Exhibit 99.1
SUNNYSIDE, LLC, dba Sundry
UNAUDITED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2022 AND 2021
Sunnyside, LLC, dba Sundry
Index to the Financial Statements
As of June 30, 2022
| Unaudited Balance Sheets | 1 | |
| Unaudited Statements of Operations | 2 | |
| Unaudited Statements of Members’ Equity | 3 | |
| Unaudited Statements of Cash Flows | 4 | |
| Notes to Unaudited Financial Statements | 5 |
Sunnyside, LLC, dba Sundry
BALANCE SHEETS
UNAUDITED
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 1,025,641 | $ | 417,235 | ||||
| Accounts receivable, net of allowance | 69,773 | 124,342 | ||||||
| Due from factor | 552,367 | 590,022 | ||||||
| Inventory | 4,999,496 | 4,917,128 | ||||||
| Prepaid expenses and other current assets | 242,982 | 219,902 | ||||||
| Total current assets | 6,890,259 | 6,268,628 | ||||||
| Fixed assets, net | 126,102 | 161,954 | ||||||
| Deposits | 9,612 | 19,742 | ||||||
| Total assets | $ | 7,025,973 | $ | 6,450,324 | ||||
| LIABILITIES AND MEMBERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,382,180 | $ | 1,142,671 | ||||
| Accrued liabilities | 390,774 | 773,274 | ||||||
| Loan payable, related party | 495,000 | - | ||||||
| Total liabilities | 2,267,954 | 1,915,945 | ||||||
| Commitments and contingencies (Note 7) | ||||||||
| Members' equity | 4,758,019 | 4,534,379 | ||||||
| Total members' equity | 4,758,019 | 4,534,379 | ||||||
| Total liabilities and members' equity | $ | 7,025,973 | $ | 6,450,324 | ||||
The accompanying notes are an integral part of these financial statements.
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Sunnyside, LLC, dba Sundry
STATEMENTS OF OPERATIONS
UNAUDITED
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | ||||||
| Net revenues | $ | 9,449,734 | $ | 13,765,815 | ||||
| Cost of goods sold | 4,948,290 | 8,410,619 | ||||||
| Gross profit | 4,501,444 | 5,355,196 | ||||||
| Operating expenses: | ||||||||
| General and administrative | 1,853,295 | 1,551,030 | ||||||
| Distribution | 556,910 | 570,665 | ||||||
| Sales and marketing | 1,759,932 | 2,179,883 | ||||||
| Total operating expenses | 4,170,137 | 4,301,578 | ||||||
| Income from operations | 331,307 | 1,053,618 | ||||||
| Other income (expense), net | ||||||||
| Other income | - | 689,171 | ||||||
| Interest expense | (36,867 | ) | (37,067 | ) | ||||
| Total other income (expense), net | (36,867 | ) | 652,104 | |||||
| Provision for income taxes | 800 | 800 | ||||||
| Net income | $ | 293,640 | $ | 1,704,922 | ||||
The accompanying notes are an integral part of these financial statements.
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Sunnyside, LLC, dba Sundry
STATEMENTS OF MEMBERS’ EQUITY
UNAUDITED
| Members' | ||||
| Equity | ||||
| Balances at December 31, 2020 | $ | 4,630,468 | ||
| Distributions | (1,180,000 | ) | ||
| Net income | 1,704,922 | |||
| Balances at June 30, 2021 | $ | 5,155,390 | ||
| Balances at December 31, 2021 | $ | 4,534,379 | ||
| Distributions | (70,000 | ) | ||
| Net income | 293,640 | |||
| Balances at June 30, 2022 | $ | 4,758,019 | ||
The accompanying notes are an integral part of these financial statements.
