DESTINATION XL GROUP, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect” or “anticipate” or the negatives thereof, variations thereon or similar terminology. The forward-looking statements contained in this Quarterly Report are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may be found in other locations as well, and include statements regarding the continuing impact of the COVID-19 pandemic on our business and financial results, expected savings from our efforts to right size our lease structure, expected sales trends, expected marketing spend, expected inventory levels, potential freight cost and raw materials cost increases, and our liquidity expectations for the next 12 months. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. The forward-looking statements in this Quarterly Report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and notes to those statements included elsewhere in this Quarterly Report and our audited Consolidated Financial Statements for the year ended January 30, 2021, included in our Annual Report on Form 10-K for the year ended January 30, 2021, as filed with the Securities and Exchange Commission on March 19, 2021 (our “Fiscal 2020 Annual Report”). Numerous factors could cause our actual results to differ materially from such forward-looking statements. We encourage readers to refer to our “Risk Factors” found in Part I, Item 1A of our Fiscal 2020 Annual Report. This discussion sets forth certain risks and uncertainties that may have an impact on future results and direction of our Company, including, without limitation, risks relating to the duration and continuing impact of the COVID-19 pandemic and its impact on the Company’s results of operations, the execution of our corporate strategy, predict customer tastes and fashion trends, forecast sales growth trends, grow market share, ability to maintain sufficient inventory levels, navigate supply chain uncertainties and compete successfully in our market. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the foregoing. These forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances in which the forward-looking statement is based. BUSINESS SUMMARY Destination XL Group, Inc., together with our consolidated subsidiaries (the “Company”), is the largest specialty retailer of big and tall men’s clothing with retail, wholesale and direct operations in the United States and Toronto, Canada. We operate under the trade names of Destination XL ® , DXL ® , DXL Outlets, Casual Male XL ® and Casual Male XL Outlets. At July 31, 2021, we operated 221 Destination XL stores, 16 DXL outlet stores, 40 Casual Male XL retail stores, 20 Casual Male XL outlet stores and a digital business, including an e-commerce site at dxl.com and a mobile site m.destinationXL.com and mobile app . Unless the context indicates otherwise, all references to “we,” “our,” “us” and “the Company” refer to Destination XL Group, Inc. and our consolidated subsidiaries. We refer to our fiscal years, which end on January 29, 2022, January 30, 2021 and February 1, 2020 as “fiscal 2021,” “fiscal 2020” and “fiscal 2019,” respectively. All three fiscal years are 52-week periods. SEGMENT REPORTING We have three principal operating segments: our stores, direct business and our wholesale business. We consider our stores and direct business segments to be similar in terms of economic characteristics, production processes and operations, and have therefore aggregated them into one reportable segment, retail segment, consistent with our omni-channel business approach. Due to the immateriality of the wholesale segment’s revenues, profits and assets, its operating results have been aggregated with the retail segment for all periods. COMPARABLE SALES Our customer’s shopping experience continues to evolve across multiple channels and we are continually adapting to meet the guest’s needs. The majority of our stores have the capability of fulfilling online orders if merchandise is not available in the warehouse. As a result, we continue to see more transactions that begin online but are ultimately completed at the store level. Similarly, if a customer visits a store and the item is out of stock, the associate can order the item through our website. A customer also has the ability to order online and pick-up in a store and, more recently due to the COVID-19 pandemic, pick-up at curbside. We define store sales as sales that originate and are fulfilled directly at the store level. E-commerce sales, which we also refer to as direct sales, are defined as sales that originate online, whether through our website, at the store level or through a third-party marketplace. 