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, 2022

☐ 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)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	DBGI	The Nasdaq Stock Market LLC
Warrants, each exercisable to purchase one share of common stock	DBGIW	The Nasdaq Stock Market LLC

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 15, 2022 the Company had 52,874,188 shares of common stock, $0.0001 par value, issued and outstanding.

Table of Contents

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, 2022 and December 31, 2021	3

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021	4

	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Six Months ended June 30, 2022 and 2021	5

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021	6

	Notes to Condensed Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	24

ITEM 4.	Controls and Procedures	25

PART II. OTHER INFORMATION		27

ITEM 1.	Legal Proceedings	27

ITEM 1A.	Risk Factors	27

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

ITEM 3.	Defaults upon Senior Securities	28

ITEM 4.	Mine Safety Disclosures	28

ITEM 5.	Other Information	28

ITEM 6.	Exhibits	29

SIGNATURES		31

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

DIGITAL BRANDS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	June 30,		December 31,
	2022		2021
ASSETS
Current assets:
Cash and cash equivalents	$	802,724	$	528,394
Accounts receivable, net		190,056		89,394
Due from factor, net		929,989		985,288
Inventory		2,883,613		2,755,358
Prepaid expenses and other current assets		813,681		417,900
Total current assets		5,620,063		4,776,334
Deferred offering costs		367,696		367,696
Property, equipment and software, net		65,235		97,265
Goodwill		18,264,822		18,264,822
Intangible assets, net		11,765,688		12,841,313
Deposits		137,794		137,794
Right of use asset		201,681		—
Total assets	$	36,422,979	$	36,485,224

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	7,003,333	$	6,562,690
Accrued expenses and other liabilities		3,698,717		2,237,145
Deferred revenue		221,363		276,397
Due to related parties		250,598		277,635
Contingent consideration liability		19,300,716		12,179,476
Convertible notes, current		100,000		100,000
Accrued interest payable		1,801,303		1,110,679
Note payable - related party		154,489		299,489
Venture debt, net of discount		6,251,755		6,001,755
Loan payable, current		1,489,335		2,502,000
Promissory note payable		3,500,000		3,500,000
Right of use liability, current portion		201,681		—
Total current liabilities		43,973,290		35,047,266
Convertible note payable, net		5,986,068		5,501,614
Loan payable		298,900		713,182
Derivative liability		1,044,939		2,294,720
Warrant liability		—		18,223
Total liabilities		51,303,197		43,575,005

Commitments and contingencies (Note 11)

Stockholders’ deficit:
Undesignated preferred stock, $0.0001 par, 10,000,000 shares authorized, 0 shares issued and outstanding as of both June 30, 2022 and December 31, 2021		—		—
Common stock, $0.0001 par, 200,000,000 shares authorized, 52,874,188 and 13,001,690 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		5,287		1,300
Additional paid-in capital		68,185,315		58,612,873
Accumulated deficit		(83,070,820)		(65,703,954)
Total stockholders’ deficit		(14,880,218)		(7,089,781)
Total liabilities and stockholders’ deficit	$	36,422,979	$	36,485,224

See the accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

DIGITAL BRANDS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Net revenues		3,739,001		1,003,529	$	7,171,411	$	1,411,934
Cost of net revenues		1,567,922		608,944		3,526,833		1,224,886
Gross profit		2,171,079		394,585		3,644,578		187,048
Operating expenses:
General and administrative		4,990,232		7,192,460		9,601,467		9,099,978
Sales and marketing		1,705,291		923,283		2,745,863		1,094,103
Distribution		221,925		69,864		424,773		133,442
Change in fair value of contingent consideration		5,920,919		3,050,901		7,121,240		3,050,901
Total operating expenses		12,838,367		11,236,508		19,893,343		13,378,424
Loss from operations		(10,667,288)		(10,841,923)		(16,248,765)		(13,191,376)
Other income (expense):
Interest expense		(2,203,599)		(897,920)		(3,771,476)		(1,572,964)
Other non-operating income (expenses)		3,336,963		(57,775)		2,653,375		(57,213)
Total other income (expense), net		1,133,364		(955,695)		(1,118,101)		(1,630,177)
Income tax benefit (provision)		—		1,100,120		—		1,100,120
Net loss	$	(9,533,924)	$	(10,697,498)	$	(17,366,866)	$	(13,721,433)

Weighted average common shares outstanding - basic and diluted		35,822,250		5,435,023		24,591,052		3,062,774
Net loss per common share - basic and diluted	$	(0.27)	$	(1.97)	$	(0.71)	$	(4.48)

See the accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

DIGITAL BRANDS GROUP, INC.

