UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
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☒ | Smaller reporting company | ||
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| Emerging growth company |
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DIGITAL BRANDS GROUP, NC.
FORM 10-Q
TABLE OF CONTENTS
2
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: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net |
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Due from factor, net |
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Inventory |
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Prepaid expenses and other current assets |
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Total current assets |
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Deferred offering costs |
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Property, equipment and software, net |
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Goodwill |
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Intangible assets, net |
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Deposits |
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Right of use asset | | — | ||||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued expenses and other liabilities |
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Deferred revenue |
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Due to related parties |
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Contingent consideration liability | | | ||||
Convertible notes, current |
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Accrued interest payable |
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Note payable - related party |
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Venture debt, net of discount |
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Loan payable, current |
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Promissory note payable |
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Right of use liability, current portion | | — | ||||
Total current liabilities |
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Convertible note payable, net |
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Loan payable |
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Derivative liability |
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Warrant liability |
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Total liabilities |
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Commitments and contingencies (Note 11) |
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Stockholders’ deficit: |
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Undesignated preferred stock, $ |
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Common stock, $ | | | ||||
Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ deficit |
| ( |
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Total liabilities and stockholders’ deficit | $ | | $ | |
See the accompanying notes to the unaudited condensed consolidated financial statements
3
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 | | | $ | | $ | | ||||||
Cost of net revenues |
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Gross profit |
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Operating expenses: |
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General and administrative |
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Sales and marketing |
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Distribution |
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Change in fair value of contingent consideration | | | | | ||||||||
Total operating expenses |
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Loss from operations |
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Other income (expense): |
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Interest expense |
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Other non-operating income (expenses) |
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Total other income (expense), net |
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Income tax benefit (provision) |
| — |
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| — |
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Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
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Weighted average common shares outstanding - basic and diluted |
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Net loss per common share - basic and diluted | ( | ( | ( | ( |
See the accompanying notes to the unaudited condensed consolidated financial statements
4
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 | | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | |||||||||||
Stock-based compensation | — |
| — |
| — |
| — |
| — |
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| — |
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Net loss | — |
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| ( |
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Balances at March 31, 2021 | | $ | | | $ | | | | | | | | | | | | | ( | ( | |||||||||||||||||||||||||
Conversion of preferred stock into common stock | ( | ( | ( | ( | ( | ( | ( | ( | ( | ( | ( | ( | | | | — | — | |||||||||||||||||||||||||||
Issuance of common stock in public offering | — | — | — | — | — | — | — | — | — | — | — | — | | | | — | | |||||||||||||||||||||||||||
Offering costs | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||
Exercise of over-allotment option, net of offering costs | — | — |
| — | — |
| — | — |
| — | — |
| — | — |
| — | — |
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Conversion of debt into common stock | — | — | — | — | — | — | — | — | — | — | — | — | | | | — | | |||||||||||||||||||||||||||
Conversion of related party notes and payables into common stock | — | — |
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Common stock and warrants issued in connection with note | — | — | — | — | — | — | — | — | — | — | — | — | | | | — | | |||||||||||||||||||||||||||
Common stock issued in connection with business combination | — | — | — | — | — | — | — | — | — | — | — | — | | | | — | | |||||||||||||||||||||||||||
Exercise of warrants | — | — | — | — | — | — | — | — | — | — | — | — | | | | — | | |||||||||||||||||||||||||||
Common stock issued pursuant to consulting agreement | — | — | — | — | — | — | — | — | — | — | — | — | | | | — | | |||||||||||||||||||||||||||