18 Stores that have been open for 13 months are included in comparable sales. Stores that have been remodeled or re-located during the period are also included in our determination of comparable stores sales. Stores that have been expanded by more than 25% are considered non-comparable for the first 13 months. If a store becomes a clearance center, it is also removed from the calculation of comparable sales. The method of calculating comparable sales varies across the retail industry and, as a result, our calculation of comparable sales is not necessarily comparable to similarly titled measures reported by other retailers. The Company has not carved-out prior year sales for periods where the stores were temporarily closed in fiscal 2020 due to the pandemic. However, because the Company’s two stores in Canada were closed by government edict for a significant portion of the first six months of fiscal 2021, we have removed them from the current calculation of comparable sales. RESULTS OF OPERATIONS Continuing Impact of COVID-19 Pandemic on Our Business On March 11, 2020, the World Health Organization declared COVID-19 as a global pandemic. While the pandemic had an adverse effect on our business, financial condition and result of operations in fiscal 2020, we are hopeful that the worst is behind us and we are on the road to recovery. Substantial uncertainty remains regarding the duration of the pandemic, the potential impact of new variants, and the long-term effect of the pandemic on the global economy and its supply chain, unemployment, and overall consumer demand and spending. Executive Summary The following review of our results for second quarter and first six months of fiscal 2021 includes certain comparisons against the second quarter and first six months of fiscal 2019 in addition to the second quarter and first six months of fiscal 2020. Due to the COVID-19 pandemic and its impact on our results during the first six months of fiscal 2020, we believe that the additional discussion against the second quarter and first six months of fiscal 2019 is a more meaningful comparison with respect to the progress the Company made through the end of the second quarter of fiscal 2021. For the three months ended For the six months ended July 31, 2021 August 1, 2020 August 3, 2019 July 31, 2021 August 1, 2020 August 3, 2019 (in millions, except percentage of sales and per share data) Sales $ 138.6 $ 76.4 $ 123.2 $ 250.1 $ 133.7 $ 236.2 Net income (loss) $ 24.5 $ (10.7 ) $ 0.0 $ 33.1 $ (52.4 ) $ (3.0 ) Adjusted EBITDA (Non-GAAP basis) $ 29.8 $ (4.3 ) $ 7.1 $ 43.5 $ (23.2 ) $ 11.9 Gross Margin. as a percentage of sales 51.7 % 28.1 % 44.3 % 49.0 % 26.0 % 44.0 % SG&A expenses, as a percentage of sales 30.1 % 33.7 % 38.5 % 31.5 % 43.3 % 39.0 % Per diluted share: Net income (loss) $ 0.36 $ (0.21 ) $ 0.00 $ 0.50 $ (1.03 ) $ (0.06 ) Adjusted net income (loss) (Non-GAAP basis) $ 0.27 $ (0.15 ) $ 0.00 $ 0.37 $ (0.52 ) $ (0.04 ) We are pleased to report that net income for the second quarter of fiscal 2021 was $0.36 per diluted share, as compared to a loss of $(0.21) per diluted share in the second quarter of fiscal 2020 and breakeven in the second quarter of fiscal 2019. While we had planned for the second quarter to perform well based on the trends coming out of the first quarter, the second quarter results exceeded our expectations. This strong earnings performance was driven by month-over-month sales growth in both stores and direct business, an improved merchandise margin, lower occupancy costs and reduced SG&A expenses as a result of cost savings initiatives, implemented during fiscal 2020. We believe we are seeing a material shift in how consumers are thinking about and engaging with DXL. Many of our existing customers have returned to shop after months of staying close to home, and many new customers are discovering DXL for the first time. We believe we are steadily increasing our market share in the big + tall market by driving sales through our initiatives around digital engagement, a customer-first approach and repositioning of the brand. Our 12-month active customer file is almost back to pre-pandemic levels and in the second quarter we saw an increase in the new-to-file rate of 28.5%, as compared to the second quarter of fiscal 2019. Our earnings performance for the second quarter was not only driven by our sales growth, it was also due to improvement in our merchandise margin, driven by our reduced promotional posture that reduced markdowns