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This draft registration statement has not been publicly filed with the U.S. Securities and Exchange Commission and all information herein remains strictly confidential.

As filed with the Securities and Exchange Commission on February 16, 2021

Registration No. 333-

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 1 TO
FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

DIGITAL BRANDS GROUP, INC.

(Exact name of registrant as specified in its charter)

	Delaware			5699			46-1942864
	(State or other jurisdiction of incorporation or organization)			(Primary Standard Industrial Classification Code Number)			(I.R.S. Employer Identification Number)

4700 South Boyle Avenue
Vernon, California 90058
(209) 651-0172

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

John Hilburn Davis IV
President and Chief Executive Officer
4700 South Boyle Avenue
Vernon, California 90058
(209) 651-0172

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Thomas J. Poletti
Veronica Lah
Manatt, Phelps & Phillips, LLP
695 Town Center Drive, 14th Floor
Costa Mesa, CA 92646
(714) 312-7500

Andrew M. Tucker
Michael Bradshaw
Nelson Mullins Riley & Scarborough LLP
101 Constitution Avenue, NW Suite 900
Washington, D.C. 20001
(202) 689-2000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☒

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b- 2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☒
Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐


Title of Each Class of Securities to be Registered	Amount to be Registered	Proposed Maximum Offering Price Per Share			Proposed Maximum Aggregate Offering Price(1)			Amount of Registration Fee(2)
Common Stock $0.0001 par value	2,300,000 shares		$	5.00		$	11,500,000		$	1,254.65
Underwriters’ Warrants to purchase Common Stock(3)	160,000 warrants			—			—			—
Common Stock underlying Underwriters’ Warrants(4)	160,000 shares		$	5.50		$	880,000		$	96.01
Total Registration Fee									$	1,350.66

(1)

Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. Includes offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any. Pursuant to Rule 416 under the Securities Act of 1933, as amended, the shares of common stock registered hereby also include an indeterminate number of additional shares of common stock as may from time to time become issuable by reason of stock splits, stock dividends, recapitalizations or other similar transactions.

(2)

Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the registrant.

(3)

No registration fee pursuant to Rule 457(g) under the Securities Act.

(4)

Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. We have agreed to issue upon the closing of this offering, warrants to the underwriters entitling them to purchase up to 8.0% of the aggregate shares of Common Stock sold in this offering (the “Underwriters’ Warrants”). The Underwriters’ Warrants are exercisable at a per-share exercise price equal to 110% of the public offering price per share of Common Stock.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the prospectus filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

1Preliminary Prospectus Subject to Completion, dated February 16, 2021

2,000,000 Shares

Digital Brands Group, Inc.

Common Stock

This is the initial public offering of our common stock. The initial public offering price of our Common Stock is expected to be $5.00 per share.

Prior to this offering, there has been no public market for our common stock. We have applied to list our common stock on the NasdaqCM (“NasdaqCM”) under the symbol “DBGI.”

After the completion of this offering, our executive officers and directors and 5% holders of our common stock and their affiliates will beneficially own, in the aggregate, approximately 50.0% of our outstanding common stock.

We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary — Implications of Being an Emerging Growth Company and a Smaller Reporting Company.”

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 18 for a discussion of the risks that you should consider in connection with an investment in our securities.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

	Per Share			Total
Public offering price		$	5.00		$	10,000,000
Underwriting discount and commissions(1)		$	0.40		$	800,000
Proceeds, before expenses, to us		$	4.60		$	9,200,000

(1)

See “Underwriting” for a full description of underwriter compensation.

The underwriters have the option for a period of 45 days from the effective date of this offering to purchase up to an additional 300,000 shares from us at the public offering price less the underwriting discount.

Delivery of the shares of common stock is expected to be made on or about , 2021.

Kingswood Capital Markets

division of Benchmark Investments, Inc.

The date of this prospectus is February 16, 2021

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	SUMMARY					6
	IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY AND A SMALLER REPORTING COMPANY					17
	RISK FACTORS					18
	CAUTIONARY DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS					37
	INDUSTRY AND MARKET DATA					39
	USE OF PROCEEDS					40
	DIVIDEND POLICY					41
	CAPITALIZATION					42
	DILUTION					44
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS					48
	BUSINESS					76
	THE ACQUISITIONS OF BAILEY AND H&J					89
	MANAGEMENT					93
	EXECUTIVE COMPENSATION					97
	CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS					101
	PRINCIPAL STOCKHOLDERS					103
	DESCRIPTION OF CAPITAL STOCK					105
	SHARES ELIGIBLE FOR FUTURE SALE					109
	MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS					111
	UNDERWRITING					115
	LEGAL MATTERS					122
	EXPERTS					123
	WHERE YOU CAN FIND MORE INFORMATION					123
	FINANCIAL STATEMENTS

Neither we nor the underwriters have authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus, any amendment or supplement to this prospectus and any related free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurances as to the reliability of, any information that others may give you. This prospectus is not an offer to sell, not is it seeking an offer to buy, these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus or in any free writing prospectus is only accurate as of its date, regardless of its time of delivery or the time of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus and any such free writing prospectus outside of the United States.

DSTLD, 20Jeans ACE STUDIOS, Bailey 44, 44 for Bailey 44, B44 Core, and B44 Dressed are trademarks and are the property of Digital Brands Group, Inc. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Our use or display of

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SUMMARY

This summary highlights information contained elsewhere in the prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in our common stock. You should read and carefully consider this entire prospectus before making an investment decision, especially the information presented under the headings “Risk Factors,” “Cautionary Disclosure Regarding Forward-Looking Statements,” “Selected Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Unless otherwise indicated, all share and per share amounts give effect to (i) the conversion immediately prior to the effective date of this offering of all shares of our outstanding preferred stock into shares of common stock on a one-for-one basis, (ii) a 1-for-15.625 reverse stock split, (iii) the issuance of 664,167 shares of common stock issuable upon the “Debt Conversion” (as that term is defined immediately below) and (iv) the issuance of 1,820,000 shares of common stock issuable further to the acquisition of Harper & Jones, LLC assuming an initial public offering price of $5.00 per share (“Harper & Jones” or “H&J”) to be effected concurrently with the closing of this offering. The description of our business that follows assumes that the acquisition of H&J has occurred and the operations of H&J have been combined. After the completion of this offering, our executive officers and directors and 5% holders of our common stock and their affiliates will beneficially own, in the aggregate, approximately 51.1% of our outstanding common stock.

Unless otherwise indicated by the context, references to (A) “DBG” refer to Digital Brands Group, Inc. solely, and references to the “Company,” “Digital Brands Group”, “our,” “we,” “us” and similar terms refer to Digital Brands Group, Inc., together with Bailey 44 LLC (“Bailey”) and H&J; (B) “IPO Price means the initial public offering price of the shares offered by means of this prospectus; and (C) “Debt Conversion” refer to the conversion of the following principal amount of convertible indebtedness, plus interest accrued and unpaid interest where indicated below, immediately prior to the effective date of this offering assuming an IPO Price of $5.00 per share (i) $799,280 due between August and October 2022 bearing interest at 12% per annum convertible, plus accrued interest, into an estimated 365,385 shares of common stock (a 56% discount to the IPO Price; (ii) $675,000 due November 2022 bearing interest at 14% per annum convertible into an estimated 260,000 shares of common stock (a 50% discount to the IPO Price); and (iii) $911,000 due October 2022 bearing interest at 6% per annum convertible, plus accrued interest, into an estimated 260,350 shares of common stock (a 30% discount to the IPO Price).

For accounting and reporting purposes, DBG has been identified as the accounting acquirer of Bailey and H&J.

Our Company

We offer a wide variety of apparel through numerous brands on a both direct-to-consumer and wholesale basis. We have created a business model derived from our founding as a digitally native-first vertical brand. Digital native first brands are brands founded as e-commerce driven businesses, where online sales constitute a meaningful percentage of net sales, although they often subsequently also expand into wholesale or direct retail channels., Unlike typical e-commerce brands, as a digitally native vertical brand we control our own distribution, sourcing products directly from our third-party manufacturers and selling directly to the end consumer. We focus on owning the customer’s “closet share” by leveraging their data and purchase history to create personalized targeted content and looks for that specific customer cohort. We have strategically expanded into an omnichannel brand offering these styles and content not only on-line but at selected wholesale and retail storefronts. We believe this approach allows us opportunities to successfully drive Lifetime Value (“LTV”) while increasing new customer growth.

The COVID-19 pandemic has upended the retail industry, forcing the closure of physical stores and causing uncertainty for the future of the in-store experience. In-person interaction has dramatically changed or been supplanted by digital engagement, and early indications suggest that much of this shift may endure in the long term. In a global study released by Salesforce Inc., 63% of consumers said the way they obtain goods and services “transformed” during 2020 and 57% said the same about the ways they engage with companies. In addition, 62% said this year changed how they conduct their lives offline and an equal percentage said it changed their online lives. Also, 58% of consumers said they expect to do more online shopping after the pandemic than they did before it. These abrupt shifts have not only left retailers

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that prioritized physical stores and face-to-face engagement over omnichannel strategies scrambling to effectively serve customers, but have forced many larger retailers to close a substantial number of physical retail outlets in order to maintain profitability. According to global market-research firm Coresight Research, retailers are likely to close as many as 25,000 U.S. stores in 2020. From January through mid-August, retailers had announced they would close a total of more than 10,000 stores in the U.S.

However, according to Digital Commerce 360, the in-person store experience will substantially continue to drive retail sales. The report states that 28% of consumers indicate that they will continue to shop mostly online after the pandemic, with 39% saying they will shop both online and in-store, 24% saying they “can’t wait” to shop in-store, and 10% not sure. We believe that pure e-commerce retailers will lag in the ability to capture this available market share as marketing data continues to indicate that for apparel brands, a physical environment is the best way to acquire customers as the customer can touch, see and fit the product in person. Based on our historical pop up store data, a customer who visited or purchased in our pop up store had a significantly lower return rate when they subsequently ordered online, had higher average order values and higher repeat order rate and frequency compared with customers who had not visited or purchased at a pop up store.

We believe that a successful apparel brand needs to sell in every revenue channel. 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. We currently offer products under the DSTLD, ACE Studios and Bailey 44 brands. We will also offer products under the Harper & Jones brand upon the consummation of this offering. Bailey is primarily a wholesale brand, which we have begun to transition to a digital, direct-to-consumer brand. DSTLD is primarily a digital direct-to-consumer brand, to which we recently added select wholesale retailers to create more brand awareness. Harper & Jones is also primarily a direct-to-consumer brand using its own showrooms. We will leverage all three channels (our websites, wholesale and our own stores) for all our brands. Every brand will have a different revenue mix by channel based on optimizing revenue and margin in each channel for each brand, which includes factoring in customer acquisition costs and retention rates by channel and brand.

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.

Competitive Strengths

We believe that the following competitive strengths contribute to our success and distinguish us from our competitors:

Highly Fragmented Market Primed for Consolidation

We believe the fragmented nature of the apparel industry presents substantial consolidation and growth opportunities. According to McKinsey Global Fashion Index and statista.com, fashion is one of the world’s largest and most fragmented industries, divided into multiple product segments and categories, housed in many different types of organizations, and widely dispersed across geographies. Given the

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fragmented nature of our industry, we believe there is significant opportunity for us to employ a disciplined acquisition program to capitalize on industry growth opportunities through value-enhancing and accretive acquisitions.

We believe there are three ideal acquisition targets: strong legacy brands that have been mismanaged, strong brands that do not have capital to grow, and wholesale brands that are struggling to transition to e-commerce.

We acquired Bailey in February 2020. Bailey was a strong brand, but had been mismanaged with declining revenue and increasing losses. Since its acquisition, we have hired a new designer, whose first collections are being well received by the wholesale and direct-to-consumer channels. Additionally, we have reorganized the company and eliminated significant labor and structural costs.

We have been working with Harper & Jones to reorganize their marketing team and create targeted and return driven marketing strategies. We have also helped analyze the sales representative, customer and showroom data, which we are using to develop the growth strategies we will implement after the acquisition. As an example, our analysis showed that the showrooms cost $125,000 to open while generating $250,000 in store level cash flow in its first year. This 100% cash on cash return shows the benefit of opening more showrooms, but Harper & Jones does not have the cash or balance sheet to support additional showrooms. We plan to use a portion of the proceeds of this offering to open additional Harper & Jones showrooms in markets where the brand already has a strong customer base, subject to limitations that current and future COVID-19 circumstances allow.

We have been in discussions with several wholesale brands that are transitioning to e-commerce. During these discussions, we have seen consistent themes and strategies that are creating an inefficient and difficult transition from wholesale to e-commerce, including utilizing the wrong third-party vendors, paying too much for third-party vendors, lack of return discipline, lack of cohesive digital marketing strategy and inability to create a hybrid supply chain that can support wholesale and e-commerce production. However, we do not have any agreements or understandings to acquire additional brands at this time.

Additionally, we believe that as a public company, we will be able to grow our business in an expedited manner through greater access to capital for organic and inorganic growth as well as the potential to use our stock as consideration for acquisitions.

Complementary Brand Portfolio

We believe that customers seldomly wear the same brand from head to toe. By owning multiple brands across complementary categories, each customer is provided head to toe looks and personalized styles. This results in the customer buying and wearing multiple brands, across product categories instead of wearing a singular brand’s products in one category. We believe that we are revolutionizing the fashion retailing industry by focusing on a customer’s “closet share” and leveraging the customer’s data to create personalized customer cohorts and customized customer content. This allows us to successfully increase our customer lifetime value, lower our customer acquisition cost, increase new customer growth across our portfolio brands, increase our average order value and improve our operating margins.

We believe that greater scale will increase our purchasing power and negotiating strength with both customers and suppliers. We believe that more acquisitions generate more customer data and more product offerings, which allows us to create more personalized customer cohorts and marketing communications. We believe the more personalized our marketing and product selections are, the more the customer will spend with us annually and over their lifetime.

Leverage E-commerce Expertise as a Digitally Native-First Retailer

We were founded as a digitally native-first retailer, developing deep relationships with our on-line customers. As we have moved into a strategic omnichannel retailer, we believe we have been able to leverage our robust on-line experience to further enhance or customer’s shopping experience. We strive to leverage our digital channels to create customized marketing campaigns by customer cohort to increase repeat purchase behavior including frequency and average order value. We can control the cadence, message, promotion value and which customer cohorts receive different looks or promotions in our digital channels. We can create

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difference marketing and strategic campaigns based on our customer data to increase frequency, win back customers who have not purchased in a while or level up customers to higher annual spend by creating specific promotions for them.

By transacting directly with our customers, we capture an individual’s shopping behavior, purchases, and style preferences. This results in the ability to create customized customer content that is highly targeted and cross merchandise styles for every customer using all the brands in the portfolio to create personalized looks for each customer. As we aggregate more data and acquire additional brands, it increases the choices we can offer each customer and better target our product offerings for each customer.

Extensive Industry Expertise

We believe that we will benefit from our industry operating track record, industry expertise and strong customer relationships that our brands have established over the course of their respective histories. We believe that our combined management will be instrumental in the ongoing implementation of operational best practices across our platform. As long-term participants in the industry, we believe that our management personnel have deep relationships with peers, supply chains and key vendors that will help facilitate discussions for future acquisitions and enhance our consolidation strategy.

Experienced Management Team

Our senior management team has approximately 75 years of combined experience in apparel connected businesses. We believe that we have assembled a senior management team with highly complementary skills and experiences in the apparel industry, accounting, finance, and acquisitions.

Organizational Structure

We plan to operate the brands on a decentralized basis with an emphasis on brand level execution supported by corporate coordination. Each brand’s executive teams will continue to operate separately and leverage relationships with customers and suppliers, including designing and producing product and developing marketing plans including social media, email and digital communications.

