What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-16 compared with 2021-06-28 · 65 added, 38 removed, 167 unchanged (38% of the section changed)

28 unchanged sentences

Our products are sold direct-to-consumers principally through our websites, but also through our wholesale channel, primarily in specialty stores and select department stores, and our own showrooms.

We currently offer products under the DSTLD and Bailey 44 brands.

We will also offer products under the Harper & Jones (“H&J”) brand upon their acquisition in May 2021 and under ACE Studios once we finalize the re-branding and repositioning into more casual wear.

We currently offer products under the DSTLD, Bailey 44 (“Bailey”) and Harper & Jones (“H&J”) brands.

We plan to begin offering products under ACE Studios once we finalize the re-branding and repositioning into more casual wear.

Bailey was historically a wholesale brand, which we have begun to transition to a digital, direct-to-consumer brand.

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The COVID-19 pandemic is ongoing and dynamic in nature, and continues to drive global uncertainty and disruption.

As a result, COVID-19 is having a significant negative impact on the Company’s business, including the consolidated financial condition, results of operations and cash flows throughout 2020.

While we are not able to determine the ultimate length and severity of the COVID-19 pandemic, we expect store closures, an anticipated reduction in traffic once stores initially reopen and a highly promotional marketplace will have a significant negative impact on our financial performance for at least the first two quarters of 2021.

As a result, COVID-19 had a significant negative impact on the Company’s business, including the consolidated financial condition, results of operations and cash flows throughout 2020 and the first six months of 2021.

While we are not able to determine the ultimate length and severity of the COVID-19 pandemic, we expect store closures, an anticipated reduction in traffic once stores initially reopen and a highly promotional marketplace will continue to have a negative impact on our financial performance through the balance of 2021.

DBG has implemented cost controls to reduce discretionary spending to help mitigate the loss of sales and to conserve cash while continuing to support employees.

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Bailey also sells its products indirectly through wholesale channels that include third-party online channels and physical channels such as specialty retailers and department stores.

H&J sells its products directly to customers through their showrooms and sales reps.

Cost of Net Revenue

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and inbound freight.

H&J’s cost of net revenue sold is associated with procuring fabric and custom tailoring each garment.

Operating Expenses

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These costs consist of general and administrative, sales and marketing, and fulfillment and shipping expense to the customer.

General and administrative expenses consist primarily of all payroll and payroll-related expenses, professional fees, insurance, software costs, and expenses related to our operations at our headquarters, including utilities, depreciation and amortization, and other costs related to the administration of our business.

General and administrative expenses consist primarily of all payroll and payroll-related expenses, stock-based compensation, professional fees, insurance, software costs, and expenses related to our operations at our headquarters, including utilities, depreciation and amortization, and other costs related to the administration of our business.

Sales and marketing expense primarily includes digital advertising;

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and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse.

In addition, going forward, the amortization of the identifiable intangibles acquired in the acquisitions will be included in operating expenses.

At each reporting period, we estimate changes in the fair value of contingent consideration and recognize any change in fair in our consolidated statement of operations, which is included in operating expenses.

Additionally, amortization of the identifiable intangibles acquired in the acquisitions is also included in operating expenses.

Interest Expense

1 unchanged sentence

Results of Operations

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

The following table presents our results of operations for the three months ended March 31, 2021 and 2020:

Three Months Ended June 30, 2021 compared to Three Months Ended June 30, 2020

The following table presents our results of operations for the three months ended June 30, 2021 and 2020:

Three Months Ended

6 unchanged sentences

Provision for income taxes

Revenue decreased by $2.2 million to $0.4 million for the three months ended March 31, 2021, compared to $2.6 million in the corresponding fiscal period in 2020.

The decrease was primarily due to the effects of COVID-19 on the operations of Bailey in 2021.

The design and release of new collections was delayed due to our lack of sufficient working capital.

We plan on designing and releasing new collections now that we have sufficient funding after the IPO.

Our gross profit decreased by $1.6 million for the three months ended March 31, 2021 to ($0.2) million from $1.4 million for the corresponding fiscal period in 2020.

The decrease in gross margin was primarily attributable to the lower revenues in the three months ended March 31, 2021.

Our gross margin was (50.8%) for the three months ended March 31, 2021 compared to 52.5% for the three months ended March 31, 2020.

The decrease in the gross margin was due to our discounting and liquidation measures by both DBG and Bailey44 to sell aged inventory.

In the three months ended March 31, 2021, we made mark downs to net realizable value for certain inventory that liquidated and sold in the second quarter.

Revenues increased by $0.3 million to $1.0 million for the three months ended June 30, 2021, compared to $0.7 million in the corresponding fiscal period in 2020.

The increase was primarily due to the acquisition of H&J in May 2021.

Gross Profit (Loss)

Our gross profit increased by $0.7 million for the three months ended June 30, 2021 to $0.4 million from a gross loss of ($0.3) million for the corresponding fiscal period in 2020.

The increase in gross margin was primarily attributable to increased revenue in the three months ended June 30, 2021 and the gross profit achieved by H&J since the May 2021 acquisition.

