Digital Brands Group, Inc.

Greetings, and welcome to Digital Brands Group Incorporated's first quarter 2021 earnings conference call. At this time, our participants are on a listen-only mode. A brief question and answer session will follow the presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Reid Galman. Please proceed, sir.

Thank you. Good day, everyone, and welcome to the Digital Brands Group first quarter fiscal year 2021 earnings conference call webcast. As mentioned, all participants will be in listen-only mode. This earnings call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding, among other things, the company's business strategy, and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future developments and actual results could differ materially from those set forth and contemplated by the underlying forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. On the conference call today are Hill Davis, Chief Executive Officer, Reid Yeoman, Chief Financial Officer, and Laura Dowling, our Chief Marketing Officer. I'll now turn it over to Hill Davis, our Chief Executive Officer, to introduce the call. Thank you.

Welcome, everyone, and good morning. Our first quarter 2021 results are a reflection of a combination of factors, which are limited cash, limited inventory, minimal marketing spend, and the continued effects of COVID-19 impact on Bailey 44. We expect to see improved operating results in the second quarter, which is done in almost three days, and significantly improved operating results in the third quarter and fourth quarter of 2021, now that we have sufficient cash and inventory to support expected levels of operations. Since our IPO this May, which bolstered our balance sheet with cash for working capital, we have been able to, one, ship inventory for distilled, which started to arrive at our warehouse in late May, with the majority arriving this mid-July to mid-September. Two, ship Bailey 44 product to wholesale accounts starting mid-May, with a significant acceleration in wholesale booking orders for this fall that are in line with pre-pandemic wholesale levels. And let me repeat that. Ship Bailey 44 product to wholesale accounts starting mid-May with a significant acceleration in wholesale booking orders for this fall that are in line with pre-pandemic wholesale levels. And three, develop a marketing and advertising plan, including an Amazon marketing strategy, which we are rolling out starting mid-July with the majority of the spend starting this fall. Additionally, we closed our acquisition of Harper and Jones as part of the IPO. We were not able to include operating results of Harper and Jones in our Q1 earnings as it was not acquired at that point. For the first quarter of 2021, Harper and Jones had $903,000 in revenue and $60,000 in EBITDA. Finally, we announced the nine binding LOI to acquire stateside, which if the acquisition is consummated, will be accretive to revenue and operating results. The stateside acquisition and our goal to acquire additional accretive acquisitions, as noted in our S-1, would not have been possible if we had not gone public. I'm going to turn it over to Reed Joven, our CFO, to report the first quarter results.

