Digital Brands Group Reports Third Quarter 2023 Financial Results

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Nov 14, 2023, 16:30 ET

In October, the Company began generating internal free cash flow

First quarter 2024 wholesale bookings are $4.5 million, which does not include e-commerce revenue, wholesale re-orders and licensing income

AUSTIN, Texas, Nov. 14, 2023 /PRNewswire/ -- Digital Brands Group, Inc. ("DBG") (NASDAQ: DBGI), a curated collection of luxury lifestyle, digital-first brands, today reported financial results for its third quarter ended September 30, 2023.

"We are pleased to have turned Sundry around. Based on current trends and first quarter wholesale bookings, we are past the brand's bottom set in August. For example, we have tripled Sundry's first quarter 2024 wholesale bookings versus the brand's third quarter 2023 wholesale revenue," said Hil Davis, CEO of Digital Brands Group.

"The increase in our revenue, coupled with the cost synergies, has resulted in meaningful operating leverage and internal free cash flow that started in October. We expect our internal free cash flow to continue going forward."

Results for the Third Quarter

Net revenues increased 22.5% to $3.3 million compared to $2.7 million a year ago
- This excludes revenue from Harper & Jones as it was spun out in the second quarter
- This represents the lowest point of Sundry's wholesale revenue based on current trends, as well as the brand's first quarter wholesale bookings
Gross margin increased 77.7% to $1.7 million compared to $1.0 million a year ago
- Gross profit margins increased to 52.3% from 36.0% a year ago
G&A expenses, including non-cash items, increased 25.3% to $3.7 million compared to $3.0 million a year ago
- G&A expenses, excluding non-cash item expenses, decreased 30.8% to $1.6 million compared to $2.3 million a year ago
- G&A expenses included $2.1M in non-cash expenses associated with D&A, amortization of loan discount, and stock option expense
Sales & Marketing expenses increased 12.6% to $1.2 million compared to $1.0 million a year ago
- Sales and marketing expenses ratio was 35.3% compared to 38.5% a year ago
Net operating loss, excluding the non-cash charges was $1.2 million compared to a loss of $2.5 million a year ago
Net loss per diluted share attributable to common stockholders was $5.4 million, or $14.55 per diluted share, compared to a loss of $4.9 million, or a loss of $223.83 per diluted share, a year ago
- Net loss per diluted share, excluding non-cash expenses, was $2.6 million, or $8.92 per share

"As we stated, the Board is reviewing strategic alternatives given the continued dislocation between Digital Brand Group's public market value and the intrinsic value of the Company's underlying assets and operating performance. We believe the first quarter 2024 wholesale bookings and the monthly internal free cash flow illustrate how significant this dislocation has become. To illustrate this dislocation, we are on a $18 million wholesale revenue run rate for 2024, which does not include any benefit from additional revenue from e-commerce, stores and licensing income," said Hil Davis, Chief Executive Officer of Digital Brands Group.

Conference Call and Webcast Details Updated

Management will host a conference call on Tuesday, November 14 at 5:30 p.m. ET to discuss the results. The live conference call can be accessed by dialing (800) 715-9871 from the U.S. or internationally. The conference I.D. code is 7049695 or referencing Digital Brands or via the web by using the following link: https://event.choruscall.com/mediaframe/webcast.html?webcastid=4F6hhED1.

Forward-looking Statements

Certain statements included in this release are "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting DBG and therefore involve several risks and uncertainties. You can identify these statements by the fact that they use words such as "will," "anticipate," "estimate," "expect," "should," and "may" and other words and terms of similar meaning or use of future dates, however, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements regarding DBG's plans, objectives, projections and expectations relating to DBG's operations or financial performance, and assumptions related thereto are forward-looking statements. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. DBG undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Potential risks and uncertainties that could cause the actual results of operations or financial condition of DBG to differ materially from those expressed or implied by forward-looking statements include, but are not limited to: risks arising from the widespread outbreak of an illness or any other communicable disease, or any other public health crisis, including the coronavirus (COVID-19) global pandemic; the level of consumer demand for apparel and accessories; disruption to DBGs distribution system; the financial strength of DBG's customers; fluctuations in the price, availability and quality of raw materials and contracted products; disruption and volatility in the global capital and credit markets; DBG's response to changing fashion trends, evolving consumer preferences and changing patterns of consumer behavior; intense competition from online retailers; manufacturing and product innovation; increasing pressure on margins; DBG's ability to implement its business strategy; DBG's ability to grow its wholesale and direct-to-consumer businesses; retail industry changes and challenges; DBG's and its vendors' ability to maintain the strength and security of information technology systems; the risk that DBG's facilities and systems and those of our third-party service providers may be vulnerable to and unable to anticipate or detect data security breaches and data or financial loss; DBG's ability to properly collect, use, manage and secure consumer and employee data; stability of DBG's manufacturing facilities and foreign suppliers; continued use by DBG's suppliers of ethical business practices; DBG's ability to accurately forecast demand for products; continuity of members of DBG's management; DBG's ability to protect trademarks and other intellectual property rights; possible goodwill and other asset impairment; DBG's ability to execute and integrate acquisitions; changes in tax laws and liabilities; legal, regulatory, political and economic risks; adverse or unexpected weather conditions; DBG's indebtedness and its ability to obtain financing on favorable terms, if needed, could prevent DBG from fulfilling its financial obligations; and climate change and increased focus on sustainability issues. More information on potential factors that could affect DBG's financial results is included from time to time in DBG's public reports filed with the SEC, including DBG's Annual Report on Form 10-K, and Quarterly Reports on Form 10-Q, and Forms 8-K filed or furnished with the SEC.

