Digital Brands Group, Inc.

Greetings and welcome to the Digital Brand Groups, Inc. Third Quarter 2021 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Hill Davis, Chief Executive Officer at

Good morning. Thank you, Donna. Good day and good morning to everyone, and welcome to the Digital Brands Group third quarter fiscal year 2021 earnings conference call and webcast. All participants will be in listen-only mode. We will open the call up for question and answer at the end of the listen-only period. 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 or underlying the forward-looking statements. A lot of these risks and uncertainties, there can be no assurances that the forward-looking information will prove to be accurate. The company will be hosting a Q&A session at the conclusion of these remarks. Please note that this event is being recorded and will be available. And with that, that is the legal portion of our earnings script. So what I'd like to do is I'm going to start with the third quarter results, and then we'll move to discuss our trends, our 2022 guidance, and acquisitions. So with that, for our Q3 results, net revenue increased 1 million to 2.2 million versus 1.2 million in the comparable period a year ago. This is an increase of 75% year over year. Importantly, we experienced an increase in revenue across all our brands. Please keep in mind that we only benefited from one month of stateside revenue due to the timing of the acquisition on August 31st. Our Q3 revenues would have been meaningfully higher if all three months had been included. We also experienced a three week delay on most product deliveries through the backlog and air shipments associated with other brands shifting from their shipments from sea cargo to air cargo due to the port backlog. This meant some product landed in October versus September, which is Q4 versus Q3. To be very clear and upfront, all our product has landed across all our brands, so we do not have any risk around any more delays for fall or holiday. but it did have an impact in timing of landing in Q3, i.e. September, versus Q4, i.e. October. Our gross profit margin increased 96% year-over-year to 55.9% from a negative 40.1% in the comparable period a year ago. We experienced an increase in gross margin across all our brands. And we also expect our gross margins as a percentage of revenue to be higher in Q4 and even higher than that in fiscal year 2022. So we continue to expect this gross margin expansion in Q4 and in the next year. Our gross profit increased by 1.7 million for the three months ended September 30th, 2021 to a positive 1.2 million from a negative 0.5 million for the corresponding fiscal period in 2020. We expect our gross margin dollars to increase in Q4 due to higher revenues and higher gross margin profit, which will create additional dollars to cover our fixed cost of business versus our previous quarters this year. I think this is really important because this is about getting leverage on our fixed cost of business. We cannot stress enough that we are finally getting this leverage due to the higher revenue, due to higher gross margin percentage, and also due to our shared expense model, which we are finally seeing the full effect of since we were able to launch it this summer. We believe that this will result in profitable fiscal 2022 and much improved profitability in Q4 versus Q3. Our operating expenses increased by 6.2 million for the three months ended September 30th, 2021 to 9.1 million compared to 2.9 million for the corresponding fiscal period in 2020. This net loss included two non-cash expenses. The first is associated with a change in the fair value of contingent liabilities of 4 million. And the second is a non-cash expense associated with a change in the fair value of our convert note of 0.6 million. The other increases were due to hiring our marketing team, the addition of stateside operating expenses for a month, and an increase in our marketing spend. As we stated, we've begun getting leverage on these investments that we made in the summer to ramp marketing, and we expect those to drive incremental revenue growth in Q4 and in 2022. Other expenses increased by $0.5 million to $1 million in the three months ended September 30th, compared to $0.5 million in the corresponding fiscal year in 2020. The increase in other expenses was primarily due to $0.6 million in other non-operating income, which we do not expect to continue going forward. I think what's really important is our net loss to attributable common stockholders was $5 million, increased $5 million to $8.9 versus a net loss of $3.9 a year ago. The net loss included two non-cash expenses, which I noted above. The first is associated with the change in the fair value of contingent liabilities of $4 million, and the second non-cash expense is associated with the change in the fair value value of our convert note of $0.6 million. Let me talk about these a little bit more so everyone understands what this is. This contingency is related to the guaranteed valuation one year post our IPO for our Bailey 44 and Harper & Jones acquisitions. If the value of their shares are lower than the same value as the IPO, then the management and certain board members will make up the difference with their stock. The management and certain board members, not the shareholders, will make up the difference for