We plan to consolidate marketing and tech contracts as we have done with Bailey’s contracts, which has already provided significant cost savings. We will also review the fabric mills and factories used by each brand to see if we can consolidate or cross utilize these mills and factories, which will drive increased volumes, lower production costs and increase gross margins. As an example, we are utilizing DSTLD’s denim mills and factories to develop denim products for Bailey and H&J. We are also consolidating production into a few factories in Europe from China and the U.S., which lowers our average production cost per unit.

We also plan to leverage the DBG marketing and data analytics team to create cross marketing campaigns based on the customer data respective to each brand’s customer base. As an example, the DBG marketing and data analytics team will review the customer data across all our portfolio brands and will work with each brand to identify the new customers from our other portfolio brands that they can target and what styles and looks should be created for each of those customer cohorts. The brand level employees will then execute the looks and styles and create the customized customer communication based on the information and data from the DBG marketing and data analytics teams.

Certain administrative functions will be centralized on a regional and, in certain circumstances, a national basis following this offering, including but not limited to accounting support functions, corporate strategy and acquisitions, human resources, information technology, insurance, marketing, data analytics and customer cross merchandising, advertising buys, contract negotiations, safety, systems support and transactional processing.

Our Growth Strategy

We intend to pursue the strategies described below to grow our business and enhance shareholder value.

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We will use a disciplined approach to identify and evaluate acquisition candidates. We believe that our expansion strategy, our financial resources and our ability as a public company to use our stock as acquisition consideration also makes us an attractive buyer to sellers of apparel businesses that may wish to remain active in their business while participating in our acquisition growth strategy. We also believe that there are a number of owners of such businesses who are close to retirement or institutional investors with limited exit strategy options who would find us to be an attractive buyer, providing them with both a way to transition out of their businesses, generate returns for their investors and to protect their employees.

We believe that our ability to acquire businesses at prevailing private company valuations will present opportunities for increased earnings through accretive acquisitions. Moreover, our acquisition strategy will provide opportunities, not only to expand into new geographic areas, but also to expand our range of product offerings in existing areas of operation and cross-sell to all of our customers.

Organically Grow Market Share and Expand our Profit Margins

We believe integrated operations will create opportunities for economies of scale as we grow. We expect cost savings in such areas as materials purchasing, bulk apparel production, shipping and logistics, information systems, marketing purchasing (both online and offline) and contractual relationships with key suppliers. We also believe there are significant opportunities to improve operating margins by consolidating administrative functions such as accounting, employee benefits, finance, insurance, marketing, data analytics, cross merchandising and risk management. We have identified initiatives to increase market share, revenue and volume and to expand our profit margins. These initiatives include:

•

Implement System-Wide Best Practices. We have identified certain best practices among our brands, including marketing strategies, data analytics, contract renegotiating, sourcing and supply chain and organization structure and hiring plans. We plan to implement these best practices to improve the operating margins of our brands and any subsequently-acquired businesses.

•

Leverage Size to Create Efficiencies. we believe our increasing scale will enhance our ability to leverage buying power in product quantities, marketing strategies and assets, vendor contracts and fulfillment and shipping, resulting in lower costs, higher margins and cash flow. This in turns creates competitive advantages. We also believe that we will expand our operating margins through a shared services model, which eliminates redundant back office expenses and leverages our marketing and data analytics teams and expenses across our portfolio of brands.

•

Expand our Product Offerings. We will have opportunities to share expertise across our acquired businesses on the sale of certain products and lines that are not currently offered by all of them or that will become available to us through acquisitions.

•

Lower our customer acquisition cost and increase our LTV. We will have the opportunity to cross market our brands to new customers that are loyal to other brands we own. This cross merchandising should lower our customer acquisition cost meaningfully, while also increasing our LTV. This should not only increase our margins, cash flow and revenues, but also creates loyalty and repeat purchases by the customer as we provide a single solution for their products that are personalized to them based on their past purchases and data.

The H&J Acquisition

In October 2020, DBG signed an agreement with the holder of all of the outstanding membership interests in Harper & Jones LLC whereby at the closing of the acquisition, the holder of all of the membership interests of H&J shall exchange all of such membership interests for that number of common stock equal to the lesser of (i) $9.1 million at a per share price equal to the initial public offering price of the shares offered by this prospectus or (ii) the number of Subject Acquisition Shares; “Subject Acquisition Shares” means the percentage of the aggregate number of shares of our common stock issued pursuant to the acquisition agreement, which is the percentage that Subject Seller Dollar Value is in relation to Total Dollar Value. “Subject Seller Dollar Value” means $9.1 million. “Total Dollar Value” means the sum of Existing Holders Dollar Value plus the Bailey Holders Dollar Value plus the aggregate dollar value with respect to all Bailey each of H&J (including the Subject Seller Dollar Value). “Existing Holders Dollar Value” means $40.0 million. “Bailey Holders Dollar Value” means $11.0 million. In addition, DBG will pay the holder of the membership

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interests a $500,000 cash payment that shall be allocated towards H&J’s debt outstanding immediately prior to the closing. Thirty percent of the shares issued at the closing will be issued into escrow to cover possible indemnification obligations of the seller under the agreement.

If, at the one year anniversary of the closing date of this offering, the product of the number of shares of company common stock issued at the closing multiplied by the average closing price per share of our common stock as quoted on the NasdaqCM for the thirty (30) day trading period immediately preceding such date plus Sold Buyer Shares Gross Proceeds does not exceed the sum of $9.1 million less the value of any shares of common stock cancelled further to any indemnification claims made against seller under the agreement, then we shall issue to the seller an additional aggregate number of shares of our common stock equal to the valuation shortfall at a per share price equal to the then closing price per share of our common stock as quoted on the NasdaqCM (collectively, the “Valuation Shortfall”).

Concurrently, we will cause a number of shares of our common stock or common stock equivalents held by certain of our affiliated stockholders prior to the date of this offering to be cancelled in an equivalent dollar amount as the Valuation Shortfall on a pro rata basis in proportion to the number of shares of our common stock or common stock equivalents held by each of them. “Sold Buyer Shares” means shares of our common stock issued further to the acquisition and which are sold by the seller within the period that is one year from the closing date of this offering. “Sold Buyer Shares Gross Proceeds” means the aggregate gross proceeds received by the seller from sales of Sold Buyer Shares within the period that is one year from the closing date of this offering.

Risk Factors Summary

Investing in shares of our common stock involves a high degree of risk. See “Risk Factors” beginning on page 18 of this prospectus for a discussion of factors you should carefully consider before investing in our common stock. If any of these risks actually occurs, our business, financial condition, results of operations, cash flows and prospects would likely be materially and adversely affected. As a result, the trading price of our common stock would likely decline, and you could lose all or part of your investment. Listed below is a summary of some of the principal risks related to our business:

•

We have not operated as a combined company, and we may not be able to successfully integrate Bailey and H&J into one entity.

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Our business strategy includes growth through acquisitions. If we are unable to locate desirable companies, acquire them on commercially reasonable terms, or finance such acquisitions, or if we are unable to successfully integrate the companies we do acquire or to manage our internal growth, our operating results could be adversely affected.

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Our success depends in part on the future contributions of our executives and managers, including those who were employees of Bailey and H&J. The loss of the services of any of them could have an adverse effect on our business and business prospects.

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Claims may be made against Bailey, H&J and other acquired businesses arising from their operations prior to the dates we acquired them.

•

We have incurred significant net losses since our inception and we anticipate that our operating expenses will increase substantially. Accordingly, we cannot assure you that we will achieve or maintain profitable operations, obtain adequate capital funding, or improve our financial performance to continue as a going concern.

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Widespread outbreak of an illness or any other public health crisis, including the recent coronavirus (COVID-19) global pandemic, or an economic downturn in the United States could materially and adversely affect our business, financial condition and results of operations.

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Our results of operations and financial condition could be adversely affected as a result of asset impairments and increases in labor costs.

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If we fail to effectively manage our growth by implementing our operational plans and strategies, improving our business processes and infrastructure, and managing our employee base, our business, financial condition and operating results could be harmed.

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If we are unable to anticipate and respond to changing customer preferences and shifting fashion and industry trends or maintain a strong portfolio of brands, customer base, order and inventory levels or our platforms by which our customers shop with us online, our business, financial condition and operating results could be harmed.

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We operate in highly competitive markets and the size and resources of some of our competitors, including wholesalers and direct retailers of apparel, 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.

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If we are unable to cost-effectively use or fully optimize social media platforms and influencers or we fail to abide by applicable laws and regulations, our reputation may be materially and adversely affected or we may be subject to fines or other penalties.

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We rely on third-party suppliers and manufacturers, and in H&J’s case, a single supplier, to provide raw materials for and to produce our products. We have limited control over these suppliers and manufacturers and we may not be able to obtain quality products on a timely basis or in sufficient quantity.

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Our operations are currently dependent on a single warehouse and distribution center in Vernon, California, and the loss of, or disruption in, our warehouse and distribution center or our third-party carriers could have a material adverse effect on our business and operations.

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Our sales and gross margins may decline as a result of increasing product costs and freight costs and decreasing selling prices.

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We have an amount of debt which may be considered significant for a company of our size and we may not be able to service all of our debt.

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Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

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If we cannot successfully protect our intellectual property, our business could suffer.

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We face growing regulatory and compliance requirements and 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.

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Our business is affected by the general seasonal trends common to the retail apparel industry.

Our Corporate Information

We were incorporated in Delaware in January 2013 under the name Denim .LA, Inc, and changed our name to Digital Brands Group, Inc. in December 2020. Our corporate offices are located at 4700 South Boyle Avenue, Vernon, California 90058. Our telephone number is (209) 651-0172. Our website is www.digitalbrandsgroup.co. None of the information on our website or any other website identified herein is part of this prospectus or the registration statement of which it forms a part.

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The Offering

Common stock offered by us in this offering

2,000,000 shares

Common stock to be outstanding after this offering(1)

7,396,957 shares. We have granted the underwriters a 45-day option to purchase up to an additional 300,000 shares of our common stock at the public offering price, less underwriting discounts and commissions.

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $8,400,000 (or $9,780,000 if the underwriters exercise their option to purchase additional shares in full) assuming an initial public offering price of $5.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use $1.0 million of the net proceeds from this offering to pay the remaining approximately $1.0 million owed for the acquisition of Bailey by DBG, $500,000 to fund the acquisition of H&J (which accrues interest at 12.0% per annum), $300,000 to fund the opening of additional showrooms for H&J, $163,000 to repay accrued and unpaid interest further to our 2019 convertible debt offering (which accrues interest at 14.0% per annum), and for working capital and general corporate purposes. While we have not allocated a specific amount of the remaining net proceeds from this offering for any particular purpose, we may use such remaining net proceeds for the acquisitions of additional businesses. Except for the H&J acquisition, we do not have any agreements or understandings to acquire additional businesses as of the date of this prospectus. See “Use of Proceeds”.

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

NasdaqCM symbol

We have applied to list our common stock on the NasdaqCM under the symbol “DBGI.”

Lockup Agreements

We, our executive officers and directors, have agreed, subject to limited exceptions, not to sell or transfer any common stock for one hundred eighty days (180) after the date of this prospectus without first obtaining the written consent of Kingswood Capital Markets. See “Underwriting — No Sales of Similar Securities”.

The number of shares of common stock outstanding is based on 5,396,957 shares of our common stock outstanding as of December 15, 2020 after giving effect to (i) the conversion of all shares of preferred stock into common stock to occur immediately prior to the effective date of this offering, (ii) a 1-for-15.625 reverse stock split, (iii) the issuance of 664,167 shares of common stock issuable upon conversion of convertible indebtedness immediately prior to the effective date of this offering assuming an initial public offering price of $5.00 per share (the “Debt Conversion”) and (iv) 1,820,000 shares of common stock issuable to the holder of membership interests of H&J for the purchase of all of the issued and outstanding membership interests of H&J assuming an initial public offering price of $5.00 per share, and excludes as of such date:

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SUMMARY FINANCIAL DATA

The summary financial information for the nine months ended September 30, 2020 and 2019 represents the historical financial information of DBG. The statements of operations data for the years ended December 31, 2019 and 2018 have been derived from our audited financial statements included elsewhere in this prospectus. We have derived the statements of operations data for the nine months ended September 30, 2020 and 2019 and the balance sheet data as of September 30, 2020 from the unaudited financial statements of DBG appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that should be expected in any future periods and our results for any interim period are not necessarily indicative of results that should be expected for any full year.

The unaudited pro forma condensed combined financial information for the nine months ended September 30, 2020 and the year ended December 31, 2019 represents the financial information of DBG and gives effect to (a) the acquisition of Bailey and H&J, (b) the conversion of all shares of preferred stock into common stock on a one-for-one basis and a 1-for-15.625 reverse stock split, each to occur immediately prior to the effective date of this offering and (c) the Debt Conversion. The pro forma adjustments are based on currently available information and certain estimates and assumptions, and, therefore, the actual effects of the offering and the acquisition of H&J reflected in the pro forma data may differ from the effects reflected below. However, management believes that the assumptions provide a reasonable basis for presenting the significant effects of the offering and acquisition of H&J as contemplated and that the pro forma adjustments give appropriate effect to those assumptions. During the periods presented, DBG, Bailey and H&J were not under common control or management and, therefore, the data presented may not be comparable to, or indicative of, post-acquisition results.

You should review the information below together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited financial statements of DBG, Bailey and H&J, and the related notes all included elsewhere in this prospectus.

	Nine Months Ended September 30,									Year Ended December 31,
Statement of Operations	2020 Pro Forma			2020 Actual			2019 Actual			2019 Pro Forma			2019 Actual			2018 Actual
	(unaudited)									(unaudited)
Net revenues		$	8,432,642		$	4,475,507		$	2,319,205		$	33,459,696		$	3,034,216		$	3,777,493
Cost of net revenues		$	5,175,069		$	3,884,864		$	1,046,116		$	15,492,838		$	1,626,505		$	1,656,332
Gross profit		$	3,257,573		$	590,643		$	1,273,089		$	17,966,859		$	1,407,711		$	2,121,161
Operating expenses		$	11,981,473		$	7,458,722		$	5,040,258		$	27,610,667		$	6,255,180		$	6,140,232

Operating loss		$	(8,723,900)		$	(6,868,079)		$	(3,767,169)		$	(9,643,809)		$	(4,847,469)		$	(4,019,071)
Other expenses		$	(1,692,305)		$	(1,207,244)		$	(579,167)		$	(962,737)		$	(805,704)		$	(705,662)
(Loss) before provision for income taxes		$	(10,416,205)		$	(8,075,323)		$	(4,346,336)		$	(10,606,545)		$	(5,653,973)		$	(4,724,733)
Provision for income taxes		$	13,657		$	13,657		$	—		$	(15,690)		$	(800)		$	(800)
Net loss		$	(10,429,862)		$	(8,088,980)		$	(4,346,336)		$	(10,622,236)		$	(5,653,973)		$	(4,725,533)
Pro forma earnings per share – basic and diluted(1):
Basic		$	(1.28)								$	(1.30)
Diluted		$	(1.28)								$	(1.30)
Pro forma number of common shares outstanding – basic and diluted(1):
Basic			7,396,957									7,396,957
Diluted			7,396,957									7,396,957

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	As of September 30, 2020
Balance Sheet	Actual			Pro Forma			Pro Forma as Adjusted(2)
				(uaudited)			(uaudited)
Total cash		$	282,059		$	304,428		$	7,041,428
Total current assets		$	2,860,231		$	3,018,537		$	9,918,537
Total assets		$	17,531,830		$	24,610,937		$	31,510,937
Total current liabilities including current portion of long-term debt		$	20,346,697		$	22,093,605		$	20,593,605
Total long-term obligations		$	514,876		$	606,919		$	606,919
Total liabilities		$	20,861,573		$	22,700,524		$	22,700,524
Total stockholders’ equity (deficit)		$	(3,329,743)		$	1,910,413		$	10,310,413
Total liabilities and stockholders’ equity		$	17,531,830		$	24,610,937		$	31,510,937

(1)

Basic and diluted shares outstanding on a pro forma basis assumes 1,820,000 shares issuable further to the acquisition of H&J and 888,735 shares issuable further to the Debt Conversion.

(2)

Pro forma as adjusted amounts reflect the sale of 2,000,000 shares of our Common Stock in this offering as the assumed initial public offering of $5.00 per share, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $5.00 per share would increase (decrease) each of cash, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $1.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this Prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) the pro forma as adjusted amount of each of cash, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $4.6 million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us

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IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY AND A
SMALLER REPORTING COMPANY

We qualify as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include, among other things:

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a requirement to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

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an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);

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reduced disclosure about the emerging growth company’s executive compensation arrangements;

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deferral of complying with certain changes in accounting standards; and

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no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

The JOBS Act also permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. Currently, we are choosing to take advantage of this extended transition period. We may later choose to “opt out” of the extended transition period, with the result that we would then be required to comply with new or revised accounting standards as applicable to public companies. Any later decision to opt out of the extended transition period would be irrevocable.

We have elected to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of these elections, the information that we provide in this prospectus may be different from the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of our elections, which may result in a less active trading market for our common stock and more volatility in our stock price.

We may take advantage of these provisions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our prior second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We may choose to take advantage of some but not all of the reduced disclosure requirements.

Additionally, we are a “smaller reporting company” as defined in Rule 10(f)(1) of Regulation S-K. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our ordinary shares held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our ordinary shares held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, reduced disclosure obligations regarding executive compensation. Furthermore, as long as we are neither a “large accelerated filer” nor an “accelerated filer,” as a smaller reporting company, we would not be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible.

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, 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 of your investment.

Risks related to our 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 consolidated net loss (giving effect to the acquisitions of each of Bailey and H&J) was approximately $10.4 million for the nine months ended September 30, 2020 and $10.6 million for the year ended December 31, 2019. 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, including the length of time COVID-19 related restrictions impact the business.

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. 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.

If we do not obtain adequate capital funding or improve our financial performance, we may not be able to continue as a going concern.

The report of our independent registered public accounting firm for the year ended December 31, 2019 included herein contains an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a going concern as a result of recurring losses from operations. In addition, we have incurred a net loss in each quarter since our inception and expect to incur losses in future periods as we continue to increase our expenses in order to grow our business. If we are unable to obtain adequate funding or if we are unable to grow our revenue substantially to achieve and sustain profitability, we may not be able to continue as a going concern.

Widespread outbreak of an illness or any other public health crisis, including the recent coronavirus (COVID-19) global pandemic, could materially and adversely affect, and has materially and adversely affected, our business, financial condition and results of operations.

Our business has been, and will continue to be, impacted by the effects of the COVID-19 global pandemic in countries where our suppliers, third-party service providers or consumers are located. These effects include recommendations or mandates from governmental authorities to close businesses, limit travel, avoid large gatherings or to self-quarantine, as well as temporary closures and decreased operations of the facilities of our suppliers, service providers and customers. The impacts on us have included, and in the future could include, but are not limited to:

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significant uncertainty and turmoil in global economic and financial market conditions causing, among other things: decreased consumer confidence and decreased consumer spending, now and in the mid and long-term. Specifically, COVID has impacted our business in several ways, including some of our wholesale accounts closing, supply chain disruptions and delivery delays, meaningfully lower net revenue, employee furloughs and layoffs and increased costs to operate our warehouse to ensure a healthy and safe work environment. A meaningful number of our boutique accounts closed temporarily and permanently in 2020 and into 2021. Additionally, our department store accounts have closed some of their stores as well. We do not anticipate the department stores opening those stores back up, and we do not anticipate a majority of the closed boutique stores to open back up, In addition, the pandemnic meaningfully reduced our 2020 net revenue as our wholesale accounts closed temporarily, and reduced orders for the entire year all the way through the end of 2020. We also waited to hire a new Creative Director until the summer, once we knew that stores would open back up at some capacity. This delay in hiring a new designer also impacted the first four months of 2021, as her first collection was not offered until recently for a May 2021 shipment to our accounts. We expect to also experience lower order quantities from our accounts throughout 2021 versus pre-COVID levels, but meaningfully higher than 2020.

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inability to access financing in the credit and capital markets at reasonable rates (or at all) in the event we, or our suppliers find it desirable to do so, increased exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar, and volatility in the availability and prices for commodities and raw materials we use for our products and in our supply chain. Specifically, the pandemnic shut down our supply chain for several months in 2020, and delayed deliveries throughout the year.

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inability to meet our consumers’ needs for inventory production and fulfillment due to disruptions in our supply chain and increased costs associated with mitigating the effects of the pandemic caused by, among other things: reduction or loss of workforce due to illness, quarantine or other restrictions or facility closures, scarcity of and/or increased prices for raw materials, scrutiny or embargoing of goods produced in infected areas, and increased freight and logistics costs, expenses and times; failure of third parties on which we rely, including our suppliers, customers, distributors, service providers and commercial banks, to meet their obligations to us or to timely meet those obligations, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties, including business failure or insolvency and collectability of existing receivables; and

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significant changes in the conditions in markets in which we do business, including quarantines, governmental or regulatory actions, closures or other restrictions that limit or close our operating and manufacturing facilities and restrict our employees’ ability to perform necessary business functions, including operations necessary for the design, development, production, distribution, sale, marketing and support of our products. Specifically, we had to furlough and layoff a significant amount of employees to adjust to our lower revenues.

Any of these impacts could place limitations on our ability to execute on our business plan and materially and adversely affect our business, financial condition and results of operations. We continue to monitor the situation and may adjust our current policies and procedures as more information and guidance become available regarding the evolving situation. The impact of COVID-19 may also exacerbate other risks discussed in this “Risk Factors” section, any of which could have a material effect on us. This situation is changing rapidly and additional impacts may arise that we are not aware of currently.

We have no combined operating history, and there are risks associated with our recently closed acquisition of Bailey and the acquisition of H&J that could adversely affect the results of our operations.

DBG has entered into an agreement in October 2020 to acquire H&J simultaneously with, and as a condition to, the sale of the shares of common stock in this offering — H&J has operated independently of DBG since inception. In addition, we recently acquired Bailey in February 2020 which operated independently of DBG and H&J. There can be no assurance that we will be able to integrate the operations of H&J and Bailey successfully or to institute the necessary systems and procedures, including accounting and financial reporting systems, to manage the combined enterprise on a profitable basis and to report the results of operations of the combined entities on a timely basis. In addition, there can be no assurance

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that our management team will be able to successfully manage the combined entity and effectively implement our operating or growth strategies. The pro forma financial results of H&J and Bailey cover periods during which they were not under common control or management and, therefore, may not be indicative of our future financial or operating results. Our success will depend on management’s ability to integrate H&J, Bailey and other companies we may acquire in the future into one organization. Our inability to successfully integrate these companies and to coordinate and integrate certain operational, administrative, financial and information technology systems would have a material adverse effect on our financial condition and results of operations.

If our efforts to locate desirable targets are unsuccessful or if we are unable to acquire desirable companies on commercially reasonable terms, our revenues and operating results will be adversely affected.

Following this offering, one of our principal growth strategies will be to increase our revenue through the acquisition of additional businesses within our industry, particularly since there is no assurance that the operations of H&J and Bailey alone will be sufficiently profitable to meet our expectations. 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 are not successful, our revenues and operating results may be adversely affected.

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.

Following this offering, 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, 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 issued in this offering. 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 may not be able to successfully integrate future acquisitions or generate sufficient revenues from future acquisitions, which could cause our business to suffer.

If we buy a company or a division of a company, 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:

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the key personnel of the acquired business may decide not to work for us;

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changes in management at an acquired business may impair its relationships with employees and customers;

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we may be unable to maintain uniform standards, controls, procedures and policies among acquired businesses;

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we may be unable to successfully implement infrastructure, logistics and systems integration;

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we may be held liable for legal claims (including environmental claims) arising out of activities of the acquired businesses prior to our acquisitions, some of which we may not have discovered during

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our due diligence, and we may not have indemnification claims available to us or we may not be able to realize on any indemnification claims with respect to those legal claims;

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we will assume risks associated with deficiencies in the internal controls of acquired businesses;

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we may not be able to realize the cost savings or other financial benefits we anticipated; and

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our ongoing business may be disrupted or receive insufficient management attention.

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.

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 results of operations could be adversely affected as a result of asset impairments.

Our results of operations and financial condition could be 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. For additional description on this impairment testing, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies”. 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 rapidly and 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, 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

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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, engaged customers and influencers. 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 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

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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 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:

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quickly adapting to changes in customer requirements or consumer preferences;

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discounting excess inventory that has been written down or written off;

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devoting resources to the marketing and sale of their products, including significant advertising campaigns, media placement, partnerships and product endorsement; and

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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.

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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 and is expected to continue to impact 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.

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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 shortage 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.

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,

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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, H&J 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 the business, financial condition and results of operations of H&J and us.

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,

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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.

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 24, 2020, we had an aggregate principal amount of debt outstanding of approximately $13.5 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:

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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;

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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;

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increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations;

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place us at a competitive disadvantage to our competitors with proportionately less debt for their size;

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limit our ability to refinance our existing indebtedness or borrow additional funds in the future;

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limit our flexibility in planning for, or reacting to, changing conditions in our business; and

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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 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.

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.

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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.

For example, as of December 24, 2020, we owed our senior secured lender approximately $5.8 million that is due on the scheduled maturity date of June 2021. Our credit agreement contains negative covenants that, subject to significant exceptions limit our ability, among other things to make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, or undergo other fundamental changes. A breach of any of these covenants could result in a default under the credit facility and permit the lender to cease making loans to us. Upon the occurrence of an event of default under this agreement, the lender could elect to declare all amounts outstanding thereunder to be immediately due and payable. We have pledged all of our assets as collateral under our credit facility. If the lender accelerates the repayment of borrowings, we may not have sufficient assets to repay them and we could experience a material adverse effect on our 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

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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” and “ACE STUDIOS” 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”, and www.harperandjones.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

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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.

Our 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 this Offering and our Common Stock

There is no public market for our common stock, and an active trading market for our common stock may not develop, which could impede your ability to sell shares and depress the market price of your shares.

Prior to this offering, there has been no public market for our common stock. An active trading market for our common stock may not develop upon completion of this offering, or if it does develop, it may not be sustained. If an active trading market does not develop, you may have difficulty selling any shares of our common stock that you purchase. The initial public offering price of our common stock was determined by negotiations between us and representatives of the underwriters and may not reflect the prevailing price in the open market. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price you paid in this offering.

The price of our common stock may fluctuate substantially, and your investment may decline in value.

Following this offering, the market price of our common stock could be extremely volatile and may be significantly affected by factors, such as:

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market conditions affecting the apparel industries;

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quarterly variations in our results of operations;

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changes in government regulations;

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the announcement of acquisitions by us or our competitors;

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changes in general economic and political conditions;

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volatility in the financial markets;

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results of our operations and the operations of others in our industry;

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changes in interest rates;

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threatened or actual litigation and government investigations;

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the addition or departure of key personnel;

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actions taken by our stockholders, including the sale or disposition of their shares of our common stock; and

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differences between our actual financial and operating results and those expected by investors and analysts and changes in analysts’ recommendations or projections.

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.

The requirements of being a public company may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a public company with listed equity securities, we will need to comply with certain laws, regulations and requirements, including corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the Securities and Exchange Commission (the “SEC”) and the requirements of NasdaqCM, including the listing standards of the NasdaqCM. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our board of directors and management and will result in significant costs and expenses, particularly after we are no longer an emerging growth company under the JOBS Act. We will need to:

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institute comprehensive corporate governance and compliance functions;

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design, establish, evaluate and maintain a system of internal control over financial reporting in compliance with the requirements of Section 404(a) of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;

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comply with rules promulgated by NasdaqCM;

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prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

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establish internal policies, such as those relating to disclosure controls and procedures and insider trading;

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involve and retain to a greater degree outside counsel and accountants with these activities; and

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establish an investor relations function.

If we are not able to comply with the applicable continued listing requirements or standards of NasdaqCM, NasdaqCM could delist our common stock.

In conjunction with this offering, we have applied to list our common stock on the NasdaqCM simultaneously with the closing of this offering. Prior to this offering, there has been no established public market for our common stock. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to comply with the applicable listing standards. If NasdaqCM were to delist our common stock, it would be more difficult for our stockholders to dispose of our common stock and more difficult to obtain accurate price quotations on our common stock. Our ability to issue additional securities for financing or other purposes, or otherwise to arrange for any financing we may need in the future, may also be materially and adversely affected if our common stock is not listed on a national securities exchange.

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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, 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. 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 will be 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. In addition, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, at the time of our second annual report on Form 10-K, which will be for our year ending December 31, 2022. We intend to begin the process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation upon the completion of this offering, 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 of 2002, or 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 NasdaqCM, 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 all the necessary improvements to address the material weaknesses, continued disclosure of our material weaknesses will be required in future filings with the SEC, which could reduce investor confidence in our reported results and our cause our stock price to decline.

We are an emerging growth company and a smaller reporting company within the meaning of the Securities Act, and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies and smaller reporting companies, our common stock may be less attractive to investors and may make it more difficult to compare our performance with other public companies.

We are an emerging growth company, as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies. Those exemptions include, but are not limited to, a requirement to present only two years of audited financial statements, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, reduced disclosure about executive compensation arrangements in our periodic reports and proxy statements, and no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements. We have elected to adopt these reduced disclosure requirements. We may take advantage of these provisions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior

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September 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

The market price of our common stock could decline significantly as a result of sales of a large number of shares of our common stock in the market after this offering. These sales, or the perception that these sales might occur, could depress the market price of our common stock or make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon the completion of this offering and assuming an initial public offering price of $5.00 per share, we will have 7,396,957 shares of common stock outstanding (or 7,696,957 if the underwriters exercise their option to purchase additional shares in full). Of these shares, 2,000,000 shares sold in this offering (or 2,300,000 if the underwriters exercise their option to purchase additional shares in full) and 1,003,746 shares held by persons not subject to a lock-up agreement with our underwriters will be freely tradable without restriction immediately following this offering. After the lock-up agreements expire 180 days from the date of this prospectus, an additional shares will be eligible for sale in the public market, 2,571,150 of which will be held by our directors, executive officers and other affiliates, and will be subject to volume limitations under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), and certain other restrictions. The underwriters may also, in their sole discretion, permit our founders, officers, directors, current stockholders and stockholders and the equity interest holder of H&J to sell shares prior to the expiration of the lockup agreements. See “Shares Eligible for Future Sale” for more information regarding shares of our common stock that may be sold by existing stockholders after the closing of this offering.

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Our management will have broad discretion over the use of the remaining proceeds and may not apply those proceeds in ways that increase the value of your investment.

We estimate that our net proceeds from this offering will be approximately $8,400,000 (or $9,780,000 if the underwriters exercise their option to purchase additional shares in full) assuming an initial public offering price of $5.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use $1.0 million of the net proceeds from this offering to pay the remaining approximately $1.0 million owed for the acquisition of Bailey by DBG, $500,000 to fund the acquisition of H&J (which accrues interest at 12.0% per annum), $300,000 to fund the opening of additional showrooms for H&J, $163,000 to repay accrued and unpaid interest incurred further to our 2019 convertible debt offering (which accrues interest at 14.0% per annum), and for working capital and general corporate purposes. While we have not allocated a specific amount of the remaining net proceeds from this offering for any particular purpose, we may use such remaining net proceeds for the acquisitions of additional businesses. Except for the H&J acquisition, we do not have any agreements or understandings to acquire additional businesses as of the date of this prospectus. See “Use of Proceeds”. Our management will have broad discretion to use the remaining net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of such proceeds.

