UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Date of report (Date of earliest event reported)
August 31, 2022
DIGITAL BRANDS GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
| 001-40400 | 46-1942864 | |
| (Commission File Number) | (IRS Employer Identification No.) |
| 1400 Lavaca Street, Austin, TX | 78701 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(209) 651-0172
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbols | Name of each exchange on which registered |
| Common Stock, par value $0.0001 | DBGI | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
Emerging growth company x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Item 1.01. Entry Into a Material Definitive Agreement
On August 31, 2022, Digital Brands Group, Inc. (the “Company”) entered into a Subscription and Investment Representation Agreement (the “Subscription Agreement”) with John Hilburn Davis IV, its Chief Executive Officer, who is an accredited investor (the “Purchaser”), pursuant to which the Company agreed to issue and sell one (1) share of the Company’s Series A Preferred Stock, par value $0.0001 per share (the “Preferred Stock”), to the Purchaser for $25,000 in cash. The sale closed on August 31, 2022. Additional information regarding the rights, preferences, privileges and restrictions applicable to the Preferred Stock is set forth under Item 5.03 of this Current Report on Form 8-K and is incorporated herein by reference.
The Subscription Agreement contains customary representations and warranties and certain indemnification rights and obligations of the parties.
The foregoing summary of the Subscription Agreement does not purport to be complete and is subject to, and qualified in its entirety by, such document, which is filed as Exhibit 10.1 to this Current Report on Form 8-K and is incorporated herein by reference.
Item 3.02 Unregistered Sales of Equity Securities
The disclosure required by this Item is included in Item 1.01 of this Current Report on Form 8-K and is incorporated herein by reference. Based in part upon the representations of the Purchaser in the Subscription Agreement, the offering and sale of the Preferred Stock was exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.
Item 3.03 Material Modifications to Rights of Security Holders
The disclosure required by this Item is included in Item 5.03 of this Current Report on Form 8-K and is incorporated herein by reference.
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year
On August 31, 2022, the Company filed a certificate of designation (the “Certificate of Designation”) with the Secretary of State of the State of Delaware, effective as of the time of filing, designating the rights, preferences, privileges and restrictions of the share of Preferred Stock. The Certificate of Designation provides that the Preferred Stock will have 250,000,000 votes per share of Preferred Stock and will vote together with the outstanding shares of the Company’s common stock as a single class exclusively with respect to any proposal to amend the Company’s Sixth Amended and Restated Certificate of Incorporation (as may be amended and/or restated from time to time, the “Restated Certificate”) to effect a reverse stock split of the Company’s common stock and to increase the authorized number of shares of the Company’s common stock. The Preferred Stock will be voted, without action by the holder, on any such proposal in the same proportion as shares of common stock are voted. The Preferred Stock otherwise has no voting rights except as otherwise required by the General Corporation Law of the State of Delaware.
The Preferred Stock is not convertible into, or exchangeable for, shares of any other class or series of stock or other securities of the Company. The Preferred Stock has no rights with respect to any distribution of assets of the Company, including upon a liquidation, bankruptcy, reorganization, merger, acquisition, sale, dissolution or winding up of the Company, whether voluntarily or involuntarily. The holder of the Preferred Stock will not be entitled to receive dividends of any kind.
The outstanding share of Preferred Stock shall be redeemed in whole, but not in part, at any time: (i) if such redemption is ordered by the Board of Directors in its sole discretion or (ii) automatically upon the approval by the Company's stockholders of an amendment to the Restated Certificate to increase the authorized number of shares of the Company's common stock and an amendment to the Restated Certificate to implement a future reverse stock split. Upon such redemption, the holder of the Preferred Stock will receive consideration of $25,000 in cash.
Furthermore, on August 31, 2022, the Board of Directors of the Company approved a second amendment (the “Second Amendment”) to the Company’s Amended and Restated Bylaws (as amended, the “Bylaws”) that amends the quorum for a stockholders’ meeting or action to be at least 33 1/3% of the shares of the capital stock of the Company issued and outstanding and entitled to vote, present in person or represented by proxy.
