Filed Pursuant to Rule 424(b)(3)
Registration No. 333-255193

Registration No. 333-256174

PROSPECTUS SUPPLEMENT NO. 2

(to Prospectus dated May 17, 2021)

DIGITAL BRANDS GROUP, INC.

2,409,639 Shares of

Common Stock and

Warrants to Purchase up to 2,409,639 Shares of Common Stock

This prospectus supplement is being filed to update and supplement the information contained in the prospectus dated May 17, 2021 (as may be supplemented or amended from time to time, the “Prospectus”), with the information contained in our Quarterly Report on Form 10-Q, which we filed with the Securities and Exchange Commission on August 16, 2021 (the “Quarterly Report”). Accordingly, we have attached the Quarterly Report to this prospectus supplement.

The Prospectus and this prospectus supplement relate to the issuance by us of up to an aggregate of up to 2,409,639 shares of our common stock, $0.0001 par value per share (“Common Stock”), issuable upon exercise of the warrants to purchase up to 2,409,639 shares of Common Stock (the “Warrants”), for which we will receive the proceeds from any exercise of any such Warrants for cash.

This prospectus supplement updates and supplements the information in the Prospectus and is not complete without, and may not be delivered or utilized except in combination with, the Prospectus, including any amendments or supplements thereto. This prospectus supplement should be read in conjunction with the Prospectus and if there is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information in this prospectus supplement.

Our Common Stock and Warrants trade on the NasdaqCM (“NasdaqCM”) under the symbols “DBGI” and “DBGIW,” respectively. The closing sales prices of our Common Stock and Warrants on the NasdaqCM on August 18, 2021 was $2.68 per share and $0.64 per Warrant, respectively.

We are an “emerging growth company”, as defined under the federal securities laws and, as such, we may continue to elect to comply with certain reduced public company reporting requirements in future reports. Certain implications of being an “emerging growth company” are described on page 18 of the Prospectus.

Investing in our securities involves a high degree of risk. You should refer to the discussion of risk factors, beginning on page 19 of the Prospectus.

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

The date of this prospectus supplement is August 20, 2021.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number: 001-40400

DIGITAL BRANDS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		46-1942864
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1400 Lavaca Street

Austin, TX 78701

(Address of principal executive offices, including zip code)

Tel: (209) 651-0172

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition 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 this registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 16, 2021 the Company had 11,399,594 shares of common stock, $0.0001 par value, issued and outstanding

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DIGITAL BRANDS GROUP, NC.

FORM 10-Q

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION		3


ITEM 1.	Condensed Consolidated Financial Statements – Unaudited	3

	Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020	3

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020	4

	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020	5

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020	6

	Notes to Condensed Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	37

ITEM 4.	Controls and Procedures	37

PART II. OTHER INFORMATION		38

ITEM 1.	Legal Proceedings	38

ITEM 1A.	Risk Factors	39

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

ITEM 3.	Defaults upon Senior Securities	40

ITEM 4.	Mine Safety Disclosures	40

ITEM 5.	Other Information	40

ITEM 6.	Exhibits	41

SIGNATURES		43

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PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

DIGITAL BRANDS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	June 30,		December 31,
	2021		2020
ASSETS
Current assets:
Cash and cash equivalents	$	4,075,921	$	575,986
Accounts receivable, net		346,390		35,532
Due from factor, net		6,859		210,033
Inventory		1,165,152		1,163,279
Prepaid expenses		849,434		23,826
Total current assets		6,443,756		2,008,656
Deferred offering costs		—		214,647
Property, equipment and software, net		119,817		62,313
Goodwill		16,160,766		6,479,218
Intangible assets, net		11,175,794		7,494,667
Deposits		116,199		92,668
Total assets	$	34,016,332	$	16,352,169

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	6,307,071	$	5,668,703
Accrued expenses and other liabilities		1,615,622		1,245,646
Deferred revenue		172,470		1,667
Due to related parties		252,635		441,453
Contingent consideration liability		6,539,417		—
Convertible notes, current		100,000		700,000
Accrued interest payable		801,031		737,039
Note payable - related party		299,489		137,856
Venture debt, current		300,000		5,854,326
Loan payable, current		1,712,000		992,000
Promissory note payable		3,500,000		4,500,000
Total current liabilities		21,599,735		20,278,690
Convertible notes		—		1,215,815
Loan payable		1,762,639		709,044
Venture debt, net of discount		5,701,755		—
Warrant liability		78,710		6,265
Total liabilities		29,142,839		22,209,814

Commitments and contingencies (Note 12)

