What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-12 compared with 2021-08-16 · 78 added, 74 removed, 158 unchanged (49% of the section changed)

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Business Overview

We offer a wide variety of apparel through several brands on a both direct-to-consumer and wholesale basis.

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.

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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, 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.

DSTLD was historically a digital direct-to-consumer brand, to which we recently added select wholesale retailers to create more brand awareness.

H&J is also primarily a direct-to-consumer brand using its own showrooms.

We will leverage all three channels (our websites, wholesale and our own stores) for all our brands.

We currently offer products under the DSTLD, Bailey 44, Harper & Jones and Stateside brands.

Bailey is primarily a

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

DSTLD is primarily a digital direct-to consumer brand, to which we recently added select wholesale retailers to create more brand awareness.

Harper & Jones is primarily a direct-to-consumer brand using its own showrooms.

Stateside is primarily a digital, direct-to-consumer brand.

We intend to leverage all three channels (our websites, wholesale and our own stores) for all our brands.

Every brand will have a different revenue mix by channel based on optimizing revenue and margin in each channel for each brand, which includes factoring in customer acquisition costs and retention rates by channel and brand.

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This in turn has the effect of lowering our inventory risk and cash needs since we can order and replenish product based on the data from our online sales history, replenish specific inventory by size, color and SKU based on real time sales data, and control our mark-down and promotional strategies versus being told what mark downs and promotions we have to offer by the department stores and boutique retailers.

We acquired Bailey in February 2020.

Upon the closing of our IPO in May 2021, we closed on our acquisition of H&J.

We agreed on the consideration that we are paying in each acquisition in the course of arm’s length negotiations with the holders of the membership interests in each of Bailey and H&J.

In determining and negotiating this consideration, we relied on the experience and judgment of our management and our evaluation of the potential synergies that could be achieved in combining the operations of Bailey and H&J.

We acquired Bailey in February 2020, H&J in May 2021 and Stateside in August 2021.

We agreed on the consideration that we are paying in each acquisition in the course of arm’s length negotiations with the holders of the membership interests in each of Bailey, H&J and Stateside.

We did not obtain independent valuations, appraisals or fairness opinions to support the consideration that we agreed to pay.

We agreed on the consideration that we are paying in each acquisition in the course of arm’s length negotiations with the holders of the membership interests in each Bailey, H&J and Stateside.

Material Trends, Events and Uncertainties

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Approximately 220 boutique stores where we sold our products closed temporarily and permanently in 2020 and into 2021, representing a reduction in approximately 40% of such stores prior to COVID.

Additionally, approximately 40 department stores that carried our products have closed as well, representing a reduction of approximately 35% of such stores prior to COVID.

Additionally, approximately 40 department stores that carried our

products have closed as well, representing a reduction of approximately 35% of such stores prior to COVID.

We do not anticipate the department stores will open those stores back up, and we do not anticipate a majority of the closed boutique stores will reopen.

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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 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.

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Components of Our Results of Operations

We sell our products to our customers directly through our website.

DSTLD sells its products to our customers directly through our website.

In those cases, sales, net represents total sales less returns, promotions, and discounts.

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

Stateside sells its products directly to customers.

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

Cost of Net Revenue

Cost of net revenue include direct cost of purchased merchandise;

inventory shrinkage;

inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost and net realizable reserves.

Bailey’s cost of net revenue includes the direct cost of purchased and manufactured merchandise;

DSTLD, Bailey and Stateside’s cost of net revenue include direct cost of purchased merchandise;

inventory shrinkage;

inventory adjustments due to obsolescence including excess and slow-moving inventory and lower of cost and net realizable reserves;

inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost and net realizable reserves, duties;

and inbound freight.

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We expect these costs will increase our operating costs.

Distribution expenses include the cost to operate our warehouse — or prior to Bailey 44 acquisition, costs paid to our third-party logistics provider — including occupancy and labor costs to pick and pack customer orders and any return orders;

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

Distribution expenses includes costs paid to our third-party logistics provider, packaging and shipping costs to the customer from the warehouse and any returns from the customer to the warehouse.

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.

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Results of Operations

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

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

Three Months Ended

September 30,

Cost of net revenues

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Provision for income taxes

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.

Revenues increased by $0.9 million to $2.2 million for the three months ended September 30, 2021, compared to $1.2 million in the corresponding fiscal period in 2020.

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

Our gross profit increased by $1.7 million for the three months ended September 30, 2021 to $1.2 million from a gross loss of ($0.5) million for the corresponding fiscal period in 2020.

The increase in gross margin was primarily attributable to increased revenue in the three months ended September 30, 2021 and the gross profit achieved by H&J and Stateside since the acquisitions, as well as mark downs to net realizable value of DBG and Bailey’s inventory in the third quarter of 2020.

due to the effects of COVID.

Our gross margin was 55.9% for the three months ended September 30, 2021 compared to (40.1)% for the three months ended September 30, 2020.

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

due to the effects of COVID.

Operating Expenses

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.

Our operating expenses increased by $6.2 million for the three months ended September 30, 2021 to $9.1 million compared to $2.9 million for the corresponding fiscal period in 2020.

The increase in operating expenses was primarily due to the change in fair value of contingent consideration of $4.0 million, as well as increased professional fees, marketing expenses 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 $0.6 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

Other expenses increased by $0.5 million to $1.0 million in the three months ended September 30, 2021 compared to $0.5 million in the corresponding fiscal period in 2020.

The increase in the other expense was primarily due to the change in fair value of derivative liability pertaining to the Oasis Note.