A significant amount of the proceeds we receive may be invested in short-term, investment-grade securities; there can be no guarantees that our investments will not lose value or that the returns on our investments will not decrease due to market and economic conditions or other factors outside of our control.

We intend to invest the net proceeds from this offering in short-term, investment grade securities until we deploy them for other corporate uses. See “Use of Proceeds.” Although the risks inherent in short-term, investment grade securities are generally low, economic and market conditions could result in a decrease in returns on short-term securities or in the partial or entire loss of our investment. For example, there can be sudden shifts in interest rates, major credit quality downgrades for multiple firms and/or world events that create extreme volatility in the financial markets. Although we intend to implement investment procedures and safeguards and to diversify investments and asset allocations so that our combined investment risk exposure is limited, there is no guarantee that our efforts will prevent the loss of, or the decrease in returns on, our investments, which may cause our stock price to decline.

Our officers and directors and the equity interest holder of H&J and their affiliates will exercise significant control over us.

After the completion of this offering, our executive officers and directors and the equity interest holder of H&J and their affiliates will beneficially own, in the aggregate, approximately 50.0% of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent someone from acquiring or merging with us. These stockholders may have interests that are different from yours.

Provisions in our second amended and restated certificate of incorporation and bylaws and under Delaware law could discourage a takeover that stockholders may consider favorable.

Following this offering, our second amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable because they, among other things:

•

establish supermajority voting requirements in order to amend certain provisions in our second amended and restated certificate of incorporation, which makes it more difficult for stockholders to eliminate anti- takeover provisions;

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eliminate stockholder-initiated action by written consent in lieu of a meeting, which hampers the ability of stockholders to take action during the interim periods between annual meetings of stockholders; and

•

require the written request of stockholders holding an aggregate of 25% of shares of our common stock in order for stockholders to call a special meeting, which together with the elimination of

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stockholder action by written consent described above, makes it very difficult for stockholders to take action during the interim periods between annual meetings of stockholders.

As a Delaware corporation, we are also subject to the Delaware anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law. Under Delaware law, a corporation may not engage in a business acquisition with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our board of directors could rely on this provision to prevent or delay an acquisition of us. See “Description of Capital Stock.”

Our second amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Our second amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) shall be the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:

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any derivative action or proceeding brought on our behalf;

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any action asserting a breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders;

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any action asserting a claim against us or our directors, officers or other employees arising under the Delaware General Corporation Law, our second amended and restated certificate of incorporation or our bylaws;

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any action or proceeding to interpret, apply, enforce or determine the validity of our second amended and restated certificate of incorporation or our bylaws;

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any action or proceeding as to which the Delaware General Corporation Law confers jurisdiction to the Court of Chancery of the State of Delaware; or

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any action asserting a claim against us or our directors, officers or other employees that is governed by the “internal affairs doctrine” as that term is defined in Section 115 of the Delaware General Corporation Law,

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and to have consented to this exclusive forum provision of our second amended and restated certificate of incorporation. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find this choice of forum provision in our second amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions. Additional costs associated with resolving an action in other jurisdictions could materially adversely affect our business, financial condition and results of operations

Our second amended and restated certificate of incorporation authorizes us to issue shares of blank check preferred stock, and issuances of such preferred stock, or securities convertible into or exercisable for such preferred stock, may result in immediate dilution to existing stockholders, including investors in this offering.

If we raise additional funds through future issuances of preferred equity or debt securities convertible into preferred equity, our stockholders could suffer significant dilution, and any new equity or debt securities that we issue could have rights, preferences and privileges superior to those of holders of shares of common stock. Although we have no present plans to issue any shares of preferred stock or any additional convertible debt securities, in the event that we issue shares of our preferred stock, or securities convertible into or exercisable for our common stock after the date of the offering, the investors in this offering may be

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diluted. We may choose to raise additional capital using such preferred equity or debt securities because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans.

Purchasing shares of our common stock in this offering will result in an immediate and substantial dilution of your investment, and your investment may be further diluted if new securities are issued in connection with capital raises.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, investors purchasing shares of our common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, after giving effect to the acquisitions, investors purchasing common stock in this offering will incur immediate dilution of $4.24 per share (assuming no exercise of the underwriters’ option to purchase additional shares of our common stock), based on an assumed initial public offering price of $5.00 per share. Furthermore, if we raise additional capital or acquire new businesses by issuing new convertible or equity securities, the interests of investors in this offering may be further diluted. This may result in the loss of all or a portion of their investment. In addition, newer securities may have rights, preferences or privileges senior to those of securities held by investors in our common stock. See “Dilution.”

In addition, further to the acquisitions of Bailey and H&J, we agreed that if, at the one year anniversary of the closing date of this offering, the product of the number of shares of our common stock issued at the closing of such acquisitions multiplied by the average closing price per share of our shares of common stock as quoted on the NasdaqCM for the thirty (30) day trading period immediately preceding such date plus the gross proceeds, if any, of shares of our stock issued to such sellers and sold by them during the one year period from the closing date of this offering does not exceed the sum of $9.1 million or $11.1 million, respectively, less the value of any shares of common stock cancelled further to any indemnification claims or post-closing adjustments under the acquisition agreements, then we shall issue to the subject sellers an additional aggregate number of shares of common stock equal to any such valuation shortfall at a per share price equal to the then closing price per share of our common stock as quoted on the NasdaqCM. Although we have agreed that concurrently we will cause a number of shares of common stock or common stock equivalents held by certain of our affiliated stockholders prior to this offering to be cancelled in an equivalent dollar amount as any such valuation shortfalls on a pro rata basis in proportion to the number of shares of common stock or common stock equivalents held by each of them, the substantial majority of such cancellations would likely be in the form of cancellation of stock options held by such persons as opposed to shares held by them. As a result, additional shares of common stock may be issued further to which the interests of investors in this offering may be further diluted.

We do not expect to pay any dividends in the foreseeable future.

We intend to retain our future earnings, if any, in order to reinvest in the development and growth of our business and, therefore, do not intend to pay dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, the limits imposed by the terms of our credit facility and such other factors as our board of directors deems relevant. Accordingly, investors in our common stock may need to sell their shares to realize a return on their investment in our common stock, and investors may not be able to sell their shares at or above the prices paid for them.

If securities analysts do not publish favorable reports about us or if we, or our industry, are the subject of unfavorable commentary, the price of our common stock could decline.

The trading price for our common stock will depend in part on the research and reports about us that are published by analysts in the financial industry. Analysts could issue negative commentary about us or our industry, or they could downgrade our common stock. We may also not receive sufficient research coverage or visibility in the market. Any of these factors could result in the decline the trading price of our common stock, causing investors in our common stock to lose all or a portion of their investment.

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CAUTIONARY DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements within the meaning of U.S. federal securities laws, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward- looking terminology, including the terms “believe,” “estimate,” “project,” “aim,” “anticipate,” “expect,” “seek,” “predict,” “contemplate,” “continue,” “possible,” “intend,” “may,” “plan,” “forecast,” “future,” “might,” “will,” “could,” would” or “should” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth strategies, the industry in which we operate and potential acquisitions. We derive many of our forward- looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this prospectus.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the stability of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this prospectus, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause our results to vary from expectations include, but are not limited to:

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our lack of combined operating history and our ability to successfully integrate Bailey and H&J into one entity;

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the highly fragmented and competitive nature of our industry;

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our ability to successfully locate and acquire companies in the apparel business, to obtain debt financing for that purpose and to successfully integrate them into our business and manage our internal growth;

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loss of any of our executives and managers;

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quarterly variations in our operating results;

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our ability to attract and retain qualified employees while controlling labor costs;

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our ability to manage our working capital to facilitate our inventory management;

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disruptions in the manufacturing and supply chains;

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our ability to adapt our product offerings to changing preferences and consumer tastes;

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our exposure to claims relating to employment violations and workplace injuries;

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our exposure to claims arising from our acquired operations;

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the potential for asset impairments when we acquire businesses;

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disruptions in our information technology systems;

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restrictions imposed on our operations by our credit facility and by other indebtedness we may incur in the future;

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our ability to implement and maintain effective internal control over financial reporting; and

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additional factors discussed under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.”

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Other sections of this prospectus include additional factors that could adversely impact our business and financial performance. In light of these risks, uncertainties and assumptions, the forward-looking events described in this prospectus may not occur. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time, and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or acquisition of factors, may cause actual results to differ materially from those contained in any forward- looking statements. We qualify all of our forward-looking statements by these cautionary statements.

Estimates and forward-looking statements speak only as of the date they were made, and, except to the extent required by law, we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. As a result of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this prospectus might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, but not limited to, the factors mentioned above. Because of these uncertainties, you should not place undue reliance on these forward-looking statements when making an investment decision.

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INDUSTRY AND MARKET DATA

In this prospectus, we rely on and refer to information and statistics regarding our industry. We obtained this information and these statistics from sources other than us, which we have supplemented where necessary with information from publicly available sources, discussions with our customers and our own internal estimates. The industry publications, reports, surveys, sources and forecasts containing the industry and market data cited in this prospectus are provided below:

We believe these sources and estimates to be reliable, but we cannot give you any assurance that any of the projected results will occur. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of 2,000,000 shares of our common stock in this offering, after deducting underwriter discounts and commissions and estimated offering expenses payable by us, will be approximately $8,400,000 (approximately $9,780,000 if the underwriters exercise their option to purchase additional shares in full). This estimate assumes a public offering price of $5.00 per share.

A $1.00 increase (decrease) in the assumed public offering price of $5.00 per share would increase (decrease) the net proceeds to us from this offering by $1.84 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, increase our visibility in the marketplace and create a public market for our common stock. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us of this offering. However, we currently intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital, marketing initiatives and capital expenditures. Specifically, we intend to use $1.0 million of the net proceeds from this offering to pay the remaining approximately $1.0 million owed for the acquisition of Bailey by DBG, $500,000 to fund the acquisition of H&J (which accrues interest at 12.0% per annum), $300,000 to fund the opening of additional showrooms for H&J, subject to limitations that current and future COVID-19 circumstances allow, and $163,000 to pay accrued interest owed further to the 2019 convertible debt (which accrues interest at 14.0% per annum). See “The Acquisitions of Bailey and H&J.”

While we have not allocated a specific amount of the remaining net proceeds from this offering to any particular purpose, we may use such remaining net proceeds for the acquisitions of additional businesses. Except for the acquisition of H&J, as of the date of this Prospectus, we do not have any understandings or agreements for any acquisitions.

The net proceeds we actually expend for the acquisition of additional businesses may vary significantly depending on a number of factors, including our ability to locate such companies and enter into a binding acquisition agreement on favorable terms and the negotiated purchase price. In addition, the net proceeds we actually expend for general corporate purposes may vary significantly depending on a number of factors, including future revenue growth and our cash flows. As a result, we will retain broad discretion over the allocation of the remaining net proceeds from this offering. Pending use of the net proceeds from this offering, we intend to invest the net proceeds in short-term, investment-grade securities.

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2020:

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on an actual basis for DBG which includes Bailey;

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on an actual basis for H&J;

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on a pro forma combined basis to reflect (i) a 1-for-15.625 common stock reverse stock split effective immediately prior to the closing of this offering, (ii) the conversion of all outstanding shares of preferred stock into common stock on a one-for one basis immediately prior to the closing of this offering, (iii) the Debt Conversion, and (iv) the acquisition of H&J assuming an initial public offering price of $5.00 per share; and

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on a pro forma as adjusted combined basis to reflect the sale of 2,000,000 shares of our common stock at the assumed public offering price of $5.00 per share, less the underwriting discounts and commissions and estimated offering expenses.

You should read this information in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited pro forma combined financial statements and the related notes and the historical financial statements and related notes appearing elsewhere in this prospectus.

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	as of September 30, 2020
	DBG			H&J			Total			Pro Forma			Pro Forma as Adjusted
ASSETS
Current assets:
Cash and cash equivalents		$	282,059		$	22,369		$	304,428		$	6,737,000		$	7,041,428
Indebtedness, including current portion		$	20,861,573		$	1,393,951		$	22,255,524					$	22,255,524
Debt		$	12,597,722		$	1,104,141			13,701,863		$	(2,299,280)			11,402,583
DBG preferred stock, $0.0001 par value, 125,000,000 shares authorized (actual), 10,000,000 shares authorized (pro forma and pro forma as adjusted), 62,924,710 shares issued and outstanding (actual), no shares issued and outstanding (pro forma)			6,291			—			6,291			(6,291)			—
DBG common stock, $0.0001 par value: 200,000,000 shares authorized (actual), 100,000,000 shares authorized (pro forma and pro forma as adjusted), 10,377,615 shares issued and outstanding (actual); 5,396,957 issued and outstanding (pro forma); 7,396,957 (pro forma as adjusted)			1,038			—			1,038			(298)			740
H&J Membership Interests			—			9,100,000			9,100,000			(9,100,000)			—
Additional paid-in capital			27,383,064						27,383,064			18,292,789			45,675,852
Subscription receivable			(13,454)						(13,454)						(13,454)
Accumulated deficit			(30,706,682)			(1,139,602)			(31,846,284)						(31,846,284)
Total stockholders’ equity (deficit)		$	(3,329,743)		$	7,960,398		$	4,630,655		$	9,186,297		$	13,816,952
Total capitalization		$	9,267,979		$	9,064,539		$	18,332,518		$	6,887,017		$	25,219,535

(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $5.00 per share would increase (decrease) each of cash, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $1.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this Prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) the pro forma as adjusted amount of each of cash, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $4.6 million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us.

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DILUTION

If you invest in our stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

The pro forma net tangible book value of our common stock on September 30, 2020 was a deficit of ($19.5) million, or ($3.17) per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding, after giving effect to (i) a 1-for-15.625 common stock reverse stock split effective immediately prior to the closing of this offering, (ii) the conversion of all outstanding shares of preferred stock into common stock on a one-for one basis immediately prior to the closing of this offering, (iii) the Debt Conversion, and (iv) the acquisition of H&J assuming an initial public offering price of $5.00 per share. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately afterwards. After giving effect to our sale of 2,000,000 shares of common stock offered by this prospectus at the assumed initial public offering price of $5.00 per share (and assuming no exercise of the underwriters’ overallotment option), and after deducting the underwriting discounts, commissions and estimated offering and acquisition expenses payable by us, our pro forma net tangible book value would have been ($11.1 million), or approximately ($1.37) per share. This represents an immediate increase in pro forma net tangible book value of $1.81 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $3.63 per share to new investors. The following table illustrates the per share dilution:

Assumed public offering price per share			$	5.00
Pro forma net tangible book value per share as of September 30, 2020	$	(3.17)
Increase in pro forma net tangible book value per share attributable to new investors	$	1.81
Pro forma net tangible book value per share after this offering			$	(1.37)
Dilution in pro forma net tangible book value per share to new investors			$	3.63

If the underwriters’ over-allotment option is exercised in full, the pro forma net tangible book value per share of our common stock after giving effect to this offering and the acquisition of H&J would be ($1.32) per share of our common stock. This represents an increase in net tangible book value of $1.86 per share of our common stock to existing stockholders (which will include the current owner of H&J pursuant to the shares of our common stock he will receive as part of the acquisition of H&J) and dilution in pro forma net tangible book value of $3.68 per share to new investors.

A $1.00 increase (decrease) in the assumed public offering price of $5.00 per share of our common stock would increase (decrease) our net tangible book value after giving effect to this offering and the acquisition s by $1.8 million, or by $0.23 per share of our common stock, assuming no change to the number of shares of our common stock offered by us as set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table sets forth as of September 30, 2020, on a pro forma combined basis to reflect (i) a 1-for-15.625 common stock reverse stock split effective immediately prior to the closing of this offering, (ii) the conversion of all outstanding shares of preferred stock into common stock on a one-for one basis immediately prior to the closing of this offering, (iii) the Debt Conversion and (iv) the acquisition of H&J, the number of shares of common stock, the total price and average price per share paid to us by our existing holders and the new investors, before deducting estimated offering and acquisition expenses payable by us, using the assumed public offering price of $5.00 per share.

	Shares Purchased				Total Consideration					Average Price Per Share
	Number		Percentage		Amount			Percentage		Average Price Per Share
Existing Stockholders		5,396,957		73.0%		$	14,193,996		58.7%		$	2.63
New Investors in this offering		2,000,000		27.0		$	10,000,000		41.3%		$	5.00
Total		7,396,957		100.0%		$	24,193,996		100.0%

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SELECTED FINANCIAL DATA

The selected historical financial information for the nine months ended September 30, 2019 and 2020 and for the years ended December 31, 2018 and 2019 represents the historical financial information of DBG. The statements of operations data for the years ended December 31, 2019 and 2018 have been derived from our audited financial statements included elsewhere in this prospectus. We have derived the statements of operations data for the nine months ended September 30, 2020 and 2019 and the balance sheet data as of September 30, 2020 from the unaudited financial statements of DBG appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that should be expected in any future periods and our results for any interim period are not necessarily indicative of results that should be expected for any full year.

The unaudited pro forma condensed combined financial data for the nine months ended September 30, 2020 and the year ended December 31, 2019 represents the historical financial information of DBG and gives effect to (a) the acquisition of Bailey in February 2020 and that of H&J to occur immediately prior to the effective date of this offering and (b) the conversion of all shares of preferred stock into common stock on a one-for- one basis and a 1-for-15.625 reverse stock split, each to occur immediately prior to the effective date of this offering. The pro forma adjustments are based on currently available information and certain estimates and assumptions, and, therefore, the actual effects of the offering and the acquisition as reflected in the pro forma data may differ from the effects reflected below. However, management believes that the assumptions provide a reasonable basis for presenting the significant effects of the offering and acquisitions as contemplated and that the pro forma adjustments give appropriate effect to those assumptions. During the periods presented, DBG, Bailey and H&J were not under common control or management and, therefore, the data presented may not be comparable to, or indicative of, post- acquisition results.

You should review the information below together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Unaudited Pro Forma Condensed Combined Financial Information and the related notes beginning on page F-1 of this prospectus, and the audited and unaudited interim financial statements of DBG, Bailey and H&J, and the related notes all included elsewhere in this prospectus.

	Nine Months Ended September 30,									Year Ended December 31,
Statement of Operations	2020 Pro Forma			2020 Actual			2019 Actual			2019 Pro Forma			2019 Actual			2018 Actual
	(unaudited)									(unaudited)
Net revenues		$	8,432,642		$	4,475,507		$	2,319,205		$	33,459,696		$	3,034,216		$	3,777,493
Cost of net revenues		$	5,175,069		$	3,884,864		$	1,046,116		$	15,492,838		$	1,626,505		$	1,656,332
Gross profit		$	3,257,573		$	590,643		$	1,273,089		$	17,966,859		$	1,407,711		$	2,121,161
Operating expenses		$	11,981,473		$	7,458,722		$	5,040,258		$	27,610,667		$	6,255,180		$	6,140,232
Operating loss		$	(8,723,900)		$	(6,868,079)		$	(3,767,169)		$	(9,643,809)		$	(4,847,469)		$	(4,019,071)
Other expenses		$	(1,692,305)		$	(1,207,244)		$	(579,167)		$	(962,737)		$	(805,704)		$	(705,662)
(Loss) before provision for income taxes		$	(10,416,205)		$	(8,075,323)		$	(4,346,336)		$	(10,606,545)		$	(5,653,973)		$	(4,724,733)
Provision for income taxes			13,657		$	13,657		$	—			(15,690)		$	(800)		$	(800)
Net loss		$	(10,429,862)		$	(8,088,980)		$	(4,346,336)		$	(10,622,236)		$	(5,653,973)		$	(4,725,533)

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 prospectus. 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 Disclosure Regarding Forward-Looking Statements.”

Unless otherwise indicated by the context, references to “DBG” refer to Digital Brands Group, Inc. solely, and references to the “Company,” “our,” “we,” “us” and similar terms refer to Digital Brands Group, Inc., together with its wholly-owned subsidiary Bailey 44 LLC, and Harper & Jones LLC, after giving effect to the acquisition of H&J.

Business Overview

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 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 on-line but at selected wholesale and retail storefronts. We believe this approach allows us opportunities to successfully drive Lifetime Value (“LTV”) while increasing new customer growth. We define Lifetime Value or LTV 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 a successful apparel brand needs to sell in every revenue channel. However, each channel offers different margin structures and requires different customer acquisition and retention strategies. We were founded as a digital-first retailer which has strategically expanded into select wholesale and direct retail channels. We strive to strategically create omnichannel strategies 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, but also through our wholesale channel, primarily in specialty stores and select department stores, and our own showrooms. We currently offer products under the DSTLD, ACE Studios and Bailey 44 brands. We will also offer products under the Harper & Jones brand upon the consummation of this offering. Bailey is primarily a wholesale brand, which we have begun to transition to a digital, direct-to-consumer brand. DSTLD is primarily a digital direct-to-consumer brand, to which we recently added select wholesale retailers to create more brand awareness. Harper & Jones is also primarily a direct-to-consumer brand using its own showrooms. Harper & Jones is also primarily a direct-to-consumer brand using its own showrooms. We will leverage all three channels (our websites, wholesale and our own stores) for all our brands. Every brand will have a different revenue mix by channel based on optimizing revenue and margin in each channel for each brand, which includes factoring in customer acquisition costs and retention rates by channel and brand.

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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 time 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 acquired Bailey in February 2020. We entered into acquisition agreement in October 2020 with the holder of the membership interests in H&J that will close concurrently with the closing of this offering.

We agreed on the consideration that we are paying in each acquisition in the course of arm’s length negotiations with the holders of the membership interests in each of Bailey and H&J. In determining and negotiating this consideration, we relied on the experience and judgment of our management and our evaluation of the potential synergies that could be achieved in combining the operations of Bailey and H&J. We did not obtain independent valuations, appraisals or fairness opinions to support the consideration that we agreed to pay.

Material Trends, Events and Uncertainties

COVID-19

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus
(“COVID-19”) a pandemic. As the global spread of COVID-19 continues, DBG remains first and foremost focused on a people-first approach that prioritizes the health and well-being of its employees, customers, trade partners and consumers. To help mitigate the spread of COVID-19, DBG has modified its business practices, including in response to legislation, executive orders and guidance from government entities and healthcare authorities (collectively, “COVID-19 Directives”). These directives include the temporary closing of offices and retail stores, instituting travel bans and restrictions and implementing health and safety measures including social distancing and quarantines.

The Company’s digital platform remains a high priority through which its brands stay connected with consumer communities while providing experiential content. In accordance with local government guidelines and in consultation with the guidance of global health professionals, DBG has implemented measures designed to ensure the health, safety and well-being of associates employed in its distribution and fulfillment centers. Many of these facilities remain operational and support digital consumer engagement with its brands and to service retail partners as needed.

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addition, the pandemnic meaningfully reduced our 2020 net revenue as our wholesale accounts closed temporarily, and reduced orders for the entire year all the way through the end of 2020. We also waited to hire a new designer until the summer, once we knew that stores would open back up at some capacity. This delay in hiring a new designer also impacted the first four months of 2021, as her first collection was not offered until recently for a May 2021 shipment to our accounts. We expect to also experience lower order quantities from our accounts throughout 2021 versus pre-COVID levels, but meaningfully higher than 2020.

•

The COVID-19 pandemic is ongoing and dynamic in nature, and continues to drive global uncertainty and disruption. As a result, COVID-19 is having a significant negative impact on the Company’s business, including the consolidated financial condition, results of operations and cash flows through the third quarter of 2020. While we are not able to determine the ultimate length and severity of the COVID-19 pandemic, we expect store closures, an anticipated reduction in traffic once stores initially reopen and a highly promotional marketplace will have a significant negative impact on our financial performance for at least the first two quarters of 2021.

DBG has implemented cost controls to reduce discretionary spending to help mitigate the loss of sales and to conserve cash while continuing to support employees. DBG is also assessing its forward inventory purchase commitments to ensure proper matching of supply and demand, which will result in an overall reduction in future commitments. As DBG continues to actively monitor the situation, we may take further actions that affect our operations.

Although the Company has taken several measures to maximize liquidity and flexibility to maintain operations during the disruptions caused by the COVID-19 pandemic, uncertainty regarding the duration and severity of the COVID-19 pandemic, governmental actions in response to the pandemic, and the impact on us and our consumers, customers and suppliers, there is no certainty that the measures we take will be sufficient to mitigate the risks posed by COVID-19.

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. However, the second half of 2020 has been negatively impacted by the COVID-19 global pandemic.

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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 and DSTLD are also sold through a growing number of physical retail channels, including specialty stores, department stores and online multi-brand platforms. Our products for Harper & Jones are sold through its own showrooms and its outside sales reps, which can use the showrooms to meet clients.

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 customer’s 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 (1) fixed general and administrative costs, (2) variable sales and marketing costs, (3) elimination of redundant costs as we acquire and integrate brands, (4) cross marketing and cross merchandising brands in our portfolio, and (4) 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

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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.

As an example, we were able to eliminate several million in expenses within six months of acquiring Bailey. Examples of these savings include eliminating several Bailey teams, which the DGB teams took over. We merged over half of the technology contracts and operating systems contracts from two brands into one brand contract at significant savings. We also eliminated the DGB office space and rent and moved everyone into the Bailey office space. Finally, we eliminated DSTLD’s third-party logistics company and started using Bailey’s internal logistics. This resulted in an increase in DBG’s operating expenses in absolute dollars as there were now two brands versus one brand. However, the operating expenses as a percentage of pre-COVID revenue declined meaningfully and as we increase revenue for each brand, we expect to experience higher margins.

Ability to Create Free Cash Flow

Our goal is to achieve near term free cash flow through cash flow positive acquisitions, elimination of redundant expenses in acquired companies, increasing customer annual spend and lowering customer acquisition costs through cross merchandising across our brand portfolio.

Critical Accounting Policies and Estimates

Basis of Presentation and Principles of Consolidation

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America ("GAAP").

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Business Acquisitions

We record our acquisitions under the acquisition method of accounting, under which most of the assets acquired and liabilities assumed are initially recorded at their respective fair values and any excess purchase price is reflected as goodwill. We utilize management estimates and, in some instances, independent third-party valuation firms to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration, if any. Such estimates and valuations require us to make significant assumptions, including projections of future events and operating performance.

The fair value of customer relationships, backlog and trade names/trademarks acquired in our acquisitions are determined using various valuation methods, based on a number of significant assumptions.

We have established the expected useful life of the value of the Brand at ten years. We amortize such trade names using the straight-line method.

The expected useful life of customer relationships is established as three years, which is the period over which these assets are expected to reasonably contribute to future cash flows. We expect to amortize such customer relationships using the straight-line method.

The estimated fair values are subject to change during the measurement period, which is limited to one year subsequent to the acquisition date.

Revenue Recognition

Revenues are recognized when performance obligations are satisfied through the transfer of promised goods to the Company’s customers. Control transfers upon shipment of product and when the title has

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been passed to the customers. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance. The Company provides the customer the right of return on the product and revenue is adjusted based on an estimate of the expected returns based on historical rates. The Company considers the sale of products as a single performance obligation. Sales tax collected from customers and remitted to taxing authorities is excluded from revenue and is included in accrued expenses. Revenue is deferred for orders received for which associated shipments have not occurred. ASC 606 has been adopted effective January 1, 2019 using the modified retrospective method with no adjustment.

Accounts Receivable

The Company carries its accounts receivable at invoiced amounts less allowances for customer credits, doubtful accounts, and other deductions. The Company does not accrue interest on its trade receivables. Management evaluates the ability to collect accounts receivable based on a combination of factors. Receivables are determined to be past due based on individual credit terms. A reserve for doubtful accounts is maintained based on the length of time receivables are past due, historical collections, or the status of a customer’s financial position. Receivables are written off in the year deemed uncollectible after efforts to collect the receivables have proven unsuccessful.

We periodically review accounts receivable, estimate an allowance for bad debts, and simultaneously record the appropriate expense in the statement of operations. Such estimates are based on general economic conditions, the financial conditions of customers, and the amount and age of past due accounts. Past due accounts are written off against that allowance only after all collection attempts have been exhausted and the prospects for recovery are remote.

Goodwill Impairment

We are required to assess our goodwill for impairment at least annually for each reporting unit that carries goodwill. We may elect to first do a qualitative assessment to determine whether it is more likely than not that a reporting unit’s fair value is in excess of its carrying value. If the qualitative assessment concludes that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment is performed. If the fair value is determined to be less than its carrying value, we record goodwill impairment equal to the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

Intangible Assets Impairment

We evaluate the carrying amount of intangible assets and other long-lived assets for impairment whenever indicators of impairment exist. We test these assets for recoverability by comparing the net carrying amount of the asset or asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset or asset group. If the assets are recoverable, an impairment loss does not exist, and no loss is recorded. If the carrying amounts of the assets are not recoverable, an impairment loss is recognized for any deficiency of the asset or asset group’s fair value compared to their carrying amount. Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage our business, there is significant judgment in determining the cash flows attributable to these assets, including markets and market share, sales volumes and mix, and working capital changes.

Stock Based Compensation

The Company accounts for stock-based compensation costs under the provisions of ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense related to the fair value of stock-based compensation awards that are ultimately expected to vest. Stock based compensation expense recognized includes the compensation cost for all stock-based payments granted to employees, officers, and directors based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also applied to awards modified, repurchased, or cancelled during the periods reported. Stock-based compensation is recognized as expense over the employee’s requisite vesting period and over the nonemployee’s period of providing goods or services.

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Income Taxes

The Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is unlikely that the deferred tax assets will not be realized. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. In accordance with ASC 740-10, for those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements.

Recently Issued Accounting Pronouncements

A company’s internal control over financial reporting is a process designed by, or under the supervision of, that company’s principal executive and principal financial officers, or persons performing similar functions, and effected by that company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

In connection with our preparation for this offering, we concluded that, overall, there were material weaknesses in internal control over financial reporting at DBG, Bailey and H&J. Historically, both Bailey and H&J were private companies that had not previously been audited and they had maintained a complement of resources with a variety of levels of accounting knowledge, experience, and expertise that is, overall, not commensurate with our prospective financial reporting needs. Collectively, this could prospectively result in difficulties in meeting our internal reporting needs and our external reporting requirements and assessing the appropriate accounting treatment for a variety of events and/or circumstances.

Controls and Procedures

In preparation for this offering, we 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 of each of DBG, Bailey and H&J. 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 of each of DBG, Bailey and H&J. 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 each of DBG, Bailey and H&J, 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 of DBG, Bailey and H&J and related footnote disclosures. We plan to retain these financial

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consultants until such time that the internal resources of the Company, Bailey and/or H&J have been upgraded and the required financial controls have been fully implemented.

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 controls over financial reporting are 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.

Financial Statement Components

Bailey

Net Revenue

Bailey sells its products directly to customers. Bailey 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

Bailey’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.

Operating Expenses

Bailey’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.

General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, occupancy expenses related to Bailey’s stores and to Bailey’s operations at its headquarters, including utilities, depreciation and amortization, and other costs related to the administration of its business.

Bailey’s fulfillment and shipping expenses include the cost to operate its warehouse including occupancy and labor costs to pick and pack customer orders and any return orders; packaging; and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse.

Sales & Marketing

Bailey’s sales and marketing expense primarily includes digital advertising; photo shoots for wholesale and direct-to-consumer communications, including email, social media and digital advertisements; and commission expenses associated with sales representatives.

Interest Expense

Bailey’s interest expense consists primarily of interest related to its outstanding debt to our senior lender.

DBG

Net Revenue

We sell our products to our customers directly through our website. In those cases, sales, net represents total sales less returns, promotions and discounts.

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Cost of Net Revenue

Cost of net revenue include direct cost of purchased merchandise; inventory shrinkage; inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost and net realizable reserves.

Operating Expenses

Our operating expenses include all operating costs not included in cost of net revenues. These costs consist of general and administrative, sales and marketing, and fulfillment and shipping expense to the customer.

General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, and expenses related to our operations at our headquarters, including utilities, depreciation and amortization, and other costs related to the administration of our business.

Following the completion of this offering, we expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC and higher expenses for insurance, investor relations and professional services. We expect these costs will increase our operating costs.

Fulfillment and shipping expenses include the cost to operate our warehouse — or prior to Bailey 44 acquisition, costs paid to our third-party logistics provider — including occupancy and labor costs to pick and pack customer orders and any return orders; packaging; and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse.

In addition, going forward, the amortization of the identifiable intangibles acquired in the acquisitions will be included in operating expenses.

Interest Expense

Interest expense consists primarily of interest related to our debt outstanding to our senior lender, convertible debt, and other interest bearing liabilities.

H&J

Net Revenue

H&J sells its products directly to customers through their showrooms and sales reps.

Cost of Net Revenue

H&J’s cost of net revenue sold is associated with procuring fabric and custom tailoring each garment.

Operating Expenses

H&J’s operating expenses include all operating costs not included in cost of net revenue.

General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, occupancy expenses related to H&J’s stores and to H&J’s operations at its headquarters, including utilities, depreciation and amortization, and other costs related to the administration of its business.

H&J’s sales and marketing expense primarily includes digital advertising; photo shoots for wholesale and direct-to-consumer communications, including email, social media and digital advertisements; and commission expenses associated with sales representatives.

Interest Expense

H&J’s interest expense consists primarily of interest related to its outstanding debt.

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Digital Brands Group, Inc. — Pro Forma Combined

Results of Operations

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

	Nine Months Ended September 30,
Pro Forma Combined	2020			2019
	(unaudited)			(unaudited)
Statement of Operations
Net revenues		$	8,432,642		$	25,222,938
Cost of net revenues		$	5,175,069		$	11,014,077
Gross profit		$	3,257,573		$	14,208,861
Operating expenses		$	11,981,473		$	22,501,694
Operating loss		$	(8,723,900)		$	(8,292,832)
Other expenses		$	(1,692,305)		$	(1,028,781)
Loss before provision for income taxes		$	(10,416,205)		$	(9,321,613)
Provision for income taxes		$	13,657		$	14,090
Net loss		$	(10,429,862)		$	(9,335,703)

Net Revenue

Our pro forma net revenue decreased by $16.8 million to $8.4 million for the first three quarters of 2019, compared to $25.2 million for the first three quarters of 2019. The decrease was due to the Bailey 44 acquisition, which experienced a significant decline in 2020 wholesale revenues associated with COVID-19.

Additionally, at Bailey 44, we transitioned to a new Creative Director. The new Creative Director did not start until June 2020 and therefore her first collection for sale will be May 2021. This resulted in no new product for sale to wholesale or online for approximately one year, which significantly reduced revenue along with COVID-19.

Cost of Net Revenue

Our pro forma cost of net revenue decreased by $5.8 million for the first three quarters of 2020 to $5.2 million from $11.0 million for the first three quarters of 2019. The decrease in cost of net revenue was primarily due to the Bailey 44 acquisition and the subsequent lower revenue associated with Bailey 44 due to COVID-19 and the Creative Director transition as noted in the net revenue section.

Cost of net revenue increased by 17.7% to 61.4% for the first three quarters of 2020 compared to 43.7% for the first three quarters of 2019. The increase in the cost of net revenue percentage was primarily associated with our acquisition of Bailey 44 due to our heavy discounting to sell their aged and current inventory. We discounted the Bailey 44 inventory due to lower market demand and our decision to hire a new Creative Director and create a clean break in the product collections.

Gross profit

Our pro forma gross profit decreased by $11.0 million for the first three quarters of 2020 to $3.3 million from $14.2 million for the first three quarters of 2019. The decrease in gross margin was primarily due to the Bailey 44 acquisition and the subsequent lower revenue associated with Bailey 44 due to COVID-19 and the Creative Director transition as noted in the net revenue section.

Our pro forma gross margin decreased by 17.7% to 38.6% for the first three quarters of 2020 compared to 56.3% for the first three quarters of 2019. The decrease in the gross margin was primarily associated with our acquisition of Bailey 44 due to our heavy discounting to sell their aged and current inventory. We discounted the Bailey 44 inventory due to lower market demand and our decision to hire a new Creative Director and create a clean break in the product collections.

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General and administrative expense

Our pro forma general and administrative expense decreased by $10.5 million for the first three quarters of 2020 to $12.0 million compared to $22.5 million for the first three quarters of 2019. The decrease in general and administrative expenses was primarily due to the Bailey 44 acquisition As part of the acquisition we reduced expenses in the employee base, merging two corporate offices and fulfillment centers into one location for each, closing the three Bailey 44 stores, and renegotiated contracts with one of our major wholesale accounts.

Pro forma general and administrative expenses as a percentage of revenue increased by 52.9% to 142.1% for the first three quarters of 2020 compared to 89.2% for the first three quarters of 2019. The decrease was due to the Bailey 44 acquisition, which experienced a significant decline in 2020 wholesale revenues associated with COVID-19.

Other Income and Interest Expense

Our pro forma other expense increased by approximately $0.2 million to $1.2 million for the first three quarter of 2020 compared to $1.0 million for the first three quarters of 2019. The increase in the other expense was primarily due to interest expense from the Bailey 44 acquisition and an increase in the DBG interest expense year over year.

Net Loss

Our pro forma net loss increased by $1.1 million to a loss of $10.4 million for the first three quarter of 2020 compared to a loss of $9.3 million for the first three quarters of 2019 primarily due to lower revenue, lower gross profit in both dollars and as a percentage of revenue and an increase in other expenses in dollars.

Cash Flow Activities

The following sections discuss our pro forma cash flow activities:

For the nine months ended September 30, 2020 (pro forma) compared to nine months ended September 30, 2019 (pro forma).

As of September 30, we had a pro forma combined cash balance of $304,428 and a working capital deficit of ($19,075,068). The following table presents selected captions from our pro forma combined condensed statement of cash flows for the nine month ended September 30, 2020 and 2019:

	For the nine months ended September 30,
Pro Forma Combined	2020 Pro Forma			2019 Actual
Cash Flow Activities
Net cash provided by operating activities:
Net Loss		$	(10,429,862)		$	(9,335,703)
Non-cash adjustments		$	3,528,206		$	1,865,921
Change in operating assets and liabilities		$	1,474,007		$	3,842,813
Net cash used in operating activities		$	(5,427,649)		$	(3,626,969)
Net cash used in investing activities		$	(278,758)		$	(600,383)
Net cash (used in) provided by financing activities		$	5,593,678		$	3,105,948
Net change in cash		$	(112,729)		$	(1,121,404)

Cash Flows Used In Operating Activities

DBG’s cash used by operating activities increased by $2.0 million to cash used of $5.1 million for the first three quarters of 2020 as compared to cash used in operating activities of $3.1 million for the first

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three quarters of 2019. The increase in cash used by operating activities was primarily driven by $2.0 million in an increase in inventory, $0.8 million associated with impairment of intangible assets, $0.7 million in increase in accrued interest and $0.6 million on loss of disposal of property and equipment. These were offset by $1.7 million in payments due to the factor and $0.8 million in payments toward accrued expenses and accrued liabilities.

Cash Flows Used In Investing Activities

DBG’s cash used from investing activities was $214,000 for the first three quarters of 2020 as compared to cash used of $4,900 for the first three quarters of 2019. Cash used during the first three quarters of 2020 and 2019 was primarily related to purchase of property and equipment.

Cash Flows Provided By Financing Activities

DBG’s cash provided by financing activities was $5.2 million for the first three quarters of 2020 compared to cash provided of $2.6 million for the first three quarters of 2019. Cash inflows in the first three quarters of 2020 were primarily related to proceeds from an issuance of a loan payable of $1.7 million, an advance from a factor of $1.4 million, proceeds from venture debt of $0.9 million. Cash inflows in the first three quarters of 2019 were primarily related to proceeds to our Series A-3 for $1.8 million, proceeds from venture debt of $500,000 and proceeds from a convertible note of $250,000.

Year Ended December 31, 2019 compared to the year ended December 31, 2018

	Year Ended December 31,
Statement of Operations	2019			2018
	(unaudited)			(unaudited)
Net revenue		$	33,459,696		$	35,034,608
Cost of net revenue		$	15,492,838		$	15,996,245
Gross profit		$	17,966,859		$	19,038,363
Operating expenses		$	27,610,667		$	25,496,408
Operating income		$	(9,643,809)		$	(6,458,045)
Other expense		$	(962,737)		$	(214,461)
Loss before provision for income taxes		$	(10,606,545)		$	(6,672,506)
Provision for income taxes		$	(15,690)		$	12,590
Net loss		$	(10,622,236)		$	(6,659,916)

Net Revenue

Our pro forma combined net revenue decreased by $1.6 million to $33.5 million in 2019, compared to $35.0 million in 2018.

For Bailey’s, net revenue decreased by $1.9 million to $27.1 million in 2019, compared to $29.0 million in 2018. This decrease was due to a decline of $3.4 million in its wholesale channels, partially offset by an increase of $1.5 million in its direct-to-consumer channel. The decline in wholesale channels was primarily associated with reduced demand for our products by our wholesale accounts.

For DBG, net revenue decreased by $743,277 to $3.0 million in 2019, compared to $3.8 million in 2018. This decrease was due to a decrease in marketing expenses by $1.2 million as we focused on driving repeat customer revenue versus new customer revenue. This decrease in marketing expenses resulted in a decline in new customer growth versus the prior year. This decline in new customer growth was intentional due to the change in our marketing strategy as detailed below. The decline in new customer growth was offset by a higher new customer AOV, which was driven by an increase in the number of units per order. Our repeat customer AOV also increased versus the prior year due to an increase in the number of units per order. There was no change in our product pricing versus the prior year.

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For Harper & Jones, net revenue increased by $1.1 million to $3.3 million in 2019, compared to $2.2 million in 2018. This increase was due to the opening of an additional showroom and associated sales representatives.

Cost of Net Revenue

Our pro forma combined cost of net revenue decreased by $0.5 million in 2019 to $15.5 million from $16.0 million in 2018. Cost of net revenue increased by 0.6% to 46.3% in 2019 compared to 45.7% in 2018.

Bailey’s cost of net revenue decreased by $0.8 million in 2019 to $12.7 million from $13.5 million in 2018. Cost of net revenue increased by 0.4% to 46.7% compared to 46.3%, primarily due to increased raw material and finished garment costs related to imposed trade tariffs associated with the China trade dispute.

DBG’s cost of net revenue decreased by $29,827 in 2019 to $1.63 million from $1.66 million in 2018. Costs of revenue as a percent of net revenues increased by 9.8% to 53.6% versus 43.9%, primarily due to an after Christmas promotion in 2018. The majority of orders associated with this 2018 Christmas promotion did not ship until January 2019 and had lower margins, which negatively impacted 2019 Cost of Goods Sold and gross profit margins. The company did not take or benefit from a price increase in 2019 versus the prior year. The company’s higher AOV did not have an impact on the cost of revenues as our products are priced to have similar gross margins and cost of revenue as a % of revenue.

Harper & Jones’ cost of net revenue increased by $0.3 million in 2019 to $1.2 million from $0.9 million in 2018. Cost of net revenue decreased by 3.8% to 36.2% versus 40.0%, primarily due to lower product costs.

Gross profit

Our pro forma combined gross profit decreased by $1.1 million in 2019 to $18.0 million from $19.0 million in 2018. Gross margin decreased by 0.6% to 53.7% in 2019 compared to 54.3%% in 2018.

Bailey’s gross profit decreased by $1.1 million in 2019 to $14.4 million from $15.6 million in 2018. Gross margin decreased by 0.4% to 53.3% in 2019 compared to 53.7%% in 2018, primarily due to increased promotional activity in direct-to-consumer channels, expanded inventory liquidation events and increases in cost of goods.

DBG’s gross profit decreased by $713,450 in 2019 to $1.4 million from $2.1 million in 2018. Gross margin decreased by 9.8% to 46.4% in 2019 compared to 56.2% in 2018, primarily due to the increased promotional activity from our December 2018 Christmas promotion. The company did not take or benefit from a price increase in 2019 versus the prior year. The company’s higher AOV did not have an impact on the cost of revenues as our products are priced to have similar gross margins and cost of revenue as a % of revenue.

The majority of orders associated with this 2018 Christmas promotion did not ship until January 2019 and contained lower margins, which negatively impacted our 2019 Gross Profit.

Harper & Jones’ gross profit increased by $0.8 million in 2019 to $2.1 million from $1.3 million in 2018. Gross margin increased by 3.8% to 63.8% in 2019 compared to 60.0%% in 2018, primarily due to higher revenue and lower product costs.

General and administrative expense

Our pro forma combined general and administrative expense increased by $2.8 million in 2019 to $20.6 million compared to $17.9 million in 2018. General and administrative expenses as a percentage of revenue increased by 10.7% to 61.7% in 2019 compared to 51.0% in 2018.

Bailey’s general and administrative expense increased by $1.5 million in 2019 to $14.5 million compared to $13.0 million in 2018 due to expenses related to additional operating expenses related to a new retail store that opened in April 2019. General and administrative expenses as a percentage of revenue increased by 8.6% to 53.6% in 2019 compared to 45.0% in 2018. Bailey expects to lower general and administrative expenses as a percentage of revenue going forward as a result of a staff reorganization in 2020 that reduced headcount significantly and streamlined and lowered the cost of its processes, systems and third-party

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service providers. After the acquisition of Bailey, DBG has reorganized Bailey and eliminated significant labor and structural costs including costs associated with closing all three of Bailey’s retail stores.

DBG’s general and administrative expense increased by $1.5 million in 2019 to $4.6 million compared to $3.1 million in 2018 primarily due to (1) approximately $741,000 in expenses associated with a planned AIM offering on the London Stock Exchange that did not occur, (2) $232,921 for legal and accounting fees, (3) $148,000 in recruiting fees associated with hiring our Chief Marketing and Chief Financial Officer, and (4) $127,489 in rent expense (we terminated this lease in February 2020).

Harper & Jones’ general and administrative expense was flat in 2019 compared to 2018 due to H&J’s 2018 investments in such areas, especially in key hires. General and administrative expenses as a percentage of revenue decreased by 10.9% to 21.6% in 2019 compared to 32.5% in 2018. H&J expects to continue to decrease general and administrative expenses as a percentage of revenue going forward associated with H&J’s ability to leverage DBG resources resulting in minimal hiring needs.

Sales and marketing expense

Our pro forma combined sales and marketing expense decreased by approximately $0.6 million in 2019 to $7.0 compared to $7.6 in 2018, and as a percentage of revenue decreased by 1.0% to 21.0% in 2019 compared to 22.0% in 2018.

Bailey’s sales and marketing expense decreased by approximately $200,000 in 2019 to $4.5 million compared to $4.7 million in 2018, and increased as a percentage of sales by 0.5% to 16.7% in 2019 compared to 16.2% in 2018, primarily due to the eliminating the services of a digital marketing agency in 2019, offset by higher digital marketing spend in 2019 compared to 2018.

Bailey expects sales and marketing expense as a percentage of revenue to increase going forward associated with the transition to direct-to-consumer, which should result in higher gross margins as a percentage and in dollars.

DBG’s sales and marketing expense decreased by $1.2 million in 2019 to $0.9 compared to $2.0 million in 2018 primarily due to focusing on driving repeat customer revenue and eliminating new customer acquisition marketing spend.

