Digital Brands Group, Inc.: Form 10-Q for the period ended Jun 30, 2026

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 Quarterly Report on Form 10-Q. 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 “Digital Brands Group,” the “Company,” “our,” “we,” “us” and similar terms refer to Digital Brands Group, Inc., together with its wholly owned subsidiaries Bailey 44, LLC (“Bailey”), MOSBEST, LLC (“Stateside”) and Sunnyside (“Sundry”).

Overview

Our Company

Digital Brands Group is a curated collection of lifestyle brands, including Bailey 44, DSTLD, Stateside, Sundry and Avo, 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.

Our portfolio consists of five significant brands that leverage our three channels: our websites, wholesale and license revenue.

• 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.
• Avo is a women’s essential brand that will offer t-shirts, sweats, dresses, sweaters and athleisure. Avo eliminates the wholesale mark-up, so its products have a sharper price point. Avo also offers larger discounts when the customer bundles multiple products to their cart, which allows Avo to leverage its shipping and fulfillment costs. Avo leverages the Company’s current design and supply chain infrastructure, so we use similar or the same fabrics and contractors for Avo that we do for our other brands.

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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 (“LTV”), which we define 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.

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 the 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 online but at selected wholesale and retail storefronts. We believe this approach provides us opportunities to successfully drive LTV, while increasing new customer growth.

Material Trends, Events and Uncertainties

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 our brands as follows:

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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 June 30, 2026, we had an aggregate principal amount of debt outstanding of approximately $17.4 million, including $11.2 million payable under our secured payment obligation to RallyTown, LLC. We believe this amount of indebtedness may limit our ability to obtain additional financing on acceptable terms, requires us to dedicate a portion of any cash flow from operations to debt service, and may restrict our flexibility in planning for changes in our business. In addition, subsequent to June 30, 2026 we issued a convertible promissory note in the principal amount of $3.5 million for gross proceeds of $3.0 million.

• 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;
• 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 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. However, we have recently generated cash flows through a private offering and have established business plans that we believe are sufficient to enable us to repay the outstanding notes, including principal, premium (if any), and interest on our indebtedness.

In addition, while our ability to make scheduled payments or refinance obligations under our debt agreements remains subject to prevailing economic and competitive conditions—as well as the financial and business risks described herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025—we believe our current liquidity position and forward-looking strategies provide us with the necessary resources to meet these obligations as they come due.

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.
• 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 customers’ 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 (i) fixed general and administrative costs; (ii) variable sales and marketing costs; (iii) elimination of redundant costs as we acquire and integrate brands; (iv) cross marketing and cross merchandising brands in our portfolio; and (v) 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.

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Financial Statement Components

Bailey

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DBG

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.
• 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.

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Sundry

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Recent Developments

During the six months ended June 30, 2026, the Company continued to expand its collegiate apparel, marketing and name-image-likeness platform, entering into agreements covering additional universities and issuing common stock as consideration under several of those arrangements.

Effective January 26, 2026, the Company entered into a Marketing and Sponsorship Agreement with Learfield College, LLC relating to Vanderbilt University, providing for equity consideration of $925,000 over four contract years through June 30, 2029, together with cash and trade consideration. In May 2026 the Company issued 3,108 shares of common stock in satisfaction of the equity consideration.

Effective March 12, 2026, the Company entered into a consulting agreement with Athlete Capital Sports LLC, and in May 2026 issued 23,511 shares of common stock in settlement of the related stock payable. On May 1, 2026 the Company entered into an Exclusive Private Label Manufacturing Agreement with The Battle’s End, LLC, the marketing agent for Florida State University athletics, with stock consideration of $1,050,000.

During the six months ended June 30, 2026, holders exercised pre-funded warrants resulting in the issuance of 46,497 shares of common stock and exercised 203,613 common stock purchase warrants issued in connection with the February 2025 offering. On June 15, 2026 the Company placed a hold on 179,690 pre-funded warrants pending their expected cancellation, and on June 17, 2026 240,851 warrants issued under the February 2026 inducement expired unexercised.

During the six months ended June 30, 2026, holders converted 1,250 shares of Series D Preferred Stock into 14,082 shares of common stock. In June 2026 the Company sold 36,335 shares under its at-the-market program for net proceeds of $1,677,052, and issued a promissory note to 1800 Diagonal Lending LLC in the principal amount of $238,050 for cash proceeds of $200,000.

No Exposure to de-Minimis

The Company does not use and has never used the “de minimis” exemption. The “de minimis” provision, which allowed duty-free entry for low-value imports (under $800), has been overturned for goods from China and Hong Kong, effective May 2, 2025. This means that goods imported from these countries, even if under the $800 threshold, will now be subject to tariffs.