and, contributed to a 350 basis point improvement in merchandise margin as compared to the second quarter of fiscal 2019. We also benefitted from the operating leverage 19 we created in fiscal 2020 through our lease r enegotiations and our SG&A cost- savings initiatives. We have renegotiated approximately 133 of our store leases that we expect will deliver over $17.1 million of savings over the life of the leases, including $6.2 million of expected savings in fiscal 2021. We have also reduced our SG&A expenses by approximately 840 basis points as compared to the second quarter of fiscal 2019. All of these factors contributed to our strong second quarter results. From a liquidity perspective, we had no borrowings outstanding under our Credit Facility and unused excess availability of $65.1 million at July 31, 2021. Total debt, net of cash, at July 31, 2021, was $11.0 million as compared to $61.0 million at August 1, 2020 and $58.7 million at August 3, 2019. Financial Summary Sales The following tables present sales by segment for the three and six months ended July 31, 2021, August 1, 2020 and August 3, 2019: For the three months ended (in thousands, except percentages) July 31, 2021 August 1, 2020 August 3, 2019 Store sales $ 99,043 71.9 % $ 38,465 53.9 % $ 95,119 78.9 % Direct sales 38,664 28.1 % 32,959 46.1 % 25,406 21.1 % Retail segment $ 137,707 $ 71,424 $ 120,525 Wholesale segment 883 5,018 2,720 Total Sales $ 138,590 $ 76,442 $ 123,245 For the six months ended (in thousands, except percentages) July 31, 2021 August 1, 2020 August 3, 2019 Store sales $ 173,923 70.7 % $ 70,792 55.9 % $ 181,834 78.7 % Direct sales 72,206 29.3 % 55,841 44.1 % 49,239 21.3 % Retail segment $ 246,129 $ 126,633 $ 231,073 Wholesale segment 3,955 7,036 5,145 Total Sales $ 250,084 $ 133,669 $ 236,218 Total sales for the second quarter of fiscal 2021 were $138.6 million, as compared to $76.4 million in the second quarter of fiscal 2020 and $123.2 million in the second quarter of fiscal 2019. At July 31, 2021, we had 297 stores as compared to 317 stores at August 1, 2020 and 328 stores at August 1, 2019. As compared to the second quarter of fiscal 2020, comparable sales for the quarter were up 97.2%, with comparable sales from our stores up 168.0% and the direct business up 16.0%. Due to the COVID-19 pandemic, our stores were negatively impacted in the second quarter of 2020 by temporary closings and reduced customer demand. As compared to the second quarter of fiscal 2019, comparable sales for the second quarter were up 21.6% driven primarily by our direct business, which was up 52.2% and our stores, which were up 13.1%. The increase in our direct business was principally due to our DXL.com e-commerce site, which had a sales increase of 66.4% as compared to the second quarter of fiscal 2019. Sales accelerated throughout the quarter, with substantial month-over-month increases in both our stores and direct business. Regionally, the strongest improvements were in the Southeast, Midwest, and South Central parts of the country, which exceeded the Pacific Northwest, Northeast and Mid-Atlantic by approximately 600 basis points. For the second quarter of fiscal 2021, all regions had a comparable sales increase as compared to the second quarter of fiscal 2019. Our direct business continued to outperform our expectations during the second quarter. Similar to our stores, we saw month-over-month improvement against fiscal 2019 sales. Even with the sales recovery from our stores, we continued to see growth in our direct business. For the second quarter of fiscal 2021, our direct business represented 28.1% of total retail sales as compared to 21.1% of retail sales in the second quarter of fiscal 2019. Sales from our wholesale business were $0.9 million for the second quarter, as compared to $5.0 million for the second quarter of fiscal 2020 and $2.7 million for the second quarter of 2019. The decrease in sales from our wholesale business during the second quarter of fiscal 2021 was due primarily due to reduced order volume. The second quarter of fiscal 2020 included the sale of $4.1 million in protective masks. 