Greetings. Welcome to the Digital Brands Group Second Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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 joining us on the Digital Brands Group 2024 second quarter earnings conference call and webcast. With us on the line from management this afternoon is Hil 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 turn -- now turn the call over to Hil Davis. Go ahead, Hil. Hil, is your phone on mute?

Hil, your line is live. Okay. We still have Hil's line connected. I can try to dial back out to him just one moment.

Hi. 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 want to highlight on today's call is that we 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. Also I'd like to highlight that we continue to get offers for our NASDAQ shell that are between $3.5 million to $5 million in value plus a percentage of whatever company would be coming in, that's usually $10 million 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 $4.5 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 flow through at 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 and 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 a ton of companies report from Home Depot to even Walmart saying they've seen more $100,000 plus household income and you've seen it across Levi's and other apparel companies. For us, 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-to-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 launch 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 clean up 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 though 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 of weeks ago, we tested a concept with DSTLD 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 those -- 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 the 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 we'll be able to -- with a bundle, it'll be $50, but a 3 unit or more bundle, it will 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 DSTLD, 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 $4.5 million a year ago, that also by the way was peak Sundry before we had to kind of -- 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 $1 million during the quarter at a 2.6 to 2.9 ROAS, you're looking at an incremental $2.6 million to $2.9 million in revenue. Now if we were spending $1 million we'd expect that ROAS to come down to 2x to 2.5 times, but you can see how quickly we can accelerate revenue again when we shift from the debt and other AP (ph) pay down being accounts payable back into a growth phase. And as we noted too, the company has paid over $5 million of debt and other liabilities during the first half of 2024. Our gross 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. The digital gross profit margin is around 75% to 80%. So you can imagine how that changes when you have the digital revenue go through. Gross profit margin or gross profit dollars was $1.6 million compared to $2.3 million. 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 they 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 million compared to a net loss of $5.7 million a year ago, which excludes a one-time cash benefit of $10.7 million in the year ago period. Including this benefit, net income would have been $5 million a year ago versus a loss of $3.5 million. Net loss per diluted share was $2.08 compared to net income per diluted share of $0.31 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, Sunnyside 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 of weeks, the DTC brand that based on the DSTLD results, as well as other brands we believe is a huge growth driver for us. And there's zero incremental cost for us to launch that brand as we can use our current G&A 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 softer 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 brand. 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 $1 million or $1.5 million to work in digital, we could have generated significant revenue over that time frame. And we did not -- we focused on clean up the balance sheet because of strategic review because as we reviewed what our NASDAQ shell 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. [Operator Instructions] The first question comes from Richard Malinski, Private Investor. Please proceed.

Hi. How are you? 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 we'll continue to use. And then secondly except there's -- almost 100% toward that. And then secondly, we did that warrant exchange in May and we used a lot of that. It was $3.3 million before all the fees and everything else. It was approximately $2.8 million 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. 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? Do you have enough at this point?

Yeah. I think we're just taking it week by week. We're looking at everything that's going on and what makes sense and what doesn't make sense. The warrant exchange came out of 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. I think the other thing as we look at it is, what do we ever get credit for? We got to start getting credit for something. And so that's 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 what 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 it's 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 off, we're 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, there's a chance it's going to happen. We're going to see a nice ramp up. And now you don't have the debt expense, but I'm just concerned that 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?

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 options sets, debt, convertible debt, nothing, raising capital, 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 a point.

Okay, 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 in size participate in the raise and that was always I'm always interested in that when you in size is 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, no one can really get public. So the shell is worth a lot of money to people, which is really interesting. We think we have a growth concept and we think we're working. I mean, you look at our -- I guess what we put up almost $7 million in revenue in the first half of the year and we're trading what a fraction of even that. So -- and it's a good idea too, it's sorry, go ahead.

No, here's the good news on your part. Because there's a few shares out there's not many shares outstanding on the company, there was a company like last week. It had it only had like a 1 million shares outstanding called Sealy. 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 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 [indiscernible] is like $1 billion worth of stock. It was amazing. What happened, but it was a small float and people got excited about it. So the small flow is very positive.

Well, there is a cutting edge. Like, it does -- now I don't think we have a lot of institutional investors that are market caps shifting around, but when they do, they do want to see a larger float. Having said that, yeah, we're just going to. It's fine. We're not going to make a decision based on float to your point, right?

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. And then when it runs up, then you could raise money at your price. But hopefully, you'll see that soon enough as you announce developments. All right. But I appreciate your time. I know I'm taking up too much time.

That's right. No, I appreciate the questions.

All right. Thank you, [indiscernible]. Thank you very much and good luck.

Thanks.

[Operator Instructions] Up next, we have Timothy Endachter (ph), Private Investor. Timothy, please proceed.

The only question I have -- yeah, I'm here. The only question I have is, I'm not long time investor. I'm not rich. I've dumped up a bunch of money into this thing. What are you going to do to prevent this from RS-ing, from reverse splitting? I mean, are you going to start maybe do you want a stock buyback? Are you going to -- 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 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 not lost on people in the private markets, right? Because with especially our leverage on our fixed costs, we're $250,000 a month, $300,000 a month in revenue away from being cash flow breakeven. That's not a massive increase in anything, right? It's not like we've got to get up to $100 million in revenue to breakeven. 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 [indiscernible] opportunity, the new brand we're launching is there is -- in this market right now, there is value wins. I mean, when Walmart tells you they have more 100,000 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 we already have a supply chain, given that we already have 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 there's not -- 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 clean up balance sheet to growth, especially post-election. 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.

Yeah. Thank you. Thanks for the question.

[Operator Instructions] Okay. It appears we have no further questions in queue. We've reached the end of the question-and-answer session. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.