Stockholders' equity (deficit):
Series Seed convertible preferred stock, $0.0001 par, no shares and 20,714,518 shares, authorized, issued and outstanding at June 30, 2021 and December 31, 2020, respectively		—		2,071
Series A convertible preferred stock, $0.0001 par, no shares and 14,481,413 shares authorized, no shares and 5,654,072 shares issued and outstanding at June 30, 2021, and December 31, 2020, respectively		—		565
Series A-2 convertible preferred stock, $0.0001 par, no shares and 20,000,000 shares authorized, no shares and 5,932,742 shares issued and outstanding at June 30, 2021, and December 31,2020,respectively		—		593
Series A-3 convertible preferred stock, $0.0001 par, no shares and 18,867,925 shares authorized, no shares and 9,032,330 shares issued and outstanding at June 30, 2021, and December 31, 2020, respectively		—		904
Series CF convertible preferred stock, $0.0001 par, no shares and 2,000,000 shares authorized, no shares and 836,331 shares issued and outstanding at June 30, 2021, and December 31, 2020, respectively		—		83
Series B convertible preferred stock, $0.0001 par, no shares and 20,714,517 shares authorized, no shares and 20,714,517 shares issued and outstanding at June 30, 2021, and December 31, 2020, respectively		—		2,075
Undesignated preferred stock, $0.0001 par, 10,000,000 shares and 936,144 shares authorized, 0 shares issued and outstanding as of both June 30,2021 and December 31, 2020		—		—
Common stock, $0.0001 par, 200,000,000 and 110,000,000 shares authorized, 11,044,594 and 664,167 shares issued and outstanding as of both June 30, 2021 and December 31, 2020, respectively		1,104		66
Additional paid-in capital		51,939,819		27,481,995
Accumulated deficit		(47,067,430)		(33,345,997)
Total stockholders' equity (deficit)		4,873,493		(5,857,645)
Total liabilities and stockholders' equity (deficit)	$	34,016,332	$	16,352,169

See the accompanying notes to the unaudited condensed consolidated financial statements

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DIGITAL BRANDS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Net revenues	$	1,003,529	$	664,017	$	1,411,934	$	3,240,702
Cost of net revenues		608,944		932,362		1,224,886		2,155,155
Gross profit (loss)		394,585		(268,345)		187,048		1,085,547
Operating expenses:
General and administrative		7,192,460		1,426,388		9,099,978		3,901,431
Sales and marketing		923,283		124,370		1,094,103		442,246
Distribution		69,864		75,246		133,442		213,681
Change in fair value of contingent consideration		3,050,901		—		3,050,901		—
Total operating expenses		11,236,508		1,626,004		13,378,424		4,557,358
Loss from operations		(10,841,923)		(1,894,349)		(13,191,376)		(3,471,811)
Other income (expense):
Interest expense		(897,920)		(373,957)		(1,572,964)		(688,932)
Other non-operating income (expenses)		(57,775)		—		(57,213)		—
Total other income (expense), net		(955,695)		(373,957)		(1,630,177)		(688,932)
Income tax benefit (provision)		1,100,120		709		1,100,120		(13,381)
Net loss	$	(10,697,498)	$	(2,267,597)	$	(13,721,433)	$	(4,174,124)
Weighted average common shares outstanding -
basic and diluted		5,435,023		664,167		3,062,774		664,167
Net loss per common share - basic and diluted	$	(1.97)	$	(3.41)	$	(4.48)	$	(6.28)

See the accompanying notes to the unaudited condensed consolidated financial statements

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DIGITAL BRANDS GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)


	Series Seed			Series A			Series A-2			Series A-3			Series CF			Series B						Additional						Total
	Preferred Stock			Preferred Stock			Preferred Stock			Preferred Stock			Preferred Stock			Preferred Stock			Common Stock			Paid-in		Subscription		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Capital		Receivable		Deficit		Equity (Deficit)

Balances at December 31, 2019	20,714,518	$	2,071	5,654,072	$	565	5,932,742	$	593	8,223,036	$	823	126,641	$	12	—	$	—	664,167	$	66	$	15,486,050	$	(22,677)	$	(22,617,702)	$	(7,150,199)
Stock-based compensation	—		—	—		—	—		—	—		—	—		—	—		—	—		—		49,932		—		—		49,932
Issuance of Series A-3 preferred stock for cash	—		—	—		—	—		—	809,294		81	—		—	—		—	—		—		428,845		(117,614)		—		311,312
Issuance of Series B preferred stock for cash	—		—	—		—	—		—	—		—	—		—	20,754,717		2,075	—		—		10,997,925		—		—		11,000,000
Offering costs	—		—	—		—	—		—	—		—	—		—	—		—	—		—		(31,690)		—		—		(31,690)
Fair value of warrant issuances - venture debt	—		—	—		—	—		—	—		—	—		—	—		—	—		—		58,421		—		—		58,421
Net loss	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		—		(1,906,527)		(1,906,527)
Balances at March 31, 2020	20,714,518	$	2,071	5,654,072	$	565	5,932,742	$	593	9,032,330	$	904	126,641	$	12	20,754,717	$	2,075	664,167	$	66	$	26,989,483	$	(140,291)	$	(24,524,229)	$	2,331,249
Stock-based compensation	—		—	—		—	—		—	—		—	—		—	—		—	—		—		49,932		-		-		49,932
Issuance of Series CF preferred stock for cash	—		—	—		—	—		—	—		—	709,690		71	—		—	—		—		286,447		-		-		286,518
Issuance of Series A-3 preferred stock for cash	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		126,837		-		126,837
Net loss	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		-		(2,267,597)		(2,267,597)
Balances at June 30, 2020	20,714,518	$	2,071	5,654,072	$	565	5,932,742	$	593	9,032,330	$	904	836,331	$	83	20,754,717	$	2,075	664,167	$	66	$	27,325,862	$	(13,454)	$	(26,791,826)	$	526,939