Sales and marketing expense as a percentage of revenue decreased by 25.4% to 28.6% in 2019 compared to 54.1% in 2018 due to eliminating new customer growth marketing spending and focusing on driving repeat customer revenue.

Our new Chief Marketing Officer (CMO) customer data analysis suggested that historically we acquired low quality customers who had little to no repeat purchase behavior and low average order values (AOV). Average order value or AOV represents the average revenue generated per order from our websites. The higher the AOV, the more revenue our brands generate. Higher AOV also increases our operating margins since the cost to pick, pack and ship an order is significantly fixed and will not increase at the same rate as the higher average order value. This results in higher flow through as the incremental revenue from a AOV has a higher profit margin since the pick, pack and shipping costs do not increase at the same percentage rate.

Given this, our CMO wanted to (1) focus on acquiring high quality new customers through organic media channels and (2) driving repeat customer revenue by increasing the AOV and repeat purchase behavior.

Our new customer AOV increased 22.6% to $168 in 2019 compared to $137 in 2018. The new customer cohort also has a higher repeat behavior than prior years. Our repeat customer AOV increased 26.1% to $150 in 2019 compared to $119 in 2018. The repeat customer cohort also has a significantly higher repeat behavior than prior years.

Harper & Jones’ sales and marketing expense increased by $0.7 million in 2019 to $1.6 million compared to $0.9 million in 2018 primarily due to commissions, which represented $0.4 million of the increase. Commissions increased 2.3% to 31.1% in 2019 compared to 28.8% in 2018. The additional $0.3 million increase was associated with building its website and investing in its brand, including photo shoots.

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Harper & Jones’ sales and marketing expense as a percentage of revenue increased by 7.9% to 47.4% in 2019 compared to 39.5% in 2018 due to higher commission rates, its brand investments and launching its website. H&J expects to decrease sales and marketing expense as a percentage of revenue going forward due to a more disciplined analysis based on return on marketing metrics and more focused and prioritized marketing strategies and programs.

Other Income and Interest Expense

Our pro forma combined other expense decreased by approximately $0.3 million to $1.0 million in 2019 compared to $1.3 million in 2018.

Bailey’s other expense decreased by $0.4 million primarily related to a loss on disposal of property and equipment. Interest expense increased $78,000 associated with an increase of $850,000 in a note payable.

DBG’s other income and interest expense increased by $100,842 to $806,504 in 2019 compared to $705,662 in 2018 primarily related to an increase of $66,930 in interest expense. Other income and interest expense as a percentage of revenue increased by 7.9% to 26.6% in 2019 compared to 18.7% in 2018 due to lower revenue.

Harper & Jones’ other income decreased by $36,000 primarily related to $50,000 in other income associated with a buyout of H&J’s original Dallas showroom lease by another retailer. Interest expense increased $14,000 associated with an increase of $237,000 in short-term and long-term debt.

Net Loss

Our pro forma combined net loss increased by $2.9 million to a loss of $10.6 million for 2019 compared to a loss of $7.8 million in 2018 primarily due to lower revenue, lower gross profit in both dollars and as a percentage of revenue, and an increase in general and administrative expenses.

Bailey’s net loss increased by $2.1 million to a loss of $4.8 million for 2019 compared to a loss of $2.7 million in 2018 primarily due to lower revenue, lower gross profit in both dollars and as a percentage of revenue, an increase in general and administrative expenses and an increase in sales and marketing expenses.

DBG’s net loss increased by $0.9 million to a loss of $5.7 million for 2019 compared to a loss of $4.7 million in 2018 primarily due to lower revenue, lower gross profit in both dollars and as a percentage of revenue associated with the December 2018 promotional credit, an increase in general and administrative expenses offset by a decrease in both sales and marketing and distribution expenses.

Harper & Jones’ net loss decreased by $132,000 to a loss of $176,000 for 2019 compared to a loss of $308,000 in 2018 primarily due to higher revenue, higher gross profit in both dollars and as a percentage of revenue and flat general and administrative expenses in dollars, offset by higher sales and marketing expenses in both dollars and as a percentage of revenue.

Year ended December 31, 2019 Compared to Year Ended December 31, 2018

The following table presents selected captions from our pro forma combined condensed statement of cash flows for the year ended December 31, 2019 and 2018:

	For the Year Ended December 31,
	2019			2018
Net cash provided by operating activities:
Net loss		$	(10,622,236)		$	(7,749,894)
Non-cash adjustments		$	886,014		$	924,700
Change in operating assets and liabilities		$	3,100,656		$	1,899,398
Net cash used in operating activities		$	(6,635,567)		$	(4,925,796)
Net cash used in investing activities		$	(805,123)		$	(216,827)
Net cash (used in) provided by financing activities		$	6,297,063		$	4,902,907
Net change in cash		$	(1,143,627)		$	(239,716)

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As of December 31, we had a pro forma combined cash balance of $417,704 and a working capital deficit of ($8,097,146). During the years ended December 31, 2019 and 2018, our sources and uses of cash were as follows:

Net Cash Provided by Operating Activities

Pro forma combined cash used by operating activities increased by $1.7 million to $6.6 million for 2019 as compared to cash used in operating activities of $4.9 million in 2018. The increase in pro forma combined cash used by operating activities was primarily driven by $2.1 million from an additional net loss at Bailey.

Net Cash Used in Investing Activities

Pro forma combined cash used from investing activities was $0.8 million in 2019 as compared to pro forma combined cash used of $0.2 million in 2018. Pro forma combined cash used during 2019 and 2018 were primarily related to purchase of product and equipment at Bailey and expenditures for leasehold improvements at Harper & Jones.

Net Cash Used in and Provided by Financing Activities

Pro forma combined cash provided by financing activities was $6.3 million in 2019 compared to pro forma combined cash provided of $4.9 million in 2018. Cash inflows in 2019 were primarily related to proceeds from a related party notes payable of $850,000 and $1.9 million in advances from our factor at Bailey. Cash inflows in 2018 were primarily related to proceeds of $0.6 million in advances from our factor, offset by $0.3 million in distribution to members at Bailey and proceeds of $3.5 million from our crowd funding raises and $1.1 million from venture debt at DBG.

Each of DBG, Bailey and H&J has historically satisfied our liquidity needs and funded operations with internally generated cash flow and borrowings and capital raises. Changes in working capital, most notably accounts receivable, are driven primarily by levels of business activity. Historically each of DBG, Bailey and H&J has maintained credit line facilities to support such working capital needs and makes repayments on that facility with excess cash flow from operations.

As of September 30, 2020 and December 31, 2019, we had combined cash balances of approximately $ and $417,704, respectively, and a working capital deficit of $ and $8,097,146, respectively.

In March 2017, DBG entered into a senior credit agreement with an outside lender for up to $4,000,000, dependent upon the achievement of certain milestones. The initial close amount was a minimum of $1,345,000. The loan bears interest at 12.5% per annum, compounded monthly, plus fees. A 5% closing fee is due upon each closing, legal and accounting fees of up to $40,000, and management fees of $4,167-$5,000 per month. The loan requires monthly payments of interest commencing March 31, 2017, and a balloon payment for the full principal amount at maturity in June 2022. The loan’s maturity date has been extended to June 30, 2021. Additionally, we expect to enter new agreement with the loan holder that will extend the maturity date to November 30, 2022.

Repayment is accelerated upon a change in control, as defined in the senior credit agreement. The loan is senior to all other debts and obligations of DBG, is collateralized by all assets of DBG, and shares of DBG’s common stock pledged by officers of DBG. As of September 30, 2020 and December 31, 2019 and 2018, the gross loan balance was $ , $4,542,544 and $4,000,000, respectively resulting from cash disbursed to DBG and considerations for outstanding interest of $ , $508,249 and $1,092,500, respectively plus loan fees of $ , $34,296 and $57,500, respectively charged to the loan balance, respectively. DBG failed to comply with certain debt covenants during the nine months ended September 30, 2020 and the years ended December 31, 2019 and 2018. Accordingly, as of September 30, 2020 and December 31, 2019 and 2018, the entire amount is shown as a current liability.

The lender was also granted warrants to purchase common stock representing 1% of the fully diluted capitalization of DBG for each $1,000,000 of principal loaned under the agreement, which was increased to 1.358% during 2019. During the nine months ended September 30, 2020 and the years ended December 31, 2019 and 2018, the Company granted , 2,010,423 and 1,248,347 common stock warrants, respectively, to the lender with an exercise price of $0.16 per share and a ten-year contractual life. As discussed in Note

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8 to the financial statements, during the nine months ended September 30, 2020 and the years ended December 31, 2019 and 2018, these warrants were valued at $ , $49,928 and $147,943, respectively. The value of the warrants was initially recorded as a discount to the note, which is amortized over its term.

For the nine months ended September 30, 2020 and the years ended December 31, 2019 and 2018, $ , $149,948 and $171,194, respectively of these loan fees and discounts from warrants were amortized to interest expense, leaving unamortized balances of $ , $159,995 and $225,720 as of September 30, 2020 and December 31, 2019 and 2018, respectively. Unamortized balances are expected to be amortized through June 2021, the maturity date of the loan.

Interest expense and effective interest rate on this loan for the nine months ended September 30, 2020 and the year ended December 31, 2019 and 2018 was $ , $624,127 and $526,251, respectively, and %, 17.7% and 18.6%, respectively.

Capital Resources

Our current capital resources, combined with the net proceeds from the offering, are expected to be sufficient for us to fund operations for the next 12 months. We expect that additional sources of equity and debt financing should be available to us after the closing of this offering.

Off-Balance Sheet Arrangements and Future Commitments

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.

DBG

Results of Operations

Nine Months Ended September 30, 2020 compared to the nine months ended September 30, 2019

The following table presents DBG’s results of operations for the nine month period ended September 30, 2020 and 2019:

	Nine Months Ended September 30,
Statement of Operations	2020			2019
	(unaudited)
Net revenues		$	4,475,507		$	2,319,205
Cost of net revenues		$	3,884,864		$	1,046,116
Gross profit		$	590,643		$	1,273,089
Operating expenses		$	7,458,722		$	5,040,258
Operating loss		$	(6,868,079)		$	(3,767,169)
Other expenses		$	(1,207,244)		$	(579,167)
Loss before provision for income taxes		$	(8,075,323)		$	(4,346,336)
Provision for income taxes		$	13,657		$	—
Net loss		$	(8,088,980)		$	(4,346,336)

Net Revenue

DBG’s net revenue increased by $2.2 million to $4.5 million for the first three quarters of 2020, compared to $2.3 million for the first three quarters of 2019. The increase was due to the Bailey 44 acquisition.

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Cost of Net Revenue

DBG’s cost of net revenue increased by $2.8 million for the first three quarters of 2020 to $3.9 million from $1.0 million for the first three quarters of 2019. The increase in cost of net revenue was primarily due to the Bailey 44 acquisition.

DBG’s cost of net revenue increased by 41.7% to 86.8% for the first three quarters of 2020 compared to 45.1% for the first three quarters of 2019. The increase in the cost of net revenue percentage was primarily associated with the acquisition of Bailey 44 due to heavy discounting to sell their aged and current inventory. DBG discounted the Bailey 44 inventory due to lower market demand and decision to hire a new designer and create a clean break in the product collections.

Gross profit

DBG’s gross profit decreased by $0.7 million for the first three quarters of 2020 to $0.6 million from $1.3 million for the first three quarters of 2019. The increase in gross margin was primarily due to the Bailey 44 acquisition.

DBG’s gross margin decreased by 41.7% to 13.2% for the first three quarters of 2020 compared to 54.9% for the first three quarters of 2019. The decrease in the gross margin was primarily associated with the acquisition of Bailey 44 due to heavy discounting to sell their aged and current inventory. DBG discounted the Bailey 44 inventory due to lower market demand and our decision to hire a new designer and create a clean break in the product collections.

General and administrative expense

DBG’s general and administrative expense increased by $2.4 million for the first three quarters of 2020 to $7.5 million compared to $5.0 million for the first three quarters of 2019. The increase in general and administrative expenses was primarily due to the Bailey 44 acquisition.

DBG’s general and administrative expenses as a percentage of revenue decreased by 50.7% to 166.7% for the first three quarters of 2020 compared to 217.3% for the first three quarters of 2019. The decrease in general and administrative expenses as a percentage was primarily due to cost synergies and significant cost reductions from merging Bailey 44 operations with DBG operations. The cost reductions were driving by eliminating the DBG office and moving into the Bailey 44 office, by eliminating DBG’s third-party fulfillment center and moving it into Bailey 44’s fulfillment operations, and layoffs due to overlapping roles and responsibilities.

Other Income and Interest Expense

DBG’s other expense increased by approximately $0.6 million to $1.2 million for the first three quarter of 2020 compared to $0.6 million for the first three quarters of 2019. The increase in the other expense was primarily due to interest expense from the Bailey 44 acquisition and an increase in the DBG interest expense year over year.

Net Loss

DBG’s net loss increased by $3.7 million to a loss of $8.1 million for the first three quarter of 2020 compared to a loss of $4.3 million for the first three quarters of 2019 primarily due to lower gross profit in both dollars and as a percentage of revenue, an increase in general and administrative expenses and an increase in other expenses in dollars.

Year ended December 31, 2019 compared to the Year Ended December 31, 2018

The following table presents DBG’s results of operations for the years ended December 31, 2019 and 2018:

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	For the Year Ended December 31,
Statement of Operations	2019			2018
Net revenue		$	3,034,216		$	3,777,493
Cost of net revenue		$	1,626,505		$	1,656,332
Gross profit		$	1,407,711		$	2,121,161
Operating expenses		$	6,255,180		$	6,140,232
Operating loss		$	(4,847,469)		$	(4,019,071)
Other expense		$	(805,704)		$	(705,662)
Loss before provision for income taxes		$	(5,563,173)		$	(4,724,733)
Provision for income taxes		$	(800)		$	(800)
Net loss		$	(5,563,973)		$	(4,725,533)

Net Revenue

Net revenue decreased by $743,277 to $3.0 million in 2019, compared to $3.8 million in 2018. This decrease was due to a decrease in marketing expense by $1.2 million as DGB focused on driving repeat customer revenue versus new customer revenue.

This decrease in marketing expenses resulted in a decline in new customer growth versus the prior year. The decline in new customer growth was offset by a higher new customer AOV, which was driven by an increase in the number of units per order. Our repeat customer AOV also increased versus the prior year due to an increase in the number of units per order. There was no change in our product pricing versus the prior year.

DGB’s new Chief Marketing Officer (CMO) customer data analysis suggested that historically we acquired low quality customers who had little to no repeat purchase behavior and low average order values (AOV). Given this, DGB’s CMO wanted to (1) focus on acquiring high quality new customers through organic media channels and (2) driving repeat customer revenue by increasing the AOV and repeat purchase behavior.

DGB’s new customer AOV increased 22.6% to $168 in 2019 compared to $137 in 2018. The new customer cohort also has a higher repeat behavior than prior years. DGB’s repeat customer AOV increased 26.1% to $150 in 2019 compared to $119 in 2018. The repeat customer cohort also has a significantly higher repeat behavior than prior years.

While DGB’s net revenue declined, we believe the customer base is now primarily higher quality customers with higher AOV and repeat purchase behavior. We also now better understand the type of new customer we need to target and where and how to acquire them.

Cost of Revenues

Cost of revenue decreased by $29,827 in 2019 to $1.63 million from $1.66 million in 2018. Costs of revenue as a percent of net revenue increased by 9.8% to 53.6% versus 43.9%, primarily due to an after Christmas promotion in 2018. The majority of orders associated with this 2018 Christmas promotion did not ship until January 2019 and had lower margins, which negatively impacted 2019 cost of net revenue and gross profit margins.

DGB did not take or benefit from a price increase in 2019 versus the prior year. DBB’s higher AOV did not have an impact on the cost of revenues as our products are priced to have similar gross margins and cost of revenue as a percentage of revenue.

