Digital Brands Group, Inc.

Greetings and a welcome to Digital Brands Group Inc. Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal 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, Mr. Hill Davis, Chief Executive Officer. Please go ahead, sir.

Yeah, thank you very much. And good morning and welcome to the Digital Brands Group second quarter 2022 earnings conference call. Just a usual legal disclaimer, 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 statements are 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 our underlining 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. This company will be hosting a Q&A session at the conclusion of our prepared remarks. Please note this event is being recorded. So with that, let me start by saying For the quarter, we delivered strong top-on results of 273% year-over-year growth, along with very strong gross margins of 58.1%, which was an increase of 450% versus a year ago, an improvement of 15.2% in terms of gross margin expansion sequentially. We continue to achieve operating leverage on our fixed cost of business through the increase in revenue growth and our gross margin expansions. We saw that the operating leverage significantly increased on both the year over year basis and a sequential basis. Please note our second quarter only included two months of wholesale shipping across our wholesale brand. It's wholesale demand is not as strong in the June period. The majority of wholesale accounts only focus on the two months of this period. The same thing happens in the fourth quarter as most wholesale brands do not ship in December. That is going into the holiday period. As we look into the second half of the year, We are now into our peak wholesale season, which starts with the July 30th shipments, which is considered pre-fall and goes through the November 30th shipments. We are pleased with what we're seeing from our wholesale bookings. Given this, we expect our second half of the year to see an acceleration in our revenue and we should maintain strong gross margins. Therefore, we expect our combined EBITDA for the September through December period of 2022 to be flat to negative $500,000. We believe this forecast says there's a clear and short path to profitability. To this point, we hired a head of wholesale for Distilled, which has never been offered in the wholesale channel. She joins us from another denim brand where she increased their wholesale revenues from 6 million to 39 million in three years. We will benefit from Distilled's wholesale revenues starting in the first quarter of 2023 as the wholesale shows for Q1 delivery start in September. The wholesale revenue generated from this channel We'll have an incredible impact on our cash flow as there's minimum costs needed to launch and grow this channel. We already have the corporate showrooms in place, the marketing team, the back office, distribution, and the corporate overhead. Therefore, the gross profit from this channel should flow to the bottom line at almost 85% to 90%. And as you just think about the impact even this would have had on our current September-December period if this person had been in place this time last year. We do believe we've found the right person for Distilled. and that she will help us expand both the brand awareness revenue and cashflow of the distilled brand. Before we jump into the second quarter, uh, 2022 results, we wanted to discuss some updates that we have from our investors. We filed our proxy this past Friday for upcoming shareholder meeting to be held on October 3rd. This proxy is important for our investors because all it includes shareholder voting to approve the shares issued for the sundry acquisition. This acquisition increases our revenue by over 20 million. it will also increase our EBITDA significantly. In fact, once we close Sundry after the shareholder vote, we will be EBITDA positive right away. It also includes a vote for reverse stock split, which will put us in compliance with NASDAQ listing rules. This is extremely important. Along those lines, we have our NASDAQ hearings reported in early September, and we have laid out a plan that will show how we will achieve compliance for the listing requirements. We believe that there's a lot of opportunity in wholesale and direct consumer. We continue to experience very strong direct consumer growth as well as wholesale growth. I think one of the things that people don't realize is we're not able to factor. So for us, we have to front load and pay for all our product now. and then we get paid 60 to 90 days post that via the wholesale channel. This results in a four to five month negative working cap cycle, which is why we have to borrow money from time to time as we have to pay for the upcoming product, fabric, and production. And this is especially true as we move from the seasonally slow second quarter into the peak revenues season. This creates a need that we have to borrow against. However, we get paid back that capital 69 days later. As we move into next year, we do expect to have a factor in place, and that will eliminate the need for the borrowings and also change our working cap to a positive working cap cycle, which is a significant change in our business. And we think that's a really big deal for our investors. And you'll also see that in our P&L, as we won't have the cost to borrow those. And then finally, in terms of the housekeeping items, I think that's important, is that when you look at the Sundry acquisition, we believed that that will be very positive to our synergies as well. Not only do we get the incremental revenue and cash flow, we also believe there's significant savings in both having a single