CONDENSED 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		Accumulated		Stockholders’
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Capital		Deficit		Equity (Deficit)
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

Balances at December 31, 2021	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	13,001,690	$	1,300	$	58,612,873	$	(65,703,954)	$	(7,089,781)
Conversion of notes and derivative liability into common stock	—		—	—		—	—		—	—		—	—		—	—		—	873,901		87		1,201,495		—		1,201,582
Stock-based compensation	—		—	—		—	—		—	—		—	—		—	—		—	—		—		139,093		—		139,093
Net loss	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		(7,832,942)		(7,832,942)
Balances at March 31, 2022	—		—	—		—	—		—	—		—	—		—	—		—	13,875,591		1,387		59,953,461		(73,536,896)		(13,582,048)
Issuance of common stock in public offering	—		—	—		—	—		—	—		—	—		—	—		—	37,389,800		3,739		9,343,711		—		9,347,450
Offering costs	—		—	—		—	—		—	—		—	—		—	—		—	—		—		(1,930,486)		—		(1,930,486)
Conversion of notes and derivative liability into common stock	—		—	—		—	—		—	—		—	—		—	—		—	1,608,797		161		600,629		—		600,790
Warrants issued in connection with note	—		—	—		—	—		—	—		—	—		—	—		—	—		—		98,241		—		98,241
Stock-based compensation	—		—	—		—	—		—	—		—	—		—	—		—	—		—		119,759		—		119,759
Net loss																							—		(9,533,924)		(9,533,924)
Balances at June 30, 2022	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	52,874,188	$	5,287	$	68,185,315	$	(83,070,820)	$	(14,880,218)

See the accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

DIGITAL BRANDS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six Months Ended
	June 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(17,366,866)	$	(13,721,433)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,113,188		291,661
Amortization of loan discount and fees		2,818,174		580,684
Stock-based compensation		258,852		4,021,529
Fees incurred in connection with debt financings		—		132,609
Change in fair value of warrant liability		(18,223)		72,445
Change in fair value of derivative liability		(880,388)		—
Change in fair value of contingent consideration		7,121,240		3,050,901
Forgiveness of Payroll Protection Program		(1,760,755)		—
Deferred income tax benefit		—		(1,100,120)
Change in credit reserve		(5,053)		9,748
Changes in operating assets and liabilities:
Accounts receivable, net		(100,662)		(261,386)
Due from factor, net		202,787		139,629
Inventory		(128,255)		75,287
Prepaid expenses and other current assets		(395,781)		(688,893)
Accounts payable		435,110		575,513
Accrued expenses and other liabilities		1,461,572		262,019
Deferred revenue		(55,034)		(99,045)
Accrued compensation - related party		—		(88,550)
Accrued interest		690,624		151,465
Net cash used in operating activities		(6,609,470)		(6,595,937)
Cash flows from investing activities:
Cash acquired (consideration) pursuant to business combination		—		(475,665)
Purchase of property, equipment and software		—		(10,276)
Deposits		—		(19,115)
Net cash used in investing activities		—		(505,056)
Cash flows from financing activities:
Proceeds (repayments) from related party advances		(172,036)		—
Advances (repayments) from factor		(142,436)		53,795
Proceeds from venture debt		237,500		—
Issuance of loans payable		311,308		2,626,050
Repayments of convertible and promissory notes		(3,068,750)		(2,001,305)
Issuance of convertible notes payable		2,301,250		528,650
Issuance of common stock in public offering		9,347,450		10,000,002
Exercise of over-allotment option with public offering, net		—		1,364,997
Exercise of warrants		—		145,696
Offering costs		(1,930,486)		(2,116,957)
Net cash provided by financing activities		6,883,800		10,600,928
Net change in cash and cash equivalents		274,330		3,499,935
Cash and cash equivalents at beginning of period		528,394		575,986
Cash and cash equivalents at end of period	$	802,724	$	4,075,921
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	—	$	—
Cash paid for interest	$	191,152	$	460,179
Supplemental disclosure of non-cash investing and financing activities:
Conversion of notes and debt into common stock	$	1,802,372	$	2,680,289
Right of use asset	$	201,681	$	—
Warrants issued in connection with note	$	98,241	$	—
Conversion of preferred stock into common stock	$	—	$	6,293
Conversion of related party notes and payables into common stock	$	—	$	257,515
Contingent consideration liability issued in connection with acquisition	$	—	$	3,421,516