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Sunnyside, LLC, dba Sundry
STATEMENTS OF CASH FLOWS
UNAUDITED
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 293,640 | $ | 1,704,922 | ||||
| Adjustments to reconcile net income to net cash provided by | ||||||||
| operating activities: | ||||||||
| Depreciation and amortization | 27,000 | 28,800 | ||||||
| Bad debt | - | 6,629 | ||||||
| Other income - PPP forgiveness | - | (689,171 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 54,569 | (260,403 | ) | |||||
| Due from factor | 189,953 | 448,791 | ||||||
| Inventory | (82,367 | ) | 854,796 | |||||
| Prepaid expenses and other current assets | (23,080 | ) | 6,673 | |||||
| Accounts payable | 239,509 | (453,122 | ) | |||||
| Accrued liabilities | (382,500 | ) | (655,942 | ) | ||||
| Net cash provided by operating activities | 316,724 | 991,973 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | - | (5,000 | ) | |||||
| Proceeds from sale of property and equipment | 8,852 | - | ||||||
| Deposits | 10,130 | - | ||||||
| Net cash provided by (used in) investing activities | 18,982 | (5,000 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from loans payable | - | 630,637 | ||||||
| Proceeds from loan payable, related party | 995,000 | - | ||||||
| Repayments to loan payable, related party | (500,000 | ) | - | |||||
| Factor advances (repayments), net | (152,300 | ) | (185,000 | ) | ||||
| Distributions | (70,000 | ) | (1,180,000 | ) | ||||
| Net cash provided by (used in) financing activities | 272,700 | (734,363 | ) | |||||
| Net change in cash and cash equivalents | 608,406 | 252,611 | ||||||
| Cash at beginning of period | 417,235 | 733,440 | ||||||
| Cash at end of period | $ | 1,025,641 | $ | 986,051 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | 800 | $ | 800 | ||||
| Cash paid for interest | $ | 36,867 | $ | 37,067 | ||||
The accompanying notes are an integral part of these financial statements.
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Sunnyside, LLC, dba Sundry
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS
Sunnyside, LLC, dba Sundry, (the “Company”) was formed on January 1, 2014, in the State of California.
The Company is headquartered in Los Angeles and its principal business activity is the design and manufacture of coastal casual women’s apparel. The Company sells predominantly to department and specialty stores located throughout the United States of America and internationally. The Company also sells directly to the consumer through its website.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Unaudited Interim Financial Information
The accompanying financial statements for the six months ended June 30, 2022 and the related footnote disclosures are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in our opinion, reflect all adjustments, consisting of only normal recurring adjustments, necessary to present fairly our financial position as of June 30, 2022 and results of operations, and cash flows for the six months ended June 30, 2022 and 2021. The results for the six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other periods. These unaudited financial statements should be read in conjuncture with the annual financial statements filed in the Digital Brands Group, Inc. prospectus on Form 424B4 on May 9, 2022.
Use of Estimates
Preparation of the financial statements in conformity with U.S. GAAP requires us to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could ultimately differ from these estimates. It is reasonably possible that changes in estimates may occur in the near term.
Risks and Uncertainties
On January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. While the majority of pandemic related restrictions have been lifted, the Company expects to continue to have periodic issues in 2022 and potentially beyond, that may be a result of lingering pandemic related issues, including but not limited to: supply chain delays, human capital hiring and retention, and remaining restrictions in geographical locations where we source products and services from.
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Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect our assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Fair-value estimates discussed herein are based upon certain market assumptions and pertinent information available to us as of June 30, 2022 and December 31, 2021. Fair values of the Company’s financial instruments were assumed to approximate carrying values because of the instruments’ short-term nature.
Cash
The Company maintains its cash in various commercial banks in the United States (“U.S.”). Accounts at U.S. banks are insured by the Federal Deposit Insurance Corporation up to $250,000. While the Company's accounts at these institutions, at times, may exceed the federally insured limits, management believes that the risk of loss is not significant and the Company has not experienced any losses in such accounts to date.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and are non-interest-bearing. An allowance for doubtful accounts is maintained based on the length of time receivables are past due, the status of a customers’ financial position, and other factors. As of June 30, 2022 and December 31, 2021, there was an allowance for doubtful accounts of $19,000.
Inventory
Inventory consists of raw materials purchased from the Company’s suppliers, work in progress and finished goods. Inventory is valued at the lower of first-in, first-out, cost, or net realizable value. As of June 30, 2022 and December 31, 2021, there was an allowance for obsolescence of $100,000.
Fixed Assets, Net
Fixed assets are stated at cost less accumulated depreciation. The Company’s fixed assets are depreciated using the straight-line method over the estimated useful life of three (3) to seven (7) years. Leasehold improvements are depreciated over the lesser of the term of the respective lease or estimated useful economic life. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations.
