Digital Brands Group, Inc.

Greetings. Welcome to the Digital Brands Group second quarter 2024 conference call. At this time, all participants are in our 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. Please note, this conference is being recorded. I will now turn the conference over to your host, John McNamara of Investor Relations. You may begin.

Thank you. Good afternoon, everyone, and Thank you for on the Digital Brands Group 2024 Second Quarter Earnings Conference Call and Webcast. With us on the line for management this afternoon is Hill Davis, Chief Executive Officer. Hill will begin the call with an overview of the quarter and then we will open up the line for questions. As usual, we would remind you that this call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended. This may include 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 the 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 in these 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. With that, I will now turn the call over to Hill Davis.

Go ahead, Hill. Hill, is your phone on mute? Hill, your line is live. Okay, we still have Hill's line connected. I can try to dial back out to him just one moment. All right, sorry about that. Can everyone hear me okay? Yes.

All right, sorry about that. Good afternoon, everyone, and welcome to our second quarter conference call. I think the first thing I wanted to highlight on today's call is that we've paid off over $5 million in debt and other liabilities during the first half of the year, which is very significant, as you can imagine. This was driven by conversations with strategic partners as part of our strategic review. And what they wanted to see us do was start to clean up the balance sheet, which we've done now. And that was an incredibly important attribute for them, especially as they look at potential opportunities with us. Um, also I'd like to highlight that we continue to get offers for our NASDAQ shell that are between three and a half to $5 million in value, plus a percentage of whatever company would be coming in. That's usually 10 to 20 million. So as you can imagine, there's value in our shell alone. And so one of the things as part of the strategic review process was based on feedback from strategic partners, what was most critical for them to focus on and the debt cleanup, which we did, which was 5 million in debt and other liabilities, was a big piece of that. As part of that too, just through our sundry acquisition and basically focusing on those synergies, We've lowered our G&A expenses by four and a half million during the first six months. We're going to continue to see those savings in the back half of the year. And in our conversations with strategic partners, that has been incredibly well received. In the private markets, as you can imagine, you get your cost to good or your cost down, and then any incremental revenue really starts to float to a much higher level. And so, these were two of the big pieces. We knew the operating leverage would come as we talked about for a while. The big piece in change for us was really clean up the balance sheet, especially given this environment where the consumer is softer today. I think you've seen, you know, a ton of companies report from Home Depot to, you know, even Walmart saying they've seen more 100K plus household income. And you've seen it across Levi's and other apparel companies. For us, you know, we don't have as much exposure to the majors. So we do have one big major department store asking to bring on our brands. And another one that is increasing the number of doors we're in. So we're seeing success in the wholesale market. What we've done is we kind of shifted our direct consumer marketing spend into paying off the debt and the AP per our conversations with the strategic partners. And now we're starting to turn that back on and start to ramp. We're just very thoughtful in this environment too, because there's no reason to lean into a soft consumer. You just want to manage through this process, which we're doing. and focused on that. And despite that, we're still seeing a 2.6 to 2.9 ROAS. So what does that mean? What that means is for every dollar we spend, we're getting $2.60 and $2.90 in revenue back. So that usually what you, once you get to about 2X ROAS is when you start to become breakeven. And so that shows you how much room we have now to continue to basically lean in and spend on the marketing side, especially since we focused the first half of the year on the cleanup. And now we're going to start to move into the growth phase again. And again, as we said, we're going to do a strategic review. And these were the conversations we've had. And this was one of the critical things that they wanted to hear. And that's been a big piece of our strategy. And now that we're basically turned digital marketing back on, we're seeing that And then we're also seeing incredible sell through. We had a call with one of our majors two weeks ago and we are in their top five of sell through. We continue to sell through really well. They're increasing the number of doors. They're taking products to all doors. And then, like I said, as well, we have another big major that wants to add us, which we will, we're in talks with to figure that out and onboard them as well sometime. So we're excited about how the product is selling and, Really, it was just a strategic decision in the first half of this year to focus on the balance sheet cleanup as opposed to the growth based on those conversations. Now that we're through that, we are starting to now work on and look back at to the growth side, especially on the DTC side as the wholesale is there, as you can see. So we're excited about that, and we continue to think that's going to continue to grow. As we also announced a couple weeks ago, We tested a concept with Distilled called Build Your Own Bundle, and that's been incredibly successful with no digital advertising, zero digital advertising. We saw 114% growth, actually, sorry, 150% growth in that brand by doing Build Your Own Bundle. And what that made us realize, that along with looking at brands such as True Classics, Fresh Clean Threads, which are all bundle concepts that have grown incredibly well, that there was a major opportunity in the women's category to build this same concept. So we've also been working on that. You're going to see that launch in the next couple of weeks, which we're really excited about. We've been beta testing it with a high success rate, and we've already had some stores lean in. We're shipping a big order this week to a store, and we're excited about where this brand is going to go, and it's based on that but in the women's space. And the nice thing about it is we can use our current infrastructure to do this. And so there's very little incremental cost. In fact, the fabrics that we're using right now came from the Sundry acquisition that Sundry doesn't sell on wholesale anymore. So we have zero costs on that fabric and it's a great fabric. And what's exciting about that is you're talking about a $20 t-shirt in women's that is a Nordstrom's quality and will be able to With a bundle, it'll be $50, but a three-unit or more bundle, it'll be $20 each. And so we're excited to see where that goes, given the success of those other brands, and especially our beta test with Distilled, which is denim and a more expensive price point, to see where that goes. So we've got several growth drivers, and then we've been really focused on cleaning up the balance sheet, as we said. So with that, I'm going to get into the numbers. Net revenues were $3.4 million compared to $4.2 $5 million a year ago. That also, by the way, was peak sundry before we had to kind of, when we bought them, they had already sold through this period, and the brand was in slight decline. So our next two comparisons are going to be a lot easier this year. But more importantly, the volume of that brand, we've doubled the units sold at that brand. The net revenues that we noticed were negatively impacted by no digital advertising spend. And so think about this, if we would have spent a million dollars during the quarter at a 2.6 to 2.9 ROAS, you're looking at an incremental 2.6 to 2.9 million dollars in revenue. Now, if we were spending a million dollars, we'd expect that ROAS to come down to two to two and a half times, but you can see how quickly we can accelerate revenue again when we shift from the debt and old AP pay down, being accounts payable, back into a growth phase. And as we noted too, the company's paid over $5 million of debt and other liabilities during the first half of 2024. Our growth profit margins were 45.9% compared to 52% a year ago. The decline in this is all associated with the no digital revenue, very little digital revenue for the quarter. You know, the digital gross profit margin is around 75 to 80%. So you can imagine how that changes when you have the digital revenue grow through. gross profit margin or gross profit dollars was 1.6 compared to 2.3. G&A expenses decreased 1.1 million to 2.9 million compared to 4.1 million a year ago. As we said, that is a significant reduction both in the first quarter and the second quarter, and we expect that to continue. Keep in mind, G&A includes 1.8 million in non-cash expenses, which is primarily associated with depreciation and amortization. And of that Over approximately half that will roll off in the first quarter as the amortization of stateside acquisition, the goodwill of that will go to zero and it will no longer impact the P&L. Sales and marketing, as you can imagine, was lower than a year ago at 615,000 versus 1.1 million. Again, due to no digital advertising, it was 18.1% compared to 24.4% a year ago. And we're going to start ramping that back up as we've cleaned up that balance sheet piece that we were talking about. Net loss was 3.5 compared to a net loss of 5.7 million a year ago, which includes a one-time cash benefit of 10.7 in the year-ago period. Including this benefit, net income would have been 5 million a year ago versus a loss of 3.5. Net loss per diluted share was $2.08 compared to net income per diluted share of 31 cents a year ago. But please keep in mind that included a $10.7 million benefit from a one-time non-cash gain in the quarter. So in closing, what I want people to realize as they look at these numbers is the first half of this year was really about cleaning up the balance sheet, and especially in the second quarter. And that was driven – by the fact that as everyone's reported, the consumer has been soft. So this is the right time to really focus on the balance sheet cleanup versus the growth given what everyone's experiencing. As we shift into the second half of the year, especially as we move through the election and what everyone is believing will be a rate cut, we will really start to dial that growth marketing dollars back up, especially given we're getting 2.6 to 2.9 ROAS. I can't stress how significant that is. Again, like for every dollar you spend, you want to continue to spend until you get to about 2X ROAS. And there's plenty of room there. So you've got significant room on the digital marketing side. You've got wholesale that continues to perform. We're in talks with a major department store about adding the brands. We're also are launching another licensed brand. sending side by sundry where we already have our first order which we're excited about which will be significant licensing revenue on top of our bailey's licensing revenue and then finally we're launching the new brand in the next couple weeks the dtc brand that based on the distilled results as well as other brands we believe is a huge growth driver for us and there's zero incremental calls for us to launch that brand as we can use our current gna structure as well as supply chain, and finally fabric that we have to really drive that going forward. So you've kind of got what we felt like was an important piece of our strategic review, which was focus on the balance sheet cleanup first, especially given a software consumer environment, and then start to shift back into significant growth mode as we move forward, especially given the ROAS results, and then what we think will be the success of our new brands. So we're excited about where we've been. I know the numbers were a little bit lower, but please keep in mind that was almost all wholesale. There was very little digital. So if we would have focused on putting a million or half a million dollars to work in digital, we could have generated significant revenue over that timeframe. And we did not. We focused on cleaning up the balance sheet because of strategic review, because as we reviewed what our NASDAQ show was worth, as we reviewed what the investors would get for reverse merger, all these different things, there's significant upside that is there. And so as part of this process, that was a very important part of it. So with that, I'll turn it over to Q&A.

Thank you. At this time, we will be conducting 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'd 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. Once again, please press star 1 if you have a question or a comment. The first question comes from Richard Malensky, private investor. Please proceed.

Hi, how are you? I'm a recent shareholder of the company. I'm a recent shareholder of the company. My course is around probably $1.50, $1.60. But I just was curious to find out, how do you pay off the $5 million in the debt? Was that cash that was on the balance sheet? Was there an equity line on that? Just curious first how that was paid off.

Yeah, so it's a combination of two things primarily. It was working capital from the business, which we continue to use to pay that down and will continue to use. And then secondly, except it was almost 100% toward that. And then secondly, we did that warrant exchange in May, and we used a lot of that. You know, it was $3.3 million before, you know, all the fees and everything else. It was approximately $2.8 after all fees and expenses. And that was a piece of it. So it's both working capital as well as that piece.

Okay. My biggest concern is also – When you look at the balance sheet, you see the current assets over current liabilities. You know, I like the business that you have, and I think what you're saying in the second half could be very exciting for me as a shareholder in the company. But my biggest concern is are you going to be okay with the capital that you currently have, or have you publicly disclosed that you're going to be looking to raise more money in the second half of this year to have that growth, you know? Do you have enough at this point?

Yeah, I think we're just taking it week by week. You know, we're looking at everything that's going on and what makes sense and what doesn't make sense. Um, we, you know, the warning exchange came out of, uh, just kind of an offer out of nowhere and it gave us an opportunity to clean up some stuff. So we'll be proactive where it makes sense. Um, I think that the other thing as, as we look at it is, you know, what do we ever get credit for? You know, we, we got to start getting credit for something. And, um, and so that's, you know, especially in talks in the private markets, they look at the business, they look at the baseline business, and they feel like the interesting thing is the valuation we get in the private market seems drastically different than when we get in the public markets to the positive in the private markets, which there shouldn't be such a disassociation between those two markets, especially when private values you more than the public.

No, I understand that. But at the end of the day, they do see the last quarter was – was off, was still losing money. My biggest concern is that can you go the next six months and prove to Wall Street that, look, what you're discussing publicly, you know, there's a chance it's going to happen. We're going to see a nice ramp up, you know, and now you don't have the debt expense. But I'm just concerned that, you know, do you have that capital? If we didn't have to raise money, do you have enough at this point? Because you did get that warrant money, you know?

Yeah, we can continue to go along this pace. The question is what makes the most sense for the business? And that's why we're always reviewing, right? I mean, that's why we're always in talks with private investors and looking at all the different option sets, debt, convertible debt, nothing, raising capital or not. It's always, it's all very fluid and we're looking at all of it. So I can't answer the question because it's always- Okay, no problem, no problem.

Yeah, the last thing I'll just mention is just, One good thing is that if you do a raise, it's always good to see insiders participate in the raise, and I'm always interested in that when insiders are participating too. But look, I'm looking forward to the future and seeing you execute on the plan that you discussed. It should be interesting.

Yeah, and I think just so everyone understands too on the insider, and I agree with that, the problem is because we are in these strategic discussions, we're privy to material non-public information. And so that prevents us from doing anything. So it's kind of a double-edged sword, right? Like it's doing a strategic review and in talks. And, I mean, we get an offer once a week to reverse, right? I mean, there's no – in this market, you know, no one can really get public. So the shell is worth a lot of money to people, which is really interesting. Right.

Yeah.

You know, we think we have a growth concept and we think we're working.

I mean, you know, you look at our –

I guess what we put up almost 7 million in revenue in the, in the first half of the year. And we're trading at what a fraction of even that. So, yeah.

And, and, and the idea too, it's.

Oh, sorry. Go ahead. No, here's the, here's the good news on your part, because there's a few shares out. There's not many shares outstanding on the company. Um, there was a company like best week. It had, it only had like a million shares outstanding called ceiling stock was trading below $2 a share. And it went up to over $20 in just a couple of days because it was a small float and they came out with some good news. So I don't know when that's going to happen, but if you continue to come out with contracts or news, you're going to get caught. I think that someone's going to recognize that, look, this is a small float that has exciting potential. And even Sigma traded like a billion dollars worth of stock. You know, it was amazing, you know, what happened. But it was a small float and people got excited about it, you know. So the small float is very positive, you know.

Well, there is a cutting edge. Like it does. Now, I don't think you have a lot of institutional investors that are market cap sniffing around. But when they do, they do want to see a larger float. Having said that, you know, we're just going to, you know, it's fine. We're not going to make a decision based on float, to your point, right?

No, no, no. Like I said, there's so many companies with small floats that have had runs over the last year or so that people love it for some reason it's got caught up. So that's an advantage, not a disadvantage, you know? And then when it runs up, then you can raise money at your price, you know? But hopefully you'll see that soon enough, you know, as you announce developments. All right, but I appreciate your time. I know I'm taking up too much time, you know? Oh, sorry. No, I appreciate the questions. All right. Thank you very much, and good luck. Yeah, thank you. Thank you, Mike.

Once again, if you have a question or a comment, please indicate so by pressing star 1. Up next, we have Timothy Endactor, private investor. Timothy, please proceed.

Yes, I'm here. The only question I have is I'm a longtime investor. I'm not rich. I've dumped a bunch of money into this thing. What are you going to do to prevent this from RSing, from reverse splitting? I mean, are you going to start maybe doing a stock buyback? Do you have any plan to prevent this from reverse splitting again?

Well, I think all we can do is continue to focus on the fundamentals, right? I mean, that's, that's the thing. It's like, it's, I mean, look at our market cap relative to where we are. It's definitely a dislocation and that's, that's not lost on people in the private markets, right? Because with, especially our, our leverage on our fixed costs, I mean, we're, we're $250,000 a month, $300,000 a month in revenue away from being cashflow break even. That's not a massive increase in anything, right? It's not like we've got to get up to, you know, a hundred million dollars in revenue to break even. And so we're just going to continue to focus on that. We just kind of felt the big thing for us is with the Avvo opportunity, the new brand we're launching is, you know, there's a, in this market right now, there is value wins. I mean, when Walmart tells you they have more a hundred thousand plus household income shoppers shopping at Walmart than they've ever seen in their history, that tells you where the consumer is. So we had a decision. Do we continue to do what we're doing, which we're going to do? Or do we also step back and say, Hey, how can we participate in this shift that consumers are experiencing? And given that, that we already have a supply chain given that we already have, you know, fabrics and products, how can we step back and figure out how to take advantage of that? And so that's what we're doing. And all that becomes incremental to us. And I think that's what really gets exciting. I mean, you look at our revenue and we've had very little growth capital in a year and a half. It's all going back to service debt and old AP. So imagine as we shift into more of that mode, what can happen? So again, I don't know if share buyback is the best use of capital right now versus starting to see where the growth is, especially after cleaning up the balance sheet. But we're going to just focus on executing the business and see where it goes and really focus on driving that top line because we're knocking on the door of profitability. It's not very far away. And we believe we can achieve it, especially as we shift from cleanup balance sheet to you know, growth, especially post-election. You know, the election creates a lot of hangover when you talk to people. And then I think everyone kind of feels like a Fed rate cut is coming, which I think will also help. And as those things start to get behind us, that gets really interesting for us.

All right.

Thank you. Yep. Thank you. Thanks for the question.

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