Balances at December 31, 2020	20,714,518	$	2,071	5,654,072	$	565	5,932,742	$	593	9,032,330	$	904	836,331	$	83	20,754,717	$	2,075	664,167	$	66	$	27,481,995	$	—	$	(33,345,997)	$	(5,857,645)
Stock-based compensation	—		—	—		—	—		—	—		—	—		—	—		—	—		—		36,976		—		—		36,976
Net loss	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		—		(3,023,935)		(3,023,935)
Balances at March 31, 2021	20,714,518	$	2,071	5,654,072	$	565	5,932,742	$	593	9,032,330	$	904	836,331	$	83	20,754,717	$	2,075	664,167	$	66	$	27,518,971	$	—	$	(36,369,932)	$	(8,844,604)
Conversion of preferred stock into common stock	(20,714,518)		(2,071)	(5,654,072)		(565)	(5,932,742)		(593)	(9,032,330)		(904)	(836,331)		(83)	(20,754,717)		(2,075)	4,027,181		403		5,888		—		—		—
Issuance of common stock in public offering	—		—	—		—	—		—	—		—	—		—	—		—	2,409,639		241		9,999,761		—		—		10,000,002
Offering costs	—		—	—		—	—		—	—		—	—		—	—		—	—		—		(2,116,957)		—		—		(2,116,957)
Exercise of over-allotment option, net of offering costs	—		—	—		—	—		—	—		—	—		—	—		—	361,445		36		1,364,961		—		—		1,364,997
Conversion of debt into common stock	—		—	—		—	—		—	—		—	—		—	—		—	1,135,153		114		2,680,175		—		—		2,680,289
Conversion of related party notes and payables into common stock	—		—	—		—	—		—	—		—	—		—	—		—	152,357		15		257,500		—		—		257,515
Common stock and warrants issued in connection with note	—		—	—		—	—		—	—		—	—		—	—		—	20,000		2		73,956		—		—		73,958
Common stock issued in connection with business combination	—		—	—		—	—		—	—		—	—		—	—		—	2,192,771		219		8,025,323		—		—		8,025,542
Exercise of warrants	—		—	—		—	—		—	—		—	—		—	—		—	31,881		3		145,693		—		—		145,696
Common stock issued pursuant to consulting agreement	—		—	—		—	—		—	—		—	—		—	—		—	50,000		5		182,995		—		—		183,000
Stock-based compensation	—		—	—		—	—		—	—		—	—		—	—		—	—		—		3,801,553		—		—		3,801,553
Net loss	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		—		(10,697,498)		(10,697,498)
Balances at June 30, 2021	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	11,044,594	$	1,104	$	51,939,819	$	—	$	(47,067,430)	$	4,873,493

See the accompanying notes to the unaudited condensed consolidated financial statements

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DIGITAL BRANDS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six Months Ended
	June 30,
	2021		2020
Cash flows from operating activities:
Net loss	$	(13,721,433)	$	(4,174,124)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		291,661		318,057
Amortization of loan discount and fees		580,684		69,710
Stock-based compensation		4,021,529		99,864
Fees incurred in connection with debt financings		132,609		—
Change in fair value of warrant liability		72,445		—
Change in fair value of contingent consideration		3,050,901		—
Deferred income tax benefit		(1,100,120)		—
Change in credit reserve		9,748		(58,132)
Changes in operating assets and liabilities:
Accounts receivable, net		(261,386)		12,399
Due from factor, net		139,629		(67,361)
Inventory		75,287		639,006
Prepaid expenses		(688,893)		(40,165)
Accounts payable		575,513		1,410,476
Accrued expenses and other liabilities		262,019		(770,907)
Deferred revenue		(99,045)		(15,231)
Accrued compensation - related party		(88,550)		(28,807)
Accrued interest		151,465		446,854
Net cash used in operating activities		(6,595,937)		(2,158,361)
Cash flows from investing activities:
Cash acquired (consideration) pursuant to business combination		(475,665)		106,913
Issuance of related party receivable		—		(20,000)
Purchase of property, equipment and software		(10,276)		—
Deposits		(19,115)		43,510
Net cash provided by (used in) investing activities		(505,056)		130,423
Cash flows from financing activities:
Proceeds from related party advances		—		22,856
Advances from factor		53,795		180,552
Proceeds from venture debt		—		250,000
Issuance of loans payable		2,626,050		1,701,044
Repayments of promissory notes and loans payable		(2,001,305)		—
Issuance of convertible notes payable		528,650		—
Proceeds from initial public offering		10,000,002		—
Exercise of over-allotment option with public offering, net		1,364,997		—
Exercise of warrants		145,696		—
Proceeds from sale of Series A-3 preferred stock		—		428,845
Subscription receivable from Series A-3 preferred stock		—		9,223
Proceeds from sale of Series CF preferred stock		—		286,518
Offering costs		(2,116,957)		(30,772)
Net cash provided by financing activities		10,600,928		2,848,266
Net increase in cash and cash equivalents		3,499,935		820,328
Cash and cash equivalents at beginning of period		575,986		40,469
Cash and cash equivalents at end of period	$	4,075,921	$	860,797
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	—	$	—
Cash paid for interest	$	460,179	$	—
Supplemental disclosure of non-cash investing and financing activities:
Conversion of preferred stock into common stock	$	6,293	$	—
Conversion of related party notes and payables into common stock	$	257,515	$	—
Conversion of debt into common stock	$	2,680,289	$	—
Venture debt issued in exchange of forgiveness of accrued interest	$	—	$	209,211
Warrants issued for offering costs	$	—	$	918
Warrants issued with venture debt	$	—	$	58,421
Issuance of promissory note payable in acquisition	$	—	$	4,500,000
Issuance of Series B preferred stock in acquisition	$	—	$	11,000,000