their stock. this is a non-cash expense that's a mark to market per gap that will have no impact on shareholders as if there is a true up it will come from management and certain board members so this is really critical this is um this will also set up an easy comparison for our second and third quarters next year as this contingent liability will go away as we anniversary our ipo in may 22 and Again, there's no cost to shareholders that will come from management and certain board members. Our net loss per share was $0.76 versus a net loss of $5.89 per diluted share a year ago, an improvement of 677% year over year. The two non-cash expenses mentioned above resulted in a loss per diluted share of $0.39. So we would have lost $0.37 including those losses versus $5.89 a year ago. As you can see, as we get leverage in our business, as we drive revenue, we are definitely getting more and more positive toward the EBITDA, and that's what led us to the Q4 EBITDA positive, I mean, to 2022 positive EBITDA. This concludes our quarterly financial review, which leads us to what we believe is the most critical trend for our company. This is the sequential quarterly revenue trend through this year and into Q4. We have doubled our quarterly revenue sequentially from approximately $400,000 in Q1 to approximately $1 million in Q2 to approximately $2.2 million in Q3, and we are forecasting approximately $4 million in Q4. Please keep in mind that this revenue for fiscal 2021 only includes four months of contribution from stateside and seven months of Harper and Jones. In addition to that, we had no inventory for six months at Bailey 44 and no limited inventory for seven months at Distilled. And finally, we spent very little marketing dollars across any of our brands. So when you look at our increase in revenue and you look at the fact of where our inventory levels were, the minimum contribution from our acquisitions due to the timing of those acquisitions and very little marketing dollars, we are still doubling revenues sequentially. We continue to increase our gross margin significantly, and we expect these increases to continue. And then finally, we are leveraging our fixed cost of the business due to higher revenue, higher gross margins, and shared operating expenses. We expect all these factors to continue going forward into Q4 and also into 2022, which will lead to profitability in 2022. One thing to weigh in on is that these results have been driven only over four and a half months since our IPO and includes only partial contribution from two cash flow positive acquisitions, Harper & Jones and Stateside. This has been done over four and a half months. I cannot stress how critical that is. We have turned a business that was losing money and that were two turnaround brands in four and a half months into something that will be incredibly creative and cash flow positive in 2022. As we discussed in our S-1, we are an acquisition vehicle. We expect to acquire more companies this year and also next year. We believe in acquiring positive cash flow brands, which would lead to an increase in our cash flow next year before any incremental cash flow from one cost savings from our shared expenses, which we've already seen works, And two, revenue synergies from our cross-marketing platform, which you've also seen that works. In four and a half months since our IPO, we are now generating revenue momentum, gross margin expansion, and operating leverage, which we, again, continue to expect in Q4 and in fiscal year 2022. Given that, we are providing fiscal 2022 revenue and EBITDA guidance. we expect to generate net revenue guidance of $37.5 to $42.5 million in fiscal year 2022, an increase of a minimum of 350% revenue growth year over year from 2021. Our forecasted increase in revenues is driven by the following factors. I think this is really important and Given that we've now had four and a half months in the business with some operating cash, we can detail what the drivers are. The addition for distilled, one, the addition of wholesale revenue with limited key accounts for brand awareness. And some of these are major department store chains. Two, a meaningful increase in digital marketing advertising, which was minimal in 2021. Three, a full year of selling on the Amazon. Four, a full inventory stock for the entire year versus only three to four months this year. And finally, five, new product expansion driven by a recently hired women's designer, of which we did not have a women's designer before for Distilled. For Bailey 44, there are three main drivers. One, a full year of wholesale revenue versus six months in 2021, of which most of that was back-end loaded this year. Again, a full year of wholesale revenue. A meaningful increase in digital marketing advertising, which was minimal in 2021, and which we are seeing being incredibly effective this year since we turned it on this fall. And then also a full inventory stock for the entire year. As we have limited inventory even now because most of it went to wholesale, so our digital spend is smaller in Bailey's because the inventory levels But we are seeing unbelievable responses to our digital advertising for Bailey's. And imagine what we can do with full inventory loads for e-commerce. For Harper and Jones, a full year of revenue contribution versus approximately seven months in 2021. New showroom openings. The full year benefit of new clothiers who have started in the fall of this year. And there have been several. and a meaningful larger ready-to-wear offering versus 2021, which we just launched this month and have already sold over half of the ready-to-wear inventory in less than two weeks. For stateside, a full year of revenue contribution versus four months of 2021. New product categories in women's knits and woven tops, which we'll be showing at Coterie in February for fall wholesale and we'll also have online. This is one of the largest categories, two largest categories in women's wear in which Stateside has not had any product in, which we'll have product in. And Stateside will double this year from last year in terms of revenue, excluding these new categories. So we expect great things from Stateside next year. And then a meaningful increase in digital marketing advertising, which was super minimal in 2021. And we're already seeing massive returns on that as well. And again, very limited inventory there because when we bought it, they were predominantly wholesale, only $300,000 in digital revenue. And we're seeing it work incredibly well with minimal inventory. So we are buying into e-commerce inventory that we can also sell into the wholesale channel for spring and going forward. I think what's really important is our 2022 guidance does not include any additional acquisitions this year or next year. To reiterate, we are an acquisition vehicle. We expect to acquire more companies this year, and we also expect to acquire several companies next year. We believe in acquiring positive cash flow brands. I cannot stress how critical this is. because we've seen the effects of acquiring cash flow brands. We will continue to acquire cash flow brands both this year and next year. This will of course lead to an increase in our already projected EBITDA positive numbers for next year. And we believe we'll generate this incremental cash flow from cost savings from shared expenses and revenue synergies from our cross-marketing platform. So we're talking about acquiring cash flow positive companies and then being able to leverage those fixed costs with our cost savings and our revenue synergies. I'm extremely proud of our team, as we have completely transformed this company in four and a half months since our IPO. We took two brands that needed to be turned around, one that was denim and leather and cashmere, which were not hot items during COVID. And two is Bailey 44, which is women's date night, which was also during COVID, not a popular category considering most people weren't leaving the home. Both those trends have changed. We had minimal revenue, minimal inventory due to the COVID impacts. And now you're seeing us come out of that. And you're seeing what we can do when we have cash on the balance sheet. We've done this in four and a half months. So imagine what we can do over the next 12 months with the cash flow and the acquisitions that we have just made and will be making. What's most interesting is our acquisition pipeline is the strongest it has ever been with the most high-quality brands we've seen since we announced this idea two years ago. We have over $175 million in revenue in our acquisition pipeline. And these aren't just targets. These are conversations that are well-passed. Hi, how are you doing? And as we scale that we're generating and we'll only make, we'll generate only make future acquisitions easier, faster, and more accretive. I think what's really important that people don't understand necessarily, nor did I, when we first started this is you have a gap significance test, which is driven by three items. If you trip any of those items, you have to do audits. The one that we keep tripping is the purchase price to market cap. So as we acquire, brands that starts to go away because our market cap grows and the purchase price that market cap does not create that trigger which is really critical to give you an idea if it's zero to twenty percent there's no audit if it's twenty to forty percent you have to do a one-year audit and if it's forty percent plus you have to do a two-year audit we're having to do several two-year audits but once these come through the market cap will reflect our revenue which will then most likely eliminate, which we believe strongly will eliminate the fact that we'll have to do these audits, which then is a lower cost to the company. And also you can move a lot faster as well because you don't have a six to eight week audit process. And I think that's really, really critical. So we understand that. With that, again, I can only tell you this team has done an unbelievable job in four and a half months. And I think for our investors, if you go back and you look at the p l and the revenue and the state of the business at the s1 filing and where we are today and especially our guidance for next year which we strongly believe in then i think you can see what we've done and what we're going to do and we're seeing the numbers show up so with that i'll turn it over to q a please ma'am thank you the floor is now open for questions if you would like to ask a question please press star 1 on your telephone keypad at this time

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 1 to register a question at this time. Our first question is coming from Eric Fetter of SCC Research. Please go ahead.