distribution center, a single office, shared marketing, and other things. I think we've proven with our current acquisitions that are much smaller in scale that we can get these savings. So we believe that with this acquisition of this size, the savings will be significantly larger than what we've been able to benefit so far. So with that, let me get into the results for the second quarter of 2022 highlights compared to the second quarter of 2021. Net sales were 3.7 million versus a million in a year ago, an increase of 273% year over year. Our second quarter is our lowest wholesale revenue quarter across all our wholesale brands, as these brands only shipped two of the three months due to lower wholesale demand during this period, as noted previously. Gross profit margin was 58.1% versus 39.3% a year ago, an increase of 4,450%. Gross profit increased by $1.8 million due to improved gross margins at all our brands. Additionally, this is the first quarter we reported where we did not incur any inventory write-downs associated with older products, which we believe illustrates the gross margin power of our brands. General and administrative expenses as a percentage of revenue decreased 538%. to 133.5% of revenues versus 716.7% a year ago. G&A expenses were $5 million versus $7.2 million in the year-ago quarter. Starting in September, all our brands will share one office and one distribution center, which result in additional cost savings going forward. Also, we do not expect any additional increases in G&A expenses in the second half of the year, which should result in significant revenue leverage as we enter our peak revenue season. Sales and marketing expenses were 45.6% of revenue versus 92% a year ago, a decrease of 50.4%. Sales and marketing expenses were 1.7 million versus 923,000 a year ago. We continue to experience meaningful e-commerce revenue growth year over year associated with our digital marketing programs. This increase in e-commerce revenue is also driving higher gross margins across all our brands as we have higher gross margins in the e-commerce channels. Distribution expenses were 5.9% of revenue versus 7% a year ago, a decline of 14.7%. Distribution expenses were $222,000 versus $70,000 a year ago, driven by the addition of Harper & Jones and stateside distribution expenses in this quarter versus approximately one-third of Harper & Jones distribution expenses and no distribution expenses for stateside a year ago. And even then, stateside... had a different office and a different distribution center up until this period in Q3, so basically starting in July. We expect to benefit from a reduction in our distribution expenses associated with operating one distribution center versus two distribution centers as we consolidated this into one. Change in the fair value of contingent considerations, which is a non-cash expense, was $5.9 million versus $3.1 million a year ago. Loss from operations excluding the change in fair value of contingent considerations was 4.7 million versus 7.8 million a year. Net loss attributable to common stockholders was 9.5 million or 27 cents per diluted share compared to net loss attributable to common stockholders of 10.7 million or $1.97 per diluted share a year ago. Excluding the non-cash charge associated with the change in fair value of contingent considerations Net loss attributable to common stockholders was $3.6 million, or $0.10 per diluted share, compared to net loss attributable to common stockholders of $7.7 million, or $1.41 per diluted share, a year ago. In closing, we believe that we are on a clear and short path to profitability with our current brands. The sundry acquisition post a shareholder vote approval will create and should create positive EBITDA immediately. We continue to add revenue streams to our current brands, which generate high cash flow. This cash flow adds visibility and consistency to our business model. This is magnified by the operating leverage we are generating as we have increased our revenue and gross margin in the first half of this year, which we expect to continue and expand in the second half of the year. This operating leverage will only be enhanced by our higher revenue associated with the upcoming peak selling season. Finally, we believe that we are moving out of our negative working cap cycle and high cash burn rate, as we believe we'll be able to factor next year, which will prevent us, which means we will not have to borrow expensive debt to meet the demand of the wholesale channel, as we'll be able to factor. And this will create significant cash flow savings and also move us to a positive net working capital cycle. Thanks, everyone, for their time, and we look forward for the continued momentum. This concludes our second quarter 2022 earnings call, and let's open it up to Q&A, please.

Thank you very much. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two 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. One moment, please, while we poll for questions. A reminder to participants, to ask a question, you may press star and 1 on your telephone keypad. A reminder to participants, if you would like to ask a question, then please press star and 1 on your telephone keypad.

Sounds like there are no questions. So I appreciate everyone's time for this call. Hopefully, as you can see, we continue to grow the business on the top line, the gross margin line, and we are on a path to be profitable, which is very exciting as we continue to scale this company. We look forward to both the sundry acquisition and future acquisitions going forward. And thanks, everyone, for your time, and have a great day. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.