See the accompanying notes to the unaudited condensed consolidated financial statements

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1: NATURE OF OPERATIONS

Digital Brands Group, Inc. (formerly Denim.LA, Inc.) (the “Company” or “DBG”), was organized on September 17, 2012 under the laws of Delaware as a limited liability company under the name Denim.LA LLC. The Company converted to a Delaware corporation on January 30, 2013 and changed its name to Denim.LA, Inc. Effective December 31, 2020, the Company changed its name to Digital Brands Group, Inc. (DBG).

On February 12, 2020, Denim.LA, Inc. entered into an Agreement and Plan of Merger with Bailey 44, LLC (“Bailey”), a Delaware limited liability company. On the acquisition date, Bailey 44 , LLC became a wholly owned subsidiary of the Company. See Note 4.

On May 18, 2021, the Company closed its acquisition of Harper & Jones, LLC (“H&J”) pursuant to its Membership Interest Stock Purchase Agreement with D. Jones Tailored Collection, Ltd. to purchase 100% of the issued and outstanding equity of Harper & Jones, LLC. On the acquisition date, H&J became a wholly owned subsidiary of the Company. See Note 4.

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 in accordance with 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 full extent of the future impact of the COVID-19 pandemic on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic, the development and availability of effective treatments and vaccines, and the imposition of protective public safety measures.

Reverse Stock Split

On May 12, 2021, the Board of Directors approved a one-for-15.625 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s preferred stock (see Note 8). Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

Initial Public Offering

On May 13, 2021, the Company’s registration statement on Form S-1 relating to its initial public offering of its common stock (the “IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). Further to the IPO, which closed on May 18, 2021, the Company issued and sold 2,409,639 shares of common stock at a public offering price of $4.15 per share. Additionally, the Company issued warrants to purchase 2,771,084 shares, which includes 361,445 warrants sold upon the partial exercise of the over-allotment option. The aggregate net proceeds to the Company from the IPO, were $8.6 million after deducting underwriting discounts and commissions of $0.8 million and direct offering expenses of $0.6 million. Concurrent with this offering, the Company acquired H&J (see Note 4). The Company incurred an additional $0.6 million in offering costs related to the IPO that were not paid directly out of the proceeds from the offering.

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2: GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has not generated profits since inception, has sustained net losses of $13,721,433 and $4,174,124 for the six months ended June 30, 2021 and 2020, respectively, and has incurred negative cash flows from operations for the six months ended June 30, 2021 and 2020. The Company has historically lacked liquidity to satisfy obligations as they come due and as of June 30, 2021, and the Company had a working capital deficit of $15,155,979. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company expects to continue to generate operating losses for the foreseeable future.

Management Plans

As of August 16, 2021, the date of issuance of these unaudited interim condensed consolidated financial statements, the Company expects that its cash and cash equivalents of $4.1 million as of June 30, 2021, together with the measures described below, will be sufficient to fund its operating expenses, debt obligations and capital expenditure requirements for at least one year from the date these consolidated financial statements are issued.

Throughout the next twelve months, the Company intends to fund its operations from the funds raised through the IPO, increased revenues as new designs and collections will be deployed in the second half of 2021, through settlement or renegotiation of aged payables and outstanding debt, and continuing its cost cutting measures.

The Company also plans to continue to fund its capital funding needs through a combination of public or private equity offerings, debt financings or other sources. There can be no assurance as to the availability or terms upon which such financing and capital might be available in the future. If the Company is unable to secure additional funding, it may be forced to curtail or suspend its business plans.

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated balance sheet as of June 30, 2021, the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2021 and 2020 and of cash flows for the six months ended June 30, 2021 and 2020 have been prepared by the Company, pursuant to the rules and regulations of the SEC for the interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and in the opinion of management, reflect all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the results for the interim periods presented and of the financial condition as of the date of the interim consolidated balance sheet.

The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2020 included in the Company’s prospectus that forms a part of the Company’s Registration Statement on Form S-1 ( File No. 333-255193). The prospectus was filed with the SEC pursuant to Rule 424(b)(4) on May 17, 2021.

Principles of Consolidation

These condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Bailey and H&J. All inter-company transactions and balances have been eliminated on consolidation.