Our net loss increased by $5.0 million to a loss of $8.9 million for the three months ended September 30, 2021 compared to a loss of $3.9 million for the corresponding fiscal period in 2020 primarily due to change in fair value of contingent consideration of $4.0 million, as well as increased professional fees, marketing expenses and investor relations costs, partially offset by higher gross profit.

A majority of the increase was due to the change in fair value of contingent consideration of $4.0 million, as well as increased professional fees, marketing expenses and investor relations costs.

Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020

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

Nine Months Ended

September 30,

Cost of net revenues

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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.

Revenue decreased by $0.9 million to $3.6 million for the nine months ended September 30, 2021, compared to $4.5 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 and Stateside in August 2021.

Our gross profit increased by $0.8 million for the nine months ended September 30, 2021 to $1.4 million from $0.6 million for the corresponding fiscal period in 2020.

The increase in gross margin was primarily attributable to the margins achieved by H&J and Stateside, as well as significant write-downs to inventory in 2020, partially offset by lower revenues in the nine months ended September 30, 2021.

Our gross margin was 39.1% for the nine months ended September 30, 2021 compared to 13.2% for the nine months ended September 30, 2020.

The increase in in gross margin was due margins per our H&J and Stateside acquisitions, as well as mark downs to net realizable value of DBG and Bailey’s inventory in the third quarter of 2020

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.

Our operating expenses increased by $15.0 million for the nine months ended September 30, 2021 to $22.5 million compared to $7.5 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 $7.0 million, as well as increased professional fees, marketing costs 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 $0.9 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.

Other expenses increased by $1.5 million to $2.7 million in the nine months ended September 30, 2021 compared to $1.2 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, amortization of debt discounts recorded upon debt conversions during the IPO and the change in the fair value of the Company’s derivative liability issued in August 2021.

Our net loss increased by $14.6 million to a loss of $22.7 million for the nine months ended September 30, 2021 compared to a loss of $8.1 million for the corresponding fiscal period in 2020 primarily due to our increased operating expenses, partially offset by a higher gross profit and tax benefit recorded in 2021.

The majority of the increase 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 $7.0 million, as well as increased professional fees, marketing costs and investor relations costs.

Liquidity and Capital Resources

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.

Additionally, we intend to fund operations from increased revenues as new designs and collections will be deployed in the second half of 2021, through settlement or renegotiation of aged payables and outstanding debt, and continuing its cost cutting measures.

We expect that the 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, the Company intends to fund its operations primarily from the funds raised through the equity line of credit agreement.

The Company also plans to pursue secondary offerings through early 2022.

The Company also plans to continue to fund its capital funding needs through a combination of public or private equity offerings, debt financings or other sources.

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Cash Flow 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:

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

Nine Months Ended

September 30,

Net cash provided by operating activities:

Non-cash adjustments

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Net cash used in operating activities

Net cash provided by (used in) investing activities

Net cash used in investing activities

Net cash provided by financing activities

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Cash Flows Used In Operating Activities

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.

Our cash used by operating activities increased by $10.3 million to cash used of $11.5 million for the nine months ended September 30, 2021 as compared to cash used of $1.2 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 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.

Our cash used in investing activities was $5.5 million in the nine months ended September 30, 2021 as compared to cash used 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 and Stateside acquisitions.

Cash used during 2020 was primarily related to purchases of property and equipment, partially offset by cash generated due to the acquisition of Bailey and deposits.

Cash Flows Provided by Financing Activities

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.

Cash provided by financing activities was $16.7 million for the nine months ended September 30, 2021 compared to cash provided of $1.5 million for the corresponding fiscal period in 2020.

Cash inflows in the nine months ended September 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, exercises of warrants of $1.8 million and proceeds from convertible notes payable of $5.1 million, partially offset by loan and note repayments of $2.0 million.

Cash inflows in the nine months ended September 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 and proceeds from venture debt of $0.9 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 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.

In addition, if we consummate an additional follow-on offering thereafter on or before September 30, 2021, we are required to make another $3,000,000 payment on the loan within five business days after such public offering.

If we do not consummate the initial follow-on offering or, if we do but do not consummate the aforementioned second follow-on offering by September 30, 2021, we are required to make a $300,000 payment on the loan by September 30, 2021.

While we have no current plans to conduct a follow-on offering prior to July 31, 2021 and September 30, 2021, we may effect such an offering if market conditions are favorable for such an offering and should the representative agree to waive the standstill provision set forth herein.

There is no assurance that even if market conditions are favorable that the representative will waive the standstill provision.

In such a case we anticipate to make any required payments under our senior credit facility from cash generated from operations.

As of September 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 consummated a follow-on public offering on or before July 31, 2021, we were required to make a $3,000,000 payment on the loan within five business days after such public offering.

In addition, if we consummated an additional follow-on offering thereafter on or before September 30, 2021, we were required to make another $3,000,000 payment on the loan within five business days after such public offering.

If we did not consummate the initial follow-on offering or, if we did not consummate the aforementioned second follow-on offering by September 30, 2021, we were required to make a $300,000 payment on the loan by September 30, 2021.

As of the filing date of these financial statements, all defaults were cured and there are no additional expected defaults in the next twelve months.

Our credit agreement contains negative covenants that, subject to significant exceptions, limit our ability, among other things to make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, or undergo other fundamental changes.

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

As of September 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.

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Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.

The preparation of our financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements.

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.

The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements.

We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

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

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).

During the nine months ended September 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.

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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