The foregoing summaries of the Certificate of Designation and Second Amendment to the Bylaws do not purport to be complete and are subject to, and qualified in their entirety by reference to the Certificate of Designation and the Second Amendment, copies of which are attached hereto as Exhibit 3.1 and Exhibit 3.2 and are incorporated herein by reference.
| Item 5.08. | Shareholder Director Nominations. |
The information set forth under the caption “Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year” is incorporated herein by reference.
| Item 8.01 | Other Events. |
As previously reported on June 23, 2022, Digital Brands Group, Inc., a Delaware corporation (the “Company” or “DBG”), entered into an Amended and Restated Membership Interest Purchase Agreement (the “Agreement”) on June 17, 2022 with Moise Emquies, George Levy, Matthieu Leblan and Carol Ann Emquies (“Sellers”), Sunnyside, LLC, a California limited liability company (“Sundry”), and George Levy as the Sellers’ representative (the “Sellers’ Representative”), pursuant to which the Company will acquire all of the issued and outstanding membership interests of Sundry (such transaction, the “Acquisition”).
In connection with the proposed Acquisition, the Company is filing this Current Report on Form 8-K to provide the following financial information with respect to Sundry and the Company:
| (1) | unaudited pro forma combined balance sheets of DBG and Sundry as of June 30, 2022 and unaudited pro forma combined statements of operations for the six months ended June 30, 2022 and the year ended December 31, 2021; and |
| (2) | unaudited balance sheets of Sundry as of June 30, 2022 and December 31, 2021, and statement of operations for the six months ended June 30, 2022 and 2021, filed as Exhibit 99.1 and incorporated by reference herein. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SUNNYSIDE, LLC (“SUNDRY”)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the historical financial statements of the relevant entities and the pro forma financial statements and the notes thereto included elsewhere in this Report. This discussion and analysis contains forward- looking statements that involve risks and uncertainties. Sundry’s actual results may differ materially from those anticipated in these forward-looking statements.
Overview
Sundry captures coastal casual style with a certain French Chic. Sundry is primarily a wholesale brand that we intend to transition to a digital, direct-to-consumer brand.
Net Revenue
Sundry sells its products directly to customers. Sundry also sells its products indirectly through wholesale channels that include third-party online channels and physical channels such as specialty retailers and department stores.
Cost of Net Revenue
Sundry’s cost of net revenue includes the direct cost of purchased and manufactured merchandise; inventory shrinkage; inventory adjustments due to obsolescence including excess and slow-moving inventory and lower of cost and net realizable reserves; duties; and inbound freight.
Operating Expenses
Sundry’s operating expenses include all operating costs not included in cost of net revenues and sales and marketing. These costs consist of general and administrative, fulfillment and shipping expense to the customer.
General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, occupancy expenses related to Sundry’s stores and to Sundry’s operations at its headquarters, including utilities, depreciation and amortization, and other costs related to the administration of its business.
Sundry’s fulfillment and shipping expenses include the cost to operate its warehouse including occupancy and labor costs to pick and pack customer orders and any return orders; packaging; and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse.
Sales and Marketing
Sundry’s sales and marketing expense primarily includes digital advertising; photo shoots for wholesale and direct-to-consumer communications, including email, social media and digital advertisements; and commission expenses associated with sales representatives.
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Results of Operations
The following table presents our results of operations for the six months ended June 30, 2022 and 2021:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net revenues | $ | 9,449,734 | $ | 13,765,815 | ||||
| Cost of net revenues | 4,948,290 | 8,410,619 | ||||||
| Gross profit | 4,501,444 | 5,355,196 | ||||||
| Operating expenses | 4,170,137 | 4,301,578 | ||||||
| Operating income | 331,307 | 1,053,618 | ||||||
| Other income (expenses) | (36,867 | ) | 652,104 | |||||
| Income before provision for income taxes | 294,440 | 1,705,722 | ||||||
| Provision for income taxes | (800 | ) | (800 | ) | ||||
| Net income | $ | 293,640 | $ | 1,704,922 | ||||
Net Revenues
Revenue decreased by $4.3 million for the six months ended June 30, 2022 compared to the same period in 2021. The decrease was due to less e-commerce and wholesales sales as consumers and companies were affected by macronemic conditions.
Gross Profit
Sundry’s gross profit decreased by $0.9 million for the six months ended June 30, 2022 compared to the same period in 2021. The decrease in gross profit was primarily due to the corresponding decreases in revenues, offset by better margins in 2022.
Sundry’s gross margin was 47.6% and 38.9% for the six months ended June 30, 2022 and 2021, respectively. The increase in margin was due to write-downs of inventory in the spring of 2021.