DIGITAL BRANDS GROUP, INC STATEMENT OF OPERATIONS

			Three Months Ended		Nine Months Ended
			September 30,		September 30,
			2023	2022	2023	2022
				Restated		Restated
Net revenues			$ 3,257,332	$ 2,658,844	$ 12,127,135	$ 7,937,406
Cost of net revenues			1,554,044	1,700,547	6,094,532	5,252,943
		Gross profit	1,703,288	958,298	6,032,603	2,684,464

Operating expenses:
	General and administrative		3,735,527	2,979,915	12,115,590	11,053,536
	Sales and marketing		1,151,377	1,022,331	3,188,054	3,252,418
	Distribution		238,546	97,737	750,945	522,510
	Change in fair value of contingent consideration		-	(702,885)	(10,698,475)	6,418,355
		Total operating expenses	5,125,450	3,397,098	5,356,114	21,246,820

Income (loss) from operations			(3,422,162)	(2,438,800)	676,489	(18,562,356)

Other income (expense):
	Interest expense		(1,956,080)	(2,271,548)	(4,907,567)	(6,002,160)
	Other non-operating income (expenses)		(57,752)	(23,690)	(734,501)	2,629,685
		Total other income (expense), net	(2,013,832)	(2,295,238)	(5,642,068)	(3,372,475)

Income tax benefit (provision)			-	-	-	-
Net loss from continuing operations			(5,435,994)	(4,734,038)	(4,965,579)	(21,934,831)
Income (loss) from discontinued operations, net of tax			-	(160,433)	(1,562,503)	(326,507)
Net loss			$ (5,435,994)	$ (4,894,471)	$ (6,528,082)	$ (22,261,338)

Weighted average common shares outstanding -
	basic and diluted		373,498	21,150	283,673	13,649
Net loss from continuing per common share - basic and diluted			$ (14.55)	$ (223.83)	$ (17.50)	$ (1,607.05)

The accompanying notes are an integral part of these financial statements.

DIGITAL BRANDS GROUP, INC STATEMENTS OF CASH FLOW

	Nine Months Ended
	September 30,
	2023	2022
Cash flows from operating activities:
Net loss	$ (6,528,082)	$ (22,261,338)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	2,485,166	1,669,782
Amortization of loan discount and fees	1,956,355	4,610,234
Loss on extinguishment of debt	689,100	-
Loss on disposition of business	2,923,940	-
Stock-based compensation	308,511	491,945
Shares issued for services	1,656,417	-
Change in credit reserve	354,282	(26,429)
Change in fair value of contingent consideration	(12,098,475)	6,418,355
Discontinued operations	7,666	-
Fees incurred in connection with debt financings	-	48,245
Change in fair value of warrant liability	-	(18,223)
Change in fair value of derivative liability	-	(794,477)
Forgiveness of Payroll Protection Program	-	(1,760,755)
Changes in operating assets and liabilities:
Accounts receivable, net	153,479	(289,061)
Due from factor, net	72,220	433,671
Inventory	514,955	100,006
Prepaid expenses and other current assets	(366,615)	(522,434)
Accounts payable	182,242	382,943
Accrued expenses and other liabilities	1,088,763	1,715,221
Deferred revenue	(183,782)	119,977
Accrued interest	326,219	992,482
Net cash used in operating activities	(6,457,638)	(8,689,857)
Cash flows from investing activities:
Cash disposed	(18,192)	-
Purchase of property, equipment and software	(27,855)	(5,533)
Deposits	87,378	-
Net cash provided by (used in) investing activities	41,331	(5,533)
Cash flows from financing activities:
Proceeds (repayments) from related party advances	(218,967)	(162,692)
Advances (repayments) from factor	154,073	(60,735)
Proceeds from venture debt	-	237,500
Issuance of loans and note payable	5,799,989	248,858
Repayments of convertible and promissory notes	(8,840,092)	(3,068,750)
Issuance of convertible notes payable	-	3,751,250
Exercise of warrants	1,167,566	-
Issuance of common stock in public offering	10,000,003	9,347,450
Offering costs	(1,854,622)	(1,930,486)
Net cash provided by financing activities	6,207,950	8,362,395
Net change in cash and cash equivalents	(208,357)	(332,995)
Cash and cash equivalents at beginning of period	1,275,616	528,394
Cash and cash equivalents at end of period	$ 1,067,259	$ 195,399

