have
little or no recourse to recover damages for these losses. Any delays, interruption or increased costs in the supply of fabric or manufacture
of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in
lower net revenues and net income both in the short and long term.
In
addition to the foregoing, one of our subsidiary’s depends on two primary suppliers located in China and Turkey for the substantial
portion of raw materials used in its products and the manufacture of these products, which makes it vulnerable to a disruption in the
supply of its products. As a result, termination of these supply arrangements, an adverse change in the financial condition of these
suppliers or an adverse change in their ability to manufacture and/or deliver desired products on a timely basis each could have a material
adverse effect on our business, financial condition and results of operations.
Our
sales and gross margins may decline as a result of increasing product costs and decreasing selling prices.
The
fabrics used in our products include synthetic fabrics whose raw materials include petroleum-based products, as well as natural fibers
such as cotton. Significant price fluctuations or shortages in petroleum or other raw materials can materially adversely affect our cost
of net revenues.
In
addition, the United States and the countries in which our products are produced or sold internationally have imposed and may impose
additional quotas, duties, tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty or tariff levels.
Countries impose, modify and remove tariffs and other trade restrictions in response to a diverse array of factors, including global
and national economic and political conditions, which make it impossible for us to predict future developments regarding tariffs and
other trade restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards, and customs restrictions, could increase
the cost or reduce the supply of products available to us or may require us to modify our supply chain organization or other current
business practices, any of which could harm our business, financial condition and results of operations.
Our
operations are currently dependent on a single warehouse and distribution center, and the loss of, or disruption in, the warehouse and
distribution center and other factors affecting the distribution of merchandise could have a material adverse effect on our business
and operations.
Our
warehouse and fulfillment/distribution functions are currently primarily handled from a single facility in Vernon, California. Our current
fulfillment/distribution operations are dependent on the continued use of this facility. Any significant interruption in the operation
of the warehouse and fulfillment/ distribution center due to COVID-19 restrictions, natural disasters, accidents, system issues or failures,
or other unforeseen causes that materially impair our ability to access or use our facility, could delay or impair the ability to distribute
merchandise and fulfill online orders, which could cause sales to decline.
We
also depend upon third-party carriers for shipment of a significant amount of merchandise directly to our customers. An interruption
in service by these third-party carriers for any reason could cause temporary disruptions in business, a loss of sales and profits, and
other material adverse effects.
Our
sales and gross margins may decline as a result of increasing freight costs.
Freight
costs are impacted by changes in fuel prices through surcharges, among other factors. Fuel prices and surcharges affect freight costs
both on inbound freight from suppliers to the distribution center as well as outbound freight from the distribution center to stores/shops,
supplier returns and third-party liquidators, and shipments of product to customers. The cost of transporting our products for distribution
and sale is also subject to fluctuation due in large part to the price of oil. Because most of our products are manufactured abroad,
our products must be transported by third parties over large geographical distances and an increase in the price of oil can significantly
increase costs. Manufacturing delays or unexpected transportation delays can also cause us to rely more heavily on airfreight to achieve
timely delivery to our customers, which significantly increases freight costs. Increases in fuel prices, surcharges, and other potential
factors may increase freight costs. Any of these fluctuations may increase our cost of products and have an adverse effect on our margins,
results of operations and financial condition.
Increases
in labor costs, including wages, could adversely affect our business, financial condition and results of operations.
Labor
is a significant portion of our cost structure and is subject to many external factors, including unemployment levels, prevailing wage
rates, minimum wage laws, potential collective bargaining arrangements, health insurance costs and other insurance costs and changes
in employment and labor legislation or other workplace regulation. From time to time, legislative proposals are made to increase the
federal minimum wage in the United States, as well as the minimum wage in California and a number of other states and municipalities,
and to reform entitlement programs, such as health insurance and paid leave programs. As minimum wage rates increase or related laws
and regulations change, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our
other hourly or salaried employees. Any increase in the cost of our labor could have an adverse effect on our business, financial condition
and results of operations or if we fail to pay such higher wages we could suffer increased employee turnover. Increases in labor costs
could force us to increase prices, which could adversely impact our sales. If competitive pressures or other factors prevent us from
offsetting increased labor costs by increases in prices, our profitability may decline and could have a material adverse effect on our
business, financial condition and results of operations.