20 For the first six months of fiscal 2021, total sales increased 5.9% to $250.1 million, as compared to $236.2 for the first six months of fiscal 2019. Comparable sales for the first six months of fiscal 2021, as compared to fiscal 2019, increased 13.1%, with comparable sales from stores up 3.7% and the direct business up 46.1%. For the first six months of fiscal 2021, sales from wholesale were $4.0 million as compared to $7.0 million for the first six months of fiscal 2020 and $5.1 million for the first six months of fiscal 2019. Gross Margin Rate For the second quarter of fiscal 2021, our gross margin rate, inclusive of occupancy costs, was 51.7% as compared to a gross margin rate of 28.1% for second quarter of fiscal 2020 and 44.3% for the second quarter of fiscal 2019. As compared to fiscal 2020, the 2,360 basis point improvement was due to a 1,460 basis point improvement in merchandise margins, driven by lower promotional markdowns, and a 900 basis point improvement in occupancy costs, due to the leveraging of sales and savings realized from the renegotiated lease reductions. In the second quarter of last year, we were highly promotional in an effort to drive traffic as stores started to reopen and to move inventory. As compared to fiscal 2019, our gross margin rate improved by 740 basis points, driven by a 350 basis point improvement in merchandise margins and a 390 basis point improvement in occupancy costs. On a dollar basis, our occupancy costs decreased by $3.2 million, as a result of our lease renegotiations as well as closed stores. The improvement in merchandise margin of 350 basis points was due to our change in promotional strategy. During the second quarter of this year, we did not run any broad-based promotions for Memorial Day weekend or Father’s Day, which allowed us to sell more full-price merchandise. This strategy drove significant savings in markdown dollars and an improvement in gross margin rate and, while we expect to increase our promotional activity during the holiday season, we expect to maintain a reduced promotional strategy going forward. Partially offsetting the savings in markdown dollars was the continued increased cost of freight due to shortage of containers and vessels for overseas product, which we expect to continue in the short-term. We are also continuing to see increases in the cost of certain raw materials, particularly cotton. For the first six months of fiscal 2021, our gross margin rate was 49.0% as compared to a gross margin rate of 26.0% for the second quarter of fiscal 2020 and 44.0% for the second quarter of fiscal 2019. As compared to fiscal 2020, our gross margin rate improved by 2,300 basis points, driven by an increase in merchandise margin of 1,130 basis points and an improvement in occupancy costs as a percentage of sales of 1,170 basis points. As compared to fiscal 2019, 500 basis point improvement in gross margin was due to a 180 basis point improvement in merchandise margins and a 320 basis point improvement in occupancy costs. Selling, General and Administrative Expenses As a percentage of sales, SG&A expenses for the second quarter of fiscal 2021 were 30.1% as compared to 33.7% for the second quarter of fiscal 2020 and 38.5% for the second quarter of fiscal 2019. As compared to the second quarter of fiscal 2020, on a dollar basis, SG&A expenses increased by $16.0 million, or 62%. The increase was primarily due to increases in store payroll costs to support the increase in sales, increased advertising costs and incentive accruals. These increases were partially offset by realized cost savings. As compared to the second quarter of fiscal 2019, SG&A expenses decreased by $5.7 million, or (12.0%). The reduction in SG&A costs was the result of cost reduction efforts taken in fiscal 2020 to not only preserve liquidity at the time but to lower our operating cost structure long-term. These savings were partially offset by an increase in incentive-based accruals. For the first six months of fiscal 2021, SG&A expenses were 31.5% as compared to 43.3% for the first six months of fiscal 2020 and 39.0% for the first six months of fiscal 2019. As compared to the first six months of fiscal 2019, SG&A costs were down $13.2 million, or 14.3%, as a result of our cost-savings initiatives, reductions in store payroll costs and reduced marketing costs, partially offset by an increase in incentive-based accruals. Management views SG&A expenses through two primary cost centers: Customer Facing Costs and Corporate Support Costs. Customer Facing Costs, which include store payroll, marketing and other store and direct operating costs, represented 17.4% of sales for the first six months of fiscal 2021 as compared to 23.3% of sales for the first six months of fiscal 2019. Corporate Support Costs, which include the distribution center and corporate overhead costs, represented 14.1% of sales for the first six months of fiscal 2021 compared to 15.7% of sales for the first six months of fiscal 2019. For the first six months of