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

Cash and Equivalents and Concentration of Credit Risk

The Company considers all highly liquid securities with an original maturity of less than three months to be cash equivalents. As of June 30, 2021 and December 31, 2020, the Company did not hold any cash equivalents. The Company’s cash and cash equivalents in bank deposit accounts, at times, may exceed federally insured limits of $250,000.

Fair Value of Financial Instruments

FASB guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active).

Level 3 — Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.

The Company’s financial instruments consist of cash and cash equivalents, prepaid expenses, accounts payable, accrued expenses, due to related parties, related party note payable, and convertible debt. The carrying value of these assets and liabilities is representative of their fair market value, due to the short maturity of these instruments.

The following tables present information about the Company's financial assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value hierarchy used to determine such fair values:


	Fair Value Measurements
	as of June 30, 2021 Using:
	Level 1		Level 2		Level 3		Total
Liabilities:
Warrant liability	$	—	$	78,710	$	—	$	78,710
Contingent consideration		—		—		6,539,417		6,539,417
	$	—	$	78,710	$	6,539,417	$	6,618,127

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	Fair Value Measurements
	as of December 31, 2020 Using:
	Level 1		Level 2		Level 3		Total
Liabilities:
Warrant liability	$	—	$	—	$	6,265	$	6,265
	$	—	$	—	$	6,265	$	6,265

Warrant Liability

Certain of the Company’s common stock warrants are carried at fair value. As of December 31, 2020, the fair value of the Company’s common stock warrant liabilities was measured under the Level 3 hierarchy using the Black-Scholes pricing model as the Company’s underlying common stock had no observable market price (see Note 10). The warrant liability was valued using a market approach. Upon the IPO, the warrant liabilities were valued using quoted prices of identical assets in active markets, and was reclassified under the Level 2 hierarchy. Changes in common stock warrant liability during the six months ended June 30, 2021 are as follows:


	Warrant
	Liability
Outstanding as of December 31, 2020	$	6,265
Change in fair value		72,445
Outstanding as of June 30, 2021	$	78,710

Contingent Consideration

The Company records contingent consideration liabilities relating to stock price guarantees included in its acquisition and consulting agreements. The estimated fair value of the contingent consideration is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

The fair value of the contingent consideration liability related to the Company's business combinations is valued using the Monte Carlo simulation model. The Monte Carlo simulation inputs include the stock price, volatility of common stock, timing of settlement and resale restrictions and limits. The fair value of the contingent consideration is then calculated based on guaranteed equity values at settlement as defined in the acquisition agreements. Changes in contingent consideration liability during the six months ended June 30, 2021 are as follows:


	Contingent
	Consideration
	Liability
Balance as of December 31, 2020	$	—
Initial recognition in connection with acquisition of Harper & Jones		3,421,516
Stock price guarantee per consulting agreement		67,000
Change in fair value		3,050,901
Balance as of June 30, 2021	$	6,539,417

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Inventory

Inventory is stated at the lower of cost or net realizable value and accounted for using the weighted average cost method and first-in, first-out method for Bailey. The inventory balances as of June 30, 2021 and December 31, 2020 consist substantially of finished good products purchased or produced for resale, as well as any materials the Company purchased to modify the products.

Property, Equipment, and Software

Property, equipment, and software are recorded at cost. Depreciation/amortization is recorded for property, equipment, and software using the straight-line method over the estimated useful lives of assets. The Company reviews the recoverability of all long-lived assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable. The balances at June 30, 2021 and December 31, 2020 consist of software with three (3) year lives, property and equipment with 3-10 year lives, and leasehold improvements which are depreciated over the shorter of the lease life or expected life.

Depreciation and amortization charges on property, equipment, and software are included in general and administrative expenses and amounted to $27,738 and $115,509 for the three months ended June 30, 2021 and 2020, and $36,758 and $180,557 for the six months ended June 30, 2021 and 2020, respectively. Capital assets as of June 30, 2021 and December 31, 2020 are as follows:


	June 30,		December 31,
	2021		2020
Computer equipment	$	6,339	$	57,810
Furniture and fixtures		184,701		207,140
Leasehold improvements and showrooms		444,951		69,274
		635,991		334,224
Accumulated depreciation		(574,362)		(334,224)
Property and equipment, net	$	61,629	$	—
Software	$	233,737	$	278,405
Accumulated amortization		(175,549)		(216,092)
Software, net	$	58,188	$	62,313

Business Combinations

The Company accounts for acquisitions in which it obtains control of one or more businesses as a business combination. The purchase price of the acquired businesses is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the purchase price over those fair values is recognized as goodwill. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments, in the period in which they are determined, to the assets acquired and liabilities assumed with the corresponding offset to goodwill. If the assets acquired are not a business, the Company accounts for the transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase.

Goodwill represents the excess of the purchase price of an acquired entity over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination.