Security
breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation
to suffer.
In
the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information,
and financial and other personally identifiable information of our customers and employees. The secure processing, maintenance, and transmission
of this information is critical to our operations and business strategy. Despite our security measures, our information technology and
infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions. Any such
breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost, or stolen. Advanced
attacks are multi-staged, unfold over time, and utilize a range of attack vectors with military-grade cyber weapons and proven techniques,
such as spear phishing and social engineering, leaving organizations and users at high risk of being compromised. The vast majority of
data breaches, whether conducted by a cyber attacker from inside or outside of the organization, involve the misappropriation of digital
identities and user credentials. These credentials are used to gain legitimate access to sensitive systems and high-value personal and
corporate data. Many large, well-known organizations have been subject to cyber-attacks that exploited the identity vector, demonstrating
that even organizations with significant resources and security expertise have challenges securing their identities. Any such access,
disclosure, or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of
personal information, regulatory penalties, a disruption of our operations, damage to our reputation, or a loss of confidence in our
business, any of which could adversely affect our business, revenues, and competitive position.
Our
future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel.
Our
future success largely depends upon the continued services of our executive officers and management team, especially our Chief Executive
Officer and President, Mr. John “Hil” Davis. If one or more of our executive officers are unable or unwilling to continue
in their present positions, we may not be able to replace them readily, if at all. Additionally, we may incur additional expenses to
recruit and retain new executive officers. If any of our executive officers joins a competitor or forms a competing company, we may lose
some or all of our customers. Finally, we do not maintain “key person” life insurance on any of our executive officers. Because
of these factors, the loss of the services of any of these key persons could adversely affect our business, financial condition, and
results of operations, and thereby an investment in our stock.
In
addition, our continuing ability to attract and retain highly qualified personnel, especially employees with experience in the fashion
and fitness industries, will also be critical to our success because we will need to hire and retain additional personnel as our business
grows. There can be no assurance that we will be able to attract or retain highly qualified personnel. We face significant competition
for skilled personnel in our industries. This competition may make it more difficult and expensive to attract, hire, and retain qualified
managers and employees. Because of these factors, we may not be able to effectively manage or grow our business, which could adversely
affect our financial condition or business. As a result, the value of your investment could be significantly reduced or completely lost.
If
we cannot successfully protect our intellectual property, our business could suffer.
We
rely on a combination of intellectual property rights, contractual protections and other practices to protect our brand, proprietary
information, technologies and processes. We primarily rely on copyright and trade secret laws to protect our proprietary technologies
and processes, including the algorithms we use throughout our business. Others may independently develop the same or similar technologies
and processes, or may improperly acquire and use information about our technologies and processes, which may allow them to provide a
service similar to ours, which could harm our competitive position. Our principal trademark assets include the registered trademarks
“DSTLD”, “Bailey 44”, “AVO”, “STATESIDE” and “SUNDRY” and our logos and taglines.
Our trademarks are valuable assets that support our brand and consumers’ perception of our services and merchandise. We also hold
the rights to the “www.digitalbrandsgroup.co”, www.dstld.com, “www.bailey44.com” Internet domain name and various
related domain names, which are subject to Internet regulatory bodies and trademark and other related laws of each applicable jurisdiction.
