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Table of Contents

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

2

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

3

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

4

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

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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

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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”).

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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.

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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