Intangible assets are established with business combinations and consist of brand names and customer relationships. Intangible assets with finite lives are recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives using the straight-line method. The estimated useful lives of amortizable intangible assets are as follows:


Customer relationships		3 years

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Contingent Consideration

The Company estimates and records the acquisition date fair value of contingent consideration as part of purchase price consideration for acquisitions. Additionally, each reporting period, the Company estimates changes in the fair value of contingent consideration and recognizes any change in fair in the consolidated statement of operations. The estimate of the fair value of contingent consideration requires very subjective assumptions to be made of future operating results, discount rates and probabilities assigned to various potential operating result scenarios. Future revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and, therefore, materially affect the Company’s future financial results. The contingent consideration liability is to be settled with the issuance of shares of common stock once contingent provisions set forth in respective acquisition agreements have been achieved. Upon achievement of contingent provisions, respective liabilities are relieved and offset by increases to common stock and additional paid in capital in the stockholders’ equity section of the Company’s consolidated balance sheets.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets (property and equipment and amortizable intangible assets) for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

Goodwill

Goodwill and identifiable intangible assets that have indefinite useful lives are not amortized, but instead are tested annually for impairment and upon the occurrence of certain events or substantive changes in circumstances. The annual goodwill impairment test allows for the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An entity may choose to perform the qualitative assessment on none, some or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit and proceed directly to step one of the quantitative impairment test. If it is determined, on the basis of qualitative factors, that the fair value of a reporting unit is, more likely than not, less than its carrying value, the quantitative impairment test is required.

The quantitative impairment test calculates any goodwill impairment as the difference between the carrying amount of a reporting unit and its fair value, but not to exceed the carrying amount of goodwill. It is our practice, at a minimum, to perform a qualitative or quantitative goodwill impairment test in the first quarter every year.

In the first quarter of 2021, management performed its annual qualitative impairment test. The Company determined no factors existed to conclude that it is more likely than not that the fair value of the reporting unit was less than its carrying amount. As such, no goodwill impairment was recognized as of June 30, 2021.

Indefinite-Lived Intangible Assets

Indefinite-lived intangible assets established in connection with business combinations consist of the brand name. The impairment test for identifiable indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

Convertible Instruments

U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional as that term is described under applicable U.S. GAAP.

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. The Company also records, when necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares.

Accounting for Preferred Stock

ASC 480, Distinguishing Liabilities from Equity, includes standards for how an issuer of equity (including equity shares issued by consolidated entities) classifies and measures on its balance sheet certain financial instruments with characteristics of both liabilities and equity.

Management is required to determine the presentation for the preferred stock as a result of the redemption and conversion provisions, among other provisions in the agreement. Specifically, management is required to determine whether the embedded conversion feature in the preferred stock is clearly and closely related to the host instrument, and whether the bifurcation of the conversion feature is required and whether the conversion feature should be accounted for as a derivative instrument.

If the host instrument and conversion feature are determined to be clearly and closely related (both more akin to equity), derivative liability accounting under ASC 815, Derivatives and Hedging, is not required. Management determined that the host contract of the preferred stock is more akin to equity, and accordingly, liability accounting is not required by the Company. The Company has presented preferred stock within stockholders’ equity.

Costs incurred directly for the issuance of the preferred stock are recorded as a reduction of gross proceeds received by the Company, resulting in a discount to the preferred stock. The discount is not amortized.

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 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.

The reserve for returns totaled $22,214 and $5,229 as of June 30 , 2021 and December 31, 2020, respectively, and is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.

Cost of Revenues

Cost of revenues consists primarily of inventory sold and related freight-in.

Shipping and Handling

The Company recognizes shipping and handling billed to customers as a component of net revenues, and the cost of shipping and handling as a component of sales and marketing. Total shipping and handling billed to customers as a component of net revenues was approximately $0 and $3,800 for the three and six months ended June 30, 2021 and 2020, respectively. Total shipping and handling costs included in distribution costs were approximately $59,000 and $104,000 for the three months ended June 30, 2021 and 2020, and $119,000 and $161,000 for the six months ended June 30, 2021 and 2020, respectively.

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Advertising and Promotion

Advertising and promotional costs are expensed as incurred. Advertising and promotional expense for the three months ended June 30, 2021 and 2020 amounted to approximately $0 and $78,000, and $3,800 and $139,000 for the six months ended June 30, 2021 and 2020,respectively. The amounts are included in sales and marketing expense.

Common Stock Purchase Warrants and Other Derivative Financial Instruments

The Company accounts for derivative instruments in accordance with ASC 815, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedging relationships and the types of relationships designated are based on the exposures hedged. At June 30, 2021 and December 31, 2020, the Company did not have any derivative instruments that were designated as hedges.

Stock Option and Warrant Valuation

Stock option and warrant valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from an index of historical stock prices for comparable entities. For warrants and stock options issued to non- employees, the Company accounts for the expected life based on the contractual life of the warrants and stock options. For employees, the Company accounts for the expected life of options in accordance with the “simplified” method, which is used for “plain-vanilla” options, as defined in the accounting standards codification. The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options.

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.

Deferred Offering Costs

The Company complies with the requirements of ASC 340, Other Assets and Deferred Costs, with regards to offering costs. Prior to the completion of an offering, offering costs are capitalized. The deferred offering costs are charged to additional paid-in capital or as a discount to debt, as applicable, upon the completion of an offering or to expense if the offering is not completed. As of December 31, 2020, the Company had capitalized $214,647 in deferred offering costs. Upon completion of the IPO in May 2021, all capitalized deferred offering costs were charged to additional paid-in capital.

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Segment Information

In accordance with ASC 280, Segment Reporting (“ASC 280”), we identify our operating segments according to how our business activities are managed and evaluated. As of June 30, 2021 our operating segments included: DSTLD, Bailey and H&J. Each operating segment currently reports to the Chief Executive Officer. Each of our brands serve or are expected to serve customers through our wholesale, in store and online channels, allowing us to execute on our omni-channel strategy. We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments are aggregated into one reportable segment. All of the operating segments have met the aggregation criteria and have been aggregated and are presented as one reportable segment, as permitted by ASC 280. We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments.

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.

Net Loss per Share

Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of the diluted net loss per share if their inclusion would be anti-dilutive. As all potentially dilutive securities are anti-dilutive as of June 30, 2021 and 2020, diluted net loss per share is the same as basic net loss per share for each year. Potentially dilutive items outstanding as of June 30, 2021 and 2020 are as follows:


	June 30,
	2021	2020
Series Seed Preferred Stock (convertible to common stock)	—	20,714,518
Series A Preferred Stock (convertible to common stock)	—	5,654,072
Series A-2 Preferred Stock (convertible to common stock)	—	5,932,742
Series CF Preferred Stock (convertible to common stock)	—	836,331
Series A-3 Preferred Stock (convertible to common stock)	—	9,032,330
Series B Preferred Stock (convertible to common stock)	—	20,754,717
Common stock warrants	3,946,348	572,845
Preferred stock warrants	—	806,903
Stock options	3,875,103	1,084,215
Total potentially dilutive shares	7,821,451	65,388,673

All shares of preferred stock were convertible into shares of common stock at a ratio of 15.625:1 per share. Upon the closing of the IPO, all 62,924,710 shares of preferred stock converted into an aggregate of 4,027,181 shares of common stock according to their respective terms. Additionally, all preferred stock warrants converted into 51,642 common stock warrants at the same ratio as the underlying preferred stock conversion.

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Concentrations

The Company utilized four vendors that made up 62% of all inventory purchases during the six months ended June 30, 2021 and three vendors that made up 23% of all inventory purchases during the six months ended June 30, 2020. The loss of one of these vendors, may have a negative short-term impact on the Company’s operations; however, we believe there are acceptable substitute vendors that can be utilized longer-term.

Recent Accounting Pronouncements

In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, which simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature and convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt and will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that is within the scope of ASU 2020-06. ASU 2020-06 is applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company has elected to early adopt this ASU and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02: Leases (Topic 842). The new guidance generally requires an entity to recognize on its balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The new standard requires a modified retrospective transition for existing leases to each prior reporting period presented. The Company has elected to utilize the extended adoption period available to the Company as an emerging growth company and has not currently adopted this standard. This standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2021. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial position, results of operations and cash flows once adopted.

Management does not believe that any other recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.

NOTE 4: BUSINESS COMBINATIONS

Bailey 44

On February 12, 2020, the Company acquired 100% of the membership interests of Bailey. The purchase price consideration included (i) an aggregate of 20,754,717 shares of Series B Preferred Stock of the Company (the “Parent Stock”) and (ii) a promissory note in the principal amount of $4,500,000.

Of the shares of Parent Stock issued in connection with the Merger, 16,603,773 shares were delivered on the effective date of the Merger (the “Initial Shares”) and four million one hundred fifty thousand nine hundred forty four (4,150,944) shares were held back solely, and only to the extent necessary, to satisfy any indemnification obligations of Bailey or the Holders pursuant to the terms of the Merger Agreement (the “Holdback Shares”).

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

DBG agreed that if at that date which is one year from the closing date of the IPO, the product of the number of shares of Parent Stock issued under the Merger multiplied by the sum of the closing price per share of the common stock of the Company on such date, plus Sold Parent Stock Gross Proceeds (as that term is defined in the Merger Agreement), does not exceed the sum of $11,000,000 less the value of any Holdback Shares cancelled further to the indemnification provisions of the Merger Agreement, then the Company shall issue to the Holders pro rata an additional aggregate number of shares of common stock of the Company equal to the valuation shortfall at a per share price equal to the then closing price per share of the common stock of the Company.


Series B preferred stock	$	11,000,000
Promissory note payable		4,500,000
Purchase price consideration	$	15,500,000


	Purchase Price
	Allocation
Cash and cash equivalents	$	106,913
Accounts receivable, net		37,479
Due (to) from factor, net		(312,063)
Inventory		3,303,660
Prepaid expenses		165,856
Deposits		187,493
Property, equipment and software, net		1,215,748
Goodwill		6,479,218
Intangible assets		8,600,000
Accounts payable		(3,397,547)
Accrued expenses and other liabilities		(886,757)
Purchase price consideration	$	15,500,000

As of June 30, 2021, the Company has a contingent consideration liability of $4,736,270 based on the valuation shortfall as noted above. See Note 3.

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Harper & Jones

On May 18, 2021, the Company closed its acquisition of H&J pursuant to its previously disclosed Membership Interest Stock Purchase Agreement (as amended, the “Purchase Agreement”) with D. Jones Tailored Collection, Ltd. (the “Seller”), to purchase 100% of the issued and outstanding equity of Harper & Jones LLC. The purchase price consideration included (i) an aggregate of 2,192,771 shares of the Company’s common stock and (ii) $500,000 financed from the proceeds of the IPO.

Pursuant to the H&J Purchase Agreement, the Seller, as the holder of all of the outstanding membership interests of H&J, will exchange all of such membership interests for a number of common stock of the Company equal to the lesser of (i) $9.1 million at a per share price equal to the initial public offering price of the Company’s shares offered pursuant to its initial public offering or (ii) the number of Subject Acquisition Shares; “Subject Acquisition Shares” means the percentage of the aggregate number of shares of the Company’s common stock issued pursuant to the 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. If, at the one year anniversary of the closing date of the Company’s IPO, the product of the number of shares of the Company’s common stock issued at the closing of the acquisition multiplied by the average closing price per share of the shares of the Company’s common stock as quoted on the NasdaqCM for the thirty (30) day trading period immediately preceding such date does not exceed the sum of $9.1 million less the value of any shares of the Company’s common stock cancelled further to any indemnification claims made against the Seller then the Company shall issue to Seller an additional aggregate number of shares of the Company’s common stock equal to the valuation shortfall at a per share price equal to the then closing price per share of the Company’s common stock as quoted on the NasdaqCM.

The Company evaluated the acquisition of H&J pursuant to ASC 805 and ASU 2017-01, Topic 805, Business Combinations. The acquisition method of accounting requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at their estimated respective fair values as of the closing date of the acquisition. Goodwill recognized in connection with this transaction represents primarily the potential economic benefits that the Company believes may arise from the acquisition.

Total fair value of the purchase price consideration was determined as follows:


Cash	$	500,000
Common stock		8,025,542
Contingent consideration		3,421,516
Purchase price consideration	$	11,947,058

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DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company has made an allocation of the purchase price in regard to the acquisition related to the assets acquired and the liabilities assumed as of the purchase date. The following table summarizes the purchase price allocation:


	Purchase Price
	Allocation
Cash and cash equivalents	$	24,335
Accounts receivable, net		49,472
Inventory		77,159
Prepaid expenses		69,715
Deposits		4,415
Property, equipment and software, net		83,986
Goodwill		9,681,548
Intangible assets		3,936,030
Accounts payable		(51,927)
Accrued expenses and other liabilities		(107,957)
Deferred revenue		(269,848)
Due to related parties		(1,361)
Loan payable		(148,900)
Note payable - related party		(299,489)
Deferred tax liability		(1,100,120)
Purchase price consideration	$	11,947,058

The customer relationships and will be amortized on a straight-line basis over their estimated useful lives of three years. The brand name is indefinite-lived. The Company used the reilief of royalty approach to estimate the fair value of intangible assets acquired.

Goodwill is primarily attributable to the go-to-market synergies that are expected to arise as a result of the acquisition and other intangible assets that do not qualify for separate recognition. The goodwill is not deductible for tax purposes.

The Company recorded an initial contingent consideration liability at a fair value of $3,421,516 based on the valuation shortfall noted above. As of June 30, 2021, the H&J contingent consideration was valued at $1,736,147. See Note 3.

The results of H&J have been included in the consolidated financial statements since the date of acquisition. H&J’s net revenue and net income included in the consolidated financial statements since the acquisition date were approximately $379,000 and $158,000, respectively.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the Company’s financial results as if the Bailey and H&J acquisitions had occurred as of January 1, 2020. The unaudited pro forma financial information is not necessarily indicative of what the financial results actually would have been had the acquisitions been completed on this date. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the Company’s future financial results. The following unaudited pro forma financial information includes incremental property and equipment depreciation and intangible asset amortization as a result of the acquisitions. The pro forma information does not give effect to any estimated and potential cost savings or other operating efficiencies that could result from the acquisition:


	Six Months Ended
	June 30,
	2021		2020
Net revenues	$	2,392,195	$	6,683,132
Net loss	$	(14,099,782)	$	(6,686,352)
Net loss per common share	$	(4.60)	$	(10.07)

Table of Contents

DIGITAL BRANDS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5: DUE FROM FACTOR

The Company, via its subsidiary, Bailey, assigns a portion of its trade accounts receivable to a third- party factoring company, who assumes the credit risk with respect to the collection of non-recourse accounts receivable. The Company may request advances on the net sales factored at any time before their maturity date, and up to 50% of eligible finished goods inventories. The factor charges a commission on the net sales factored for credit and collection services. Interest on advances is charged as of the last day of each month at a rate equal to the LIBOR rate plus 2.5%. Advances are collateralized by a security interest in substantially all of Bailley’s assets.

Due to/from factor consist of the following:


	June 30,		December 31,
	2021		2020
Outstanding receivables:
Without recourse	$	54,474	$	151,158
With recourse		—		42,945
Advances		2,449		56,246
Credits due customers		(50,064)		(40,316)
	$	6,859	$	210,033

NOTE 6: GOODWILL AND INTANGIBLE ASSETS

The Company recorded $6,479,218 in goodwill from the Bailey business combination in Feb