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Impairment of Long-Lived Assets
The Company reviews its long-lived assets in accordance with Accounting Standards Codification (“ASC”) 360-10-35, Impairment or Disposal of Long-Lived Assets. Under that directive, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Such group is tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such factors and circumstances exist, the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives are compared against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. For the six months ended June 30, 2022 and 2021, there were no impairment charges.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 - Revenue from Contracts with Customers (ASC 606). The Company determines revenue recognition through the following steps:
| • | Identification of a contract with a customer; |
| • | Identification of the performance obligations in the contract; |
| • | Determination of the transaction price; |
| • | Allocation of the transaction price to the performance obligations in the contract; and |
| • | Recognition of revenue when or as the performance obligations are satisfied. |
Revenue is recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. As a practical expedient, the Company does not adjust the transaction price for the effects of a significant financing component if, at contract inception, the period between customer payment and the transfer of goods or services is expected to be one year or less.
In accordance with ASC 606, the Company recognizes revenue via the sale of the Company’s merchandise to its customers. Sales contracts (purchase orders) generally have a single performance obligation, which is satisfied upon shipment of merchandise at a point in time. Revenue is measured based on the consideration stated on an invoice, net of estimated returns, chargebacks, and allowances for other deductions based upon management’s estimates and the Company’s historical experience. The Company accepts product returns from customers in line with the Company's return policy, with each return depending on the underlying reason for and timing of the returned merchandise.
Wholesale revenues are recognized upon shipment of product to the customer. Revenues are recorded, net of expected returns, discounts and allowances. The Company reviews and refines these estimates using historical trends, seasonal results and current economic and market conditions.
E-commerce revenues of products ordered through the Company’s website are recognized upon shipment to the customers. E-commerce revenues are also reduced by expected returns and discounts.
The Company evaluates the allowance for sales returns and allowances based on historical percentages, utilizing a multiple-month lookback period. As part of its evaluation, the Company considers actual returns and allowances to date that are in process and its actual sales within the past months that may result in returns and allowances in the future. The allowance for sales returns is recorded within accrued expenses and amounted to approximately $8,600 and $73,000 at June 30, 2022 and December 31, 2021, respectively. Under ASC 606, the Company also records an asset on the balance sheet within prepaid expenses and other current assets for the cost of the estimated returns of inventory, which amounted to approximately $4,300 and $30,000 at June 30, 2022 and December 31, 2021, respectively.
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Utilizing the practical expedient provided for under ASC 606, the Company has elected to expense sales commissions related to product sales as incurred as the amortization period is generally one year or less for the time between customer purchase and utilization. These fees are recorded within sales and marketing expenses on the statement of operations.
Cost of Goods Sold
Cost of goods sold consist of the costs of inventory sold and inbound freight. The Company includes outbound freight associated with shipping goods to customers as a component of distribution expenses as noted below.
Shipping and Handling Fees and Costs
The Company includes shipping and handling fees billed to customers within revenues. The costs associated with shipping goods to customers are recorded within distribution expenses and amounted to approximately $350,000 and $381,000 for the six months ended June 30, 2022 and 2021, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising costs expensed were approximately $237,000 and $594,000 for the six months ended June 30, 2022 and 2021, respectively.
Income Taxes
The Company is a limited liability company (LLC) classified as a partnership for federal income tax purposes, which provides for profits and losses to be reported at the individual member level for income tax purposes. The Company pays the necessary amount of distributions in order to satisfy the member’s estimated personal income tax liabilities arising from the Company’s profits. The state of California imposes an annual fee on the LLC based on the level of gross revenue of the LLC. As of December 31, 2021 and 2020, the Company does not have any entity-level uncertain tax positions. The Company files income tax returns in the U.S. federal and California state jurisdictions. Generally, the Company is subject to examination by U.S. federal (or state and local) income tax authorities for three to four years from the filing of a tax return.
Concentration of Credit Risk
Concentrations — The Company had one customer which accounted for 52% of accounts receivable as June 30, 2022. During the six months ended June 30, 2022, one customer accounted for 27% of the Company’s revenues.
Suppliers — The Company relies on a small number of vendors for raw materials and inventory purchases. Management believes that the loss of one or more of these vendors would have a material impact on the Company’s financial position, results of operations and cash flows. Purchases from two suppliers amounted to approximately 26% of total purchases for the six months ended June 30, 2022. The Company had two suppliers which accounted for 47% of accounts payable as of June 30, 2022.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability, measured on a discounted basis, the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. A modified retrospective transition approach is required for capital and operating leases existing at the date of adoption, with certain practical expedients available. The Company adopted the new guidance on January 1, 2022, but did not have any impact on its financial statements as the Company had no applicable leases.
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. Several amendments to this new guidance have also been issued by the FASB between 2016 and 2020. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. The Company is evaluating the impact of this guidance, which is effective for the Company beginning on January 1, 2023, although early adoption is permitted.