fiscal 2020, Customer Facing Costs were 20.0% of sales and Corporate Support Costs were 23.3% of sales. Impairment of Assets During the second quarter and first six months of fiscal 2021, we recorded non-cash gains of $0.4 million and $1.1 million, respectively, on the reduction of our operating lease liability in connection with our decision to close certain retail stores, which resulted in a revaluation of the lease liability. Approximately $0.4 million and $1.0 million of the non-cash gains for the second quarter and first six months of fiscal 2021, respectively, related to leases where the right-of-use assets had previously been impaired and was recorded as a reduction of the previously recorded impairment and included in the Impairment of Assets line of the Consolidated Statement of Operations for the three and six months ended July 31, 2021. The remainder of the non-cash gain of $0.1 million for the six months ended July 31, 2021 was reflected as a reduction of occupancy costs. 21 In the first six months of fiscal 2020 , we recorded an impairment charge of $ 16.3 million . The imp airment charge included approximately $ 12.5 million for the write-down of certain right-of-use assets , related to leases where the carrying value exceeded fair value, and $ 3.8 million for the write-down of property and equipment, related to stores where the carrying value exceeded fair value . Based on the indicators present in the first quarter of fiscal 2020, we completed a recoverability analysis , which included the impact of the COVID-19 pandemic on the operations of our stores and we used projections that were based on multiple probability-weighted scenarios, assuming that our stores would gradually open throughout the second quarter of fiscal 2020 but tha t consumer retail spending would remain substantially curtailed for a period of time . Depreciation and Amortization Depreciation and amortization for the second quarter of fiscal 2021 of $4.4 million decreased from $5.3 million for the second quarter of fiscal 2020. For the first six months of fiscal 2021, depreciation and amortization decreased $2.2 million to $8.9 million as compared to $11.1 million for the first six months of fiscal 2020. The decrease was due to a lower depreciable cost base, especially from our store assets. Interest Expense, Net Net interest expense for the second quarter of fiscal 2021 decreased to $0.9 million, as compared to $1.1 million for the second quarter of fiscal 2020. The decrease in interest expense for the second quarter was due to reduced borrowings on the credit facility, partially offset by an increase in interest rates. For the first six months of fiscal 2021, net interest expense was $2.1 million as compared to $1.8 million for the first six months of fiscal 2020. The increase was due to an increase in the effective borrowing rates on both short-term and long-term borrowings, offset by reduced borrowings under the credit facility. Income Taxes We established a full valuation allowance against our deferred tax assets at the end of fiscal 2014. While the Company has returned to profitability for the first six months of fiscal 2021, and has projected that it will generate taxable income and ultimately emerge from a three-year cumulative loss, the Company believes that a full valuation allowance remains appropriate until the Company generates a more consistent history of profitability. Our tax provision for the second quarter and first six months of fiscal 2021 was primarily due to income tax in states where NOL usage is statutorily limited. Our tax provision for the second quarter and first six months of fiscal 2020 was primarily due to state margin tax, based on gross receipts less certain deductions. Net Income (Loss) For the second quarter of fiscal 2021, we recorded net income of $24.5 million, or $0.36 per diluted share, compared with a net loss of $(10.7) million, or $(0.21) per diluted share, for the second quarter of fiscal 2020 and net income of $0.0 million, or $0.00 per diluted share, for the second quarter of fiscal 2019. For the first six months of fiscal 2021, we had net income of $33.1 million, or $0.50 per diluted share, compared to a net loss of $(52.4) million, or $(1.03) per diluted share, for the first six months of fiscal 2020 and a net loss of $(3.0) million, or $(0.06) per diluted share, for the first six months of fiscal 2019. On a non-GAAP basis, before asset impairment costs and assuming a normalized tax rate of 26% for all periods, adjusted net income for the second quarter of fiscal 2021 was $0.27 per diluted