If we are unable to protect our trademarks or domain names, our brand recognition and reputation would suffer, we would incur significant
expense establishing new brands and our operating results would be adversely impacted. Further, to the extent we pursue patent protection
for our innovations, patents we may apply for may not issue, and patents that do issue or that we acquire may not provide us with any
competitive advantages or may be challenged by third parties. There can be no assurance that any patents we obtain will adequately protect
our inventions or survive a legal challenge, as the legal standards relating to the validity, enforceability and scope of protection
of patent and other intellectual property rights are uncertain. We may be required to spend significant resources to monitor and protect
our intellectual property rights, and the efforts we take to protect our proprietary rights may not be sufficient.
If
the technology-based systems that give our customers the ability to shop with us online do not function effectively, our operating results
could be materially adversely affected.
A
substantial number of our customers currently shop with us through our e-commerce website and mobile application. Increasingly, customers
are using tablets and smart phones to shop online with us and with our competitors and to do comparison shopping. Any failure on our
part to provide an attractive, effective, reliable, user-friendly e-commerce platform that offers a wide assortment of merchandise with
rapid delivery options and that continually meet the changing expectations of online shoppers could place us at a competitive disadvantage,
result in the loss of sales, harm our reputation with customers, and could have a material adverse impact on our business and results
of operations.
Organizations
face growing regulatory and compliance requirements.
New
and evolving regulations and compliance standards for cyber security, data protection, privacy, and internal IT controls are often created
in response to the tide of cyber-attacks and will increasingly impact organizations. Existing regulatory standards require that organizations
implement internal controls for user access to applications and data. In addition, data breaches are driving a new wave of regulation
with stricter enforcement and higher penalties. Regulatory and policy-driven obligations require expensive and time-consuming compliance
measures. The fear of non-compliance failed audits, and material findings has pushed organizations to spend more to ensure they are in
compliance, often resulting in costly, one-off implementations to mitigate potential fines or reputational damage. Any substantial costs
associated with failing to meet regulatory requirements, combined with the risk of fallout from security breaches, could have a material
adverse effect on our business and brand.
Our
failure to comply with trade and other regulations could lead to investigations or actions by government regulators and negative publicity.
The
labeling, distribution, importation, marketing and sale of our products are subject to extensive regulation by various federal agencies,
including the Federal Trade Commission, Consumer Product Safety Commission and state attorneys general in the U.S., as well as by various
other federal, state, provincial, local and international regulatory authorities in the locations in which our products are distributed
or sold. If we fail to comply with those regulations, we could become subject to significant penalties or claims or be required to recall
products, which could negatively impact our results of operations and disrupt our ability to conduct our business, as well as damage
our brand image with consumers. In addition, the adoption of new regulations or changes in the interpretation of existing regulations
may result in significant unanticipated compliance costs or discontinuation of product sales and may impair the marketing of our products,
resulting in significant loss of net revenues.
Any
international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-bribery
laws applicable to our operations. Although we have policies and procedures to address compliance with the FCPA and similar laws, there
can be no assurance that all of our employees, agents and other partners will not take actions in violations of our policies. Any such
violation could subject us to sanctions or other penalties that could negatively affect our reputation, business and operating results.
Our
business is affected by seasonality.
Our
business is affected by the general seasonal trends common to the retail apparel industry. This seasonality may adversely affect our
business and cause our results of operations to fluctuate, and, as a result, we believe that comparisons of our operating results between
different quarters within a single fiscal year are not necessarily meaningful and that results of operations in any period should not
be considered indicative of the results to be expected for any future period.
Risks
Related to our Common Stock
The
price of our common stock has in the past and may in the future fluctuate substantially.
The
market price of our common stock has in the past and could in the future be extremely volatile. From May 2021 to December 31, 2025, the
high and low prices of our common stock as quoted on the NasdaqCM was $746,250 and $1.12, respectively (as appropriately adjusted for
the 1-for-100 , 1-for-25 and 1-for-50 reverse stock splits effectuated by the Company in November 2022, August 2023 December 2024, respectively).