Gross Profit

Gross profit decreased by $713,450 in 2019 to $1.4 million from $2.1 million in 2018. Gross margin decreased by 9.8% to 46.4% in 2019 compared to 56.2% in 2018, primarily due to the increased promotional activity from DGB’s December 2018 Christmas promotion.

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DGB did not take or benefit from a price increase in 2019 versus the prior year. DGB’s higher AOV did not have an impact on the cost of revenues as our products are priced to have similar gross margins and cost of revenue as a percentage of revenue.

The majority of orders associated with this 2018 Christmas promotion did not ship until January 2019 and contained lower margins, which negatively impacted our 2019 Gross Profit.

Operating Expense

General and administrative expense increased by $1.5 million in 2019 to $4.6 million compared to $3.1 million in 2018 primarily due to (1) approximately $741,000 in expenses associated with a planned AIM offering on the London Stock Exchange that did not occur, (2) $232,921 for legal and accounting fees, (3) $148,000 in recruiting fees associated with the hiring of DBG’s Chief Marketing Officer and Chief Financial Officer, and (4) $127,489 in rent expense (this lease was terminated in February 2020).

General and administrative expense as a percentage of revenue increased by 68.4% to 151.1% in 2019 compared to 82.6% in 2018. A certain amount of these expenses did not carry forward in 2020.

Sales & Marketing

Sales and marketing expense decreased by $1.2 million in 2019 to $0.9 compared to $2.0 million in 2018 primarily due to focusing on driving repeat customer revenue and eliminating new customer acquisition marketing spend.

Sales and marketing expense as a percentage of net revenue decreased by 25.4% to 28.6% in 2019 compared to 54.1% in 2018 due to eliminating new customer growth marketing spending and focusing on driving repeat customer revenue.

Other Income and Interest Expense

Other income and interest expense increased by $100,842 to $806,504 in 2019 compared to $705,662 in 2018 primarily related to an increase of $66,930 in interest expense. Other income and interest expense as a percentage of net revenue increased by 7.9% to 26.6% in 2019 compared to 18.7% in 2018 due to lower revenue.

Net Loss

Net loss increased by $0.9 million to a loss of $5.7 million for 2019 compared to a loss of $4.7 million in 2018 primarily due to lower revenue, lower gross profit in both dollars and as a percentage of net revenue associated with the December 2018 promotional credit, an increase in general and administrative expenses offset by a decrease in both sales and marketing and distribution expense.

Cash Flow Activities

Nine Months ended September 30, 2020 compared to Nine Months ended September 30. 2019

As of September 30, 2020, DBG had a cash balances of $282,059 and working capital of ($17,282,472). The following table presents selected captions from DBG’s condensed statement of cash flows for the nine months ended September 30, 2020 and 2019:

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	For the nine month period ended September 30,
DBG	2020			2019
Cashflow Activities
Net cash provided by operating activities:
Net Loss		$	(8,088,980)		$	(4,346,336)
Non-cash adjustments		$	1,486,280		$	244,600
Change in operating assets and liabilities		$	1,443,892		$	969,936
Net cash used in operating activities		$	(5,158,808)		$	(3,131,799)
Net cash used in investing activities		$	(70,642)		$	(4,901)
Net cash (used in) provided by financing activities		$	4,686,540		$	2,642,105
Net change in cash		$	(502,441)		$	89,886

The following sections discuss DBG’s cash flow activities:

Cash Flows Used In Operating Activities

DBG’s cash used by operating activities increased by $2.0 million to cash used of $5.2 million for the first three quarters of 2020 as compared to cash used in operating activities of $3.1 million for the first three quarters of 2019. The increase in cash used by operating activities was primarily driven by an increase of $2.2 million in inventory.

Cash Flows Used In Investing Activities

DBG’s cash used from investing activities was $71,000 for the first three quarters of 2020 as compared to cash used of $4,900 for the first three quarters of 2019. Cash used during the first three quarters of 2020 was primarily related to purchases of property and equipment.

Cash Flows Provided By Financing Activities

DBG’s cash provided by financing activities was $4.7 million for the first three quarters of 2020 compared to cash provided of $2.6 million for the first three quarters of 2019. Cash inflows in the first three quarters of 2020 were primarily related to proceeds from a loan payable of $1,7 million, proceeds from an advance from our factoring vendor for $1.4 million, and proceeds from venture debt of $860,000. Cash inflows in the first three quarters of 2019 were primarily related to proceeds to our Series A-3 for $1.8 million, proceeds from venture debt of $500,000 and proceeds from a convertible note of $250,000.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

As of December 31, 2019, DGB had a cash balance of $$40,469, and working capital of ($7,258,602). The following table presents selected captions from DBG’s condensed statement of cash flows for the years ended December 31, 2019 and 2018:

	December 31,
	2019			2018
Net cash used in operating activities:
Net loss		$	(5,563,173)		$	(4,725,533)
Non-cash adjustments		$	371,324		$	416,703
Change in operating assets and liabilities		$	1,413,284		$	140,127
Net cash used in operating activities		$	(3,869,365)		$	(4,168,703)
Net cash used in investing activities		$	6,642		$	37,891
Net cash provided by financing activities		$	3,318,711		$	4,368,393
Net change in cash		$	(544,012)		$	237,581

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During the year ended December 31, 2019 and 2018, DBG’s sources and uses of cash were as follows:

Cash Flows Used In Operating Activities

DBG’s cash used by operating activities decreased by $219,756 to $3.9 million for 2019 as compared to cash used in operating activities of $4.2 million in 2018. The decrease in cash used by operating activities was primarily driven by $485,663 in deferred revenue year over year.

Cash Flows Used In Investing Activities

DBG’s cash generated from investing activities was $6,642 in 2019 as compared to cash generated of $37,891 in 2018. The decrease in cash generated for investing activities during 2019 compared to 2018 was primarily related to proceeds of $171,900 from related party receivables in 2018.

Cash Flows Provided By Financing Activities

DBG’s cash provided by financing activities decreased by $1.0 million to $3.3 million in 2019 compared to cash provided of $4.4 million in 2018. Cash inflows in 2019 were primarily related to proceeds from our Series A-3 crowd funding of $2.5 million, proceeds from a convertible note of $0.8 million and proceeds from venture debt of $0.5 million. Cash inflows in 2018 were primarily related to proceeds from our Series A-2 and A-3 crowd funding of $3.5 million and proceeds from venture debt of $1.1 million.

Bailey 44, LLC

Bailey results from January 1, 2020 through February 11, 2020 (pre-acquisition) are not considered material, thus financial information for that period and for the comparative period in 2019 is not provided.

Results of Operations

Year ended December 31, 2019 compared to the year ended December 31, 2018

The following table presents the results of operations for the years ended December 31, 2019 and 2018:

	December 31,
Statement of Operations	2019			2018
Net revenue		$	27,099,718		$	29,037,497
Cost of net revenue		$	12,663,514		$	13,451,654
Gross profit		$	14,436,204		$	15,585,843
Operating expenses		$	19,060,108		$	17,756,807
Operating income		$	(4,623,904)		$	(2,170,964)
Other expense		$	(153,078)		$	(531,599)
Loss before provision for income taxes		$	(4,776,982)		$	(2,702,563)
Provision for income taxes		$	(14,890)		$	(13,390)
Net loss		$	(4,791,872)		$	(2,715,953)

Net Revenue

Bailey’s net revenue decreased by $1.9 million to $27.1 million in 2019, compared to $29.0 million in 2018. This decrease was due to a decline of $3.4 million in its wholesale channels, partially offset by an increase of $1.5 million in its direct-to-consumer channel. The decline in its wholesale channels was primarily associated with reduced demand for its products by its wholesale accounts.

Cost of Net Revenue

Bailey’s cost of net revenue decreased by $0.8 million in 2019 to $12.7 million from $13.5 million in 2018. Costs of net revenue increased by 0.4% to 46.7% compared to 46.3%, primarily due to increased raw material and finished garment costs related to imposed trade tariffs associated with the China trade dispute.

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Gross Profit

General and Administrative Expense

Bailey’s general and administrative expense increased by $1.5 million in 2019 to $14.5 million compared to $13.0 million in 2018 due to expenses related to additional operating expenses related to a new retail store that opened in April 2019. General and administrative expense as a percentage of net revenue increased by 8.6% to 53.6% in 2019 compared to 45.0% in 2018. Bailey expects to lower general and administrative expenses as a percentage of revenue going forward as a result of a staff reorganization in 2020 that reduced headcount significantly and streamlined and lowered the cost of its processes, systems and third-party service providers. After the acquisition of Bailey, DBG has reorganized Bailey and eliminated significant labor and structural costs including costs associated with closing all three of Bailey’s retail stores.

Sales and Marketing Expense

Bailey’s sales and marketing expense decreased by approximately $200,000 in 2019 to $4.5 million compared to $4.7 million in 2018, and as a percentage of net revenue increased by 0.5% to 16.7% in 2019 compared to 16.2% in 2018, primarily due to the eliminating the services of a digital marketing agency in 2019, offset by higher digital marketing spend in 2019 compared to 2018.

We expect Bailey’s sales and marketing expense as a percentage of net revenue to increase going forward associated with the transition to direct-to-consumer, which should result in higher gross margins as a percentage and in dollars.

Other Income and Interest Expense

Net Income (Loss)

Bailey’s net loss increased by $2.1 million to a loss of $4.8 million for 2019 compared to a net loss of $2.7 million in 2018 primarily due to lower revenue, lower gross profit in both dollars and as a percentage of revenue, an increase in general and administrative expenses and an increase in sales and marketing expenses.

Cash Flow Activities

The following sections discuss Bailey’s cash flow activities:

As December 31, 2019, Bailey had a cash balances of $ 358,726 and working capital of ($322,073).

The following table presents selected captions from Bailey’s condensed statement of cash flows for the years ended December 31, 2019 and 2018:

	December 31,
	2019			2018
Net cash used in operating activities:
Net loss		$	(4,791,872)		$	(2,715,953)
Non-cash adjustments		$	432,268		$	469,318
Change in operating assets and liabilities		$	1,571,996		$	1,622,885
Net cash used in operating activities		$	(2,787,609)		$	(623,750)
Net cash used in investing activities		$	(557,328)		$	(185,970)
Net cash provided by financing activities		$	2,741,350		$	349,514
Net change in cash		$	(603,587)		$	(460,206)

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During the years ended December 31, 2019 and 2018, Bailey’s sources and uses of cash were as follows:

Cash Flows Used In Operating Activities

Bailey’s cash used by operating activities increased by $2.2 million to $2.8 million for 2019 as compared to cash used in operating activities of $0.6 million in 2018. The increase in cash used by operating activities was primarily driven by $2.1 million from in its additional net loss.

Cash Flows Used In Investing Activities

Bailey’s cash used from investing activities was $0.6 million in 2019 as compared to cash used of $0.2 million in 2018. Cash used during 2019 and 2018 were primarily related to purchase of product and equipment.

Cash Flows Provided By Financing Activities

Bailey’s cash provided by financing activities was $2.7 million in 2019 compared to cash provided of $0.4 million in 2018. Cash inflows in 2019 were primarily related to proceeds from a related party notes payable of $850,000 and $1.9 million in advances from our factor. Cash inflows in 2018 were primarily related to proceeds of $0.6 million in advances from Bailey’s factor, offset by $0.3 million in distribution to members.

Harper & Jones, LLC

Results of Operations

Nine months ended September 30, 2020 compared to the Nine months ended September 30, 2019

The following table presents the results of operations for the nine months ended September 30, 2020 and 2019:

	September 30,
Harper & Jones	2020			2019
Statement of Operations
Net revenues		$	1,937,312		$	2,496,237
Cost of net revenues		$	675,515		$	871,231
Gross profit		$	1,261,797		$	1,625,006
Operating expenses		$	1,482,152		$	1,676,398
Operating loss		$	(220,355)		$	(51,392)
Other expenses		$	(54,665)		$	12,526
Loss before provision for income taxes		$	(275,020)		$	(38,866)
Provision for income taxes		$	—		$	—
Net loss		$	(275,020)		$	(38,866)

Net Revenues

H&J’s net revenue decreased by $0.6 million to $1.9 million in the first three quarters of 2020, compared to $2.5 million in the first three quarters of 2019. This decrease was due to the impact of COVID-19 on customer demand and customer traffic at the retail stores. The customer traffic at the retail stores has increased from its lows during the height of the pandemic in the second quarter of 2020.

Cost of Net Revenue

H&J’s cost of net revenues decreased by $0.2 million in the first three quarters of 2020 to $0.7 million from $0.9 million in the first three quarters of 2019. Costs of net revenue was flat at 34.9% year over year for the first three quarters of 2020 versus the same period for 2019, primarily due to no discounting.

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Gross Profit

H&J’s gross profit decreased by $0.3 million in the first three quarters of 2020 to $1.3 million from $1.6 million in the first three quarters of 2019. Gross margin was flat at 65.1% year over year for the first three quarters of 2020 versus the same period for 2019, primarily due to no discounting.

Operating Expenses

H&J’s general and administrative expense increased $0.1 million in the first three quarters of 2020 to $0.6 million compared to $0.5 million in the first three quarters of 2019 due to new hires and new showrooms that were made in the second half of 2019. These new hires and new showrooms had no expense associated with them in the first half of 2019 but did have expenses associated with them in the first half of 2020.

General and administrative expenses as a percentage of revenue increased by 10.0% to 29.6% in the first three quarters of 2020 compared to 19.7% in the first three quarters of 2019. The increase in the general and administrative expenses as a percentage of revenue was significantly impacted by the lower revenue associated with COVID-19.

Sales & Marketing

H&J’s sales and marketing expense decreased by $0.3 million in the first three quarters of 2020 to $1.0 million compared to $1.2 million in the first three quarters of 2019 primarily due to commissions associated with lower revenue.

H&J’s sales and marketing expenses as a percentage of revenue decreased by 0.7% to 46.9% in the first three quarters of 2020 compared to 47.5% in the first three quarters of 2019 due to lower commission rates associated with lower revenue from COVID-19.

Other Income (Expense)

H&J’s other income increased by $67,000 primarily related to a 2019 one-time benefit of $50,000 in other income associated with a buyout of H&J’s original Dallas showroom lease by another retailer. Interest expense increased $37,000 associated with an increase in short-term and long-term debt.

Net Loss

H&J’s net loss decreased by $39,000 to a loss of $275,000 for the first three quarters of 2020 compared to a loss of $236,000 in the first three quarters of 2019 primarily due to lower revenue and lower gross profit in dollars, lower sales and marketing expenses in dollars, offset slightly by higher general and administrative expenses in dollars.

Year ended December 31, 2019 compared to the year ended December 31, 2018

The following table presents the results of operations for the years ended December 31, 2019 and 2018:

	For the Year Ended December 31,
Statement of Operations	2019			2018
Net revenue		$	3,325,762		$	2,219,618
Cost of net revenue		$	1,202,819		$	888,259
Gross profit		$	2,122,943		$	1,331,359
Operating expenses		$	2,295,379		$	1,599,369

	As of September 30, 2020						As of December 31, 2019
Balance Sheet	Actual			Pro Forma			As of December 31, 2019
				(unaudited)
Total cash		$	282,059		$	304,428		$	40,469
Total current assets		$	2,860,231		$	3,018,537		$	1,165,954
Total assets		$	17,531,830		$	24,610,937		$	1,282,057
Total current liabilities including current portion of long-term debt		$	20,346,697		$	22,093,605		$	8,424,556
Total long-term obligations		$	514,876		$	606,919		$	7,700
Total liabilities		$	20,861,573		$	22,700,524		$	8,432,256
Total stockholders’ equity (deficit)		$	(3,329,743)		$	1,910,413		$	(7,150,199)
Total liabilities and stockholders’ deficit		$	17,531,830		$	24,610,937		$	1,282,057