NOTE 3 - DUE FROM FACTOR
Pursuant to the terms of a continuing agreement between the Company and a factor, the Company sells a significant portion of its trade accounts receivable to a factor on a pre-approved, non-recourse basis. The price at which the accounts are sold is the invoice amount reduced by the factor commission and all selling discounts. For accounts sold to the factor without recourse, the factor is responsible for collection, assumes all credit risk and obtains all of the rights and remedies against the Company’s customers. For such accounts, payment is due from the factor upon the earlier of the payment of the receivable to the factor by the customer, or the maturity of the receivable. Certain receivables are subject to recourse in the event of non-payment by the customer.
The Company may request advances prior to the collection of accounts receivable. Advances are granted at the sole discretion of the factor and are payable upon demand. The factor charges interest on advances at the higher of the prime rate plus 2.00% or 4.00% per annum. The factoring agreement is collateralized by substantially all of the Company’s assets.
Due from factor consists of the following:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Outstanding receivables | ||||||||
| Without recourse | $ | 1,696,907 | $ | 1,886,591 | ||||
| With recourse | - | 11,000 | ||||||
| 1,696,907 | 1,897,591 | |||||||
| Advances | (1,057,000 | ) | (1,209,300 | ) | ||||
| Credits due customers | (87,540 | ) | (98,269 | ) | ||||
| Due from factor | $ | 552,367 | $ | 590,022 | ||||
NOTE 4 — INVENTORY
The Company had inventories consisting of the following:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | 1,775,982 | $ | 1,746,722 | ||||
| Work in progress | 1,984,240 | 1,951,549 | ||||||
| Finished goods | 1,239,274 | 1,218,857 | ||||||
| Inventory | $ | 4,999,496 | $ | 4,917,128 | ||||
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NOTE 5 — FIXED ASSETS, NET
Fixed assets, net, are comprised of the following:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Leasehold improvements and showrooms | $ | 198,658 | $ | 198,658 | ||||
| Furniture and equipment | 174,006 | 183,005 | ||||||
| Automobiles | 34,220 | 34,072 | ||||||
| 406,883 | 415,735 | |||||||
| Less: accumulated depreciation and amortization | (280,781 | ) | (253,781 | ) | ||||
| Fixed assets, net | $ | 126,102 | $ | 161,954 | ||||
Depreciation and amortization expense was $27,000 and $28,800 for the six months ended June 30, 2022 and 2021, respectively.
NOTE 6 — DEBT
On February 23, 2021, the Company received a second draw PPP loan for approximately $631,000. The loan bore interest at 1% per annum and was to be repaid in full no later than five years from the disbursement date. The monthly payments were to be an amount equal to the amount necessary to fully amortize the then-outstanding principal balance at the specified interest rate and continue through maturity, if required. The second draw PPP was subject to the same forgiveness provisions as the first loan. In December 2021, the Company received full forgiveness of the PPP loan.
See Note 9 for related party loan.
NOTE 7 — COMMITMENTS AND CONTINGENCIES
Litigation
The Company is not currently involved with, and does not know of any, pending or threatened litigation against the Company or any of its officers.
Leases
The Company leases its office and showroom facilities in Los Angeles, California. The leases expire at various dates through April 2022 with base rents ranging from $4,000 to $15,000. One of the lease agreements is guaranteed by a member of the Company. As of June 30, 2022, all leases are month-to-month and there are no future commitments.
Total rent expense for the six months ended June 30, 2022 and 2021 amounted to approximately $176,000 and $118,000, respectively.
NOTE 8 — MEMBERS’ EQUITY
During the six months ended June 30, 2022 and 2021, member distributions totaled $70,000 and $1,180,000, respectively.
The debts, obligations, and liabilities of the Company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the Company, and no member of the Company is obligated personally for any such debt, obligation, or liability.
NOTE 9 — RELATED PARTY TRANSACATIONS
During the six months ended June 30, 2022 two members advanced the Company an aggregate of $995,000, of which $500,000 was repaid and $495,000 remained outstanding as of June 30, 2022. The loas are unsecured, non-interest bearing, and are due on demand.
10
During the six months ended June 30, 2022, the Company paid $255,043 to a vendor that is owned by a Member of the Company for inventory production.
NOTE 10 — SUBSEQUENT EVENTS
The Company has evaluated subsequent events that occurred through August 28, 2022, the issuance date of these financial statements.
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