The future market price of our common stock may be significantly affected by factors, such as:
● market conditions affecting the apparel industries;
● quarterly variations in our results of operations;
● changes in government regulations;
● the announcement of acquisitions by us or our competitors;
● changes in general economic and political conditions;
● volatility in the financial markets;
● results of our operations and the operations of others in our industry;
● changes in interest rates;
● threatened or actual litigation and government investigations;
● the addition or departure of key personnel;
These
and other factors may lower the market price of our common stock, regardless of our actual operating performance. As a result, our common
stock may trade at prices significantly below the public offering price.
Furthermore,
in recent years the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact
on the market price of securities issued by many companies. The changes frequently appear to occur without regard to the operating performance
of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do
with us, and these fluctuations could materially reduce the price of our common stock and materially affect the value of your investment.
In
the past, securities class action litigation often has been instituted against companies following periods of volatility in the market
price of their securities. This type of litigation, if directed at us, could result in substantial costs and a diversion of management’s
attention and resources.
If
we are not able to comply with the applicable continued listing requirements or standards of the NasdaqCM, Nasdaq could delist our common
stock.
On
January 17, 2023, Digital Brands Group, Inc. (the “Company”) was notified by the Nasdaq Hearings Panel (the “Panel”)
that the Company has evidenced compliance with all applicable requirements for continued listing on The NasdaqCM, including the $2.5
million stockholders’ equity requirement set forth in Nasdaq Listing Rule 5550(b). The Company remained subject to a “Panel
Monitor,” as that term is defined by Nasdaq Listing Rule 5815(d)(4)(A), through January 17, 2024.
There
can be no assurance that we will successfully regain our Nasdaq listing. As our Common Stock and warrants are currently traded on the
OTC marketplace, and as of the date of filing these financial statements, the company has not yet returned to NasdaqCM, our stockholders
may experience reduced liquidity and increased difficulty in obtaining accurate price quotations. Additionally, the ability to issue
additional securities for financing or other purposes, or to secure necessary funding in the future, may be materially and adversely
affected due to the absence of a national securities exchange listing.
If
we are unable to implement and maintain effective internal control over financial reporting, investors may lose confidence in the accuracy
and completeness of our financial reports, which could adversely affect the market price of our common stock.
We
are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”),
and are therefore not required to make an assessment of the effectiveness of our internal control over financial reporting for that purpose.
We have identified material weaknesses in our internal control over financial reporting. These material weaknesses relate to the fact
that we do not maintain a comprehensive policies and procedures manual designed to establish internal controls over financial reporting
to reduce the risk of publishing materially misstated financial statements, as well as define responsibilities and segregate incompatible
duties to reduce the risk of unauthorized transactions.
We
are in the process of taking steps intended to remedy these material weaknesses, and we will not be able to fully address these material
weaknesses until these steps have been completed. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Controls and Procedures” for information regarding our remediation efforts.
As
a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such
internal controls. A material weakness is defined in the standards established by the Public Company Accounting Oversight Board (United
States) as a deficiency, or an acquisition of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely
basis. We intend to begin the process of designing, implementing and testing the internal control over financial reporting required to
comply with this obligation, which process is time consuming, costly and complex. If we fail to increase and maintain the number and
expertise of our staff for our accounting and finance functions and to improve and maintain internal control over financial reporting
adequate to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we
may be unable to report our financial results accurately and prevent fraud. In addition, we cannot be certain that any such steps we
undertake will successfully remediate the material weaknesses or that other material weaknesses and control deficiencies will not be
discovered in the future. If our remediation efforts are not successful or other material weaknesses or control deficiencies occur in
the future, we may be unable to report our financial results accurately or on a timely basis, which could cause our reported financial
results to be materially misstated and result in the loss of investor confidence or delisting and cause our stock price to decline. As
a result of such failures, we could also become subject to investigations by Nasdaq, the SEC, or other regulatory authorities, and become
subject to litigation from investors and stockholders, any of which could harm our reputation and financial condition and divert financial
and management resources. Even if we are able to report our consolidated financial statements accurately and timely, if we do not make