Operating Expenses
Sundry’s operating expenses decreased by $0.1 million for the six months ended June 30, 2022 compared to the same period in 2021. The decrease was primarily due to lower sales and marketing expenses, partially offset by increased personnel costs in general and administrative departments.
Other Income / Expenses
Other expenses consist of interest expense. In 2021, the Company recorded other income pertainting to PPP forgiveness.
Net Income
Sundry had a net income of $0.3 million in 2022 compared to a net income of $1.7 million in 2021. The decrease in net income was primarily due to lower gross profit and other income recorded in 2021.
Cash Flow Activities
The following table presents selected captions from Sundry’s statement of cash flows for the six months ended June 30, 2022 and 2021:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash provided by operating activities: | ||||||||
| Net income | $ | 293,640 | $ | 1,704,922 | ||||
| Non-cash adjustments | 27,000 | (653,742 | ) | |||||
| Change in operating assets and liabilities | (3,916 | ) | (59,207 | ) | ||||
| Net cash provided by operating activities | 316,724 | 991,973 | ||||||
| Net cash provided by (used in) investing activities | 18,982 | (5,000 | ) | |||||
| Net cash provided by (used in) financing activities | 272,700 | (734,363 | ) | |||||
| Net change in cash | $ | 608,406 | $ | 252,611 | ||||
Cash Flows Provided By Operating Activities
Sundry’s cash provided by operating activities was $0.3 million in 2022 compared to cash provided by $1.0 million in 2021. The decrease in net cash provided by operating activities was primarily driven by lower net income in 2022, partially offset by non-cash adjustments.
Cash Flows Provided By Investing Activities
In 2022, Sundry received proceeds funds from a deposit.
Cash Flows Provided by Financing Activities
Sundry’s cash provided by financing activities was $0.3 million in 2022, consisting of $1.0 million in related party advances partially offset by $0.5 million in related party repayments, $0.2 million factor repayments and $0.1 million in member distributions. Sundry’s cash used in financing activities was $0.7 million in 2021, consisting of $0.6 million in proceeds from loans, factor repayments of $0.2 million and distributions of $1.2 million.
Year Ended December 31, 2021 compared to Year Ended December 31, 2020
The following table presents Sundry’s results of operations for the year ended December 31, 2021 and 2020:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net revenues | $ | 22,800,825 | $ | 19,897,696 | ||||
| Cost of net revenues | 13,638,553 | 8,525,612 | ||||||
| Gross profit | 9,162,271 | 11,372,084 | ||||||
| Operating expenses | 8,657,442 | 7,625,335 | ||||||
| Operating income | 504,829 | 3,746,749 | ||||||
| Other income (expense) | 1,249,881 | (45,527 | ) | |||||
| Income before provision for income taxes | 1,754,710 | 3,701,222 | ||||||
| Provision for income taxes | 800 | 800 | ||||||
| Net income | $ | 1,753,911 | $ | 3,700,422 | ||||
Net Revenues
Revenue increased by $2.9 million for the year ended December 31, 2021 compared to 2020. The increase was due to due to recovered customer demand after COVID-19.
Gross Profit
Sundry’s gross profit decreased by $2.2 million for the year ended December 31, 2021 compared to 2020. The decrease in gross profit was primarily due to increased product and global shipping costs
Sundry’s gross margin was 40.2% and 57.2% for the years ended December 31, 2021 and 2020, respectively.
Operating Expenses
Sundry’s operating expenses increased by $1.4 million for the year ended December 31, 2021 compared to 2020. The increase was primarily due to increased headcount and personnel costs in all departments, including general and administrative and sales.
Other Expenses
Other expenses primarily consist of interest expense. In 2022, we recorded $1.3 million in other income pertaining to PPP forgiveness.
Net Loss
Sundry had net income of $1.8 million in 2021 compared to $3.7 million in 2022. The decrease of $1.9 million was primarily due to lower gross profit and increased general and administrative expenses, partially offset by other income in 2022.