Stock-based compensation | — | — |
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| — | — |
| — | — |
| — | — |
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| — | — | | — | | |||||||||||||||||||||
Net loss | — | — |
| — | — |
| — | — |
| — | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||
Balances at June 30, 2021 | — | $ | — |
| — | $ | — |
| — | $ | — |
| — | $ | — |
| — | $ | — |
| — | $ | — |
| | | $ | | $ | ( | $ | | ||||||||||||
Balances at December 31, 2021 | — | $ | — |
| — | $ | — |
| — | $ | — |
| — | $ | — |
| — | $ | — |
| — | $ | — |
| | $ | | $ | | $ | ( | $ | ( | |||||||||||
Conversion of notes and derivative liability into common stock | — | — |
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Stock-based compensation | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | — | | |||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||
Balances at March 31, 2022 | — | — | — | — | — | — | — | — | — | — | — | — | | | | ( | ( | |||||||||||||||||||||||||||
Issuance of common stock in public offering | — | — | — | — | — | — | — | — | — | — | — | — | | | | — | | |||||||||||||||||||||||||||
Offering costs | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||
Conversion of notes and derivative liability into common stock | — | — | — | — | — | — | — | — | — | — | — | — | | | | — | | |||||||||||||||||||||||||||
Warrants issued in connection with note | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | — | | |||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | — | | |||||||||||||||||||||||||||
Net loss | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||
Balances at June 30, 2022 | — | $ | — |
| — | $ | — |
| — | $ | — |
| — | $ | — |
| — | $ | — |
| — | $ | — |
| | $ | | $ | | $ | ( | $ | ( |
See the accompanying notes to the unaudited condensed consolidated financial statements
5
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 | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Amortization of loan discount and fees |
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Stock-based compensation |
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Fees incurred in connection with debt financings | — | | ||||
Change in fair value of warrant liability | ( | | ||||
Change in fair value of derivative liability |
| ( |
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Change in fair value of contingent consideration | | | ||||
Forgiveness of Payroll Protection Program | ( | — | ||||
Deferred income tax benefit | — | ( | ||||
Change in credit reserve | ( | | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable, net |
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Due from factor, net |
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Inventory |
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Prepaid expenses and other current assets | ( | ( | ||||
Accounts payable |
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Accrued expenses and other liabilities |
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Deferred revenue |
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Accrued compensation - related party |
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Accrued interest |
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Net cash used in operating activities |
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Cash flows from investing activities: |
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Cash acquired (consideration) pursuant to business combination |
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Purchase of property, equipment and software | — | ( | ||||
Deposits |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Proceeds (repayments) from related party advances |
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Advances (repayments) from factor | ( | | ||||
Proceeds from venture debt |
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Issuance of loans payable |
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Repayments of convertible and promissory notes |
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Issuance of convertible notes payable | | | ||||
Issuance of common stock in public offering | | | ||||
Exercise of over-allotment option with public offering, net | — | | ||||
Exercise of warrants | — | | ||||
Offering costs |
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Net cash provided by financing activities |
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Net change in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | | $ | | ||
Supplemental disclosure of cash flow information: |
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Cash paid for income taxes | $ | — | $ | — | ||
Cash paid for interest | $ | | $ | | ||
Supplemental disclosure of non-cash investing and financing activities: |
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Conversion of notes and debt into common stock | $ | | $ | | ||
Right of use asset | $ | | $ | — | ||
Warrants issued in connection with note | $ | | $ | — | ||
Conversion of preferred stock into common stock | $ | — | $ | | ||
Conversion of related party notes and payables into common stock | $ | — | $ | | ||
Contingent consideration liability issued in connection with acquisition | $ | — | $ | |
See the accompanying notes to the unaudited condensed consolidated financial statements
6
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
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
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 $
Management Plans
In August 2021, the Company entered into an equity line of credit agreement which the investor is committed to purchase up to $
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”).
7
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 $
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.
8
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 |
| — |
| — |
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Derivative liability | — | — | | | ||||||||
$ | — | $ | — | $ | | $ | |
Fair Value Measurements | ||||||||||||
as of December 31, 2021 Using: | ||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Liabilities: | ||||||||||||
Warrant liability | $ | — | $ | | $ | — | $ | | ||||
Contingent consideration | — | — | | | ||||||||
Derivative liability | — | — | | | ||||||||
$ | — | $ | | $ | | $ | |
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 | $ | | |
Change in fair value |
| | |
Outstanding as of June 30, 2022 | $ | |
The detail of contingent consideration by company is as follows:
Bailey |
| $ | |