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$ -	$ -
Cash paid for interest	$ 1,176,305	$ 318,576

Supplemental disclosure of non-cash investing and financing activities:
Conversion of notes into common stock	$ -	$ 1,802,372
Conversion of notes into preferred stock	$ 5,759,177	$ -
Right of use asset	$ 467,738	$ 152,387
Warrants issued in connection with note	$ -	$ 790,540
Derivative liability in connection with convertible note	$ -	$ 559,957
Conversion of related party notes and payables into preferred and common stock	$ -	$ 25,000
Conversion of venture debt into preferred stock	$ -	$ 6,300,000

The accompanying notes are an integral part of these financial statements.

DIGITAL BRANDS GROUP, INC STATEMENT OF BALANCE SHEETS

					September 30,	December 31,
					2023	2022
	ASSETS
	Current assets:
			Cash and cash equivalents		$ 1,067,259	$ 1,275,616
			Accounts receivable, net		419,125	583,368
			Due from factor, net		258,825	839,400
			Inventory		4,710,327	5,122,564
			Prepaid expenses and other current assets		1,194,544	766,901
			Assets per discontinued operations, current		-	241,544
				Total current assets	7,650,080	8,829,393
	Property, equipment and software, net				98,170	104,512
	Goodwill				8,973,501	8,973,501
	Intangible assets, net				10,701,764	12,906,238
	Deposits				106,547	193,926
	Right of use asset				207,745	102,349
	Assets per discontinued operations				-	2,628,136
				Total assets	$ 27,737,807	$ 33,738,055

	LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
	Current liabilities:
			Accounts payable		$ 8,273,340	$ 8,016,173
			Accrued expenses and other liabilities		4,781,632	3,936,920
			Due to related parties		336,250	555,217
			Contingent consideration liability		-	12,098,475
			Convertible note payable, net		100,000	2,721,800
			Accrued interest payable		1,888,014	1,561,795
			Loan payable, current		1,878,023	1,829,629
			Promissory note payable, net		4,899,018	9,000,000
			Right of use liability, current portion		203,401	102,349
			Liabilities per discontinued operations, current		-	1,071,433
				Total current liabilities	22,359,678	40,893,791
	Loan payable				150,000	150,000
	Right of use liability				6,784	-
	Liabilities per discontinued operations				-	147,438
				Total liabilities	22,516,462	41,191,229

	Commitments and contingencies

	Stockholders' equity (deficit):
		Undesignated preferred stock, $0.0001 par, 10,000,000 shares authorized, 0 shares
			issued and outstanding as of both September 30, 2023 and December 31, 2022		-	-
		Series A convertible preferred stock, $0.0001 par, 6,800 shares designated, 6,300 shares issued and
			outstanding as of both September 30, 2023 and December 31, 2022		1	1
		Series C convertible preferred stock, $0.0001 par, 5,671 shares designated, 5,671 and 0 shares issued and
			outstanding as of September 30, 2023 and December 31, 2022, respectively		1	-
		Common stock, $0.0001 par, 1,000,000,000 shares authorized, 578,090 and 317,502 shares
			issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		58	18
		Additional paid-in capital			115,496,683	96,294,123
		Accumulated deficit			(110,275,397)	(103,747,316)
				Total stockholders' equity (deficit)	5,221,345	(7,453,174)
				Total liabilities and stockholders' equity (deficit)	$ 27,737,807	$ 33,738,055

The accompanying notes are an integral part of these financial statements.

About Digital Brands Group
We offer a wide variety of apparel through numerous brands on a both direct-to-consumer and wholesale basis. We have created a business model derived from our founding as a digitally native-first vertical brand. We focus on owning the customer's "closet share" by leveraging their data and purchase history to create personalized targeted content and looks for that specific customer cohort.

Digital Brands Group, Inc. Company Contact
Hil Davis, CEO
Email: [email protected]
Phone: (800) 593-1047