Cash Flow Activities
The following table presents selected captions from Sundry’s statement of cash flows for the years ended December 31, 2021 and 2020:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by operating activities: | ||||||||
| Net income | $ | 1,753,911 | $ | 3,700,422 | ||||
| Non-cash adjustments | $ | (1,255,981 | ) | $ | 149,618 | |||
| Change in operating assets and liabilities | $ | 421,928 | $ | (1,880,989 | ) | |||
| Net cash provided by (used in) operating activities | $ | 919,859 | $ | 1,969,051 | ||||
| Net cash used in investing activities | $ | - | $ | (11,430 | ) | |||
| Net cash provided by (used in) financing activities | $ | (1,236,063 | ) | $ | (1,429,829 | ) | ||
| Net change in cash | $ | (316,204 | ) | $ | 527,792 | |||
Cash Flows Provided By Operating Activities
Sundry’s cash provided by operating activities was $0.9 million in 2021 compared to cash provided of $2.0 million in 2020. The decrease in net cash provided by operating activities was primarily driven by the lower net income and non-cash items, partially offset by cash provided by changes in operating assets and liabilities, partially offset by Sundry’s net loss in 2022.
Cash Flows Provided By Investing Activities
In 2020, Sundry purchased a nominal amount of property and equipment.
Cash Flows Provided by Financing Activities
Sundry’s cash used in financing activities was $1.2 million in 2021, consisting of $1.9 million in member distributions partially offset by loan proceeds of $0.4 million and factor advances of $0.1 million. Sundry’s cash used in financing activities was $1.4 million in 2020, consisting of $2.0 million in member distributions and factor repayments of $0.3 million, partially offset by loan proceeds of $0.8 million.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information presents the unaudited pro forma combined balance sheet and statement of operations based upon the combined historical financial statements of DBG and Sundry after giving effect to the business combinations and adjustments described in the accompanying notes.
The unaudited pro forma combined balance sheets of DBG and Sundry as of June 30, 2022 has been prepared to reflect the effects of the acquisition as if it occurred on June 30, 2022. The unaudited pro forma combined statements of operations for the six months ended June 30, 2022 combine the historical results and operations of DBG and Sundry giving effect to the transaction as if it occurred on January 1, 2022. The unaudited pro forma combined statements of operations for the year ended December 31, 2021 combine the historical results and operations of DBG, Harper & Jones, Stateside and Sundry giving effect to the transactions as if they occurred on January 1, 2021.
The unaudited pro forma combined financial information should be read in conjunction with the audited and unaudited historical financial statements of each of DBG, Harper & Jones, Stateside and Sundry and the notes thereto. Additional information about the basis of presentation of this information is provided in Note 2 below.
The unaudited pro forma combined financial information was prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma adjustments reflecting the transaction have been prepared in accordance with business combination accounting guidance as provided in Accounting Standards Codification Topic 805, Business Combinations and reflect the preliminary allocation of the purchase price to the acquired assets and liabilities based upon the preliminary estimate of fair values, using the assumptions set forth in the notes to the unaudited pro forma combined financial information.
The unaudited pro forma combined financial information is provided for informational purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the transaction had been completed as of the dates set forth above, nor is it indicative of the future results or financial position of the combined company. In connection with the pro forma financial information, DBG allocated the purchase price using its best estimates of fair value. Accordingly, the pro forma acquisition price adjustments are preliminary and subject to further adjustments as additional information becomes available and as additional analyses are performed. The unaudited pro forma combined financial information also does not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the transaction or any integration costs.
Furthermore, the unaudited pro forma combined statements of operations do not include certain nonrecurring charges and the related tax effects which result directly from the transaction as described in the notes to the unaudited pro forma combined financial information.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2022
| Pro Forma | Pro Forma | |||||||||||||||||||
| DBG | Sundry | Total | Adjustments | Combined | ||||||||||||||||
| Net revenues | $ | 7,171,411 | $ | 9,449,734 | $ | 16,621,145 | $ | - | $ | 16,621,145 | ||||||||||
| Cost of net revenues | 3,526,833 | 4,948,290 | 8,475,123 | - | 8,475,123 | |||||||||||||||
| Gross profit | 3,644,578 | 4,501,444 | 8,146,022 | - | 8,146,022 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| General and administrative | 9,601,467 | 1,853,295 | 11,454,762 | 2,408,227 | 13,862,989 | |||||||||||||||
| Sales and marketing | 2,745,863 | 556,910 | 3,302,773 | - | 3,302,773 | |||||||||||||||
| Distribution | 424,773 | 1,759,932 | 2,184,705 | - | 2,184,705 | |||||||||||||||
| Change in fair value of contingent consideration | 7,121,240 | - | 7,121,240 | - | 7,121,240 | |||||||||||||||
| Total operating expenses | 19,893,343 | 4,170,137 | 24,063,480 | 2,408,227 | 26,471,707 | |||||||||||||||
| Loss from operations | (16,248,765 | ) | 331,307 | (15,917,458 | ) | (2,408,227 | ) | (18,325,685 | ) | |||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest expense | (3,771,476 | ) | (36,867 | ) | (3,808,343 | ) | - | (3,808,343 | ) | |||||||||||
| Other non-operating income (expenses) | 2,653,375 | - | 2,653,375 | - | 2,653,375 | |||||||||||||||
| Total other income (expense), net | (1,118,101 | ) | (36,867 | ) | (1,154,968 | ) | - | (1,154,968 | ) | |||||||||||
| Income tax benefit (provision) | - | (800 | ) | (800 | ) | - | (800 | ) | ||||||||||||
| Net income (loss) | $ | (17,366,866 | ) | $ | 293,640 | $ | (17,073,226 | ) | $ | (2,408,227 | ) | $ | (19,481,453 | ) | ||||||
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 2021
| Pro Forma | Pro Forma | ||||||||||||||||||||||
| DBG | H&J | Stateside | Sundry | Total | Adjustments | Combined | |||||||||||||||||
| Net revenues | $ | 7,584,859 | $ | 980,261 | $ | 3,269,481 | $ | 22,800,825 | $ | 34,635,426 | $ | - | $ | 34,635,426 | |||||||||
| Cost of net revenues | 4,689,200 | 350,004 | 1,194,693 | 13,638,553 | 19,872,450 | - | 19,872,450 | ||||||||||||||||
| Gross profit | 2,895,659 | 630,257 | 2,074,788 | 9,162,271 | 14,762,976 | - | 14,762,976 | ||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| General and administrative | 17,779,903 | 410,891 | 1,147,168 | 3,201,811 | 22,539,773 | 6,197,028 | (a) | 28,736,800 | |||||||||||||||
| Sales and marketing | 3,810,583 | 349,338 | 514,742 | 4,374,667 | 9,049,330 | - | 9,049,330 | ||||||||||||||||
| Distribution | 489,371 | - | 115,286 | 1,080,964 | 1,685,621 | - | 1,685,621 | ||||||||||||||||
| Impairment of intangible assets | 3,400,000 | - | - | - | 3,400,000 | - | 3,400,000 | ||||||||||||||||
| Change in fair value of contingent consideration | 8,764,460 | - | - | - | 8,764,460 | - | 8,764,460 | ||||||||||||||||
| Total operating expenses | 34,244,317 | 760,229 | 1,777,195 | 8,657,442 | 45,439,184 | 6,197,028 | 51,636,212 | ||||||||||||||||
| Loss from operations | (31,348,658 | ) | (129,972 | ) | 297,593 | 504,829 | (30,676,207 | ) | (6,197,028 | ) | (36,873,235 | ) | |||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (3,663,921 | ) | (33,668 | ) | - | (70,018 | ) | (3,767,607 | ) | (1,344,000 | ) | (b) | (5,111,607 | ) | |||||||||
| Other non-operating income (expenses) | 1,554,502 | - | (12,494 | ) | 1,319,899 | 2,861,907 | (1,319,899 | ) | (c) | 1,542,008 | |||||||||||||
| Total other income (expense), net | (2,109,419 | ) | (33,668 | ) | (12,494 | ) | 1,249,881 | (905,699 | ) | (2,663,899 | ) | (3,569,598 | ) | ||||||||||
| Income tax benefit (provision) | 1,100,120 | - | - | (800 | ) | 1,099,320 | - | 1,099,320 | |||||||||||||||
| Net income (loss) | $ | (32,357,957 | ) | $ | (163,640 | ) | $ | 285,099 | $ | 1,753,911 | $ | (30,482,587 | ) | $ | (8,860,927 | ) | $ | (39,343,514 | ) | ||||
UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 2022
| Pro Forma | Pro Forma | |||||||||||||||||||
| DBG | Sundry | Total | Adjustments | Combined | ||||||||||||||||
| ASSETS | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 802,724 | $ | 1,025,641 | $ | 1,828,365 | $ | - | $ | 1,828,365 | ||||||||||
| Accounts receivable, net | 190,056 | 69,773 | 259,829 | - | 259,829 | |||||||||||||||
| Due from factor, net | 929,989 | 552,367 | 1,482,356 | - | 1,482,356 | |||||||||||||||
| Inventory | 2,883,613 | 4,999,496 | 7,883,109 | - | 7,883,109 | |||||||||||||||
| Prepaid expenses and other current assets | 813,681 | 242,982 | 1,056,663 | - | 1,056,663 | |||||||||||||||
| Total current assets | 5,620,063 | 6,890,259 | 12,510,322 | - | 12,510,322 | |||||||||||||||
| Deferred offering costs | 367,696 | - | 367,696 | - | 367,696 | |||||||||||||||
| Property, equipment and software, net | 65,235 | 126,102 | 191,337 | - | 191,337 | |||||||||||||||
| Goodwill | 18,264,822 | - | 18,264,822 | 3,379,691 | (b) | 21,644,513 | ||||||||||||||
| Intangible assets, net | 11,765,688 | - | 11,765,688 | 21,454,063 | (a),(b) | 33,219,751 | ||||||||||||||
| Deposits | 137,794 | 9,612 | 147,406 | - | 147,406 | |||||||||||||||
| Right of use asset | 201,681 | 201,681 | 201,681 | |||||||||||||||||
| Total assets | $ | 36,422,979 | $ | 7,025,973 | $ | 43,448,952 | $ | 24,833,754 | $ | 68,282,706 | ||||||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable | $ | 7,003,333 | $ | 1,382,180 | $ | 8,385,512 | $ | - | $ | 8,385,512 | ||||||||||
| Accrued expenses and other liabilities | 3,698,717 | 390,774 | 4,089,491 | - | 4,089,491 | |||||||||||||||
| Deferred revenue | 221,363 | - | 221,363 | - | 221,363 | |||||||||||||||
| Due to related parties | 250,598 | 495,000 | 745,598 | - | 745,598 | |||||||||||||||
| Contingent consideration liability | 19,300,716 | - | 19,300,716 | - | 19,300,716 | |||||||||||||||
| Convertible notes, current | 100,000 | - | 100,000 | - | 100,000 | |||||||||||||||
| Accrued interest payable | 1,801,303 | - | 1,801,303 | - | 1,801,303 | |||||||||||||||
| Note payable - related party | 154,489 | - | 154,489 | - | 154,489 | |||||||||||||||
| Venture debt, net of discount | 6,251,755 | - | 6,251,755 | - | 6,251,755 | |||||||||||||||
| Loan payable, current | 1,489,335 | - | 1,489,335 | - | 1,489,335 | |||||||||||||||
| Promissory note payable, current | 3,500,000 | - | 3,500,000 | - | 3,500,000 | |||||||||||||||
| Right of use liability, current portion | 201,681 | 201,681 | - | 201,681 | ||||||||||||||||
| Total current liabilities | 43,973,290 | 2,267,954 | 46,241,244 | - | 46,241,244 | |||||||||||||||
| Convertible note payable, net | 5,986,068 | - | 5,986,068 | - | 5,986,068 | |||||||||||||||
| Loan payable | 298,900 | - | 298,900 | - | 298,900 | |||||||||||||||
| Derivative liability | 1,044,939 | - | 1,044,939 | - | 1,044,939 | |||||||||||||||
| Warrant liability | - | - | - | - | - | |||||||||||||||
| Right of use liability | - | - | - | - | ||||||||||||||||
| Total liabilities | 51,303,197 | 2,267,954 | 53,571,151 | - | 53,571,151 | |||||||||||||||
| Stockholders' equity (deficit): | ||||||||||||||||||||
| Common stock | 5,287 | - | 5,287 | - | 5,287 | |||||||||||||||
| Additional paid-in capital | 68,185,315 | - | 68,185,315 | 32,000,000 | (b) | 100,185,315 | ||||||||||||||
| Members' equity | - | 4,758,019 | 4,758,019 | (4,758,019 | )(b) | - | ||||||||||||||
| Accumulated deficit | (83,070,820 | ) | - | (83,070,820 | ) | (2,408,227 | ) | (85,479,047 | ) | |||||||||||
| Total stockholders' equity (deficit) | (14,880,218 | ) | 4,758,019 | (10,122,199 | ) | 24,833,754 | 14,711,555 | |||||||||||||
| Total liabilities and stockholders' equity (deficit) | $ | 36,422,979 | $ | 7,025,973 | $ | 43,448,952 | $ | 24,833,754 | $ | 68,282,706 | ||||||||||
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS
| 1. | Description of Transactions |
On February 12, 2020, the Company 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.
Sundry
On June 17, 2022, Digital Brands Group, Inc., a Delaware corporation (the “Company” or “DBG”), entered into an Amended and Restated Membership Interest Purchase Agreement (the “Agreement”) with Moise Emquies, George Levy, Matthieu Leblan and Carol Ann Emquies (“Sellers”), Sunnyside, LLC, a California limited liability company (“Sundry”), and George Levy as the Sellers’ representative (the “Sellers’ Representative”), pursuant to which the Company will acquire all of the issued and outstanding membership interests of Sundry (such transaction, the “Acquisition”). Sellers and DBG are sometimes collectively referred to herein as the “Parties” and individually as a “Party.”
Pursuant to the Agreement, Sellers, as the holders of all of the outstanding membership interests of Sundry, will exchange all of such membership interests for (i) $5 million in cash, which will be paid at Closing (as defined below), of which $2.5 million is paid to each of George Levy and Matthieu Leblan; (ii) at the Sellers’ option at Closing, either (a) $7 million dollars paid in the Company’s common stock, with a par value of $0.0001 per share (the “Buyer Shares”), at $0.19 per share, which is the per share closing price of the Buyer Shares on Nasdaq on June 17, 2022 (the “Issuance Price”); or (b) $7 million in cash, to each of the Sellers, Jenny Murphy and Elodie Crichi pro rata in accordance to the percentage set forth in the Agreement; and (iii) $20 million paid in Buyer Shares at a per share price equal to the Issuance Price issued to each of the Sellers, Jenny Murphy and Elodie Crichi pro rata in accordance to the percentage set forth in the Agreement.
Subject to the terms of the Agreement, the Acquisition shall close (the “Closing”) on a date no later than two (2) Business Days after the conditions to Closing set forth in the Agreement has been satisfied or waived. At Closing, DBG and each of the Sellers will enter a registration rights agreement to provide registration rights with respect to the Buyer Shares issuable pursuant to the Agreement, and an escrow agreement, in forms agreed to by the parties.
| 2. | Basis of Presentation |
The historical financial information has been adjusted to give pro forma effect to events that are directly attributable to the transaction, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined balance sheets and unaudited pro forma combined statements of operations, expected to have a continuing impact on the combined results.
The transactions were accounted for as a business acquisition whereas Harper & Jones, Stateside and Sundry are the accounting acquirees and DBG is the accounting acquirer.
| 3. | Consideration Transferred - Sundry |
| Cash | $ | 12,000,000 | ||
| Common stock | 20,000,000 | |||
| Purchase price consideration | $ | 32,000,000 |
For the purpose of the pro forma consideration, the $7.0 million Seller option was included as cash consideration. As a result of the acquisition, DBG recorded pro forma intangible assets of $23,862,890,including $14,449,360 attributable to brand name and $9,412,930 attributable to customer relationships. DBG recorded $3,716,276 in pro forma goodwill representing the remaining excess purchase price of the fair value of net assets acquired and liabilities assumed.
The following table shows the preliminary allocation of the purchase price for Sundry to the acquired net identifiable assets and pro forma goodwill:
| Assets acquired | $ | 7,025,973 | ||
| Goodwill | 3,379,691 | |||
| Intangible assets | 23,862,290 | |||
| Liabilities assumed | (2,267,954) | |||
| Purchase price consideration | $ | 32,000,000 |
| (a) | To recognize depreciation on the acquired entities’ property and equipment, and amortization on the intangible assets recorded as a result of the acquisition. |
| (b) | To record the purchase price allocation of the Sundry pro forma acquisition, including the recognition of goodwill and intangible assets, purchase price consideration by DBG, and elimination of Sundry’s equity. |
| (c) | To eliminate the Sundry PPP forgiveness. |
| Item 9.01 | Financial Statements and Exhibits. |
(d) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| DIGITAL BRANDS GROUP, INC. | ||
| Date: August 31, 2022. | ||
| By: | /s/ John Hilburn Davis IV | |
| Name: | John Hilburn Davis IV | |
| Title: | President and Chief Executive Officer | |