share, as compared to an adjusted net loss of $(0.15) per diluted share for the second quarter of fiscal 2020, and an adjusted net income of $0.00 per diluted share for the second quarter of fiscal 2019. Adjusted net income for the first six months of fiscal 2021 was $0.37 per diluted share, as compared to an adjusted net loss of $(0.52) per diluted share for the first six months of fiscal 2020 and an adjusted net loss of $(0.04) per diluted share for the first six months of fiscal 2019. Inventory As of July 31, 2021, our inventory decreased approximately $14.0 million to $73.4 million, as compared to $87.4 million at August 1, 2020 and decreased approximately $37.0 million as compared to $110.4 million at August 3, 2019. Given our current sales trends and global supply chain disruptions, maintaining sufficient inventory levels is a priority. We believe that we will be able to secure sufficient inventory to support our sales forecasts. At the same time, we are continuing to manage inventory conservatively, narrowing our assortment while driving meaningfully greater levels of exclusivity with national brands. At July 31, 2021, our clearance inventory decreased by approximately $3.3 million, representing 8.9% of our total inventory, as compared to 11.3% at August 1, 2020 and 10.9% at August 3, 2019. 22 SEASONALITY Historically, and consistent with the retail industry, we have experienced seasonal fluctuations as it relates to our operating income and net income. Traditionally, a significant portion of our operating income and net income is generated in the fourth quarter, as a result of the “Holiday” season. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity are cash generated from operations and availability under our credit facility with Bank of America, N.A., which was most recently amended in March 2021 (“Credit Facility”). We took several actions during fiscal 2020 to preserve our liquidity, and in the first quarter of fiscal 2021, we further strengthened our liquidity position by completing a direct offering of our common stock, which raised $4.4 million, net of offering costs, and by amending our Credit Facility to allow for the refinancing of our $15.0 million FILO loan, which increased our borrowing capability. As a result of our earnings in the second quarter of fiscal 2021, at July 31, 2021, we had no outstanding borrowings under our Credit Facility. We believe our cash on hand, availability under our Credit Facility, and ongoing cash generated from our operations will be sufficient to cover our working capital requirements and limited capital expenditures for the next 12 months. However, we remain cautiously optimistic regarding the duration of the pandemic and how it may continue to impact our financial results and liquidity. For the first six months of fiscal 2021, cash flow from operations improved to $42.2 million as compared to $(9.0) million for the first six months of fiscal 2020 and $0.9 million for the first six months of fiscal 2019. Free cash flow, a non-GAAP measure, improved to $40.5 million for the first six months of fiscal 2021 as compared to $(11.1) million for the first six months of fiscal 2020 and $(6.7) million for the first six months of fiscal 2019. The improvement in free cash flow was primarily due to our improvement in earnings as well as faster inventory turn. Cash flow from financing activities decreased by $(80.9) million as compared to fiscal 2020, primarily due to the repayment of amounts outstanding under our revolver, which included the repayment of the $30.0 million that we drew-down on our Credit Facility in March 2020 to provide the Company with financial flexibility during the pandemic. The following is a summary of our total debt outstanding at July 31, 2021 with the associated unamortized debt issuance costs: (in thousands) Gross Debt Outstanding Less Debt Issuance Costs Net Debt Outstanding FILO Loan $ 17,500 $ (666 ) $ 16,834 Total debt $ 17,500 $ (666 ) $ 16,834 Our Credit Facility provides for a maximum committed borrowing of $125.0 million, which, pursuant to an accordion feature, may be increased to $175.0 million upon our request and the agreement of the lender(s) participating in the increase (the “Revolving Facility”). The Credit Facility includes a sublimit of $20.0 million for commercial and standby letters of credit and a sublimit of up to $15.0 million for swingline loans. Borrowings made pursuant to the Revolving Facility under the Credit Facility bear interest, calculated under either the Federal Funds rate or the LIBOR rate, at a rate equal to the