A significant number of e-commerce retailers relied on the de minimis exemption, which the Company believes will require them to significantly increase their prices or to experience a significant decline in gross margin and profitability. The Company has been approached by several e-commerce companies with the de minimis exposure seeking to sell their company at meaningfully reduced valuations. The Company believes this change in the de minimis policy should reduce the number of online apparel brands, and create a less crowded marketplace.

Our Financial Position

For the three months ended June 30, 2026 and 2025, we generated net revenues of $1.2 million and $2.3 million, respectively, and reported net losses of $9.0 million and $2.1 million, respectively. For the six months ended June 30, 2026 and 2025, we generated net revenues of $2.5 million and $4.1 million, respectively, and reported net losses of $20.4 million and $4.2 million, respectively.

Results of Operations

Three and Six Months Ended June 30, 2026 compared to Three and Six Months Ended June 30, 2025.

The following table presents our results of operations for the three and six months ended June 30, 2026 and 2025:

Net Revenues

Net revenues decreased by $1.1 million to $1.2 million for the three months ended June 30, 2026, compared to $2.3 million in the corresponding period of 2025, and decreased by $1.6 million to $2.5 million for the six months ended June 30, 2026, compared to $4.1 million in the corresponding period of 2025. The decrease was driven primarily by lower wholesale shipments across the Company’s brands.

The Company expects wholesale revenue to benefit in the remainder of 2026 from its collegiate apparel programs, including the college bookstore distribution arrangement announced in July 2026, and has issued revenue guidance for the third quarter of 2026 of $8.5 million to $11.0 million.

Gross Profit

Our gross profit decreased by $0.4 million to $324,265 for the three months ended June 30, 2026, from $711,552 for the corresponding period in 2025, and decreased by $1.2 million to $369,646 for the six months ended June 30, 2026, from $1,584,007 for the corresponding period in 2025.

Our gross margin was approximately 27% for the three months ended June 30, 2026, compared to 32% for the three months ended June 30, 2025, and 15% for the six months ended June 30, 2026 compared to 38% for the corresponding period in 2025. The compression reflects lower revenue against fixed costs of production together with a higher proportion of off-price wholesale shipments.

The Company expects gross margins to expand as revenues increase and leverage fixed costs, with a higher mix of e-commerce and collegiate revenue, which carry higher gross margins than off-price wholesale.

Operating Expenses

Operating expenses totaled $7.8 million for the three months ended June 30, 2026, compared to $2.7 million for the corresponding period in 2025, and $15.3 million for the six months ended June 30, 2026 compared to $5.6 million for the corresponding period in 2025. The increase is attributable principally to amortization of prepaid marketing arising from the Company’s collegiate apparel and name-image-likeness agreements, which is recorded within sales and marketing expenses and totaled $2.8 million and $5.3 million for the three and six months ended June 30, 2026, respectively, together with the impairment of the remaining MavDB Consulting prepaid balance of $764,424 recognized in the second quarter.

Other Expense

Other expense was $1.5 million for the three months ended June 30, 2026, compared to $0.1 million for the three months ended June 30, 2025. For the six months ended June 30, 2026 other expense was $5.5 million, compared to $0.2 million for the corresponding period in 2025. The movement is driven principally by changes in the fair value of the Company’s share-based payment liabilities, which produced a charge of $1.8 million in the second quarter and a charge of $5.6 million for the six-month period.

Net Loss

Our net loss was $9.0 million for the three months ended June 30, 2026, compared to a net loss of $2.1 million for the three months ended June 30, 2025, and $20.4 million for the six months ended June 30, 2026, compared to $4.2 million for the corresponding period in 2025.

Liquidity and Capital Resources

Each of DBG, Bailey, Stateside and Sundry has historically satisfied both liquidity needs and funding of operations through borrowings capital raises and internally generated cash flow, Changes in working capital, 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.

The Company requires significant capital to meet its obligations as they become due. Management believes its existing cash resources and planned operations — including revenues expected from its collegiate apparel program and continued cost reduction measures — together with sales of equity securities under the Company’s at-the-market facility and equity line of credit, may not be sufficient to fund operations for at least twelve months from the date of issuance of these financial statements, and substantial doubt exists about the Company’s ability to continue as a going concern. These plans depend in part on factors that are not within the Company’s control, including equity market conditions; see Note 2 to the condensed consolidated financial statements. The Company may also pursue additional equity or debt financings as needed. There can be no assurance as to the availability or terms upon which such financing might be available. The Bailey sellers’ promissory note of $3,500,000 matured on December 8, 2025 and remains in default; management is in active discussions with the lender regarding repayment or extension.