Our gross margin was 39.3% for the three months ended June 30, 2021 compared to (40.4)% for the three months ended March 31, 2020.

The increase in the gross margin was due to H&J’s margins in 2021, as well as mark downs to net realizable value of DBG and Bailey’s inventory in the second quarter of 2020.

due to the effects of COVID.

Operating Expenses

Our operating expenses decreased by $0.8 million for the three months ended March 31, 2021 to $2.1 million compared to $2.9 million for the corresponding fiscal period in 2020.

The decrease in operating expenses was primarily driven by cost reductions after the Bailey acquisition and COVID, such as eliminating the DBG office and moving into the Bailey 44 office, eliminating DBG’s third-party fulfillment center and moving it into Bailey 44’s fulfillment operations, and layoffs due to overlapping roles and responsibilities.

Our operating expenses increased by $9.6 million for the three months ended June 30, 2021 to $11.2 million compared to $1.6 million for the corresponding fiscal period in 2020.

The increase in operating expenses was primarily due to non-cash charges incurred in 2021 upon the IPO and acquisition of H&J, including stock-based compensation expense of $4.0 million and the change in fair value of contingent consideration of $3.1 million, as well as increased professional fees and investor relations costs.

We expect operating expenses to increase in total dollars and as a percentage of revenues as our revenue base increases.

Other Expenses

Other expenses increased by $0.4 million to $0.7 million in the three months ended March 31, 2021 compared to $0.3 million in the corresponding fiscal period in 2020.

The increase in the other expense was primarily due to interest expense from the Bailey 44 acquisition and an increase in the DBG interest expense year over year.

Our net loss increased by $1.1 million to a loss of $3.0 million for the three months ended March 31, 2021 compared to a loss of $1.9 million for the corresponding fiscal period in 2020 primarily due to lower gross profit, partially offset by a decrease in our operating expenses.

Other expenses increased by $0.6 million to $1.0 million in the three months ended June 30, 2021 compared to $0.4 million in the corresponding fiscal period in 2020.

The increase in the other expense was primarily due to interest expense from the April 2021 note which was fully amortized during the second quarter of 2021.

Our net loss increased by $8.4 million to a loss of $10.7 million for the three months ended June 30, 2021 compared to a loss of $2.3 million for the corresponding fiscal period in 2020 primarily due to our increased operating expenses, partially offset by higher gross profit and a tax benefit recorded in 2021.

Six Months Ended June 30, 2021 compared to Six Months Ended June 30, 2020

The following table presents our results of operations for the six months ended June 30, 2021 and 2020:

Six Months Ended

Cost of net revenues

Operating expenses

Operating loss

Other expenses

Loss before provision for income taxes

Provision for income taxes

Revenue decreased by $1.8 million to $1.4 million for the six months ended June 30, 2021, compared to $3.2 million in the corresponding fiscal period in 2020.

The decrease is primarily due to the full effects of COVID-19 on the operations of Bailey in the winter of 2021, partially offset by the increase in revenue due to the acquisition of H&J in May 2021.

Our gross profit decreased by $0.9 million for the six months ended June 30, 2021 to $0.2 million from $1.1 million for the corresponding fiscal period in 2020.

The decrease in gross margin was primarily attributable to lower revenues in the six months ended June 30, 2021, partially offset by the gross profit of H&J in 2021.

Our gross margin was 13.2% for the six months ended June 30, 2021 compared to 33.5% for the six months ended June 30, 2020.

The decrease in gross margin was due to our discounting and liquidation measures by both DBG and Bailey to sell aged inventory in 2021.

Operating Expenses

Our operating expenses increased by $8.8 million for the six months ended June 30, 2021 to $13.4 million compared to $4.6 million for the corresponding fiscal period in 2020.

We expect operating expenses to increase in total dollars and as a percentage of revenues as our revenue base increases.

Other Expenses

Other expenses increased by $0.9 million to $1.6 million in the six months ended June 30, 2021 compared to $0.7 million in the corresponding fiscal period in 2020.

The increase in the other expense was primarily due to interest expense from the April 2021 note which was fully amortized during the second quarter of 2021 as well as amortization of debt discounts recorded upon debt conversions during the IPO.

Our net loss increased by $9.5 million to a loss of $13.7 million for the six months ended June 30, 2021 compared to a loss of $4.2 million for the corresponding fiscal period in 2020 primarily due to lower gross profit and our increased operating expenses, partially offset by a tax benefit recorded in 2021.

Liquidity and Capital Resources

As of June 28, 2021, we expect that our cash and cash equivalents of $711,203 as of March 31, 2021, together with the approximate $9.8 million of net proceeds received from our IPO, inclusive of the proceeds from the over-allotment exercise, and measures described below, will be sufficient to fund its operating expenses, debt obligations and capital expenditure requirements for at least one year from the date these consolidated financial statements are issued.

We expect that our cash and cash equivalents of $4.1 million as of June 30, 2021 and measures described below will be sufficient to fund its operating expenses, debt obligations and capital expenditure requirements for at least one year from the date these consolidated financial statements are issued.