See the accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

NOTE 1: NATURE OF OPERATIONS

Digital Brands Group, 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).

The Company is a curated collection of lifestyle brands, including Bailey 44, DSTLD, Harper & Jones, Stateside and ACE Studios, that offers a variety of apparel products through direct-to-consumer and wholesale distribution.

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.

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.

On August 30, 2021, the Company closed its acquisition of Mosbest, LLC dba Stateside (“Stateside”) pursuant to its Membership Interest Purchase Agreement with Moise Emquies to purchase 100% of the issued and outstanding equity of Stateside. On the acquisition date, Stateside became a wholly owned subsidiary of the Company.

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 $17,366,866 and $13,721,433 for the six months ended June 30, 2022 and 2021, respectively, and has incurred negative cash flows from operations during these periods. The Company has historically lacked liquidity to satisfy obligations as they come due and as of June 30, 2022, and the Company had a working capital deficit of $38,353,227. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company requires significant capital to fund operations and meet its obligations as demands are made. The Company expects to continue to generate operating losses for the foreseeable future. The accompanying consolidated financial statements do not include any adjustments as a result of this uncertainty.

Management Plans

In August 2021, the Company entered into an equity line of credit agreement which the investor is committed to purchase up to $17,500,000 of the Company’s common stock. The Company plans to utilize multiple drawdowns on this agreement, however, it may be unable to execute on such drawdowns due to restrictions per the agreement.

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”).

Table of Contents

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated balance sheet as of June 30, 2022, the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021 and of cash flows for the six months ended June 30, 2022 and 2021 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 consolidated results for the interim periods presented and of the consolidated financial condition as of the date of the interim consolidated balance sheet. The results of operations are not necessarily indicative of the results expected for the year ended December 31, 2022.

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, 2021 included in the Company’s Annual Form 10-K filed with SEC on March 31, 2022.

Principles of Consolidation

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

Use of Estimates

The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, inventory, impairment of long-lived assets, contingent consideration and derivative liabilities. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. 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, 2022 and December 31, 2021, 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

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.

Table of Contents

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, 2022 Using:
	Level 1		Level 2		Level 3		Total
Liabilities:
Warrant liability	$	—	$	—	$	—	$	—
Contingent consideration		—		—		19,300,716		19,300,716
Derivative liability		—		—		1,044,939		1,044,939
	$	—	$	—	$	20,345,655	$	20,345,655


	Fair Value Measurements
	as of December 31, 2021 Using:
	Level 1		Level 2		Level 3		Total
Liabilities:
Warrant liability	$	—	$	18,223	$	—	$	18,223
Contingent consideration		—		—		12,179,476		12,179,476
Derivative liability		—		—		2,294,720		2,294,720
	$	—	$	18,223	$	14,474,196	$	14,492,419

Contingent Consideration

Changes in acquisition-related contingent consideration liabilities during the six months ended June 30, 2022 are as follows:


	Contingent
	Consideration
	Liability
Outstanding as of December 31, 2021	$	12,179,476
Change in fair value		7,121,240
Outstanding as of June 30, 2022	$	19,300,716

The detail of contingent consideration by company is as follows:


Bailey	$	10,698,475