Cash Flow Activities

The following table presents selected captions from our condensed consolidated statements of cash flows for the six months ended June 30, 2026 and 2025:

Cash Flows Used In Operating Activities

Our cash used in operating activities was $10.3 million for the six months ended June 30, 2026, compared to $4.5 million for the corresponding period in 2025. The increase reflects the higher operating loss for the period, partly offset by non-cash charges for amortization of prepaid marketing, the impairment of the MavDB prepaid balance and changes in the fair value of share-based payment liabilities.

Cash Flows Used in Investing Activities

Net cash used in investing activities was approximately $0.2 million for the six months ended June 30, 2026, compared to nil for the corresponding period in 2025, and related to purchases of property and equipment.

Cash Flows Provided by Financing Activities

Cash provided by financing activities was $4.2 million for the six months ended June 30, 2026, compared to $6.6 million for the corresponding period in 2025, and comprised proceeds from warrant exercises, net proceeds of $1,677,052 from sales under the at-the-market program and $200,000 from the issuance of a promissory note, partly offset by repayments of merchant advances and other borrowings and a $70,000 payment applied to the RallyTown secured payment obligation.

Contractual Obligations and Commitments

As of June 30, 2026, we had $17.4 million in outstanding principal on debt, consisting principally of our secured payment obligation to RallyTown, LLC of $11.2 million, our promissory note due to the Bailey sellers of $3.5 million, a U.S. Small Business Administration loan, a Paycheck Protection Program note, merchant cash advances and the 1800 Diagonal Lending note. The RallyTown obligation is payable in monthly installments of $400,000 commencing August 1, 2026 and bears interest at 10% per annum. We also have operating lease obligations in respect of our Round Rock, Texas facility with future minimum payments of $6.1 million.

Off-Balance Sheet Arrangements and Future Commitment

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.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. See Note 3 to the accompanying unaudited condensed consolidated financial statements, which disclosure is incorporated herein by reference.

Emerging Growth Company Status

We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), and, as such, have elected to comply with certain reduced public company reporting requirements.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may, therefore, not be comparable to those of companies that comply with such new or revised accounting standards.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

The promissory note payable to the sellers of Bailey 44, LLC in the principal amount of $3,500,000 matured on December 8, 2025 and remains outstanding. Accrued and unpaid interest on the note was $3,019,888 as of June 30, 2026. The Company has not received a notice of acceleration from the holders. See Note 7.

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, who serve as our principal executive officer and principal financial and accounting officer, respectively, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2026. In making this evaluation, our management considered the material weakness in our internal control over financial reporting described below. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2026.

The material weakness relates to an insufficient complement of qualified accounting personnel and a lack of formalized controls over the financial close and reporting process, including controls over the accounting for and review of complex equity, share-based payment and non-routine transactions. We have initiated various remediation efforts, including the hiring of additional financial personnel/consultants with the appropriate public company and technical accounting expertise and other actions that are more fully described below. As such remediation efforts are still ongoing, we have concluded that the material weaknesses have not been fully remediated. Our remediation efforts to date have included the following:

• We have made an assessment of the basis of accounting, revenue recognition policies and accounting period cutoff procedures. In some cases, we made the necessary adjustments to convert the basis of accounting from cash basis to accrual basis. In all cases we have done the required analytical work to ensure the proper cutoff of the financial position and results of operations for the presented accounting periods.
• We have made an assessment of the current accounting personnel, financial reporting and information system environments and capabilities. Based on our preliminary findings, we have found these resources and systems lacking and have concluded that these resources and systems will need to be supplemented and/or upgraded. We are in the process of identifying a single, unified accounting and reporting system that can be used by the Company and Bailey, with the goal of ensuring consistency and timeliness in reporting, real time access to data while also ensuring ongoing data integrity, backup and cyber security procedures and processes.
• We engaged external consultants with public company and technical accounting experience to facilitate accurate and timely accounting closes and to accurately prepare and review the financial statements and related footnote disclosures. We plan to retain these financial consultants until such time that the internal resources of the Company have been upgraded and the required financial controls have been fully implemented.
• We have made an assessment on significant judgments and estimates, including impairment of long-lived assets and inventory valuation. We plan to take the steps as noted above to have the proper resources to conduct proper analyses on areas requiring judgments and estimates.

The actions that have been taken are subject to continued review, implementation and testing by management, as well as audit committee oversight. While we have implemented a variety of steps to remediate these weaknesses, we cannot assure you that we will be able to fully remediate them, which could impair our ability to accurately and timely meet our public company reporting requirements.

Notwithstanding the assessment that our internal control over financial reporting is not effective and that material weaknesses exist, we believe that we have employed supplementary procedures to ensure that the financial statements contained in this filing fairly present our financial position, results of operations and cash flows for the reporting periods covered herein in all material respects.

Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Notwithstanding the material weakness, management believes that the condensed consolidated financial statements included in this report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Changes in Internal Control over Financial Reporting

Except for the remediation measures described above, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended June 30, 2026 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.