following: (a) the Federal Funds rate plus a varying percentage based on the Company’s excess availability, of either 1.75% or 2.00%, or (b) the LIBOR rate (the Company being able to select interest periods of 1 week, 1 month, 2 months, 3 months or 6 months) plus a varying percentage based on the Company’s excess availability, of either 2.75% or 3.00%. The current maturity date is May 24, 2023. We had no outstanding borrowings under the Credit Facility at July 31, 2021. At July 31, 2021, outstanding standby letters of credit were $2.7 million and there were no outstanding documentary letters of credit. The average monthly borrowing outstanding under the Credit Facility during the first six months ended July 31, 2021 was approximately $32.7 million, resulting in an average unused excess availability of approximately $42.5 million. Unused excess availability at July 31, 2021 was $65.1 million. FILO Loans In March 2021, we refinanced our existing $15.0 million FILO loan (the “existing FILO loan”) and entered into a new $17.5 million FILO loan (the “new FILO loan”). The new FILO loan has higher advance rates and additional borrowing capacity of approximately $5.0 to $10.0 million. The total borrowing capacity under the new FILO loan is based on a borrowing base, generally defined as a specified percentage of the value of eligible accounts (including certain trade names) that step down over time, plus a specified percentage of the value of eligible inventory that steps down over time. The new FILO loan will be subject to quarterly principal repayments of $218,750 beginning December 31, 2021. The new FILO loan is subject to a prepayment penalty, if any portion of the principal for the new FILO Loan is prepaid during the initial two-year period, equal to the greater of (i) the incremental interest that would have been incurred with respect to that principal repayment during the two year period and (ii) 3% of the principal prepayment, unless the prepayment occurs after March 16, 2022 in 23 connection with the Company’s renegotiation of its Credit Agreement in which case the prepayment premium would be equal to 1% of the principal prepayment. The new FILO loan expires on May 24, 2023 , but may be automatically extended in connection with any extension of the revolving facility under the Credit Agreement, but no later than March 16, 2026, without approval from the FILO lender. Borrowings made under the new FILO loan will bear interest, at the LIBOR rate (with a LIBOR floor of 1.0%) plus an applicable margin rate of 7.50% through September 16, 2021. Thereafter, the applicable margin rate will be 7.50% for so long as the Company’s 12-month trailing consolidated EBITDA (as defined in the Fourth Amendment) measured as of the end of each month is less than $18.0 million, or 7.00% when 12-month trailing consolidated EBITDA is equal to or greater than $18.0 million. Accordingly, the interest rate at July 31, 2021 was 8.50%. Capital Expenditures The following table sets forth the open stores and related square footage at July 31, 2021, August 1, 2020 and August 3, 2019, respectively: July 31, 2021 August 1, 2020 August 3, 2019 Store Concept Number of Stores Square Footage Number of Stores Square Footage Number of Stores Square Footage (square footage in thousands) DXL Retail 221 1,685 228 1,729 220 1,697 DXL Outlets 16 80 17 82 16 82 Casual Male XL Retail 40 132 49 160 60 200 Casual Male Outlets 20 60 23 69 29 88 Rochester Clothing - - - - 3 36 Total Stores 297 1,957 317 2,040 328 2,103 We do not plan to open any new stores or rebrand any of our Casual Male XL stores during fiscal 2021. We have 119 stores that have leases with either a natural lease expiration or a kick-out option within the next two years. This provides us an opportunity to rightsize our store portfolio, through ongoing lease renegotiations or lease-term expirations, to ensure that we are optimizing our store profitability and omni-channel distribution. Since the beginning of fiscal 2020, we have renegotiated approximately 133 of our store leases, which we expect will result in over $17.1 million of savings over the life of the leases, including $6.2 million of expected savings in fiscal 2021. We will continue to work with our landlords on leases where our rents are not aligned with sales. Our capital expenditures for the first six months of fiscal 2021 were $1.7 million as compared to $2.1 million for the first six months of fiscal 2020. During the first six months of fiscal 2021, we closed 5 DXL retail stores, 1 DXL outlet store, 6 Casual Male XL retail stores and 2 Casual Male XL outlets. 24 CRITICAL ACCOUNTING POLICIES There have been no material changes to the critical accounting policies and estimates disclosed in our Fiscal 2020 Annual Report. See Note 1 to the Consolidated Financial Statements included in this report for information on recent accounting pronouncements and changes in accounting principles. Non-GAAP Financial Measures Adjusted net income (loss), adjusted net income (loss) per diluted share, free cash flow and Adjusted EBITDA are non-GAAP measures. These non-GAAP measures are not presented in accordance with GAAP and should not be considered superior to or as a substitute for net loss or cash flows from operating activities or any other measure of performance derived in accordance with GAAP. In addition, all companies do not calculate non-GAAP financial measures in the same manner and, accordingly, the non-GAAP measures presented in this Quarterly Report may not be comparable to similar measures used by other companies. We believe that inclusion of these non-GAAP measures helps investors gain a better understanding of our performance, especially when comparing such results to previous periods and that they are useful as an additional means for investors to evaluate our operating results, when reviewed in conjunction with our GAAP financial statements. Reconciliations of these non-GAAP measures are presented in the following tables (certain columns may not foot due to rounding) : Adjusted net income (loss) and adjusted net income (loss) per diluted share . Adjusted net income (loss) and adjusted net income (loss) per diluted share reflect an adjustment assuming a normal tax rate of 26% and the add-back of CEO transition and impairment of assets, if any. We have fully reserved against our deferred tax assets and, therefore, net loss is not reflective of earnings assuming a “normal” tax position. Adjusted net loss provides investors with a useful indication of the financial performance of the business, on a comparative basis, assuming a normalized tax rate of 26% and without these charges. For the three months ended For the six months ended July 31, 2021 August 1, 2020 August 3, 2019 July 31, 2021 August 1, 2020 August 3, 2019 $ Per diluted share $ Per diluted share $ Per diluted share $ Per diluted share $ Per diluted share $ Per diluted share (in thousands, except per share data) Net income (loss) (GAAP basis) $ 24,451 $ 0.36 $ (10,714 ) $ (0.21 ) $ 38 $ 0.00 $ 33,148 $ 0.50 $ (52,440 ) $ (1.03 ) $ (3,043 ) $ (0.06 ) Adjust: Impairment of assets (365 ) - - (1,017 ) 16,335 - CEO transition costs - - - - - 702 Add back actual income tax provision (benefit) 426 24 (8 ) 454 44 (29 ) Add income tax (provision) benefit, assuming a normal tax rate of 26% (6,373 ) 2,779 (8 ) (8,472 ) 9,376 616 Adjusted net income (loss) (non-GAAP basis) $ 18,139 $ 0.27 $ (7,911 ) $ (0.15 ) $ 22 $ 0.00 $ 24,113 $ 0.37 $ (26,685 ) $ (0.52 ) $ (1,754 ) $ (0.04 ) Weighted average number of common shares outstanding on a diluted basis 67,615 51,078 50,175 65,938 50,918 49,734 Free Cash Flow. We define free cash flow as cash flow from operating activities less capital expenditures. Free cash flow excludes the mandatory and discretionary repayment of debt. Free cash flow is a metric that management uses to monitor liquidity. We expect to fund our ongoing capital expenditures with cash flow from operations. The following table reconciles free cash flow: For the six months ended (in millions) July 31, 2021 August 1, 2020 August 3, 2019 Cash flow from operating activities (GAAP basis) $ 42.2 $ (9.0 ) $ 0.9 Capital expenditures (1.7 ) (2.1 ) (7.6 ) Free Cash Flow (non-GAAP basis) $ 40.5 $ (11.1 ) $ (6.7 ) 25 Adjusted EBITDA . Adjusted EBITDA is calculated as earnings before interest, taxes, depreciation and amortization and is before any impairment of assets and CEO transition costs, if any. We believe that adjusted EBITDA is useful to investors in evaluating our performance and is a key metric to measure profitability and economic productivity. For the three months ended For the six months ended July 31, 2021 August 1, 2020 August 3, 2019 July 31, 2021 August 1, 2020 August 3, 2019 (in millions) Net income (loss) (GAAP basis) $ 24.5 $ (10.7 ) $ 0.0 $ 33.1 $ (52.4 ) $ (3.0 ) Add back: Impairment of assets (0.4 ) - - (1.0 ) 16.3 - CEO transition costs - - - - - 0.7 Provision (benefit) for income taxes 0.4 - - 0.5 0.0 (0.0 ) Interest expense 0.9 1.1 0.9 2.1 1.8 1.7 Depreciation and amortization 4.4 5.3 6.2 8.9 11.1 12.5 Adjusted EBITDA (non-GAAP basis) $ 29.8 $ (4.3 ) $ 7.1 $ 43.5 $ (23.2 ) $ 11.9