Thank you, Hill. Revenue decreased by $2.2 million to approximately $0.4 million. for the three months ended March 31, 2021, compared to $2.6 million in the corresponding fiscal period in 2020. The decrease was primarily due to the effects of COVID-19 on the operations of Bailey in 2021. The design and release of new collections was delayed due to our lack of sufficient working capital. We plan on designing and releasing new collections now that we have sufficient funding after the IPO. Our gross profit decreased by 1.6 million for the three months ended March 31st, 2021 to 1.4 million for the corresponding fiscal period in 2020. The decrease in gross margin was primarily attributable to the lower revenues in the three months ended March 31st, 2021. Our gross margin was 50.8% for the three months ended March 31st, 2021, compared to 52.5% for the three months ended March 31st, 2020. Apologize. It's down. It's negative 50.8%. Apologies. The decrease in gross margin was due to our discounting and liquidation measures by both Distilled and Bailey 44. to sell aged inventory in the three months ended March 31st, 2021. We made markdowns to net realizable value for certain inventory that liquidated and sold in the second quarter. Our operating expenses decreased 5.4 million for the three months ended March 31st, 2021 to 2.1 million compared to 2.9 million for the corresponding fiscal period in 2020. The decrease in operating expenses was primarily driven by cost reductions after the Bailey acquisition and COVID-19, such as eliminating the DBG office and moving it into the Bailey 44 office, eliminating DBG's third-party fulfillment center and moving it into Bailey 44's fulfillment operations, and layoffs due to overlapping roles and responsibilities. We expect operating increases operating expenses to increase in total dollars and as a percentage of revenues as our revenue base increases. Other expenses increased by $0.4 million to $0.7 million in the three months ended March 31st, 2021, compared to $0.3 million in the corresponding fiscal period in 2020. The increase in the other expenses was primarily due to the interest expense from the Bailey 44 acquisition and an increase in the DBG interest expense year over year. Our net loss increased by 1.1 million to a loss of 3 million for the three months ended March 31st, 2021, compared to a loss of 1.9 million for the corresponding fiscal period in 2020, primarily due to lower gross profit, partially offset by a decrease in our operating expenses. In addition to first quarter results, we wish to make you aware of the following. Second quarter operating results are expected to be adversely impacted by those factors which impacted the first quarter operating results. However, the adverse impact will be lesser in the second quarter due to the Harper and Jones contribution, Bailey 44 wholesale shipments for May and June, and some inventory levels starting in May for distilled. Now, some second quarter 2021 updates. Bailey 44 started shipping wholesale orders in May, which is the first time in 15 months that Bailey 44 has shipped wholesale orders. Bailey 44 fall 2021 wholesale bookings are in line with pre-pandemic revenue levels. Distilled received a men's denim inventory shipment in May with more men's denim inventory landing in July. Distilled will receive women's denim inventory shipment in July. Distilled will also receive men's and women's t-shirt inventory in July. With that, I'm going to turn it back over to Hill Davis, our CEO, to close the call.

Thanks, Reid. I cannot stress enough that the first quarter, and to some extent the second quarter, is really the tale of two companies, one pre-IPO with limited cash, inventory and marketing dollars and one post IPO with a stronger cash position, fully stocked inventory and a meaningful marketing budget and strategy to drive revenue and earnings. Importantly, we expect the second quarter to be better than the first quarter. And with the bulk of the post IPO benefit coming in the third quarter and going forward as inventory is 100% in stock, the marketing strategy is in full force And the Bailey wholesale shipments are back to pre-pandemic levels as we are booking October and November wholesale orders currently. So we have a good insight into what those look like. We look forward to driving short and long-term shareholder value as we move through each quarter in 2021. We're excited to have completed our IPO in May. We now have the cash and working capital to execute our growth plan that is driven by both organic revenue and earnings growth with accretive acquisitions. As you can see, we have already completed the acquisition and announced another non-binding acquisition and plan to continue to make additional acquisitions this fiscal year as noted in our S-1. Additionally, we have put our worst quarter behind us due to a combination of factors, limited cash, limited inventory, minimum marketing spend, and the continued effects of COVID-19's impact on Bailey 44. We expect to see improved operating results in the second quarter and significantly improved results in the third and fourth quarter of 2021, now that we have sufficient cash and inventory to support expected levels of operations. And several of the second half of the year drivers are already in effect, such as our October and November Bailey 44 wholesale bookings. Let me repeat that. Several of the second half of the year drivers are already in fact, such as our October and November Bailey 44 wholesale bookings are in the process of being finalized, such as finished inventory that is waiting to be shipped throughout the first two weeks of July. Finally, we are now ready to launch our marketing strategy, which we have not had the ability to pursue for over a year. We expect this to drive significant upside for all our brands in the second half of the year. This concludes our first quarter 2021 earnings call. Thanks, everyone, for the time, and I'll turn it over to Latonya for questions, please. Thank you so much.

Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to ask a question at this time. One moment while we poll for questions. Once again, that's star one at this time. Mr. Davis, there are no audio questions at this time.

Great. Thank you, LaTanya. And I appreciate everyone for their time. And as we said, Q1 was the look-back quarter, and Q2, Q3, and Q4 is the look-ahead quarter. And we're June 28th in Q2, and we're already booking wholesale for October and November for Bailey's. So we have a really good indication of the trends in the current quarter as well as the future quarters, and we're very excited about where this business is going. So thank you, everyone, for their time, and have a great day. Thank you, LaTanya.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation, and have a great day.