Throughout the next twelve months, we intend to fund our operations from the funds raised through the IPO.

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Cash Flow Activities

The following table presents selected captions from our condensed statement of cash flows for the three months ended March 31, 2021 and 2020:

Three Months Ended

Net cash provided by operating activities:

The following table presents selected captions from our condensed statement of cash flows for the six months ended June 30, 2021 and 2020:

Six Months Ended

Net cash used in operating activities:

Non-cash adjustments

1 unchanged sentence

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by (used in) investing activities

Net cash provided by financing activities

1 unchanged sentence

Cash Flows Used In Operating Activities

Our cash used by operating activities increased by $0.8 million to cash used of $1.6 million for the three months ended March 31, 2021 as compared to cash used of $0.8 million for the corresponding fiscal period in 2020.

The increase in net cash used in operating activities was primarily driven by our higher net loss, partially offset by non-cash charges and cash provided by changes in our operating assets and liabilities.

Our cash used by operating activities increased by $4.4 million to cash used of $6.6 million for the six months ended June 30, 2021 as compared to cash used of $2.2 million for the corresponding fiscal period in 2020.

The increase in net cash used in operating activities was primarily driven by our higher net loss and less cash provided by changes in our operating assets and liabilities in 2021, partially offset by an increase in non-cash charges.

Cash Flows Provided By Investing Activities

Our cash generated from investing activities was $0 in the three months ended March 31, 2021 as as compared to cash generated of $150,000 for the corresponding fiscal period in 2020.

Cash generated during 2020 was primarily related to cash acquired due to business combinations and deposits.

Our cash used in investing activities was $0.5 million in the six months ended June 30, 2021 as compared to cash generated of $0.1 million for the corresponding fiscal period in 2020.

Cash used in 2021 was primarily related to the cash consideration in the H&J acquisition.

Cash generated during 2020 was primarily related to cash acquired due to the acquisition of Bailey and deposits.

Cash Flows Provided by Financing Activities

Cash provided by financing activities was $1.8 million for the three months ended March 31, 2021 compared to cash provided of $0.8 million for the corresponding fiscal period in 2020.

Cash inflows in the three months ended March 31, 2021 were primarily related to proceeds from a loan payable of $1.3 million and proceeds from convertible notes payable of $0.5 million.

Cash inflows in the three months ended March 31, 2020 were primarily related to proceeds from our Series A-3 for $0.3 million, proceeds from venture debt of $0.3 million, advances from Bailey’s factor of $0.2 million, and related party advances of $0.1 million.

Cash provided by financing activities was $10.6 million for the six months ended June 30, 2021 compared to cash provided of $2.8 million for the corresponding fiscal period in 2020.

Cash inflows in the six months ended June 30, 2021 were primarily related to $8.6 million in net proceeds from the IPO after deducting underwriting discounts and commissions and offering expenses, as well as $1.4 million in net proceeds from the underwriter’s exercise of their over-allotment option.

Cash was also generated in 2021 from proceeds from loan payables of $2.6 million and proceeds from convertible notes payable of $0.5 million, partially offset by loan and note repayments of $2.0 million.

Cash inflows in the six months ended June 30, 2020 were primarily related to proceeds from PPP and SBA loans of $1.7 million, proceeds from our Series A-3 and CF preferred stock for $0.7 million, proceeds from venture debt of $0.3 million and advances from Bailey’s factor of $0.2 million.

Contractual Obligations and Commitments

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A 5% closing fee is due upon each closing, legal and accounting fees of up to $40,000, and management fees of $4,167-$5,000 per month.

As of March 31, 2021, we owed our senior secured lender approximately $6.0 million that is due on the scheduled maturity date of December 31, 2022.

As of June 30, 2021, we owed our senior secured lender approximately $6.0 million that is due on the scheduled maturity date of December 31, 2022.

If we consummate a follow-on public offering on or before July 31, 2021, we are required to make a $3,000,000 payment on the loan within five business days after such public offering.

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The loan is senior to all of our other debts and obligations, is collateralized by all of our assets, and shares of our common stock pledged by former officers of the Company.

As of March 31, 2021 and December 31, 2020, the gross loan balance is $6,001,755.

As of June 30, 2021 and December 31, 2020, the gross loan balance is $6,001,755.

As of December 31, 2020, we were in technical default of this debt due to covenant violations.

Subsequent to our IPO, all defaults have been curred.

Subsequent to our IPO, all defaults have been cured.

Management expects that the Company will remain in good standing with all requirements of this debt in the near term.

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Our actual results may differ from these estimates under different assumptions or conditions.

During the three months ended March 31, 2021, there were no material changes to our critical accounting policies.

During the six months ended June 30, 2021, there were no material changes to our critical accounting policies except for the adoption of ASU 2020-06 (see Note 3 to the unaudited condensed consolidated financial statements).

Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our prospectus filed May 17, 2021 and the notes to the unaudited condensed financial statements included in Item 1, “Unaudited Financial Statements,” of this Quarterly Report on Form 10-Q.

10 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis