SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-38555
THE LOVESAC COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 32-0514958 | ||||||||
State or Other Jurisdiction of
| I.R.S. Employer Identification No. | ||||||||
Two Landmark Square, Suite 300 Stamford, Connecticut | 06901 | ||||||||
Address of Principal Executive Offices | Zip Code |
Registrant’s telephone number, including area code (888) 636-1223
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||||||||||||
Common Stock, $0.00001 par value per share | LOVE | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐o No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐o No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No
☒As of August 2, 20201, 2021 (last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the voting common stock held by non-affiliates of the Registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) was approximately $347,969,675.
As of April 12, 2021,March 15, 2022, there were 15,018,03015,124,910 shares of common stock, $0.00001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating to its 20212022 Annual Meeting of Stockholders, or the 20212022 Proxy Statement, to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III of this Annual Report on Form 10-K. Such 20212022 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates. Except with respect to information specifically incorporated by reference in this Form 10-K, the proxy statement is not deemed to be filed as part of this Form 10-K.
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This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other legal authority. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions.
You should not place undue reliance on forward looking statements. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. The cautionary statements set forth in this Annual Report on Form 10-K, including in “Risk Factors” and elsewhere, identify important factors which you should consider in evaluating our forward-looking statements. These factors include, among other things:
We caution you that the foregoing list may not contain all the forward-looking statements made in this Annual Report on Form 10-K.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
PART I.
When used in this report, the terms “we,” “us,” “our,” “Lovesac” and the “Company” mean The Lovesac Company.
Company Overview
We are a technology driven company that designs, manufactures and sells unique, high quality furniture derived through our proprietary Designed for Life philosophy which results in products that are built to last a lifetime and designed to evolve as our customers’ lives do. Our current product offering is comprised of modular couches called Sactionals, premium foam beanbag chairs called Sacs, and their associated home decor accessories. Innovation is at the center of our design philosophy with all of our core products protected by a robust portfolio of utility patents. We marketThe Company markets and sell oursells its products primarilythrough modern and efficient showrooms and, increasingly, through online sales directly at www.lovesac.com, supported by direct-to-consumer touch-feel points in the form of our own showrooms, which include our newly created mobile concierge and kiosks, as well as through shop-in-shops and online pop-up-shops with third party retailers. We believe that our ecommerce centric approach, coupled with our ability to deliver our large upholstered products through express couriers, is unique to the furniture industry.
The name “Lovesac” was derived from our original innovative product, a premium foam beanbag chair, the Sac. The Sac was developed in 1995 and provided the foundation for the Company. We believe that the large size, comfortable foam filling and irreverent branding of our Sacs products have been instrumental in growing a loyal customer base and our positive, fun image. Our Sacs represented 10.5%, 14.0% and 17.0% of our sales for fiscal years 2022, 2021 and 2020, respectively.
Our Sactionals product line currently represents a majority of our sales. Sactionals are a couch system that consists of two components, seats and sides, which can be arranged, rearranged and expanded into thousands of configurations easily and without tools. Our Sactional products include a number of patented features relating to their geometry and modularity, coupling mechanisms and other features. We believe that these high quality premium priced products enhance our brand image and customer loyalty and expect them to continue to garner a significant share of our sales.
Our Sactionals represented 87.6%, 84.5% and 80.7% of our sales for fiscal years 2022, 2021 and 2020, respectively. Sacs and Sactionals come in a wide variety of colors and fabrics that allow consumers to customize their purchases in numerous configurations and styles. We provide lifetime warranties on our Sactionals frames and the foam used in both product lines, and 3-year warranties on our covers. Our Designed for Life trademark reflects our dynamic product line that is built to last and evolve throughout a customer’s life. Customers can continually update their Sacs and Sactionals with new covers, additions and configurations to accommodate changes in their family and housing situations.
The Company was formed in the State of Delaware on January 3, 2017, in connection with a corporate reorganization with SAC Acquisition LLC, a Delaware limited liability company, the predecessor entity to the Company. Our common stock began trading on Nasdaq under the symbol “LOVE” on June 27, 2018 and we consummated our initial public offering of shares of our common stock, or our IPO, on June 29, 2018.
Product Overview
Our products serve as a set of building blocks that can be rearranged, restyled and re-upholstered with any new setting, mitigating constant changes in fashion and style. They are built to last and evolve throughout a customer’s life.
We offer our products through an omni-channel platform that provides a seamless and meaningful experience to our customers online and in-store. Our distribution strategy allows us to reach customers through four distinct, brand-enhancing channels.
Our Designed for Life products provide flexibility, upgradeability and sustainability, elements that attract a wide customer base and can change as their life changes. Our customers have different tastes, styles, purchasing goals and budgets when shopping for couches, and our Sactionals platform’s modularity addresses this array of needs.
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Growth Strategies
To position Lovesac for future growth, in the last several years we have made significant investments in overhead, optimized and integrated our business technologies and processes, and further developed our marketing strategies. In addition, we have refocused our strategy regarding our showrooms, moving to higher end malls and lifestyle centers while testing new showroom concept such as kiosks and mobile concierge, to support ecommerce sales, our primary growth channel. We have also moved to fixed versus variable rent structures in many of our lease arrangements and have introduced a new interactive technology driven showroom experience that has resulted in higher traffic levels and conversion.
We are also focused on the following key strategies to drive sales growth:
Continue to Build on Our Brand
Based on our own internal study concluded in April 2017, we estimated that our brand awareness is less than 1% among all consumers nationally. Before 2017, we invested minimally in advertising. Since then, we haveWe aggressively investedinvest in brand building and direct marketing efforts through a robust and diverse marketing mix. Our focus on building the Lovesac and Sactional brands has led to an increase in our new Sactional customer base, which grew by 48.3%33.1% in fiscal 2021.2022. Through our ecommerce channel, we believe we are able to significantly enhance the consumer shopping experience, driving deeper brand engagement and loyalty, while also realizing more favorable margins than our showroom locations. We continue to invest into this digital channel to improve user experience, enhancing their research, understanding and confidence in their purchase decision.
Our commitment to sustainability is central to our stated purpose and strategy. Our Designed For Life philosophy calls for products that are built to last a lifetime and designed to evolve with our customers’ lives. Sactionals represent our Designed For Life philosophy in action and customers generally invest in them with a long-term focus. We believe this is a competitive advantage and has helped us establish a unique brand and a successful culture.
New Strategy on Innovation
Innovation and test-and-learn are engrained within our Company, from product to operations to marketing and distribution. From inception, we have focused on developing unique, innovative and proprietary product platforms. We deploy a dual strategy of continuously researching and product invention and designing. We are continuously expanding and introducing new extensions to these platforms to broaden the appeal, grow the addressable market of our product offerings and ultimately continue to grow and evolve with our customers’ needs. We continually evaluate new products to complement our Sactionals and Sac lines and are currently developing accessories for the tech-savvy consumer. During October 2021, As we continue to grow our business and add additional showrooms in strategic locations across the United States, we seek the ability to service more customers locally with area-designated representatives who will shift their efforts between our showrooms and customers’ homes. Our concierge operators in the field will be able to assist customers via online chat services from home thereby creating more touchpoints customers in new and existing locations, contributing to our efficient approach to growing our footprint and services to suit the evolving needs of our customers. Increase Sales and Operating Margins We seek to increase sales and operating margins through our premium market position and pricing strategy and omni-channel platform, which we believe will require relatively small near term increases in fixed overhead. Supply Chain and Sourcing We manage a global supply chain of highly vetted and qualified, third-party manufacturing partners to produce our products. Our partners operate facilities located in the Logistics and Distribution We are able to efficiently distribute and ship our products to our customers. Due to the unique modularity of our Sactionals products and the shrinkability of our Sacs, we are able to distribute our products through nationwide express couriers and efficiently utilize warehouse space and international shipping routes. We believe our Sactionals are the only product in its category that enjoys this logistical advantage. We experience seasonal fluctuations in our sales. A larger percentage of our sales occur in the fourth quarter of our fiscal year, which coincides with Cyber Monday (the first Monday after Thanksgiving, when online retailers typically offer holiday discounts), the holiday season and our related promotional and marketing campaigns. Our fiscal We own ●Premium Market Position and Pricing. Our products are positioned in the premium couch segment of the furniture market. We market as premium products because of our proprietary foam fillings, higher quality materials and unique modularity requiring a distinct level of manufacturing capability. At our price point, we offer a unique value proposition that combines both beautiful aesthetics and utility to our customers that we believe our competitors cannot offer. Additionally, our high-end branding strategy, further enhanced by our unsolicited celebrity endorsements and large social media following, commands premium pricing, as we feel lowering prices may negatively affect the perception of our products. The difference is explained by our platform approach, where once a customer buys their first couch, the cost of expanding and adding to it over time is much less expensive than the traditional method of purchasing another new couch to replace the old one.●Omni-channel Platform. By leveraging our omni-channel platform, we cost-effectively drive traffic to our ecommerce channel, resulting in increased web-based sales and improved operating margins. We continually seek to improve our ecommerce capabilities to drive sales and take advantage of the lower cost of this channel. Our showrooms and other direct marketing efforts work in concert to drive customer conversion in ecommerce. In addition, our shop-in-shops provide a low cost alternative to drive brand awareness and both in-store and ecommerce sales.UnitedStates,United States, China, Vietnam, Malaysia, Taiwan, Indonesia, and India. We do not currently own or operate any manufacturing facilities as we believe our partners’ facilities are sufficient to meet our current demand and will be able to meet any additional demand in the future. We do, however, expect to invest in additional domestic manufacturing capabilities to support supply chain redundancy for certain of our products. Additionally, we work closely with our manufacturing partners regarding product quality and manufacturing process efficiency. To mitigate the concentration risk in our supply chain, we have and continue to pursue a higher diversification of manufacturing partners, with both sourcing, tariff, and geographical advantages.Seasonality20212022 quarters in sequential order equaled 17.0%16.6%, 19.3%20.6%, 23.3%23.4% and 40.4%39.4% of total net sales, respectively.2731 U.S. federal trademark registrations, 134177 foreign trademark registrations, and a number of U.S. and foreign trademark applications and common law trademark rights. Our registered U.S. trademarks include registrations for the Lovesac®, Lovesoft®, Sactionals®, Durafoam®, SAC®, SACS®, Moviesac®, Supersac®, Squattoman®, Total Comfort®, Gamersac®, Citysac®, Footsac®, Always Fits. Forever New®, The World’s Most Comfortable Seat®, and Designed For Life®trademarks. Our trademarks, if not renewed, are scheduled to expire between 20212022 and 2029.
In order to maintain our U.S. trademark registrations, we must continue to use the marks in commerce on the goods and services identified in the registrations and must make required filings with the U.S. Patent and Trademark Office at intervals specified by applicable statutes and regulations. Failure to comply with these requirements may result in abandonment or cancellation of the registrations.
We have 1926 issued U.S. utility patents and 2638 issued foreign utility patents, that are scheduled to expire between 2022 and 2037.2039. We have 1215 pending U.S. utility patent applications, 3635 pending foreign utility patent applications and 2 pending international patent applications. Our Sactional technology patents include our proprietary geometric modular system and segmented bi-coupling technology. We also have multiple patents pending and expect to file patent applications for future innovations. We believe that our patent portfolio, combined with our innovative design approach may deter others from attempting to imitate or replicate our products.
Competition
Our business is rapidly evolving and intensely competitive. Retailers compete based on a variety of factors, including design, quality, price and customer service. Levels of competition and the ability of our competitors to attract customers through competitive pricing or other factors may impact our results of operations. Our competition includes furniture stores, big box retailers, department stores, specialty retailers and online furniture retailers and marketplaces.
We believe our combination of proprietary products, brand strength, loyal customer base, omni-channel approach, technological platform, unique consumer experience, logistical advantages and seasoned management team allow us to compete effectively against and differentiate ourselves from the competition.
COVID-19 Update
WhileOur environmental and social initiatives include but are not limited to the COVID-19 pandemic ledfollowing: We are committed to shiftsprovide a fulfilling and inclusive workplace, cultivating a diverse workforce and continuous opportunities to learn new skills. We have increased training hours by 25 percent since fiscal 2020, recognizing the positive value of professional development for our associates. As of December 31, 2021, 55 percent of our workforce was made up of racial or ethnic minority groups, and 60 percent were women. In fiscal 2021, we founded a Diversity, Equity, and Inclusion (DEI) council and steering committee, that will lead the continued growth of programs supporting underrepresented groups and empowering employees to be responsive equality leaders. Delivering innovative solutions to support a sustainable, low carbon future is anchored in our guiding principles. By 2040, we hope to achieve a one-hundred percent circular and sustainable business model, reaching targets of zero waste and zero emissions. In the coming year, we plan to report scope 1 and 2 emissions in alignment with Green House Gas Protocol Corporate Accounting and Reporting Standard and share the roadmap intended to help us achieve our zero waste and zero emissions goals.
In an effort to appropriately manage the businesswebsite is not incorporated by reference in this uncertain environment, we tightly managedForm 10-K.
Human Capital
The long-term success of our business depends on attracting, developing and retaining top talent to drive our growth strategy and support our guiding principles. These principles are the foundation of our business and grounded in true sustainability, a singular focus on high quality execution of fewer core products, consideration of all stakeholder perspectives in our decision-making, and championing meaningful relationships through the development of products that bring people together.
Our corporate culture celebrates our associates at online rallies and annual events designed to engage our associates and reward them for exemplary work and embodiment of our values. We support our associates’ professional development through annual training programs on topics relevant to our business, functional areas, or policies and procedures. Our associates participate in quarterly coaching sessions with their managers four times per year where they are evaluated on their performance relative to certain key performance indicators and alignment with our values and given actionable feedback. We engage our associates on many levels to share learnings, educate, and foster community and connection.
Our talent acquisition strategy is to attract top talent and become a sought-after U.S. employer focused on our Designed For Life philosophy and a culture of diversity, equalityequity and inclusivity. We have initiated this strategy by expanding the areas from which we source talent and offering flexible remote working opportunities for eligible associates. We will continue to build on this strategy, working in parallel with our evolving future work strategy. We also offer a robust and immersive onboarding plan to create a strong foundation for our new associates and timely, effective integration.
Due to the ongoing COVID-19 pandemic, in fiscal 20212022 a majority of our workforce began, and in most cases continue,continued to work remotely. To support our headquarters-based associates, we took measures to ensure our associates had the technology to support remote work and are redefining our future working environment to offer flexible working solutions. For associates supporting our showrooms, we implemented specific protocols to ensure the safety of our associates and our customers.
As of January 31, 2021,30, 2022, we had 369607 full-time associates and 409578 part-time associates, and we contracted with 720 independent contractors. Our workforce was 58% female, and women hold 60%53% of the available leadership roles within the Company.
All associates and contractors are subject to contractual agreements that specify, among other things, requirements for confidentiality, ownership of newly developed intellectual property and restrictions on working for competitors as well as other matters.
Diversity, EqualityEquity and Inclusion
In fiscal 2021,2022, we prioritized developing a strategic diversity, equalityequity and inclusion plan to ensure a diverse workforce composition, operating in an inclusive and transparent workplace culture, to leverage all of our talents. We engaged with partners to guide our diversity, equalityequity and inclusion strategy, and elicited feedback from our associates on factors affecting diverse individuals and communities. We also established a steering committee of senior leaders and a Diversity and Inclusion Council of associates to drive our program’s objectives. We have expanded our diversity recruiting practices, deployed training programs to increase awareness of diversity, equalityequity and inclusion issues, and are developing tools to drive accountability toward achieving the Company’s goals.
Lovesac designsWe design and sellssell non-seasonally driven, Designed For Life products, that are focused on driving incremental value for our customer. The process leverages numerous inputs to shape our product roadmap, sequencing of product launches, and prioritization of product projects. A few examples of these sources of information are consumer insights generated by research commissioned by Lovesac, patterning our category and key competitors, and product opportunities developed to address customer satisfaction. All products that we bring to market must adhere to our Designed For Life design philosophy which calls for products that are built to last a lifetime and designed to evolve as life changes. This ensures that our products not only leverage responsible inputs when possible, but also create a sustainable product that is built to last and designed to evolve.
Government Regulation
We are subject to numerous U.S. and international trade laws and regulations, and U.S. federal, state and foreign laws and regulations covering a variety of subject matters, many of which are evolving. These laws and regulations involve matters including privacy, data use, data protection and personal information, intellectual property, product liability, ecommerce, taxation, economic or other trade prohibitions or sanctions, anti-corruption and political law compliance, securities law compliance, and online payment services. Our compliance with these laws and regulations may be onerous and could, individually or in the aggregate, increase our cost of doing business and/or otherwise have an adverse impact on our business, reputation, financial condition, and operating results.
For additional information about government regulation applicable to our business, see Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K.
Available Information
Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our Proxy Statements and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) are available, free of charge, on our investor relations website (https://investor.lovesac.com) as soon as reasonably practicable after we file such materials electronically with or furnish it to the SEC. Information contained on, or that can be accessed through, our website does not constitute part of this Annual Report on Form 10-K and the inclusion of our website address in this Annual Report is for reference only. The SEC also maintains a website that contains our SEC filings at www.sec.gov.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Annual Report on Form 10-K, including our financial statements and the related notes thereto. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently believe are not material, also may become important factors that affect us and impair our business operations. The occurrence of any of the events or developments discussed in the risk factors below could have a material and adverse impact on our business, results of operations, financial condition and cash flows, and in such case, our future prospects would likely be materially and adversely affected. If any of such events or developments were to happen, the trading price of our common stock could decline.
Summary
Our business is subject to numerous risks and uncertainties, as described below, that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows, and prospects. The principal factors and uncertainties that make investing in our common stock risky include, among others:
COVID-19 Risks
The impact of COVID-19 continues to create uncertainty for our business and may have a significant negative impact on our business, sales, results of operations and financial condition.
The global outbreak of COVID-19 has led to severe disruptions in general economic activities, particularly retail operations, as businesses and federal, state, and local governments take increasingly broad actions to mitigate this public health crisis. We have experienced significant disruption to our business, both in terms of disruption of our operations and the adverse effect on overall economic conditions. On March 18, 2020, the Company closed all showroom locations. All of our showrooms have since fully reopened to the walk-in phase; however, there is no guarantee that there will not be additional closures. We have seen and may continue to see changes in consumer demand as a result of COVID-19, including the inability of consumers to purchase our products due to factors such as quarantine or other restrictions, store closures, or financial hardship. We also continue to see shifts in product and channel preferences and an increase in demand in ecommerce. To help mitigate the impact of the pandemic on showroom and in-person sales, we have increased marketing of our website and ecommerce platform as we believe that the pandemic has contributed to an acceleration in the shift of commerce to online sales. However, it is possible that this increased ecommerce demand may not continue in future periods and may even recede as the effects of the pandemic subside, which could adversely affect our revenue growth. Our business is also dependent on the continued health and productivity of our associates, including store, region and corporate management teams, throughout this crisis. Although we continue to prioritize the health and safety of our associates, our employees may be exposed to COVID-19, and we may face claims by such employees or regulatory authorities that we have not provided adequate protection to our employees with respect to the spread of COVID-19 at our physical locations, which may affect our business, results of operations, and reputation. Our global supply chain and manufacturing operations may also be impacted by COVID-19 related constraints, such as lock-down orders and business limitations imposed on our third-party suppliers. Individually and collectively, the consequences of the COVID-19 outbreak could have a material adverse effect on our business, sales, results of operations and financial condition.
Additionally, our liquidity could be negatively impacted if these conditions continue for a significant period of time and we may be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels, and meet our financial obligations. The capital and credit markets have been disrupted by the crisis and our ability to obtain any required financing is not guaranteed and largely dependent upon evolving market conditions and other factors. Depending on the continued impact of the crisis, further actions may be required.
The extent to which COVID-19 ultimately impacts our business, sales, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak,virus and any variants, its severity, the developmentvaccination rates among the population and availabilityits
Business Risks
On November 4, 2021, the Department of Labor’s Occupational Safety and Health Administration (“OSHA”) issued an emergency temporary standard (“ETS”) requiring private employers with 100 or more employees to enforce vaccination mandates for its employees or, alternatively, require weekly testing. On January 13, 2022, the United States Supreme Court issued an opinion staying enforcement of the ETS. Then, effective January 26, 2022, OSHA withdrew the ETS as an enforceable ETS, but did not withdraw the ETS as a proposed rule. The ultimate outcome of this proposed rule and related litigation cannot be determined at this time. We are continuing to closely monitor and update our practices in response to developments or changes in the COVID-19 vaccination policies established by various federal agencies as well as the several state-specific COVID-19 vaccine mandates that provide expanded exemptions, modifications, or restrictions regarding employee vaccinations. Given current information, it is not possible to assess with certainty the impact such vaccine mandates would have historically operated at a loss, andon us. These mandates may result in increased costs, labor disruptions or employee attrition. If we may never achieve or sustain profitability.
While we have experienced recent growth, maintaining that growth is dependent on a number of factors, including increased traffic to our website and showrooms, our sales conversion rate, and our ability to open new showrooms. We also rely on shop-in-shops and pop-up-shops, and there canlose employees, it will be no assurancedifficult in the current retailer with whom we partner will continuecompetitive labor market to house them or that we will be able to enter into similar arrangements with other retailers,find qualified replacement employees, and this could have an adverse effect on future revenues and costs, which could hinderbe material. Additional uncertainty could also be caused by competing and potentially conflicting laws and regulations, such as the recent executive orders issued by certain states prohibiting vaccine mandates. Accordingly, such mandates could have a material adverse effect on our anticipated sales growth. Our business is highly competitive, and there can be no assurance that we will be able to sustain or improve our recent growth rates.
Our inability to maintain our brand image, engage new and existing customers and gain market share could have a material adverse effect on our growth strategy and our business, financial condition, operating results and prospects.
Our ability to maintain our brand image and reputation is integral to our business and implementation of our growth strategy. Maintaining, promoting and growing our brand will depend largely on the success of our design, merchandising and marketing efforts and our ability to provide a consistent, high-quality product and customer experience. Our reputation could be jeopardized if we fail to maintain high standards for product quality and integrity and any negative publicity about these types of concerns may reduce demand for our products. There is also increased focus by governmental and non-governmental organizations, customers, and other stakeholders, on corporate social responsibility and sustainability matters. Our reputation could be damaged if we do not (or are perceived not to) act responsibly with respect to any social or sustainability matters, which could negatively impact our business and results of operations. While we believe our brand enjoys a loyal customer base, the success of our growth strategy depends, in part, on our ability to keep existing customers engaged and attract new customers to our brand. If we experience damage to our reputation or loss of consumer confidence, we may not be able to retain existing customers or acquire new customers, which could have a material adverse effect on our business, financial condition, operating results and prospects.
If we fail to acquire new customers, or fail to do so in a cost-effective manner, we may not be able to achieve revenue growth or profitability.
To acquire new customers, we must appeal to prospects who have historically used other means of commerce to purchase furniture, such as traditional furniture retailers. To date, we have reached new customers primarily through our showroom presence in various markets, and through social media, digital content, third-party advocates for our brand and products and by word of mouth, and now through national television advertisements. Until now, these efforts have allowed us to acquire new customers at what we believe is a reasonable cost and rate. However, there is no guarantee that these methods will continue to be successful, will not be impacted by the COVID-19 pandemic, or will drive customer acquisition rates necessary for us to achieve revenue growth or profitability.
Our business is highly competitive. Competition presents an ongoing threat to the success of our business.
Our business is rapidly evolving and intensely competitive, and we have many competitors in different industries. We compete with furniture stores, big box retailers, department stores, specialty retailers and online furniture retailers and marketplaces.
We expect competition in both retail stores and ecommerce to continue to increase. Our ability to compete successfully depends on many factors both within and beyond our control, including:
Many of our current and potential competitors have longer operating histories, greater brand recognition, larger fulfillment infrastructures, greater technological capabilities, faster and less costly shipping, significantly greater financial, marketing and other resources and larger customer bases than we do. These factors may allow our competitors to, among other things, derive greater sales from their existing customer base, acquire customers at lower costs and respond more quickly than we can to new or emerging technologies and changes in consumer habits. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies. If we are unable to successfully compete, our business, financial condition, operating results and prospects could be materially adversely affected.
Our business depends on effective marketing and increased customer traffic.
We rely on a variety of marketing strategies to compete for customers and increase sales. If our competitors increase their spending on marketing, if our marketing is less effective than that of our competitors, or if we do not adequately leverage the technology and data analytics needed to generate concise competitive insight, our business, financial condition, operating results and prospects could be adversely affected.
Our increased use of social media poses reputational risks.
As use of social media becomes more prevalent, our susceptibility to risks related to social media increases. The immediacy of social media precludes us from having real-time control over postings made regarding us via social media, whether matters of fact or opinion. Information distributed via social media could result in immediate unfavorable publicity we may not be able to reverse. This unfavorable publicity could result in damage to our reputation and therefore have a material adverse effect on our business, financial condition, operating results and prospects.
Our efforts to launch new products may not be successful.
We plan to expand our product line in the future. We may not be able to develop products which are attractive to our customers, and our costs to develop new products may be significant. It may take longer than we might expect for a product, even if ultimately successful, to achieve attractive sales results. Failure to successfully develop or market new products or delays in the development of new products could have a material adverse effect on our financial condition, results of operations and business.
We rely on the performance of members of management and highly skilled personnel. If we are unable to attract, develop, motivate and retain well-qualified associates, our business could be harmed.
We believe our success has depended, and continues to depend, on the efforts and talents of Shawn Nelson, our founder, member of the Board of Directors and Chief Executive Officer, Andrew Heyer, our Chairman of the Board, Jack Krause,Mary Fox, our President and Chief Operating Officer, Jack Krause, our Chief Strategy Officer and a member of the Board of Directors, Donna Dellomo, our Executive Vice President, Chief Financial Officer, Treasurer and Secretary and other members of our management team. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled associates. The market for such associates in the cities in which we operate is competitive. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. The loss of any of our key associates, including members of our senior management team, could materially adversely affect our ability to execute our business plan, and we may not be able to find adequate replacements. Our inability to recruit and develop mid-level managers could have similar adverse effects on our ability to execute our business plan.
Some of our officers and other key associates are employed at-will, meaning that they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. While others have employment agreements with stated terms, they could still leave our employ. If we do not succeed in retaining and motivating existing associates or attracting well-qualified associates, our business, financial condition, operating results and prospects may be materially adversely affected.
System interruptions that impair customer access to our sites or other performance failures in our technology infrastructure could damage our business, reputation and brand, and substantially harm our business and results of operations.
The satisfactory performance, reliability and availability of our website, transaction processing systems and technology infrastructure are critical to our reputation, and our ability to acquire and retain customers and maintain adequate customer service levels. We currently rely on a variety of third party service providers to support mission critical systems and the efficient flow of merchandise from and between warehouses and showrooms to customers. For example, we rely on common carriers for the delivery of merchandise purchased by customers through our website and in our showrooms, and the systems we employ to communicate delivery schedules and update customers about order tracking interface with the information systems of these common carriers. Our own systems, which are customized versions of ecommerce, customer
Through third parties that underwrite customer risk, we offer financing options in order to increase the market demand for our products among customers who may not be able to buy them using cash. The systems of these third parties must work efficiently in order to give customers real-time credit availability. Changes in the risk underwriting or technologies of these third parties may result in lower credit availability to our potential customers and therefore reduced sales. The occurrence of any of the foregoing could substantially harm our business and results of operations.
Unauthorized disclosure of sensitive or confidential information, whether through a breach of our computer system or otherwise, could severely hurt our business.
Certain aspects of our business involve the receipt, storage and transmission of customers’ personal information and consumer preferences, as well as confidential information about our associates, our suppliers and our Company, some of which is entrusted to third-party service providers and vendors. Despite the security measures we have in place, our facilities and systems, and those of third parties with which we do business, may be vulnerable to security breaches, acts of vandalism and theft, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events.
An electronic security breach in our systems (or in the systems of third parties with which we do business) that results in the unauthorized release of individually identifiable information about customers or other sensitive data could occur and have a material adverse effect on our reputation, lead to substantial financial losses from remedial actions, and lead to a substantial loss of business and other liabilities, including possible punitive damages. In addition, as the regulatory environment relating to retailers and other companies’ obligation to protect such sensitive data becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could result in additional costs, and a material failure on our part to comply could subject us to fines, other regulatory sanctions and lawsuits.
Our business is sensitive to economic conditions and consumer spending.
We face numerous business risks relating to macroeconomic factors. Consumer purchases of discretionary items, including our products, generally decline during recessionary periods and other times when disposable income is lower. Factors impacting discretionary consumer spending include general economic conditions, inflation, wages and employment, consumer debt, reductions in net worth based on severe market declines, residential real estate and mortgage markets, taxation, volatility of fuel and energy prices, interest rates, consumer confidence, political and economic uncertainty and other macroeconomic factors, including the COVID-19 pandemic.pandemic and the conflict between Russia and the Ukraine. Deterioration in economic conditions, increasing inflation or increasing unemployment levels may reduce the level of consumer spending and inhibit consumers’ use of credit, which may adversely affect our sales. In recessionary periods and other periods where disposable income is adversely affected, we may have to increase the number of promotional sales or otherwise dispose of inventory for which we have previously paid to manufacture, which could further adversely affect our financial performance. It is difficult to predict when or for how long any of these conditions could affect our business and a prolonged economic downturn could have a material adverse effect on our business, financial condition, operating results and prospects.
A substantial portion of our business is dependent on a small number of suppliers. A material disruption or labor shortage at any of our suppliers’ manufacturing facilities could prevent us from meetingimpede our ability to meet customer demand, reduce our sales, and/or negatively affect our financial results.
We do not own or operate any manufacturing facilities and therefore depend on third-party suppliers for the manufacturing of all of our products. Moreover, a substantial portion of our business is dependent on a small number of suppliers. Sacs, which represented approximately 14%10.5% of our revenues in fiscal 2022, 14.0% of our revenues in fiscal 2021, and 17%17.0% of our revenues in fiscal 2020, are currently manufactured by a single manufacturer in Texas.Texas, which has previously experienced, and may experience in the future, disruptions to its manufacturing operations. Sactionals, which represented approximately 85%87.6% of our revenues in fiscal 2022, 84.5% of our revenues in fiscal 2021, and 81%80.7% of our revenues in fiscal 2020, are manufactured by suppliers in the United States, China, Vietnam, Malaysia, Taiwan, Indonesia, and India
Our current suppliers are located in China, Vietnam, Taiwan, India, Indonesia, Malaysia and the United States. Our reliance on international suppliers increases our risk of supply chain disruption. Events that could cause disruptions to our supply chain include but are not limited to:
The occurrence of any of the foregoing could materially increase the cost and reduce or delay the supply of our products, which could adversely affect our business, financial condition, operating results and prospects.
We are subject to risks associated with our dependence on foreign manufacturing and imports for our products.
Our business highly depends on global trade, as well as trade and other factors that impact the specific countries where our vendors’ production facilities are located. Our future success will depend in large part upon our ability to maintain our existing foreign vendor relationships and to develop new ones based on the requirements of our business and any changes in trade dynamics that might dictate changes in the locations for sourcing of products. While we rely on long-term relationships with many of our vendors, we have no long-term contracts with them and generally transact business with them on an order-by-order basis.
All of our goods imported from China are subject to additional tariffs. In September 2018, the Office of the U.S. Trade Representative began imposing a 10 percent ad valorem duty on a subset of products imported from China, inclusive of various furniture product categories. In addition, effective May 10, 2019, the Office of the U.S. Trade Representative began imposing an additional 15 percent ad valorem duty on a subset of products imported from China, inclusive of various furniture product categories. We believe that nearly all of our products sourced from China are, and will continue to be, affected by the tariffs. While we are continuing to assess these proposed tariffs on Chinese imports and are evaluating strategies to mitigate the effects of the tariffs, there can be no assurance that we will not experience disruption in our business.
Further, these changes to tariffs or other rules related to cross border trade, could materially increase our cost of goods sold with respect to products that we purchase from vendors who manufacture products in China, which could in turn require us to increase our prices and, in the event consumer demand declines as a result, negatively impact our financial performance. Certain of our competitors may be better positioned than us to withstand or react to these kinds of changes including border taxes, tariffs or other restrictions on global trade and as a result we may lose market share to such competitors. In addition, while we may be able to continue to expand and shift our sourcing options, such expansion is time consuming and would be difficult or impracticable for many products and may result in an increase in our manufacturing costs. Due to broad uncertainty regarding the timing, content and extent of any regulatory changes in the United States or abroad, we cannot predict the impact, if any, that these changes could have to our business, financial condition and results of operations.
Our reliance on suppliers in developing countries increases our risk with respect to available manufacturing infrastructure, labor and employee relations, political and economic stability, corruption, and regulatory, environmental, health and safety compliance.
Our reliance on suppliers in developing countries increases our risk with respect to infrastructure available to support manufacturing, labor and employee relations, political and economic stability, corruption, and regulatory, environmental, health and safety compliance. Any failure of our suppliers to comply with ethical sourcing standards or labor or other local laws in the country of manufacture, or the divergence of a supplier’s labor practices from those generally accepted as ethical in the United States, could disrupt the shipment of products, force us to locate alternative manufacturing sources, reduce demand for our products, damage our reputation and/or expose us to potential liability for their wrongdoings. Any of these events could have a material adverse effect on our reputation, business, financial condition, operating results and prospects.
Most of our products are shipped from our suppliers by ocean vessel. If a disruption occurs in the operation of ports through which our products are imported, we may incur increased costs and suffer delays, which could have a material adverse effect on our business, financial condition, operating results and prospects.
Most of our products are shipped from our suppliers by ocean vessel. If a disruption occurs in the operation of ports through which our products are imported, for instance, as a result of port congestion, adverse weather, natural disasters or climate change, we may incur increased costs related to air freight or use of alternative ports. Shipping by air is significantly more expensive than shipping by ocean and our margins could be reduced. Shipping to alternative ports could also lead to delays in receipt of our products. We rely on third-party shipping companies to deliver our products to us. Failures by theseus; as a result, we are subject to various risks that are beyond our control, including labor disputes, union organizing activity, the closure of such shipping companiescompanies’ offices or a reduction in operational capacity due to an economic slowdown or the inability to sufficiently ramp up operational capacity during an economic recovery or upturn, outbreaks of diseases (such as the COVID-19 pandemic), increased fuel costs and costs associated with any regulations to address climate change, and other factors affecting the shipping industry’s capacity or ability to deliver our products to us or lack ofus.
Increases in the demand for, or the price of, raw materials used to manufacture our products or other fluctuations in sourcing or distribution costs could increase our costs and negatively impact our gross margin.
We believe that we have strong supplier relationships, and we work with our suppliers to manage cost increases. Our gross margin depends, in part, on our ability to mitigate rising costs or shortages of raw materials used to manufacture our products. Raw materials used to manufacture our products are subject to availability constraints and price volatility impacted by a number of factors, including supply and demand for fabrics, weather, government regulations, economic conditions, economic and political instability, and other unpredictable factors. In addition, our sourcing costs may fluctuate due to labor conditions, transportation or freight costs, energy prices, currency fluctuations, public health crises, such as the COVID-19 pandemic, or other unpredictable factors. The occurrence of any of the foregoing could increase our costs, delay or reduce the availability of our products and negatively impact our gross margin.
Our inability to manage our inventory levels and products, including with respect to our omni-channel operations, could have a material adverse effect on our business, financial condition, operating results and prospects.
Inventory levels in excess of customer demand may result in lower than planned financial performance. Alternatively, if we underestimate demand for our products, we may experience inventory shortages resulting in delays in fulfilling customer demands and replenishing to appropriate inventory levels, missed sales and lost revenues. Continued or lengthy delays in fulfilling customer demand could cause our customers to shop with our competitors instead of us, which could harm our business. Either of these events could significantly affect our operating results and brand image and loyalty. Our financial performance may also be impacted by changes in our products and pricing. These changes could have a material adverse effect on our business, financial condition, operating results and prospects.
Our omni-channel operations create additional complexities in our ability to manage inventory levels, as well as certain operational issues, including timely shipping and returns. Accordingly, our success depends to a large degree on continually evolving the processes and technology that enable us to plan and manage inventory levels and fulfill orders, address any related operational issues and further align channels to optimize our omni-channel operations. If we are unable to successfully manage these complexities, it may have a material adverse effect on our business, financial condition, operating results and prospects.
Our ability to attract customers to our showrooms depends heavily on successfully locating our showrooms in suitable locations. Any impairment of a showroom location, including any decrease in customer traffic, could cause our sales to be lower than expected.
We plan to open new showrooms in high traffic street and urban locations and historically we have favored top tier mall locations near luxury and contemporary retailers that we believe are consistent with our key customers’ demographics and shopping preferences. Sales at these showrooms are derived, in part, from the volume of foot traffic in these locations. Showroom locations may become unsuitable due to, and our sales volume and customer traffic generally may be harmed by, among other things:
Even if a showroom location becomes unsuitable, we will generally be unable to cancel the long-term lease associated with such showroom.
We may be unable to successfully open and operate new showrooms, which could have a material adverse effect on our business, financial condition, operating results and prospects.
As of January 31, 2021,30, 2022, we had 108146 showrooms, including 8 kiosks and 2 mobile concierges, but our growth strategy requires us to increase our showroom base. There can be no assurance that we will succeed in opening additional showrooms. If we are unable to successfully open and operate new showrooms, it could have a material adverse effect on our business, financial condition, operating results and prospects.
Our ability to successfully open and operate new showrooms depends on many factors, including, among other things, our ability to:
In addition, our new showrooms may not be immediately profitable, and we may incur significant losses until these showrooms become profitable. Unavailability of desired showroom locations, delays in the acquisition or opening of new showrooms, delays or costs resulting from a decrease in commercial development due to capital restraints, difficulties in staffing and operating new showroom locations or a lack of customer acceptance of showrooms in new market areas may negatively impact our new showroom growth and the costs or the profitability associated with new showrooms. While we are seeking to mitigate some of the risks related to our mall-based showrooms by opening high traffic street and lifestyle center-based showrooms and continuing to build our online sales, there can be no assurance that this strategy will be successful or lead to greater sales.
As we expand our showroom base, we may not be able to achieve the showroom sales growth rates that we have achieved in the past, which could cause our share price to decline.
As we expand our showroom base, we may not be able to achieve the showroom sales growth rates that we have achieved historically. If our showroom sales growth rates decline or fail to meet market expectations, the value of our common stock could decline. While our focus is to continue the expansion of our showrooms, this may result in the closure of underperforming showroom locations or locations with declining profitability in order to pursue more productive opportunities that are in line with our real estate strategy. The closure of these showrooms and transition to new showroom locations as part of our strategy may impact our sales and productivity.
In addition, the results of operations of our showroom locations have fluctuated in the past and can be expected to continue to fluctuate in the future. A variety of factors affect showroom sales, including, among others, consumer spending patterns, fashion trends, competition, current economic conditions, pricing, inflation, the timing of the release of new merchandise and promotional events, changes in our product assortment, the success of marketing programs, weather conditions and public health crises, such as the COVID-19 pandemic. If we misjudge the market for our products, we may have excess inventory of some of our products and miss opportunities for other products. These factors may cause our showroom sales results in the future to be materially lower than recent periods or our expectations, which could harm our results of operations and result in a decline in the price of our common stock.
We have and will continue to expend capital remodeling our existing showrooms, and there is no guarantee that this will result in incremental showroom traffic or sales.
We intend to continue remodeling our existing showroom base to reflect our new showroom design, and we intend to expend capital doing so. While preliminary results appear promising, there is no guarantee that the capital spent on these remodeled showrooms will result in increased showroom traffic or increased sales.
Our lease obligations are substantial and expose us to increased risks.
We do not own any of our showrooms. Instead, we rent all of our showroom spaces pursuant to leases. Nearly all of our leases require a fixed annual rent, and many of them require the payment of additional rent if showroom sales exceed a negotiated amount. Most of our leases are “net” leases that require us to pay all costs of insurance, maintenance and utilities, as well as applicable taxes.
Our required payments under these leases are substantial and account for a significant portion of our selling, general and administrative expenses. We expect that any new showrooms we open will also be leased, which will further increase our
ManyWe are required to make substantial lease payments under our leases, and any failure to make these lease payments when due would likely harm our business. In addition, many of our leases contain relocation clauses that allow the landlord to move the location of our showrooms. Moreover, asAs our leases expire, we may be unable to negotiate acceptable renewals. either of these events occur, our business salesdoes not generate sufficient cash flow from operating activities, and resultssufficient funds are not otherwise available to us from other sources, we may not be able to service our substantial lease expenses, which would harm our business.operations may be harmed.the lease term if we cannot negotiate a mutually acceptable termination payment.
Many of our leases include relocation clauses that allow the landlord to move the location of our showrooms. If any of our showrooms are relocated, there can be no assurance that the new location will experience the same levels of customer traffic or success that the prior location experienced. In addition, as our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close showrooms in desirable locations. We may also be unable to enter into new leases on terms acceptable to us or in desirable locations. If any of the foregoing occur, our business, sales and results of operations may be harmed.
We are required to make substantial lease payments under our leases, and any failure to make these lease payments when due would likely harm our business.
We depend on cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from other sources, we may not be able to service our substantial lease expenses, which would harm our business.
Moreover, our showroom leases are generally long term and non-cancelable, and we generally expect future showrooms to be subject to similar long term, non-cancelable leases. If an existing or future showroom is not profitable, and we decide to close it, we may nonetheless be required to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term if we cannot negotiate a mutually acceptable termination payment.
Our inability to successfully optimize our omni-channel operations and maintain a relevant and reliable omni-channel experience for our customers could have a material adverse effect on our growth strategy and our business, financial condition, operating results and prospects.
Growing our business through our omni-channel operations is key to our growth strategy. Our goal is to offer our customers seamless access to our products across our channels, and our success depends on our ability to anticipate and implement innovations in sales and marketing strategies to appeal to existing and potential customers who increasingly rely on multiple channels, such as ecommerce, to meet their shopping needs. Failure to enhance our technology and marketing efforts to align with our customers’ developing shopping preferences could significantly impair our ability to meet our strategic business and financial goals. If we do not successfully optimize our omni-channel operations, or if they do not achieve their intended objectives, it could have a material adverse effect on our business, financial condition, operating results and prospects.
If we are unable to successfully adapt to consumer shopping preferences or develop and maintain a relevant and reliable omni-channel experience for our customers, our financial performance and brand image could be adversely affected.
We are continuing to grow our omni-channel business model. While we interact with many of our customers through our showrooms, our customers are increasingly using computers, tablets and smartphones to make purchases online and to help them make purchasing decisions when in our showrooms. Our customers also engage with us online through our social media channels, including Facebook and Instagram, by providing feedback and public commentary about aspects of our business. Omni-channel retailing is rapidly evolving. Our success depends, in part, onFailure to enhance our technology and marketing efforts to align with our customers’ developing shopping preferences could significantly impair our ability to anticipatemeet our strategic business and implement innovations in customer experience and logistics in order to appeal to customers who increasingly rely on multiple channels to meet their shopping needs. If for any reasonfinancial goals. Moreoever, if we are unable to continue to implementdo not successfully optimize our omni-channel initiativesoperations, or provideif they do not achieve their intended objectives, it could have a convenientmaterial adverse effect on our business, financial condition, operating results and consistent experience for our customers across all channels that delivers the products they want, when and where they want them, our financial performance and brand image could be adversely affected.
Purchasers of furniture may choose not to shop online, which could affect the growth of our business.
The online market for furniture is less developed than the online market for apparel, consumer electronics and other consumer products in the United States. While we believe this market is growing, it still accounts for a small percentage of the market as a whole. We are relying on online sales for our continued success and growth. If the online market for furniture does not gain wider acceptance, our growth and business may suffer.
In addition, our success in the online market will depend, in part, on our ability to attract consumers who have historically purchased furniture through traditional retailers. We may have to incur significantly higher and more sustained advertising and promotional expenditures in order to attract additional online consumers to our website and convert them into purchasing customers. Specific factors that could impact consumers’ willingness to purchase furniture from us online include:
If the online shopping experience we provide does not appeal to consumers or meet the expectations of existing customers, we may not acquire new customers at rates consistent with historical periods, and existing customers’ buying patterns may not be consistent with historical buying patterns. If either of these events occur, our business, sales and results of operations may be harmed.
We depend on our ecommerce business and failure to successfully manage this business and deliver a seamless omni-channel shopping experience to our customers could have an adverse effect on our growth strategy, business, financial condition, operating results and prospects.
Sales through our ecommerce channel account for a significant portion of our revenues. Our business, financial condition, operating results and prospects are dependent on maintaining our ecommerce business. Dependence on our ecommerce business and the continued growth of our direct and retail channels subjects us to certain risks, including:
Our failure to successfully address and respond to these risks and uncertainties could negatively impact sales, increase costs, diminish our growth prospects and damage the reputation of our brand, each of which could have a material adverse effect on our business, financial condition, operating results and prospects.
Significant merchandise returns could harm our business.
We allow our customers to return products, subject to our return policy. While we have experienced relatively few product returns, this could change, and, ifIf customer returns are significant, our business, financial condition, operating results and prospects could be harmed. Further, we modify our policies relating to returns from time to time, which may result in customer dissatisfaction or an increase in the number of product returns.
We are subject to risks related to online payment methods.
We accept payment using a variety of methods, including credit card, debit card, PayPal, Apple Pay, Amazon Pay, Affirm and gift cards. As we offer new payment options to consumers, we may become subject to additional regulations, compliance requirements and fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and increase our operating costs. We are also subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply.
As our business changes, we may also be subject to different rules under existing standards, which may require new assessments that involve costs above what we currently pay for compliance. If we fail to comply with the rules or requirements of any provider of a payment method we accept, if the volume of fraud in our transactions limits or terminates our rights to use payment methods we currently accept, or if a data breach occurs relating to our payment systems, we may, among other things, be subject to fines or higher transaction fees and may lose, or have restrictions placed upon, our ability to accept credit card and debit card payments from consumers or our ability to facilitate other types of online payments. If any of these events were to occur, our business, financial condition and operating results could be materially adversely affected.
In addition, we occasionally receive orders placed with fraudulent credit card data. We may suffer losses as a result of orders placed with fraudulent credit card data even if the associated financial institution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent credit card transactions. If we are unable to detect or control credit card fraud, our liability for these transactions could harm our business, financial condition, operating results and prospects.
Finance Risks
Our ability to raise capital in the future may be limited. Our inability to raise capital when needed could prevent us from growing and could have a material adverse effect on our business, financial condition, operating results and prospects.
If we continue to experience insufficient cash flow from operations to support our operating and capital needs, we will be required to raise additional capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all. We may sell common stock, preferred stock, convertible securities and other equity securities in one or more transactions at prices and in such a manner as we may determine from time to time. If we sell any such equity securities in subsequent transactions, investors may be materially diluted. Concerns over the economic impact of inflation, the COVID-19 pandemic and the conflict between Russia and Ukraine have caused extreme volatility in financial and capital markets, which has adversely impacted our stock price and may materially adversely affect our ability to access capital markets. Debt financing, if available, may involve restrictive covenants and could reduce, among other things, our operational flexibility. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures. In addition, debt financings may be blocked by our senior lender that provides an asset-backed revolving credit facility to fund our inventory purchases in advance of customer sales. Our lender has, and any subsequent senior lender likely will have, the right to consent to any new debt financing. There can be no assurance that our lender will provide such consent. Our inability to raise capital when needed could prevent us from growing and have a material adverse effect on our business, financial condition, operating results and prospects.
IfWe have identified a material weakness in our internal controls over financial reporting, and if we are unable to implementremediate such material weakness and maintain an effective system of internal control over financial reportingcontrols in the future, investorswe may losefail to timely and accurately report our financial results, experience a loss of investor confidence in the accuracy and completeness of our consolidated financial reportsstatements, incur material misstatements in our consolidated financial statements, and the market price of our common stock may be adversely affected.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of SOXthe Sarbanes-Oxley Act (“Section 404”) requires that we furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment requires disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not be requiredalso needs to attest to the effectiveness of our internal control over financial reporting. We designed, implemented, and tested internal control over financial reporting until our first annual report required to be filedcomply with this obligation. The process of compiling the SEC followingsystem and processing documentation necessary to perform the later of the date we are deemed to be an “accelerated filer” or a “large accelerated filer,” each as definedevaluation required under Section 404 is costly and challenging, and, in the Exchange Act, or the datefuture, we are no longer an “emerging growth company,” as definedmay not be able to complete our evaluation, testing, and any required remediation in the JOBS Act. If we havea timely fashion.
If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.
We rely on financial reporting and data analytics that must be accurate in order to make real-time management decisions, accurately manage our cash position, and maintain adequate inventory levels while conserving adequate cash to fund operations. In the event of a systems failure, a process breakdown, the departure of key management, or fraud, we would be unable to efficiently manage these items and may experience liquidity shortfalls that our cash position or revolving credit facility may not be able to accommodate. In such a situation, we also may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.
We may be unable to accurately forecast our operating results and growth rate, which may adversely affect our reported results and stock price.
We may not be able to accurately forecast our operating results and growth rate. We use a variety of factors in our forecasting and planning processes, including historical results, recent history and assessments of economic and market conditions. Our growth rates may not be sustainable, and our growth depends on the continued growth of demand for the products we offer. Lower demand caused by changes in customer preferences, a weakening of the economy or other factors may result in decreased revenues or growth. Furthermore, many of our expenses and investments are fixed, and we may not be able to adjust our spending in a timely manner to compensate for any unexpected shortfall in our operating results. Failure to accurately forecast our operating results and growth rate could cause our actual results to be materially lower than anticipated. If our growth rate declines as a result, investors’ perceptions of our business may be adversely affected, and the market price of our common stock could decline.
To manage our anticipated growth effectively, we must continue to implement our operational plans and strategies, improve and expand our corporate infrastructure, information systems, and executive management and expand, train and manage our associate base. As we grow, we will need to find, train, and monitor additional associates and continue to invest in information systems that support key functions such as accounting, human resources, sales analytics, and marketing, all of which strain the time of our executive management team and our resources. If we fail to manage our growth effectively, our business, financial condition, operating results and prospects could be harmed.
Changes in lease accounting standards may materially and adversely affect us.
The Financial Accounting Standards Board (“FASB”) issued 2016-02, Leases (Topic 842). As an “emerging growth company,” we have elected to defer compliance with new or revised financial accounting standards and, as a result we will adoptWe adopted this standard beginning in fiscal 2022. When the rulesWe are effective, we will be required to capitalize all leases with a life greater than one year on our balance sheet and account for our showroom leases as assets and liabilities, where we previously accounted for such leases on an “off balance sheet” basis. As a result, a significant amount of lease-related assets and liabilities will bewere recorded on our balance sheet, and we may be required to make other changes to the recording and classification of our lease-related expenses.sheet. These changes willhave not directly impactimpacted our overall financial condition. However, they could cause investors or others to believe that we are highly leveraged and could change the calculations of financial metrics and covenants under our debt facilities and third-party financial models regarding our financial condition.
Legal, Tax and Regulatory Risks
We have not had any significant product liability claims to date. We place a high priority on designing our products to be safe for consumers and safety test our products in third-party laboratories. Still, the products we sell or have manufactured may expose us to product liability claims, litigation and regulatory action relating to personal injury, death and environmental or property damage. Some of our agreements with our suppliers and international manufacturers may not indemnify us from product liability for a particular supplier’s or international manufacturer’s products, or our suppliers or international manufacturers may not have sufficient resources or insurance to satisfy their indemnity and defense obligations. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. Any product liability claims asserted against us could, among other things, harm our reputation, damage our brand, cause us to incur significant costs, and have a material adverse effect on our business, results of operations and financial condition.
Product warranty claims could have a material adverse effect on our business.
We provide a lifetime warranty on most componentsthe hard insert pieces of our products,Sactionals and the soft insert pieces of our Sacs, which, if deficient, could lead to warranty claims. The Company maintains a reserve for warranty claims. However, there can be no assurance that our reserve for warranty claims will be adequate and additional or reduced warranty reserves may be required. Material warranty claims could, among other things, harm our reputation and damage our brand, cause us to incur significant repair and/or replacement costs, and have a material adverse affecteffect on our business, financial condition, operating results and prospects.
A significant disruption in, or breach in security of, our information technology systems or violations of data protection laws could have a material adverse affecteffect on our business and reputation.
In the ordinary course of business, we collect and store confidential information, including proprietary business information belonging to us, our customers, suppliers, business partners and other third parties and personally identifiable information of our associates. We rely on information technology systems to protect this information and to keep financial records, process orders, manage inventory, coordinate shipments to customers, and operate other critical functions. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, telecommunication failures and user errors. If we experience a disruption in our information technology systems, it could result in the loss of sales and customers and significant incremental costs, which could materially adversely affect our business.
Government regulation of the Internet and ecommerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and ecommerce. Existing and future regulations and laws could impede the growth of the Internet, ecommerce or mobile commerce. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications, consumer protection, Internet neutrality and gift cards. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or ecommerce. It is possible that general business regulations and laws, or those specifically governing the Internet or ecommerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices.
Though we seek at all times to be in full compliance with all such laws, we cannot be sure that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by governmental entities or others. Any such proceeding or action could damage our reputation and brand, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, decrease the use of our website by consumers and result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations.
We may be unable to protect our trademarks or brand image, which could harm our business.
We rely on trademark registrations and common law trademark rights to protect the distinctiveness of our brand. However,We regard our customer and prospect lists, trademarks, domain names, copyrights, patents and similar intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection, agreements and other methods with our associates and others to protect our proprietary rights. We have 26 issued U.S. utility patents and 38 issued foreign utility patents, that are scheduled to expire between 2022 and 2039. We also have 15 pending U.S. utility patent applications, 35 pending foreign utility patent applications and 2 pending international patent applications. Our inability to
The laws of certain foreign countries may not protect the use of unregistered trademarks to the same extent as do the laws of the United States. As a result, international protection of our brand image may be limited, and our right to use our trademarks outside the United States could be impaired. Other persons or entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for furniture and/or accessories in foreign countries where our products are manufactured. There may also be other prior registrations of trademarks identical or similar to our trademarks in other foreign countries of which we are not aware. Accordingly, it may be possible for others to prevent the manufacture of our branded merchandise in certain foreign countries or the sale or exportation of our branded merchandise from certain foreign countries to the United States. If we were unable to reach a licensing arrangement with these parties, we might be unable to manufacture our products in those countries. Our inability to register our trademarks or purchase or license the right to use the relevant trademarks or logos in these jurisdictions could limit our ability to manufacture our products in less costly markets or penetrate new markets in jurisdictions outside the United States. The occurrence of any of the foregoing could harm our business.
We may not be able to adequately protect our intellectual property rights.
We regard our customer and prospect lists, trademarks, domain names, copyrights, patents and similar intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection, agreements and other methods with our associates and others to protect our proprietary rights. We have 19 issued U.S. utility patents and 26 issued foreign utility patents, that are scheduled to expire between 2022 and 2037. We have 12 pending U.S. utility patent applications, 36 pending foreign utility patent applications and 2 pending international patent applications. We expect to file U.S. and international patent applications for future innovations. We might not be able to obtain protection in the United States or internationally for our intellectual property, and we might not be able to obtain effective intellectual property protection in countries in which we may in the future sell products. If we are unable to obtain such protection, our business, financial condition, operating results and prospects may be harmed. Additionally, associates, contractors or consultants may misappropriate or disclose our confidential information or intellectual property and agreements with those persons may not exist, may not cover the information or intellectual property in question, or may not be enforceable, all of which could have an adverse impact on our business, financial condition, operating results and prospects for the future.
The protection of our intellectual property rights may require the expenditure of significant financial, managerial and operational resources. Notwithstanding such expenditures, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing, misappropriating or disclosing confidential information or intellectual property. The validity, enforceability and infringement of our patents, trademarks, trade secrets and other intellectual property rights may be challenged by others in litigation or through administrative process, and we may not prevail in such disputes. Additionally, because the process of obtaining patent and trademark protection is expensive and time-consuming, we may not be able to prosecute all necessary or desirable patent and trademark applications at a reasonable cost or in a timely manner, and such applications may never be granted. Even if such applications issue as patents and trademarks, there can be no assurance that these patents and trademarks will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patents, trademarks and other intellectual property rights are uncertain. If we are unable to adequately protect our intellectual property rights, our business, financial condition, operating results and prospects may be harmed.
We also might be required to spend significant resources to monitor and protect our intellectual property rights. We may not be able to discover or determine the extent of any infringement, misappropriation, disclosure or other violation of our intellectual property rights, confidential information or other proprietary rights. We may initiate claims or litigation against others for infringement, misappropriation or violation of our intellectual property rights, confidential information or other
Our products or marketing activities may be found to infringe or violate the intellectual property rights of others.
Third parties may assert claims or initiate litigation asserting that our products or our marketing activities infringe or violate such third parties’ patent, copyright, trademark, trade secret or other intellectual property rights. The asserted claims and/or litigation could include claims against us or our suppliers alleging infringement of intellectual property rights with respect to our products or components of such products.
Regardless of the merit of the claims, if our products are alleged to infringe or violate the intellectual property rights of other parties, we could incur substantial costs and we may have to, among other things:
If any of the foregoing occur, our business, financial condition, operating results and prospects could be materially adversely affected.
Risks Related to Ownership of Our Common Stock
The trading price of the shares of our common stock has been and is likely to continue to be highly volatile, and purchasers of our common stock could incur substantial losses.
The stock market in general has experienced volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price they paid. The market price for our common stock may be influenced by many factors, including:
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of our common stock may be volatile, and in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, and results of operations.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us or our business. If one or more of these securities or industry analysts ceases coverage of us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. If one or more of the analysts who cover us downgrades our common stock, publishes inaccurate or unfavorable research about our business or if our operating results do not meet their expectations, our stock price could decline.
Future sales and issuances of our common stock or rights to purchase common stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock. Future sales and issuances of our common stock or rights to purchase our common stock could result in substantial dilution to our existing stockholders. We may sell shares or other securities in the future that could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the current price per share of our common stock.
We are an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an “emerging growth company” as defined in the JOBS Act, and we could be an emerging growth company for up to five years following the completion of our IPO. For as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including:
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. Investors may find our common stock less attractive if we choose to rely on any of the exemptions or accommodations afforded to emerging growth companies. If investors find our common stock less attractive because we rely on any of these exemptions or accommodations, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile. We have irrevocably elected to take advantage of the extended transition period for new or revised accounting standards.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our Company more difficult, and limit attempts by our stockholders to replace or remove our current management.
Provisions in our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws include provisions that:
We do not expect to declare any dividends in the foreseeable future.
The continued operation and growth of our business will require substantial cash. Accordingly, we do not anticipate paying any cash dividends to holders of our common stock at any time in the foreseeable future. Any determination to pay future dividends will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, indebtedness, restrictions imposed by applicable law and other factors our board of directors deems relevant. Consequently, the only way investorsour shareholders may be able to realize future gain on their investment is to sell their shares of common stock after the price of such shares has appreciated. However, there is no guarantee that investors’our shares of common stock will appreciate in value or even maintain the price at which our investors purchased their shares of common stock.
Sales of a substantial number of shares of our common stock into the public market by certain of our stockholders could depress our stock price.
Sales of substantial amounts of our common stock in the public market could reduce the prevailing market prices for our common stock. Substantially all of our outstanding common stock is eligible for sale as are shares of common stock issuable under vested and exercisable stock options. If our existing stockholders sell a large number of shares of our common stock, or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. Existing stockholder sales might also make it more difficult for us to sell additional equity securities at a time and price that we deem appropriate.
Certain holders of our outstanding common stock have rights to require us to file registration statements for the public sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Registration of these shares under the Securities Act of 1933, as amended, or the Securities Act, would result in the holder being able to sell the shares without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any significant sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.
None.
Our primary offices are located at Two Landmark Square, Suite 300, Stamford, CT 06901, where we occupy 22,480 square feet of office space pursuant to a lease agreement that expires in November 2024.2024, and 904 W. 1600 S., #102, Saint George, Utah 84770, where we occupy 10,696 square feet of office space pursuant to a lease agreement that expires September 2031. We also lease retail space for our showrooms, in 108146 locations throughout the majority of the U.S. states including Alabama, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin and the District of Columbia.
We are currently involved in, and may in the future be involved in, legal proceedings, claims, and investigations in the ordinary course of our business, including claims for infringing intellectual property rights related to our products and the content contributed by our users and partners. Although the results of these proceedings, claims, and investigations cannot be predicted with certainty, we do not believe that the final outcome of these matters is reasonably likely to have a material adverse effect on our business, financial condition, or results of operations. Regardless of final outcomes, however, any such proceedings, claims, and investigations may nonetheless impose a significant burden on management and associates and may come with costly defense costs or unfavorable preliminary and interim rulings.
Not applicable.
Market Information
Our common stock is traded on Nasdaq under the symbol “LOVE.”
Holders
As of April 12, 2021,March 15, 2022, there were 207180 holders of record of our common stock. Because shares of our common stock are held by depositories, brokers and other nominees, the number of beneficial holders of our shares is substantially larger than the number of record holders.
Dividends
We have never paid cash dividends on any of our capital stock and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. We do not intend to pay cash dividends to holders of our common stock in the foreseeable future.
February 1, 2019 | February 2, 2020 | January 31, 2021 | January 30, 2022 | |||||||||||
The Lovesac Company common stock | $100.00 | $47.81 | $238.16 | $212.89 | ||||||||||
S&P 500 | $100.00 | $121.56 | $142.53 | $172.46 | ||||||||||
Russell 2000 | $100.00 | $109.02 | $141.91 | $136.05 |
Item 6. Selected Financial Data.
Not applicable.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. As discussed in the section titled “Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” under Part I, Item 1A in this Annual Report on Form 10-K.
We operate on a 52- or 53-week fiscal year that ends on the Sunday closest to February 1. Each fiscal year generally is comprised of four 13-week fiscal quarters, although in the years with 53 weeks, the fourth quarter represents a 14-week period.
Overview
We are a technology driven company that designs, manufactures and sells unique, high quality furniture derived through our proprietary Designed“Designed for Life philosophyLife” approach which results in products that are built to last a lifetime and designed to evolve as our customers’ lives do. Our current product offering is comprised of modular couches called Sactionals, premium foam beanbag chairs called Sacs, and their associated home decor accessories. Innovation is at the center of our design philosophy with all of our core products protected by a robust portfolio of utility patents. We market and sell our products primarily online directly at www.lovesac.com,, supported by direct-to-consumer touch-feel points in the form of our own showrooms, which include our newly created mobile concierge and kiosks, as well as through shop-in-shops and online pop-up-shops with third party retailers. We believe that our ecommerce centric approach, coupled with our ability to deliver our large, upholstered products through express couriers, is unique to the furniture industry.
Our Operations
See “Item 1. Business” for information on our products, customers, business model, channels, growth strategies, seasonality and other factors describing our business.
Factors Affecting Our Operating Results
While our growth strategy has contributed to our improving operating results, it also presents significant risks and challenges. The timing and magnitude of new showroom openings, existing showroom renovations, and marketing activities may affect our results of operations in future periods. These strategic initiatives will require substantial expenditures.
Other factors that could affect our results of operations in future periods include:
Impact of COVID-19
AsAlthough there has been a result of certain government actionsgeneral improvement in responseconditions related to the COVID-19 pandemic, on March 18, 2020, we closed all showroom locations followingthere continues to be uncertainties around the guidance of local, statescope and federal governments, as well as health organizations. We also implemented a reduction in workforce of approximately 445 part time associates (representing 57% of our total headcount) as well as a temporary reduction in executive cash compensation. Cash compensation was reduced by 20% for Shawn Nelson, Chief Executive Officer, Jack Krause, President and Chief Operating Officer, and Donna Dellomo, Executive Vice President, Chief Financial Officer, Treasurer and Secretary. The base salaries of all other senior management and full-time headquarter associates were temporarily reduced by graduated amounts. Our Board of Directors agreed to a temporary reduction of its retainer and monitoring fees and an extensionseverity of the associated payment timeline. As of October 1, 2020, we restored cash compensation for all headquarter associatespandemic, its impact on the global economy, including supply chains, and other than senior management. As of December 1, 2020, we restored compensation levels for all senior management to include Mr. Nelson, Mr. Krausebusiness disruptions that may impact our operating results and Ms. Dellomo, and as of December 17, 2020 we restored compensation levels for our Board of Directors. We also proactively reduced our promotional discounts which drove higher gross profit, deferred infrastructure investments and delayed hiring as part of our financial resilience measures. Additionally, we believe that the pandemic has contributed to an acceleration in the shift of commerce to online sales which resulted in an increase in sales on our ecommerce platform and a slight decline in showroom sales. However, it is possible that this increased ecommerce demand may not continue in future periods.condition. We continue to monitorfollow the situation closely
Overall Economic Trends
The industry in which we operate is cyclical. In addition, our revenues are affected by general economic conditions. Purchases of our products are sensitive to a number of factors that influence the levels of consumer spending, including economic conditions, consumer disposable income, housing market conditions, consumer debt, interest rates and consumer confidence.
Seasonality
Our business is seasonal. As a result, our revenues fluctuate from quarter to quarter, which often affects the comparability of our results between periods. Net sales are historically higher in the fourth fiscal quarter due primarily to the impact of the holiday selling season.
Competition
The retail industry is highly competitive and retailers compete based on a variety of factors, including design, quality, price and customer service. Levels of competition and the ability of our competitors to attract customers through competitive pricing or other factors may impact our results of operations.
How We Assess the Performance of Our Business
We consider a variety of financial and operating measures, including the following, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Net Sales
Net sales reflect our sale of merchandise plus shipping and handling revenue less returns and discounts. Sales made at Company operated showrooms, including shop-in-shops and pop-up-shops, and via the web are recognized in accordance with the guidance set forth in ASC 606, which is typically at the point of transference of title when the goods are shipped.
Comparable Showroom Sales
Comparable showroom sales are calculated based on point of sale transactions from showrooms that were open at least fifty-two weeks as of the end of the reporting period. These sales will differ from sales on our income statement which are reported when goods are shipped and title has transferred to the customer. A showroom is not considered a part of the comparable showroom sales base if the square footage of the showroom changed or if the showroom was relocated. If a showroom was closed for any period of time during the measurement period, that showroom is excluded from comparable showroom sales. The CompanyWe made an exception to this calculation in fiscal 2021 when all of our showrooms were temporarily closed due to government regulations in response to the COVID-19 pandemic. For fiscal years 2022 and 2021, 29 and 2020, 19 and 14 showrooms,
Customer Lifetime Value and Customer Acquisition Cost
We calculate CAC on an annual basis by dividing our expenses associated with acquiring new customers for a fiscal year by the number of new customers we acquire in that fiscal year. We include premium rent for locations above commercial rates, media costs to new customers, and a portion of showroom merchandising costs in our marketing expenses associated with acquiring new customers when calculating our CAC. We believe that fiscal 2018 is the first fiscal year that our CAC fully reflects the implementation of changes to our marketing. In fiscal 2018 we significantly increased our spending on marketing expenses and media costs. Our marketing expenses for fiscal 2022 and fiscal 2021 waswere both equal to 13.1% of revenue as compared to fiscal 2020 at 12.5% of revenue and 11.1% of revenue for fiscal 2019.revenue. For fiscal 2021,2022, our CAC was $434.61$548.74 per customer compared to a CAC of $391.71$434.61 for fiscal 2020.2021. This increase was a result of our increased marketing spend that targeted Sactional customers. We expect our CAC to continue to increase over the next few years as a result of our continued focus on increasing marketing efforts. We expect this increase in CAC to correspond with a continued increase in CLV.
We monitor repeat customer transactions in aggregate through our point of sale platform and in groups based upon the year in which customers first made a purchase from us, which we refer to as cohorts, as a way to measure our customer’s engagement with our products over their lifetime. Our fiscal 20212022 cohorts CLV is $2,044.$2,840 compared to $2,044 in fiscal 2021. In addition, our fiscal 2015 cohort has increased its CLV from $1,071 in fiscal 2015 to $1,346$1,385 in fiscal 2021,2022, a 25.6%29.3% increase in customer value since the fiscal 2015 cohorts’ first purchases with Lovesac.
Retail Sales Per Selling Square Foot
Retail sales per selling square foot is calculated by dividing the total point of sales transactions for all comparable showrooms, by the average selling square footage for the period. Selling square footage is retail space at our showrooms used to sell our products. Selling square footage excludes backrooms at showrooms used for storage, office space or similar matters.
Cost of Merchandise Sold
Cost of merchandise sold includes the direct cost of sold merchandise; inventory shrinkage; inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost or net realizable value reserves; inbound freight; all freight costs to ship merchandise to our showrooms; design, buying and allocation costs, warehousing and all logistics costs associated with shipping product to our customers. Certain of our competitors and other retailers may report gross profit differently than we do, by excluding from gross profit some or all of the costs related to their distribution network and instead including them in selling, general and administrative expenses. As a result, the reporting of our gross profit and profit margin may not be comparable to other companies.
The primary drivers of our cost of merchandise sold are raw materials costs, labor costs in the countries where we source our merchandise, and logistics costs. We expect gross profit to increase to the extent that we successfully grow our net sales and continue to realize scale economics with our manufacturing partners. We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise and use product markdowns to efficiently sell these products. The timing and level of markdowns are driven primarily by customer acceptance of our merchandise.
Gross Profit
Gross profit is equal to our net sales less cost of merchandise sold. Gross profit as a percentage of our net sales is referred to as gross margin. In September 2018, the Office of the U.S. Trade Representative began imposing a 10 percent ad valorem duty on a subset of products imported from China, inclusive of various furniture product categories. In September 2019, the Office of U.S. Trade Representative imposed an additional 15 percent ad valorem duty on products imported from China.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include all operating costs, other than advertising and marketing expense, not included in cost of merchandise sold. These expenses include all payroll and payroll-related expenses; showroom expenses, including occupancy costs related to showroom operations, such as rent and common area maintenance; occupancy and expenses related to many of our operations at our headquarters, including utilities, equity based compensation, financing
Our recent revenue growth has been accompanied by increased selling, general and administrative expenses. The most significant components of these increases are payroll, rent and rentselling related costs. We expect these expenses, as well as rent expense associated with the opening of new showrooms, to increase as we grow our business. We expect to leverage total selling, general and administrative expenses as a percentage of sales as sales volumes continue to grow. We expect to continue to invest in infrastructure to support the Company’s growth. These investments will lessen the impact of expense leveraging during the period of investment with the greater impact of expense leveraging happening after the period of investment. However, total selling, general and administrative expenses generally will leverage during the periods of investments with the most deleverage occurring in the first three quarters of the fiscal year, and the greatest leverage occurring in the fourth quarter.
Advertising and Marketing Expense
Advertising and marketing expense include digital, social, and traditional advertising and marketing initiatives, that cover all of our business channels. Advertising and marketing expense is expected to increase as a percentage to sales as we continue to invest in advertising and marketing which has accelerated sales growth.
Basis of Presentation and Results of Operations
The following discussion contains references to fiscal years 2021 and 2020 which represent our fiscal years ended January 31, 2021 and February 2, 2020, respectively. Our fiscal year ends on the Sunday closest to February 1. Both fiscal 2021 and 2020 were 52-week periods.
The following table sets forth, for the periods for fiscal 2021 and 2020, our consolidated statement of operations as a percentage of total revenues:
For the Fiscal Year Ended | ||||||||
January 31, 2021 | February 2, 2020 | |||||||
Statement of Operations Data: | ||||||||
Net sales | 100 | % | 100 | % | ||||
Cost of merchandise sold | 46 | % | 50 | % | ||||
Gross profit | 54 | % | 50 | % | ||||
Selling, general and administrative expenses | 35 | % | 42 | % | ||||
Advertising and marketing | 13 | % | 13 | % | ||||
Depreciation and amortization | 2 | % | 2 | % | ||||
Operating income (loss) | 4 | % | -7 | % | ||||
Interest income | 0 | % | 0 | % | ||||
Income (loss) before taxes | 4 | % | -7 | % | ||||
Provision for income taxes | 0 | % | 0 | % | ||||
Net income (loss) | 4 | % | -7 | % |
Fiscal 2021 Compared to Fiscal 2020
Net sales
Net sales increased $87.4 million, or 37.4%, to $320.7 million in fiscal 2021 compared to $233.4 million in fiscal 2020. The increase in net sales is primarily due to an increase in new customers, which grew by 32.9% in fiscal 2021 as compared to 22.5% in fiscal 2020 and was partially offset by a decrease in the total number of units sold by 18.4% over prior year. The fiscal 2021 average net sales based on point of transactions per showroom is $1.5 million compared to $1.8 million in fiscal 2020, which reflects the temporary closure of our showrooms related to COVID-19. We had 108 and 91 showrooms open as of January 31, 2021 and February 2, 2020, respectively. We opened 19 additional showrooms and closed 2 showrooms in fiscal 2021. Showroom net sales decreased $1.9 million, or 1.3%, to $146.2 million in fiscal 2021 compared to $148.0 million in fiscal 2020 primarily due to the decrease in our non-comparable showrooms point of sales transactions related to COVID-19 temporary closures. Our comparable showroom point of sales transaction increased by $0.1 million or 0.1%, to $124.5 million in fiscal 2021 compared to $124.3 million in fiscal 2020. Point of sales transactions represent orders places through our showrooms which does not always reflect the point at which when control transfers to the customer, which occurs upon shipment being confirmed and the sale is recorded. See Note 1 to the consolidated financial statements. Retail sales per selling square foot based on point of transactions decreased $406, or 19.5%, to $1,676 in fiscal 2021 compared to $2,083 in fiscal 2020 due to temporary closures of our showrooms. Internet sales (sales made directly to customers through our ecommerce channel) increased $95.3 million, or 170.8%, to $151.1 million in fiscal 2021 compared to $55.8 million in fiscal 2020. We believe that the increase in Internet sales was due primarily to the shift in our customers’ shopping preferences during the pandemic, our increased marketing initiatives, and the temporary closures of our showroom locations. Other sales, which include pop-up-shop sales and shop-in-shop sales decreased $6.1 million, or (20.5%), to $23.5 million in fiscal 2021 compared to $29.6 million in fiscal 2020. This decrease was due to decrease in in store pop-up-shops as a result of temporary closures and ongoing vendor negotiations partially offset by an increase in temporary online pop-ups on Costco.com and Best Buy shop-in-shops.
Gross profit
Gross profit increased $58.1million, or 49.8%, to $174.8 million in fiscal 2021 compared to $116.7 million in fiscal 2020. Gross margin increased to 54.5% of net sales in fiscal 2021 from 50.0% of net sales in fiscal 2020. The 450 basis points increase in gross margin versus the prior year period reflects 400 basis points improvement in gross profit as a result of a reduction in promotional discounts, higher Sactional product mix impact related to premium covers, reduced inventory reserve levels, and lower product costs related to vendor negotiated tariff mitigation initiatives due to higher volume. Distribution expenses including warehousing, freight and tariff related expenses also improved by 50 basis points due to higher leverage on warehousing and tariff expenses, partially offset by deleverage in freight expense.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 13.5%, or $13.3 million, to $111.4 million for the fiscal year ended January 31, 2021 compared to $98.1 million for the fiscal year ended February 2, 2020. The increase in selling, general and administrative expenses was primarily related to an increase in employment costs of $7.3 million primarily driven by an increase in variable compensation and new hires in our headquarters, $1.7 million of increased rent associated with our net addition of 17 showrooms, partially offset by a decrease of $1.2 million in selling related expenses due to a decrease of $4.6 million of in store pop-up-shop fees, partially offset by the increase of $3.1 million of credit card fees and $0.3 million of web related selling expenses. Overhead expenses increased $5.5 million consisting of an increase of $6.4 million in infrastructure investments and an increase in insurance expense of $1.0 million related to the growth of the Company, partially offset by a decrease of $1.3 million in travel expenses related to COVID-19 restrictions and a decrease of $0.6 million in equity-based compensation.
Selling, general and administrative expenses were 34.7% of net sales for fiscal year ended January 31, 2021 compared to 42.1% of net sales for fiscal year ended February 2, 2020. SG&A expense as a percent of net sales decreased 740 basis points due to a decrease of 240 basis points in selling related expenses related to a reduction in in store pop-up-shop fees partially offset by temporary online pop-up fees and the ability of the Company to leverage expenses during COVID-19 of 500 basis points such as rent expense, employment costs, equity-based compensation, travel expenses, infrastructure investments, and credit card fees.
Advertising and marketing expenses
Advertising and marketing expenses increased $12.7 million, or 43.6%, to $41.9 million for the fiscal year ended January 31, 2021 compared to $29.2 million for the fiscal year ended February 2, 2020. The increase in advertising and marketing costs relates to increased media and direct to consumer programs which are expected to drive revenue beyond the period of the expense. The increase in advertising and marketing as a percent of net sales is due to increased rates in media coupled with increased media spending during key minor market share events. We expect to continue to maintain our advertising and marketing investments at 12% to 14% of net sales on an annual basis. The investment by quarter may vary.
For the Fiscal Year Ended | |||||||||||
January 30, 2022 | January 31, 2021 | February 2, 2020 | |||||||||
Statement of Operations Data: | |||||||||||
Net sales | 100 | % | 100 | % | 100 | % | |||||
Cost of merchandise sold | 45 | % | 46 | % | 50 | % | |||||
Gross profit | 55 | % | 54 | % | 50 | % | |||||
Selling, general and administrative expenses | 32 | % | 35 | % | 42 | % | |||||
Advertising and marketing | 13 | % | 13 | % | 13 | % | |||||
Depreciation and amortization | 2 | % | 2 | % | 2 | % | |||||
Operating income (loss) | 8 | % | 4 | % | (7) | % | |||||
Interest (expense) income, net | 0 | % | 0 | % | 0 | % | |||||
Net income (loss) before taxes | 8 | % | 4 | % | (7) | % | |||||
Benefit from (provision for) income taxes | 1 | % | 0 | % | 0 | % | |||||
Net income (loss) | 9 | % | 4 | % | (7) | % |
Depreciation and amortization expenses
Depreciation and amortization expenses increased 28.2%19%, or $1.5$1.2 million to $7.9 million in fiscal 2022 compared to $6.6 million in fiscal 2021 compared to $5.1 million in fiscal 2020 to.2021. The increase in depreciation and amortization expense is principally related to capital investments for new and remodeled showrooms.
Interest (expense) income
expense, net was $0.2 million in fiscal 2022, principally related to the interest expense for unused line fees and amortization of deferred financing fees on the asset-based loan. Interest expense, net in fiscal 2021 was $0.1 million, which reflects $0.1 million of interest income on cash and cash equivalents, offset by $0.2 million of interest expense related to unused line fees, interest on borrowings and amortization of deferred financing fees on the asset-based loan for the fiscal year ended January 31, 2021. Interest income, net in fiscal 2020 was $0.6 million which reflects earnings related to the net proceeds from the IPO and primary share offerings of $0.8 million net of interest expense of $0.2 million relating to unused line fees, interest on borrowings and amortization of deferred financing fees on the asset based loan for the fiscal year ended February 2, 2020.
Provision for income taxes
IncomeDuring fiscal 2022, the Company recorded an income tax benefit of $7.6 million compared to income tax expense was less than 0.03% of sales for both$0.1 million in fiscal 2021 and2021. During fiscal 2020.
Repeat customers
Repeat customers accounted for approximately 37.5%41.6% of all transactions in fiscal 20212022 compared to 35.6%37.5% in fiscal 2020.2021. We expect new transactions to continue to become a larger portion of our transaction mix as we spend on acquisition.
Quarterly Results
Our business is seasonal and we have historically realized a higher portion of our net sales and net income in the fourth fiscal quarter due primarily to the holiday selling season. Working capital requirements are typically higher in the third fiscal quarter due to inventory built-up in advance of the holiday selling season. During these peak periods we have historically increased our borrowings under our line of credit. As such, results of a period shorter than a full year may not be indicative of results expected for the entire year, and the seasonal nature of our business may affect comparisons between periods.
Liquidity and Capital Resources
General
Our business relies on cash flows from operations, our revolving line of credit (see “Revolving Line of Credit” below) and securities issuances as our primary sources of liquidity. Our primary cash needs are for marketing and advertising, inventory, payroll, showroom rent, capital expenditures associated with opening new showrooms and updating existing showrooms, as well as infrastructure and information technology. The most significant components of our working capital are cash and cash equivalents, inventory, accounts receivable, accounts payable and other current liabilities and customer deposits. Borrowings generally increase in our third fiscal quarter as we prepare for the holiday selling season, which is in our fourth fiscal quarter. We believe that cash expected to be generated from operations, the availability under our revolving line of credit and our existing cash balances are sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.
A summary of operating, investing, and financing activities during the periods indicated are shown in the following table:
in thousands | Fiscal Year Ended | ||||||||||
January 30, 2022 | January 31, 2021 | February 2, 2020 | |||||||||
Provided by (used in) operating activities | $ | 34,018 | $ | 40,521 | $ | (11,194) | |||||
Used in investing activities | (16,488) | (9,052) | (10,651) | ||||||||
(Used in) provided by financing activities | (3,479) | (1,667) | 21,313 | ||||||||
Increase (decrease) in cash and cash equivalents | 14,051 | 29,802 | (532) | ||||||||
Cash and cash equivalents at end of period | 92,392 | 78,341 | 48,539 |
in thousands | Fiscal Year Ended | |||||||
January 31, 2021 | February 2, 2020 | |||||||
Provided by (used in) operating activities | $ | 40,521 | $ | (11,194 | ) | |||
Used in investing activities | (9,052 | ) | (10,650 | ) | ||||
(Used in) provided by financing activities | (1,667 | ) | 21,312 | |||||
Increase (decrease) in cash and cash equivalents | 29,802 | (532 | ) | |||||
Cash and cash equivalents at end of period | 78,341 | 48,539 |
Net Cash Provided by (Used in) Operating Activities
Cash from operating activities consists primarily of net income (loss) adjusted for certain non-cash items, including depreciation, amortization, loss (gain) on disposal of property and equipment, impairment of property and equipment, equity based compensation, deferred rent, and non-cash interest expense and the effect of changes in working capital and other activities.
In fiscal 2021, net cash provided by operating activities was $40.5 million and consisted of changes in operating assets and liabilities of $10.5 million, a net income of $14.7 million, and non-cash items of $15.3 million. Working capital and other activities consisted primarily of increases in inventory of $14.0 million and prepaid expenses and other current assets of $2.1 million, partially offset by a decrease in accounts receivable of $2.7 million and increases in accrued liabilities and accounts payable of $19.6 million, and customer deposits of $4.3 million.
In fiscal 2020, net cash used in operating activities was $11.2 million and consisted of changes in operating assets and liabilities of $7.8 million, a net loss of $15.2 million, and non-cash items of $11.8 million. Working capital and other activities consisted primarily of increases in inventory of $10.2 million, accounts receivable of $3.2 million, and prepaid expenses of $2.2 million, partially offset by increases in accrued liabilities and accounts payable of $7.2 million, and other current liabilities of $0.6 million.
Net Cash Used In Investing Activities
Investing activities consist primarily of investment in supply chain and systems infrastructure andinvestments related to capital expenditures related tofor new showroom openings, and the remodeling of existing showrooms.
For fiscal 2021, capital expenditures were $9.1 million as a result of investments in new and remodeled showrooms and intangibles.
For fiscal 2020, capital expenditures were $10.7 million as a result of investments in new and remodeled showrooms and intangibles which included $0.3 million in proceeds from the disposal of property and equipment.
Net Cash (Used in) Provided By Financing Activities
Financing activities consist primarily of the proceeds from stock offerings and taxes paid for the net settlement of equity awards.
For fiscal 2021, net cash used in financing activities was $1.7 million primarily due to $0.1 million of net proceeds from the issuance of warrants net of $1.7 million ofwhich is mainly attributable taxes paid for net share settlement of equity awards.
For fiscal 2020, net cash provided by financing activities was $21.3 million, primarily due to $25.6 million of net proceeds from a primary share offering net of $4.3 million of taxes paid for net share settlement of equity awards.
Revolving Line of Credit
On February 6, 2018,March 25, 2022, we entered a four-year, securedamended our existing credit agreement providing for an asset-based revolving credit facility with the lenders party thereto, and Wells Fargo Bank, National Association, (“Wells”).as administrative agent. The maturity date of our credit facility permits borrowings of upagreement was extended to March 25, 2024 and, among other things, the maximum revolver commitment was increased from $25.0 million to $40.0 million, subject to borrowing base and availability restrictions. Our credit agreement includes a $1,000,000 sublimit for the issuance of letters of credit and a $4,000,000 sublimit for swing line loans. There were no outstanding borrowings under our credit facility as of January 30, 2022 and March 30, 2022.
Contractual Obligations
We generally enter into long-term contractual obligations and commitments in the normal course of business, primarily debt obligations and non-cancelable operating leases. As of January 31, 2021,30, 2022, our contractual cash obligations over the next several periods were as follows:
Payments due by period | |||||||||||||||||||||||||||||
Total | Less than 1 year | 1 - 3 years | 3 - 5 Years | More than 5 years | |||||||||||||||||||||||||
Employment agreements | $ | 5,543 | $ | 5,543 | $ | — | $ | — | $ | — | |||||||||||||||||||
Operating leases | 130,962 | 20,493 | 38,776 | 31,364 | 40,329 | ||||||||||||||||||||||||
Total | $ | 136,505 | $ | 26,036 | $ | 38,776 | $ | 31,364 | $ | 40,329 |
Payments due by period | ||||||||||||||||||||
Total | Less than 1 year | 1 - 3 years | 3 - 5 Years | More than 5 years | ||||||||||||||||
Employment agreements | $ | 4,009,943 | $ | 4,009,943 | $ | - | $ | - | $ | - | ||||||||||
Operating leases | 92,435,828 | 14,312,251 | 38,383,746 | 19,646,366 | 20,093,465 | |||||||||||||||
Total | $ | 96,445,771 | $ | 18,322,194 | $ | 38,383,746 | $ | 19,646,366 | $ | 20,093,465 |
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements as of January 31, 2021, except for operating leases and employment agreements entered into in the ordinary course of business.
Critical Accounting Policies and Estimates
The management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in conformity with GAAP. Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Please see Note 1 to our audited consolidated financial statements included in this Annual Report on Form 10-K for a complete description of our
Revenue Recognition
Our revenue consists substantially of product sales. We report product sales net of discounts and recognize them at the point in time when control transfers to the customer, which occurs when shipment is confirmed.
Estimated refunds for returns and allowances are recorded using our historical return patterns, adjusting for any changes in returns policies. We record estimated refunds for net sales returns on a monthly basis as a reduction of net sales and cost of sales on the statement of operations and an increase in inventory and customers returns liability on the balance sheet.
In some cases, deposits are received before the Company transferswe transfer control, resulting in contract liabilities. These contract’s liabilities are reported as deposits on the Company’s balance sheet.
Upon adoption of ASC 606, we have elected the following accounting policies and practical expedients:
We recognize shipping and handling expense as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been transferred. Accordingly, we record the expenses for shipping and handling activities at the same time we recognize revenue.
We exclude from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue- producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes).
The Company doesWe do not adjust revenue for the effects of any financing components if the contract has a duration of one year or less, as the Company receiveswe receive payment from the customer within one year from when itwe transferred control of the related goods.
The Company offers itsWe offer our products through an inventory lean omni-channel platform that provides a seamless and meaningful experience to its customers in showrooms and through the internet. The other channel predominantly represents sales through the use of pop-up-shops that typically average ten days at a time and are staffed with associates trained to demonstrate and sell our product.
Impairment of Long-Lived Assets
The Company’sOur long-lived assets consist of property and equipment whichand right of use assets from leases. Property and equipment includes leasehold improvements.improvements, and other intangible assets. Long-lived assets are reviewed for potential impairment at such time that events or changes in circumstances indicate that the carrying amount of an asset might not be recovered. The Company evaluates long-lived assetsWe evaluate for impairment at the individual showroom level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Companywe will first compare the carrying amount of the assets to the individual showroom’s estimated future undiscounted cash flows.flows for the respective long-lived asset. If the estimated future cash flows are less than the carrying amounts of the assets, an impairment loss calculation is prepared. An impairment loss is measured based upon the excess of the carrying value of the asset over its estimated fair value which is generally based on an estimated future discounted cash flow. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value.
In fiscal 2022, we recognized impairment charges totaling $0.6 million associated with showroom-level right of use lease assets. During the year ended January 31,fiscal 2021, the Companywe recorded impairment charges of $0.2 million, associated with the assets of an underperforming retail location. The impairment charge wasimpairments in fiscal 2022 and fiscal were 2021 calculated using a discounted cash flow model and waswere recorded in selling, general and administrative in the Company’s consolidated statementour Consolidated Statements of operations and comprehensive income. During Fiscal Year 2020, the Company did not record any impairment charges associated with property and equipment.
Advertising and Catalog Costs
The Company capitalizes direct-response advertising costs, which consist primarily of television advertising, postcards, catalogues and their mailing costs, and recognizes expense over the related revenue stream if the following conditions are met (1) the primary purpose of the advertising is to elicit sales to customers who could be shown to have responded specifically to the advertising, and (2) the direct-response advertising results in probable and estimable future benefits.
For the years ended January 31, 2021 and February 2, 2020 the Company did not capitalize any deferred direct-response television, postcard and catalogue costs.
Direct-response advertising costs, which are included in prepaid expenses and other current assets, are amortized commencing the date the catalogs and post cards are mailed and the television commercial airs through the estimated period of time for the Company has determined the related advertising impacts sales. There was no balance as of January 31, 2021 or February 2, 2020.
Advertising and marketing costs not associated with direct-response advertising are expensed as incurred. Advertising and marketing expenses (including amortization of direct-response advertising) were $41,924,487 in fiscal 2021 and $29,194,289 in fiscal 2020.
Merchandise Inventories
Merchandise inventories are comprised of finished goods which are carried at the lower of cost or net realizable value and capitalized freight and warehousing costs. Cost is determined on a weighted-average method basis. Merchandise inventories consist primarily of foam filled furniture, sectional couches, and related accessories. The Company adjusts itsWe adjust our inventory for obsolescence based on historical trends, aging reports, specific identification and its estimates of future retail sales prices. In addition, the Company includeswe include capitalized freight and warehousing costs in inventory related to the finished goods in inventory.
Equity-based Compensation
The Company accountsdetermines if a long-term contractual obligation is a lease at inception. The majority of our operating leases relate to company showrooms. We also lease our corporate facilities. These operating leases expire at various dates through fiscal 2032. Showroom leases may include options that allow us to extend the lease term beyond the initial base period, subject to terms agreed upon at lease inception. Some leases also include early termination options, which can be exercised under specific conditions. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Recent Accounting Pronouncements
Except as described below, the Company haswe have considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its financial statements. The Company, as an emerging growth company, has elected to use the extended transition period for complying with new or revised financial accounting standards.
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) amending lease guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU No. 2020-05 extended the effective date to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company will adoptWe adopted the guidance in fiscal 2022 and there was not a material effect on the Company’s consolidated results of operations.
While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to the recognition of new Right of Use “ROU” assets and lease liabilities on our balance sheet for our showroom and office real estate leases. We do not expect a significant change in our leasing activities between now and adoption. The Company currently has deferred rent of $7 million in long-term liabilities. On adoption, we currently expect to recognize additional liabilities of approximately $92 million, of which $14 million will be short-term and $78 million will be long-term with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.January 30, 2022. The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to electThe Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to electelected the practical expedient to not separate lease and non-lease components for all of our leases.
Not applicable.
The Company’s financial statements are contained in the pages beginning on F-1, which appear at the end of this Annual Report on Form 10-K.
None.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report. Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation, that our disclosure controls and procedures were not effective as of January 31, 2021.
Management30, 2022 due to a material weakness related to information technology general controls, as discussed below in Management's Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of January 31, 2021.30, 2022. In making this assessment, management used the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the TreadwayTread way Commission (COSO) in “Internal Control-Integrated Framework.” Based on management’s assessment using the COSO criteria, due to the material weaknesses described below, management has concluded that the Company’s internal control over financial reporting was not effective as of January 31, 2021.
This
ThereOther than as described above, there were no changes in our internal control over financial reporting that occurred during the quarter ended January 31, 202130, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
None.
The following is a list of the names, ages and backgrounds of our current executive officers:
Shawn Nelson | Chief Executive Officer and Director | |||||||||||||||||||
Mary Fox | 49 | President and Chief Operating Officer | Mary Fox is the President and Chief Operating Officer of Lovesac since November 2021. Previously, she served as General Manager for North America Consumer Products at BIC from 2018 to November 2021. Prior to joining BIC, she spent six years at L’Oréal in various roles within Ecommerce, New Business Development, and Business Transformation in the United States. Before L’Oréal, Ms. Fox held several senior leadership positions at Walmart in both the United States and International divisions. During her time as SVP Global Sourcing at Walmart, Ms. Fox co-founded the Sustainable Apparel Coalition in 2009 with Patagonia, which is now the leading global apparel, footwear, and textile coalition focused on sustainable production. Since 2021, Ms. Fox has also served as a |
Jack Krause | 59 | Chief Strategy Officer, Director | Jack Krause is the Chief Strategy Officer of The Lovesac Company and a member of the Board of Directors. Previously, he served as President and Chief Operating Officer of Lovesac from 2015 until November 2021. Prior to Lovesac, Mr. Krause served as President of Vitamin World, a division of NBTY. He also served as Senior Vice-President of Watch Station Global Retail and Skagen from 2011 to 2013. Mr. Krause also held the position of General Manager of Sunglass Hut North America from 2008 to 2010 along with other executive positions at Luxottica. Mr. Krause worked for 11 years at Bath and Body Works in roles of increasing responsibility leading to Senior Vice-President of Brand Development from 2004 to 2006. Prior to that he spent 10 years in brand management at Jergens and Marion Consumer Products. Mr. Krause has a Bachelor of Science in Business Administration from Miami University. | |||||||||||||||||
Donna Dellomo | 57 | Executive Vice President and Chief Financial Officer, Treasurer and Secretary of the Company | Donna Dellomo is Executive Vice President, Chief Financial Officer, Treasurer and Secretary of The Lovesac Company. Prior to joining The Lovesac Company, Ms. Dellomo was Vice-President and Chief Financial Officer of Perfumania Holdings, a $540 million publicly traded company with over 290 retail locations, owned and licensed brands and a wholesale distribution network from January 1998 to January 2017. She also held progressive positions from October 1988 to December 1997 as Internal Audit Manager, Accounting Manager and Corporate Controller at Cybex International, Inc., a $125 million publicly traded company that manufactured and distributed fitness, rehabilitative and health care equipment. Ms. Dellomo is a Certified Public Accountant with initial focus on audit and tax and is also a Member of the Board of Trustees of Molloy College and Chair of their Fiscal Affairs Committee. |
Our board of directors has adopted a Code of Business Conduct and Ethics applicable to all officers, directors and associates, which is available on our website (https://investor.lovesac.com) under "Governance." We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Conduct by posting such information on the website address and location specified above.
The information required by this Item will appear in the 20212022 Proxy Statement and is incorporated by reference herein.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of January 31, 2021,30, 2022, about the securities which are either already issued, or authorized for future issuance, under our Amended and Restated 2017 Equity Incentive Plan (the “2017 Equity Plan”).
(a) | (b) | (c) | ||||||||||
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights(1) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | |||||||||
Equity compensation plans approved by shareholders(2)(3) | 1,150,924 | $ | 38.10 | 380,959 | ||||||||
Equity compensation plans not approved by shareholders | - | - | - | |||||||||
Total | 1,150,924 | $ | 38.10 | 380,959 |
(a) | (b) | (c) | ||||||||||||||||||
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights(1) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | |||||||||||||||||
Equity compensation plans approved by shareholders(2)(3) | 1,058,876 | $ | 38.10 | 371,943 | ||||||||||||||||
Equity compensation plans not approved by shareholders | — | — | — | |||||||||||||||||
Total | 1,058,876 | $ | 38.10 | 371,943 |
The remaining information required by this Item will appear in the 20212022 Proxy Statement and is incorporated by reference herein.
The information required by this Item will appear in the 20212022 Proxy Statement and is incorporated by reference herein.
The information required by this Item will appear in the 20212022 Proxy Statement and is incorporated by reference herein.
1. Financial Statements (see Part II, Item 8 – Consolidated Financial Statements and Supplementary Data)
2. Financial Statement Schedules
Schedules have been omitted because they are not required or are not applicable or because the information required to be set forth therein either is not material or is included in the financial statements or notes thereto.
3. Exhibits
See the Exhibit Index.
Optional disclosure not included in this Annual Report on Form 10-K.
EXHIBIT INDEX
Exhibit Number | Description of Exhibit | Filed / Incorporated by Reference from Form ** | Incorporated by Reference from Exhibit Number | Dated Filed | ||||||||||||||||||||||
2.1 | S-1 | 2.1 | 4/20/2018 | |||||||||||||||||||||||
3.1 | 8-K | 3.3 | 6/7/2021 | |||||||||||||||||||||||
3.2 | S-1/A | 3.2 | 6/8/2018 | |||||||||||||||||||||||
4.1 | S-1/A | 4.2 | 5/23/2018 | |||||||||||||||||||||||
4.2 | S-1/A | 4.3 | 5/23/2018 | |||||||||||||||||||||||
4.3 | S-1/A | 4.4 | 5/23/2018 | |||||||||||||||||||||||
4.4 | S-1/A | 4.4 | 6/25/2018 | |||||||||||||||||||||||
4.5 | Filed herewith. | |||||||||||||||||||||||||
10.1† | S-1 | 10.1 | 4/20/2018 | |||||||||||||||||||||||
10.2† | Filed herewith. | |||||||||||||||||||||||||
10.3± | S-8 | 4.1 | 9/11/2020 | |||||||||||||||||||||||
10.4± | S-1/A | 10.3 | 5/23/2018 | |||||||||||||||||||||||
10.5 | S-1 | 10.5 | 4/20/2018 | |||||||||||||||||||||||
10.6± | S-1 | 10.6 | 4/20/2018 | |||||||||||||||||||||||
10.7± | S-1 | 10.7 | 4/20/2018 | |||||||||||||||||||||||
10.8± | S-1 | 10.8 | 4/20/2018 | |||||||||||||||||||||||
10.9± | 10-K | 10.8 | 4/14/2021 | |||||||||||||||||||||||
10.10± | 10-K | 10.9 | 4/14/2021 | |||||||||||||||||||||||
10.11± | 10-K | 10.1 | 4/14/2021 | |||||||||||||||||||||||
10.12± | 8-K | 10.2 | 11/12/2021 | |||||||||||||||||||||||
10.13± | 8-K | 10.1 | 11/12/2021 | |||||||||||||||||||||||
10.14± | Filed herewith. | |||||||||||||||||||||||||
10.15± | Filed herewith. | |||||||||||||||||||||||||
10.16± | 8-K | 10.3 | 11/12/2021 |
Exhibit Number | Description of Exhibit | Filed / Incorporated by Reference from Form ** | Incorporated by Reference from Exhibit Number | Dated Filed | ||||||||||||||||||||||
10.17± | 8-K | 10.4 | 11/12/2021 | |||||||||||||||||||||||
10.18± | 10-K | 10.11 | 4/14/2021 | |||||||||||||||||||||||
10.19± | 10-Q | 10.1 | 12/9/2021 | |||||||||||||||||||||||
10.20± | 10-Q | 10.2 | 12/9/2021 | |||||||||||||||||||||||
21.1 | 10-K | 21.1 | 4/14/2021 | |||||||||||||||||||||||
23.1 | Filed herewith. | |||||||||||||||||||||||||
31.1 | Filed herewith. | |||||||||||||||||||||||||
31.2 | Filed herewith. | |||||||||||||||||||||||||
32.1* | Filed herewith. | |||||||||||||||||||||||||
32.2* | Filed herewith. | |||||||||||||||||||||||||
101.INS | XBRL Instance Document | |||||||||||||||||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||||||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on April 14, 2021.
THE LOVESAC COMPANY | ||||||||
By: | /s/ Shawn Nelson | |||||||
Shawn Nelson | ||||||||
Chief Executive Officer | ||||||||
(Principal Executive Officer) |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Shawn Nelson and Donna Dellomo, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Shawn Nelson | ||||||
Shawn Nelson | ||||||
Chief Executive Officer and Director | ||||||
(Principal Executive Officer) | ||||||
/s/ Donna Dellomo | ||||||
Donna Dellomo | ||||||
Executive Vice President and | ||||||
Chief Financial Officer | ||||||
(Principal Financial Officer and | ||||||
Principal Accounting Officer) | ||||||
/s/ Andrew Heyer | March 30, 2022 | |||||
Andrew Heyer | ||||||
Chairman and Director | ||||||
/s/ Walter McLallen | March 30, 2022 | |||||
Walter McLallen | ||||||
Director | ||||||
/s/ Sharon M. Leite | March 30, 2022 | |||||
Sharon M. Leite | ||||||
Director | ||||||
/s/ Shirley Romig | March 30, 2022 | |||||
Shirley Romig | ||||||
Director | ||||||
/s/ John Grafer | March 30, 2022 | |||||
John Grafer | ||||||
Director | ||||||
/s/ Jack Krause | ||||||
Jack Krause | ||||||
Director | ||||||
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 30, 2022 AND JANUARY 31, 2021 AND FOR THE YEARS ENDED JANUARY 30, 2022, JANUARY 31, 2021 AND FEBRUARY 2, 2020
CONTENTS
Consolidated Financial Statements | |||||
The Lovesac Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Lovesac Company (the “Company”) as of January 30, 2022 and January 31, 2021, and February 2, 2020, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the twothree years in the period ended January 31, 2021,30, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 30, 2022 and January 31, 2021, and February 2, 2020, and the results of its operations and its cash flows for each of the twothree years in the period ended January 31, 2021,30, 2022, in conformity with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Marcum LLP
We have served as the Company’s auditor since 2017.
Hartford, CT
April 14,
THE LOVESAC COMPANY
CONSOLIDATED BALANCE SHEETS
JANUARY 30, 2022 AND JANUARY 31, 2021 AND FEBRUARY 2, 2020
2022 | 2021 | ||||||||||
(amounts in thousands, except share and per share amounts) | |||||||||||
Assets | |||||||||||
Current Assets | |||||||||||
Cash and cash equivalents | $ | 92,392 | $ | 78,341 | |||||||
Trade accounts receivable | 8,547 | 4,513 | |||||||||
Merchandise inventories | 108,493 | 50,417 | |||||||||
Prepaid expenses and other current assets | 15,726 | 10,128 | |||||||||
Total Current Assets | 225,158 | 143,399 | |||||||||
Property and equipment, net | 34,137 | 25,868 | |||||||||
Operating lease right-of-use assets | 100,891 | — | |||||||||
Other Assets | |||||||||||
Goodwill | 144 | 144 | |||||||||
Intangible assets, net | 1,413 | 1,517 | |||||||||
Deferred financing costs, net | — | 91 | |||||||||
Deferred tax asset | 9,836 | — | |||||||||
Total Other Assets | 11,393 | 1,752 | |||||||||
Total Assets | $ | 371,579 | $ | 171,019 | |||||||
Liabilities and Stockholders’ Equity | |||||||||||
Current Liabilities | |||||||||||
Accounts payable | $ | 33,247 | $ | 24,311 | |||||||
Accrued expenses | 40,497 | 17,187 | |||||||||
Payroll payable | 9,978 | 6,362 | |||||||||
Customer deposits | 13,316 | 5,993 | |||||||||
Current operating lease liabilities | 16,382 | — | |||||||||
Sales taxes payable | 5,359 | 2,471 | |||||||||
Total Current Liabilities | 118,779 | 56,324 | |||||||||
Deferred Rent | — | 6,749 | |||||||||
Operating Lease Liabilities, long term | 96,574 | — | |||||||||
Line of Credit | — | — | |||||||||
Total Liabilities | 215,353 | 63,073 | |||||||||
Commitments and Contingencies (see Note 7) | 0 | 0 | |||||||||
Stockholders’ Equity | |||||||||||
Preferred Stock $0.00001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of Jan 30, 2022 and Jan 31, 2021. | — | — | |||||||||
Common Stock $0.00001 par value, 40,000,000 shares authorized, 15,123,338 shares issued and outstanding as of Jan 30, 2022 and 15,011,556 shares issued and outstanding as of Jan 31, 2021. | — | — | |||||||||
Additional paid-in capital | 173,762 | 171,382 | |||||||||
Accumulated deficit | (17,536) | (63,436) | |||||||||
Stockholders’ Equity | 156,226 | 107,946 | |||||||||
Total Liabilities and Stockholders’ Equity | $ | 371,579 | $ | 171,019 |
2021 | 2020 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 78,341,101 | $ | 48,538,827 | ||||
Trade accounts receivable | 4,513,460 | 7,188,925 | ||||||
Merchandise inventories | 50,416,712 | 36,399,862 | ||||||
Prepaid expenses and other current assets | 10,128,353 | 8,050,122 | ||||||
Total Current Assets | 143,399,626 | 100,177,736 | ||||||
Property and Equipment, Net | 25,867,980 | 23,844,261 | ||||||
Other Assets | ||||||||
Goodwill | 143,562 | 143,562 | ||||||
Intangible assets, net | 1,517,032 | 1,352,161 | ||||||
Deferred financing costs, net | 90,671 | 146,047 | ||||||
Total Other Assets | 1,751,265 | 1,641,770 | ||||||
Total Assets | $ | 171,018,871 | $ | 125,663,767 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 24,310,972 | $ | 19,887,611 | ||||
Accrued expenses | 17,187,694 | 8,567,580 | ||||||
Payroll payable | 6,361,677 | 887,415 | ||||||
Customer deposits | 5,992,633 | 1,653,597 | ||||||
Sales taxes payable | 2,470,593 | 1,404,792 | ||||||
Total Current Liabilities | 56,323,569 | 32,400,995 | ||||||
Deferred rent | 6,748,747 | 3,108,245 | ||||||
Line of credit | - | - | ||||||
Total Liabilities | 63,072,316 | 35,509,240 | ||||||
Commitments and contingencies (see Note 6) | ||||||||
Stockholders’ Equity | ||||||||
Preferred Stock $0.00001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of January 31, 2021 and February 2, 2020. | - | - | ||||||
Common Stock $.00001 par value, 40,000,000 shares authorized, 15,011,556 shares issued and outstanding as of January 31, 2021 and 14,472,611 shares issued and outstanding as of February 2, 2020. | 150 | 145 | ||||||
Additional paid-in capital | 171,382,086 | 168,317,210 | ||||||
Accumulated deficit | (63,435,681 | ) | (78,162,828 | ) | ||||
Stockholders’ Equity | 107,946,555 | 90,154,527 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 171,018,871 | $ | 125,663,767 |
The accompanying notes are an integral part of these consolidated financial statements
FOR THE YEARS ENDED JANUARY 30, 2022, JANUARY 31, 2021, AND FEBRUARY 2, 2020
(amounts in thousands, except per share data and share amounts) | January 30, 2022 | January 31, 2021 | February 2, 2020 | ||||||||||||||
Net sales | $ | 498,239 | $ | 320,738 | $ | 233,377 | |||||||||||
Cost of merchandise sold | 224,894 | 145,966 | 116,687 | ||||||||||||||
Gross profit | 273,345 | 174,772 | 116,690 | ||||||||||||||
Operating expenses | |||||||||||||||||
Selling, general and administration expenses | 161,967 | 111,354 | 98,147 | ||||||||||||||
Advertising and marketing | 65,078 | 41,925 | 29,194 | ||||||||||||||
Depreciation and amortization | 7,859 | 6,613 | 5,158 | ||||||||||||||
Total operating expenses | 234,904 | 159,892 | 132,499 | ||||||||||||||
Operating income (loss) | 38,441 | 14,880 | (15,809) | ||||||||||||||
Interest (expense) income, net | (179) | (67) | 647 | ||||||||||||||
Net income (loss) before taxes | 38,262 | 14,813 | (15,162) | ||||||||||||||
Benefit from (provision for) income taxes | 7,638 | (86) | (43) | ||||||||||||||
Net income (loss) | $ | 45,900 | $ | 14,727 | $ | (15,205) | |||||||||||
Net income (loss) per common share: | |||||||||||||||||
Basic | $ | 3.04 | $ | 1.01 | $ | (1.07) | |||||||||||
Diluted | $ | 2.86 | $ | 0.96 | $ | (1.07) | |||||||||||
Weighted average number of common shares outstanding: | |||||||||||||||||
Basic | 15,107,958 | 14,610,617 | 14,260,395 | ||||||||||||||
Diluted | 16,058,111 | 15,332,998 | 14,260,395 |
2021 | 2020 | |||||||
Net sales | $ | 320,737,750 | $ | 233,377,379 | ||||
Cost of merchandise sold | 145,965,935 | 116,687,055 | ||||||
Gross profit | 174,771,815 | 116,690,324 | ||||||
Operating expenses | ||||||||
Selling, general and administration expenses | 111,354,236 | 98,146,524 | ||||||
Advertising and marketing | 41,924,487 | 29,194,289 | ||||||
Depreciation and amortization | 6,612,872 | 5,158,062 | ||||||
Total operating expenses | 159,891,595 | 132,498,875 | ||||||
Operating income (loss) | 14,880,220 | (15,808,551 | ) | |||||
Interest (expense) income, net | (67,384 | ) | 646,844 | |||||
Net income (loss) before taxes | 14,812,836 | (15,161,707 | ) | |||||
Provision for income taxes | (85,689 | ) | (43,312 | ) | ||||
Net income (loss) | $ | 14,727,147 | $ | (15,205,019 | ) | |||
Net income (loss) per common share: | ||||||||
Basic | $ | 1.01 | $ | (1.07 | ) | |||
Diluted | $ | 0.96 | $ | (1.07 | ) | |||
Weighted average number of common shares outstanding: | ||||||||
Basic | 14,610,617 | 14,260,395 | ||||||
Diluted | 15,332,998 | 14,260,395 |
The accompanying notes are an integral part of these consolidated financial statements
FOR THE YEARS ENDED JANUARY 30, 2022, JANUARY 31, 2021, AND FEBRUARY 2, 2020
Common | Additional Paid-in | Accumulated | |||||||||||||||||||||||||||
(amounts in thousands, except share amounts) | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||
Balance - February 3, 2019 | 13,588,568 | $ | — | $ | 141,728 | $ | (62,958) | $ | 78,770 | ||||||||||||||||||||
Net loss | — | — | — | (15,205) | (15,205) | ||||||||||||||||||||||||
Equity-based compensation | 101,883 | — | 5,246 | — | 5,246 | ||||||||||||||||||||||||
Issuance of common shares, net | 750,000 | — | 25,610 | — | 25,610 | ||||||||||||||||||||||||
Issuance of common stock for restricted stock | 180,304 | — | — | — | — | ||||||||||||||||||||||||
Taxes paid for net share settlement of equity awards | — | — | (4,278) | — | (4,278) | ||||||||||||||||||||||||
Exercise of warrants | 27,246 | — | 12 | — | 12 | ||||||||||||||||||||||||
Cancelation of shares | (175,390) | — | — | — | — | ||||||||||||||||||||||||
Balance - February 2, 2020 | 14,472,611 | — | 168,318 | (78,163) | 90,155 | ||||||||||||||||||||||||
Net income | — | — | — | 14,727 | 14,727 | ||||||||||||||||||||||||
Equity-based compensation | — | — | 4,681 | — | 4,681 | ||||||||||||||||||||||||
Issuance of common stock for restricted stock | 99,498 | — | — | — | — | ||||||||||||||||||||||||
Taxes paid for net share settlement of equity awards | — | — | (1,717) | — | (1,717) | ||||||||||||||||||||||||
Exercise of warrants | 439,447 | — | 100 | — | 100 | ||||||||||||||||||||||||
Balance - January 31, 2021 | 15,011,556 | — | 171,382 | (63,436) | 107,946 | ||||||||||||||||||||||||
Net income | — | — | — | 45,900 | 45,900 | ||||||||||||||||||||||||
Equity-based compensation | — | — | 5,859 | — | 5,859 | ||||||||||||||||||||||||
Issuance of common stock for restricted stock | 100,826 | — | — | — | — | ||||||||||||||||||||||||
Taxes paid for net share settlement of equity awards | — | — | (3,583) | — | (3,583) | ||||||||||||||||||||||||
Exercise of warrants | 10,956 | — | 104 | — | 104 | ||||||||||||||||||||||||
Balance - January 30, 2022 | 15,123,338 | $ | — | $ | 173,762 | $ | (17,536) | $ | 156,226 |
Common | Preferred | Additional Paid-in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
Balance - February 3, 2019 | 13,588,568 | $ | 136 | - | $ | - | 141,727,807 | $ | (62,957,809 | ) | $ | 78,770,134 | ||||||||||||||||
Net loss | - | - | - | - | - | (15,205,019 | ) | (15,205,019 | ) | |||||||||||||||||||
Equitybased compensation | 101,883 | 1 | - | - | 5,245,587 | - | 5,245,588 | |||||||||||||||||||||
Issuance of common shares, net | 750,000 | 8 | - | - | 25,609,992 | - | 25,610,000 | |||||||||||||||||||||
Vested restricted stock units | 180,304 | 2 | - | - | (2 | ) | - | - | ||||||||||||||||||||
Taxes paid for net share settlement of equity awards | - | - | - | - | (4,278,176 | ) | - | (4,278,176 | ) | |||||||||||||||||||
Exercise of warrants | 27,246 | - | - | - | 12,000 | - | 12,000 | |||||||||||||||||||||
Cancelation of shares | (175,390 | ) | (2 | ) | - | - | 2 | - | - | |||||||||||||||||||
Balance - February 2, 2020 | 14,472,611 | 145 | - | - | 168,317,210 | (78,162,828 | ) | 90,154,527 | ||||||||||||||||||||
Net income | - | - | - | - | - | 14,727,147 | 14,727,147 | |||||||||||||||||||||
Equity-based compensation | - | - | - | - | 4,681,397 | - | 4,681,397 | |||||||||||||||||||||
Vested restricted stock units | 99,498 | 1 | - | - | (1 | ) | - | - | ||||||||||||||||||||
Taxes paid for net share settlement of equity awards | - | - | - | - | (1,716,516 | ) | - | (1,716,516 | ) | |||||||||||||||||||
Exercise of warrants | 439,447 | 4 | - | - | 99,996 | - | 100,000 | |||||||||||||||||||||
Balance - January 31, 2021 | 15,011,556 | $ | 150 | - | $ | - | 171,382,086 | (63,435,681 | ) | 107,946,555 |
The accompanying notes are an integral part of these consolidated financial statements
FOR THE YEARS ENDED JANUARY 30, 2022, JANUARY 31, 2021, AND FEBRUARY 2, 2020
(amounts in thousands) | January 30, 2022 | January 31, 2021 | February 2, 2020 | ||||||||||||||
Cash Flows from Operating Activities | |||||||||||||||||
Net income (loss) | $ | 45,900 | $ | 14,727 | $ | (15,205) | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||||||||
Depreciation and amortization of property and equipment | 7,154 | 6,100 | 4,894 | ||||||||||||||
Amortization of other intangible assets | 705 | 513 | 264 | ||||||||||||||
Amortization of deferred financing fees | 91 | 88 | 73 | ||||||||||||||
Net loss (gain) on disposal of property and equipment | 464 | 5 | (167) | ||||||||||||||
Impairment of long-lived assets | 554 | 245 | — | ||||||||||||||
Equity-based compensation | 5,859 | 4,681 | 5,246 | ||||||||||||||
Deferred rent | — | 3,641 | 1,514 | ||||||||||||||
Non-cash operating lease cost | 14,953 | — | — | ||||||||||||||
Deferred income taxes | (9,836) | — | — | ||||||||||||||
Gain on recovery of insurance proceeds - lost profit margin | (632) | — | — | ||||||||||||||
Changes in operating assets and liabilities: | |||||||||||||||||
Trade accounts receivable | (4,034) | 2,675 | (3,234) | ||||||||||||||
Merchandise inventories | (56,819) | (14,017) | (10,246) | ||||||||||||||
Prepaid expenses and other current assets | (2,459) | (2,060) | (2,116) | ||||||||||||||
Accounts payable and accrued expenses | 39,195 | 19,584 | 7,189 | ||||||||||||||
Operating lease liabilities | (14,400) | — | — | ||||||||||||||
Customer deposits | 7,323 | 4,339 | 594 | ||||||||||||||
Net Cash Provided by (Used in) Operating Activities | 34,018 | 40,521 | (11,194) | ||||||||||||||
Cash Flows from Investing Activities | |||||||||||||||||
Purchase of property and equipment | (15,887) | (8,374) | (10,277) | ||||||||||||||
Payments for patents and trademarks | (601) | (678) | (674) | ||||||||||||||
Proceeds from disposal of property and equipment | — | — | 300 | ||||||||||||||
Net Cash Used in Investing Activities | (16,488) | (9,052) | (10,651) | ||||||||||||||
Cash Flows from Financing Activities | |||||||||||||||||
Proceeds from the issuance of common shares, net | — | — | 25,610 | ||||||||||||||
Taxes paid for net share settlement of equity awards | (3,583) | (1,717) | (4,278) | ||||||||||||||
Proceeds from the exercise of warrants | 104 | 100 | 12 | ||||||||||||||
Paydown of proceeds from line of credit | — | — | (31) | ||||||||||||||
Payment of deferred financing costs | — | (50) | — | ||||||||||||||
Net Cash (used in) Provided by Financing Activities | (3,479) | (1,667) | 21,313 | ||||||||||||||
Net Change in Cash and Cash Equivalents | 14,051 | 29,802 | (532) | ||||||||||||||
Cash and Cash Equivalents - Beginning | 78,341 | 48,539 | 49,071 | ||||||||||||||
Cash and Cash Equivalents - End | $ | 92,392 | $ | 78,341 | $ | 48,539 | |||||||||||
Supplemental Cash Flow Disclosures | |||||||||||||||||
Cash paid for taxes | $ | 1,121 | $ | 86 | $ | 43 | |||||||||||
Cash paid for interest | $ | 95 | $ | 85 | $ | 63 |
2021 | 2020 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income (loss) | $ | 14,727,147 | $ | (15,205,019 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization of property and equipment | 6,099,675 | 4,894,220 | ||||||
Amortization of other intangible assets | 513,197 | 263,842 | ||||||
Amortization of deferred financing fees | 87,730 | 73,024 | ||||||
Net loss (gain) on disposal of property and equipment | 5,091 | (166,865 | ) | |||||
Impairment of property and equipment | 245,170 | - | ||||||
Equity-based compensation | 4,681,397 | 5,245,588 | ||||||
Deferred rent | 3,640,502 | 1,514,066 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 2,675,465 | (3,233,801 | ) | |||||
Merchandise inventories | (14,016,850 | ) | (10,245,548 | ) | ||||
Prepaid expenses and other current assets | (2,060,585 | ) | (2,116,250 | ) | ||||
Accounts payable and accrued expenses | 19,583,538 | 7,188,736 | ||||||
Customer deposits | 4,339,036 | 593,640 | ||||||
Net Cash Provided by (Used in) Operating Activities | 40,520,513 | (11,194,367 | ) | |||||
Cash Flows from Investing Activities | ||||||||
Purchase of property and equipment | (8,373,655 | ) | (10,276,537 | ) | ||||
Payments for patents and trademarks | (678,068 | ) | (673,672 | ) | ||||
Proceeds from disposal of property and equipment | - | 300,000 | ||||||
Net Cash Used in Investing Activities | (9,051,723 | ) | (10,650,209 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Proceeds from the issuance of common shares, net | - | 25,610,000 | ||||||
Taxes paid for net share settlement of equity awards | (1,716,516 | ) | (4,278,176 | ) | ||||
Proceeds from the issuance of warrants, net | 100,000 | 12,000 | ||||||
Paydowns of proceeds from line of credit | - | (31,373 | ) | |||||
Payments of deferred financing costs | (50,000 | ) | - | |||||
Net Cash (used in) Provided by Financing Activities | (1,666,516 | ) | 21,312,451 | |||||
Net Change in Cash and Cash Equivalents | 29,802,274 | (532,125 | ) | |||||
Cash and Cash Equivalents - Beginning | 48,538,827 | 49,070,952 | ||||||
Cash and Cash Equivalents - End | $ | 78,341,101 | $ | 48,538,827 | ||||
Supplemental Cash Flow Disclosures | ||||||||
Cash paid for taxes | $ | 85,689 | $ | 43,312 | ||||
Cash paid for interest | $ | 85,452 | $ | 62,670 |
The accompanying notes are an integral part of these consolidated financial statements
JANUARY 31, 2021 AND FEBRUARY 2, 2020
NOTE 1 - BASIS OF PRESENTATION, OPERATIONS AND LIQUIDITY, AND SIGNIFICANT ACCOUNTING POLICIES
The Company is a technology driven company that designs, manufactures and sells unique, high quality furniture derived through its proprietary Designed for Life approach which results in products that are built to last a lifetime and designed to evolve as our customers’ lives do. The Company markets and sells its products through modern and efficient showrooms and, increasingly, through online sales SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company’s fiscal year is determined on a 52/53 week basis ending on the Sunday closest to February 1. Hereinafter, the USE OF ESTIMATES The preparation of financial statements in conformity with REVENUE RECOGNITION The Company implemented Our revenue consists substantially of product sales. The Company reports product sales net of discounts and recognize them at the point in time when control transfers to the customer, which occurs when shipment is confirmed. Estimated refunds for returns and allowances are recorded using our historical return patterns, adjusting for any changes in returns policies. The Company records estimated refunds for net sales returns on a monthly basis as a reduction of net sales and cost of sales on the statement of operations and an increase in inventory and customers returns liability on the balance sheet. As of January In some cases, deposits are received before the Under ASC 606, the Company has elected the following accounting policies and practical expedients: The Company recognizes shipping and handling expense as The Company excludes from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes). The Company does not adjust revenue for the effects of any financing components if the contract has a duration of one year or less, as the Company receives payment from the customer within one year from when it transferred control of the related goods. The Company has no foreign operations and its sales to foreign countries was less than .01% of total net sales in The Company had no customers in fiscal 2022, 2021, or 2020 that comprise more than 10% of total net sales. See Note CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity at purchase of three months or less to be cash equivalents. The Company has deposits with financial institutions that maintain Federal Deposit Insurance Corporation “FDIC” deposit insurance up to $250,000 per depositor. The portion of the deposit in excess of this limit represents a credit risk to the Company. Due to the high cash balance maintained by the Company, the Company does maintain depository balances in excess of the insured amounts. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable are carried at their estimated realizable amount and do not bear interest. Management determines the allowance for doubtful accounts by regularly evaluating individual customer accounts, considering the customer’s financial condition, and credit history, and general and industry current economic conditions. Trade accounts receivable are reserved for when deemed uncollectible. Recoveries of amounts previously written off are recorded when received. Historically, collection losses have been immaterial as a significant portion of the Company’s receivables are related to individual credit card transactions and three wholesale customers for which the Company has no history of collection losses. Management has concluded that an allowance was not necessary at January 30, 2022 and January 31, 2021, Breakdown of accounts receivable is as follows: PREPAID EXPENSES AND OTHER CURRENT ASSETS The Company recognizes payments made for goods and services to be received in the near future as prepaid expenses and other current assets. Prepaid expenses and other current assets consist primarily of payments related to insurance premiums, MERCHANDISE INVENTORIES Merchandise inventories are comprised of finished goods which are carried at the lower of cost or net realizable value. Cost is determined on a weighted-average method basis. Merchandise inventories consist primarily of foam filled furniture, sectional couches, and related accessories. The Company adjusts its inventory for obsolescence based on historical trends, aging reports, specific identification and its estimates of future retail sales prices. In addition, the Company includes capitalized freight and warehousing costs in inventory relative to the finished goods in inventory. GIFT CERTIFICATES AND MERCHANDISE CREDITS The Company sells gift certificates and issues merchandise credits to its customers in the showrooms and through its website. Revenue associated with gift certificates and merchandise credits is deferred until redemption of the gift certificate and merchandise credits. The Company did not recognize any breakage revenue in fiscal 2022, fiscal 2021 or fiscal 2020 as the Company continues to honor all outstanding gift certificates. PROPERTY AND EQUIPMENT, NET Property and equipment are stated at cost less accumulated depreciation and amortization. Office and showroom furniture and equipment, software and vehicles are depreciated using the straight-line method over their estimated useful lives. Leasehold improvements are amortized using the straight-line method over their expected useful lives or lease term, whichever is shorter. Expenditures for repairs and maintenance are charged to expense as incurred. For assets sold or otherwise disposed of, the cost and related accumulated depreciation or amortization is removed from the accounts, and any resulting gain or loss is reflected in operations for the period. Expenditures for major betterments that extend the useful lives of property and equipment are capitalized. GOODWILL Goodwill represents the excess of the purchase price over the fair value of the identified net assets of each business acquired. Goodwill and other indefinite-lived intangible assets are tested annually for impairment in the fourth fiscal quarter and in interim periods if certain events occur indicating that the carrying amounts may be impaired. If a qualitative assessment is used and the Company determines that the fair value of a reporting unit or indefinite-lived intangible asset is more likely than not (i.e., a likelihood of more than 50%) less than its carrying amount, a quantitative impairment test will be performed. If goodwill is quantitatively assessed for impairment, a two-step approach is applied. In the first step, the Company compares the fair value of the reporting unit, generally defined as the same level as or one level below an operating segment, to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the second step of the impairment test must be performed in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference would be recorded. There were no impairments during INTANGIBLE ASSETS Intangible assets with finite useful lives, including There were no impairments during either fiscal 2022, 2021, or 2020. IMPAIRMENT OF LONG-LIVED ASSETS The Company’s long-lived assets consist of property and equipment ADVERTISING AND CATALOG COSTS The Company capitalizes direct response advertising costs, which consist primarily of Direct-response advertising costs, which are included in prepaid expenses and other current assets, are amortized commencing the date the catalogs and post cards are mailed and the television commercial airs through the estimated period of time for the Company has determined the related advertising impacts sales. There was no balance as of January 30, 2022 and January 31, 2021. Advertising costs not associated with direct-response advertising are expensed as incurred and were SHOWROOM PREOPENING AND CLOSING COSTS Non-capital expenditures incurred in preparation for opening new retail showrooms are expensed as incurred and included in selling, general and administrative expenses. The Company continually evaluates the profitability of its showrooms. When the Company closes or relocates a showroom, the Company incurs unrecoverable costs, including the net book value of abandoned fixtures and leasehold improvements, lease termination payments, costs to transfer inventory and usable fixtures and other costs of vacating the leased location. Such costs are expensed as incurred and are included in selling, general and administrative expenses. PRODUCT WARRANTY Depending on the type of merchandise, the Company offers either a three-year limited warranty or a lifetime warranty. The Company’s warranties require it to repair or replace defective products at no cost to the customer. At the time product revenue is recognized, the Company reserves for estimated future costs that may be incurred under its warranties based on historical experience. The Company periodically reviews the adequacy of its recorded warranty liability. Product warranty expense, without any reserve adjustments, was approximately CONSOLIDATED NOTES TO FINANCIAL STATEMENTS NOTE 1 - OPERATING LEASES FAIR VALUE MEASUREMENTS The carrying amount of the Company’s financial instruments classified as current assets and current liabilities approximate fair values based on the short-term nature of the accounts. EQUITY-BASED COMPENSATION The Company’s 2017 Equity Plan provides for awards in the form of options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares, cash-based awards and other stock-based awards. The plan allows for the issuance of up to 2,104,889 shares at January 30, 2022 and January 31, SHIPPING AND HANDLING Shipping and handling charges billed to customers are included in revenue. Shipping and handling costs incurred are included in cost of merchandise CONSOLIDATED NOTES TO FINANCIAL STATEMENTS NOTE 1 - INCOME TAXES The Company accounts for uncertainty in income taxes using a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes. In connection with the 2017 reorganization, the intent was that the net operating losses (NOLs) of SAC Acquisition, LLC, a limited liability company that had been historically treated as a C-corporation for federal and state income tax purposes, were to be inherited by the Company. The Company filed a request for a private letter ruling requesting additional time to make a check the box election pursuant to Treas. Reg. 301.7701-3. In PLR-109713-19 dated October 22, 2019 the Company was granted an extension of time of 120 days to file form 8832 “Entity Classification Election.” The completed Form 8832 was filed with The IRS on November 11, 2019. The Company has maintained the position that the NOLs were inherited from SAC Acquisition in the 2017 reorganization and consistently maintained a full valuation allowance against its NOLs as they were part of deferred income tax assets not likely to be Deferred income taxes are provided on temporary differences between the income tax A valuation allowance is provided for that portion of deferred income tax assets not likely to be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding and common stock equivalents outstanding during the period. Diluted net income (loss) per common share includes, in periods in which they are dilutive, the effect of those potentially dilutive securities where the average market price of the common stock exceeds the exercise prices for the respective periods. In fiscal 2022, the effects of 533,333 unvested restricted stock units, 495,366 stock options, and 281,750 common stock warrants were included in the diluted share calculation. In fiscal 2020, there were 1,717,539 of potentially dilutive shares which may be issued in the future, including 183,053 unvested restricted stock units, 495,366 stock options, and 1,039,120 common stock warrants. These shares were excluded in the diluted net loss per common share calculation as the effects of including theses potentially dilutive shares was antidilutive. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS NOTE 1 -
NATURE OF OPERATIONS AND LIQUIDITYprimarily online directly at www.lovesac.com, supported by direct-to-consumer touch-feel points in the form of our own showrooms, which include our newly created mobile concierge and kiosks, as well as through shop-in-shops and online pop-up-shops with third party retailers. As of January 31, 2021,30, 2022, the Company operated 108146 showrooms including kiosks and mobile concierges located throughout the United States. The Company was formed as a Delaware corporation on January 3, 2017, in connection with a corporate reorganization with SAC Acquisition LLC, a Delaware limited liability company (“SAC LLC”), the predecessor entity to the Company.hashad incurred significant operating losses and used cash in its operating activities since inception.from inception through fiscal 2020. Operating losses have resulted from inadequate sales levels for the cost structure and expenses as a result of impact of tariffs on inventory, expanding into new markets, opening new showrooms, and investments into advertising, marketing and infrastructure to support increaseincreases in revenues. The Company continuesplans to enter intocontinue to open new retail showrooms in larger markets and increase its shop-in-shop relationships to increase sales levels, and invest in advertising and marketing initiatives to increase brand awareness. Of course, thereawareness, and invest in infrastructure to support growth of the Company. There can be no assurance that the anticipated sales levels will be achieved. The Company believes that based on its current sales and expense levels, cash generated from operating activities during fiscal 2022 and fiscal 2021, projections for the next twelve months, and the credit facility with Wells Fargo Bank, N.A. ("Wells"), see Note 9,10, the Company will have sufficient working capital to cover operating cash needs through the twelve-month period from the financial statement issuance date.periods from February 3, 2020 tofiscal years ended January 30, 2022, January 31, 2021 and February 4, 2019 through February 2, 2020 are referred to as fiscal 2022, 2021 and fiscal 2020, respectively. Both fiscalFiscal 2022, 2021 and fiscal 2020 were 52-week fiscal years.accounting principles generally accepted in the United States of America (“US GAAP”)GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically and the effects of the revisions are reflected in the period the change is determined.ASUAccounting Standards Update ("ASU") 2015-04, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606, “ASC 606”), in the first quarter of fiscal 2020 using modified retrospective method, which required the companyCompany to apply the new guidance retrospectively to revenue transactions completed on or after the effective date. Adopting this new standard had no material financial impact on our consolidated financial statements but did result in enhanced presentation and disclosures.31, 2021,30, 2022, there was a returns allowance of $2,226,723$2.0 million which was in accrued expenses and $334,896$0.4 million associated with sales returns in merchandise inventories. As of February 2, 2020,January 31, 2021, there was a returns allowance of $2,177,715$2.2 million which was in accrued expenses and $442,390$0.3 million associated with sales returns in merchandise inventories.companyCompany transfers control, resulting in contract liabilities. These contract liabilities are reported as deposits on the Company’s balance sheet. As of January 30, 2022 and January 31, 2021, and February 2, 2020, the Company recorded under customer deposit liabilities the amount of $5,992,633$13.3 million and $1,653,597$6.0 million, respectively. During the fiscal year ended January 30, 2022, the Company recognized $6.0 million related to its customer deposits from fiscal 2021. During the fiscal year ended January 31, 2021, the Company recognized $1,653,597 related to its customer deposits$1.7 million from fiscal 2020. During the fiscal year ended February 2, 2020, the Company recognized $1,059,957 related to its customer deposits$1.1 million from fiscal 2019.THE LOVESAC COMPANYCONSOLIDATED NOTES TO FINANCIAL STATEMENTSJANUARY 31, 2021 AND FEBRUARY 2, 2020NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION (CONTINUED)fulfilmentfulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been transferred.performed. Accordingly, the Company records the expenses for shipping and handling activities at the same time the Company recognizes revenue.an inventory lean omni-channel platform that provides a seamless and meaningful experience to its customers in showrooms and through the internet.Internet. The other channel predominantly represents sales through the use of online and in store pop-up shops, shop-in-shops, and barter inventory transactions. In store pop-up-shops that typically average ten days at a time and are staffed with associates trained to demonstrate and sell our product. The following represents sales disaggregated by channel: For the fiscal years ended January 31, 2021 February 2, 2020 Showrooms $ 146,150,307 $ 148,003,995 Internet 151,064,651 55,781,186 Other 23,522,792 29,592,198 Total net sales $ 320,737,750 $ 233,377,379 For the fiscal years ended January 30, 2022 January 31, 2021 February 2, 2020 Showrooms $ 298,989 $ 146,150 $ 148,004 Internet 150,622 151,065 55,781 Other 48,628 23,523 29,592 Total net sales $ 498,239 $ 320,738 $ 233,377 both fiscal 2022, 2021, and 2020.1011 for sales disaggregated by product.THE LOVESAC COMPANYCONSOLIDATED NOTES TO FINANCIAL STATEMENTSJANUARY 31, 2021 AND FEBRUARY 2, 2020NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)and February 2, 2020, respectively. As of January 31, 2021 As of February 2, 2020 Credit card receivables $ 2,964,077 $ 1,073,855 Wholesale receivables 1,549,383 4,724,154 Other receivables - 1,390,916 $ 4,513,460 $ 7,188,925 As of January 30, 2022 As of As of January 31, 2021 Credit card receivables $ 3,186 $ 2,964 Wholesale receivables 5,361 1,549 $ 8,547 $ 4,513 approximately100% and 97% of wholesale receivables at January 30, 2022 and January 31, 2021, and one wholesale customer that comprised 97% of wholesale receivables at February 2, 2020.cataloguecatalog costs, barter credits, deposits, prepaid rent, prepaid inventory, and other costs.THE LOVESAC COMPANYCONSOLIDATED NOTES TO FINANCIAL STATEMENTSJANUARY 31, 2021 AND FEBRUARY 2, 2020NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)THE LOVESAC COMPANYCONSOLIDATED NOTES TO FINANCIAL STATEMENTSJANUARY 31, 2021 AND FEBRUARY 2, 2020NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)GOODWILL (CONTINUED)either fiscal 2022, 2021, or 2020.PATENTS AND LICENSESPatents and licenses are recorded at cost and amortized on a straight-line basis over the estimated remaining life of the patent or license. Ongoing maintenance costs are expensed as incurred. a vendor relationship,patents, trademarks, and patents and trade names,other intangible assets are being amortized on a straight-line basis over their estimated lives. Other intangible assets with finite useful lives are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the asset might not be recovered.THE LOVESAC COMPANYCONSOLIDATED NOTES TO FINANCIAL STATEMENTSJANUARY 31, 2021 AND FEBRUARY 2, 2020NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)DEFERRED FINANCING COSTSThe Company’s financing costs are capitalized and amortized over the life of the related financing. The financing costs are treated as debt discounts with the exception of revolving lines of credit. In fiscal 2021, the Company paid $50,000 in connection with an increase in its aggregate commitments under its line of credit. The Company amortized deferred financing costs to interest expense amounts totaling $87,730 in fiscal 2021 and $73,024 in fiscal 2020.whichand right of use assets from leases. Property and equipment includes leasehold improvements, and other intangible assets. Long-lived assets are reviewed for potential impairment at such time that events or changes in circumstances indicate that the carrying amount of an asset might not be recovered. The Company evaluates property and equipment for impairment at the individual showroom level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the future undiscounted cash flows for the respective long-lived asset. If the estimated future cash flows are less than the carrying amounts of the assets, an impairment loss calculation is prepared. An impairment loss is measured based upon the excess of the carrying value of the asset over its estimated fair value which is generally based on an estimated future discounted cash flow. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value.impairment charge wasimpairments in fiscal 2022 and fiscal were 2021 calculated using a discounted cash flow model and waswere recorded in selling, general and administrative in the Company’s consolidated statementConsolidated Statements of operations. During fiscal 2020,Operations.Company did not record any impairment charges associated with property and equipment.catalog productiontelevision advertising, postcards, catalogs and their mailing costs, and recognizes expense over the related revenue stream if the following conditions are met (1) the primary purpose of the advertising is to elicit sales to customers who could be shown to have responded specifically to the advertising, and (2) the direct-response advertising results in probable and estimable future benefits.For fiscal years 2021 and 2020 the Company did not have any capitalized deferred direct-response television, postcard and catalogue costs.THE LOVESAC COMPANYCONSOLIDATED NOTES TO FINANCIAL STATEMENTSJANUARY 31, 2021 AND FEBRUARY 2, 2020NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)ADVERTISING AND CATALOG COSTS (CONTINUED)February 2, 2020.$41,924,487$65.1 million in fiscal 2022, $41.9 million in fiscal 2021, and $29,194,289$29.2 million in fiscal 2020.$735,000$0.5 million in fiscal 2022, $0.7 million in fiscal 2021, and $933,000$0.9 million in fiscal 2020. The decreases in fiscal 2022 and fiscal 2021 are related to fewer number of warranty claims. Warranty reserve was $606,000$0.7 million as of January 30, 2022 and $0.6 million as of January 31, 2021 and $1,180,000 as2021.JANUARY 31, 2021 AND FEBRUARY 2, 2020 OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Minimumexpensescost over the estimated term of the lease, which includes options to extend lease terms that are recognizedreasonably certain of being exercised, starting when possession of the property is taken from the landlord, which normally includes a construction period prior to the showroom opening. When a lease contains a predetermined fixed escalation of the fixed rent, we recognize the related operating lease cost on a straight-line basis over the termslease term. In addition, certain of our lease agreements include variable lease payments, such as payments based on a percentage of sales that are in excess of a predetermined level and/or increases based on a change in the leases. Tenant allowancesconsumer price index or fair market value. These variable lease payments are recorded as a receivable whenexcluded from minimum lease is executed. The corresponding liability is recorded and amortized over the term of the lease. The amortization of the liability is a reduction of rent expense over the term of the lease.Our operating leases contain provisions for certain incentives. Incentives are deferredpayments and are amortized overincluded in the underlyingdetermination of net lease termcost when it is probable that the expense has been incurred and the amount can be reasonably estimated. If an operating lease asset is impaired, the remaining operating lease asset will be amortized on a straight-line basis as a reduction to rent expense. Whenover the terms or the Company’s leases provide for free rent, concessions and/or escalations, the Company establishes a deferred rent liability or asset for the differenceremaining lease term.scheduled rent payments and a straight line rent expense. This liability or asset increases or decreases depending on where the Company is at any given time in the life of the lease. Percentage rent is not subjectNotes to straight-line of expense and is expensed as incurred.2021 and 1,414,889 shares at February 2, 2020.2021. All awards shall be granted within 10 years from the effective date of the plan. The unit vesting was based on both time and performance. See Note 78 for additional disclosure.sold.sold and include inbound freight and tariff costs relative to inventory sold, warehousing, and last mile shipping to our customers. Shipping and handling costs were $63,098,657$112.8 million in fiscal 2022, $63.1 million in fiscal 2021, and $47,148,918$47.1 million in fiscal 2020.JANUARY 31, 2021 AND FEBRUARY 2, 2020 OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)realized. Accordingly,realized prior to fiscal 2022. During fiscal 2022, the Company recorded a deferred tax asset of $9.8 million. Previous to fiscal 2022, the resolution of the uncertain tax position regarding the Company’s NOL carry forward during the year did not have an impact on the Company’s financial position or results of operations. As of January 31, 2021,30, 2022, there were no uncertain tax positions. See Note 56 for additional disclosures.basesbasis of assets and liabilities and the amounts reported in the financial statements and on net operating loss and tax credit carry forwards.In fiscal 2021, the The effects of 495,366 stock options were excluded fromin the diluted net income per common share calculation because the effects of including thesetheses potentially dilutive shares was antidilutive.JANUARY 31, 2021 AND FEBRUARY 2, 2020 OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
Except as described below, the Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its financial statements. The Company, as an emerging growth company, has elected to use the extended transition period for complying with new or revised financial accounting standards.
The following new accounting pronouncements were adopted in fiscal 2021:
The following new accounting pronouncements, and related impacts on adoption are being evaluated by the Company:
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) amending lease guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU No. 2020-05 extended the effective date to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company will adopt this standard beginning with our fiscal 2022. Management has evaluated the impact ASU No. 2016-02 will have on these consolidated financial statements. Based on the initial evaluation, the Company has determined that adopting this standard will have a material impact on our consolidated balance sheet as the Company has a significant number of operating leases.
While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to the recognition of new Right of Use “ROU” assets and lease liabilities on our balance sheet for our showroom and office real estate leases. We do not expect a significant change in our leasing activities between now and adoption. The Company currently has deferred rent of $7 million in long-term liabilities. On adoption, we currently expect to recognize additional liabilities of approximately $92 million, of which $14 million will be short-term and $78 million will be long-term with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2021 AND FEBRUARY 2, 2020
Property and equipment as of January 30, 2022 and January 31, 2021 and February 2, 2020 consists of:
Estimated Life | 2021 | 2020 | ||||||||
Office and store furniture, and equipment | 5 Years | $ | 7,729,168 | $ | 6,674,950 | |||||
Software | 3 Years | 3,628,108 | 2,652,960 | |||||||
Leasehold improvements | Shorter of estimated useful life or lease term | 33,828,176 | 28,071,912 | |||||||
Tools, Dies, Molds | 5 Years | 215,412 | 97,876 | |||||||
Construction in process | NA | 2,097,065 | 2,193,218 | |||||||
47,497,929 | 39,690,916 | |||||||||
Accumulated depreciation and amortization | (21,629,949 | ) | (15,846,655 | ) | ||||||
$ | 25,867,980 | $ | 23,844,261 |
Estimated Life | 2022 | 2021 | |||||||||||||||
Office and store furniture, and equipment | 5 Years | $ | 6,497 | $ | 4,803 | ||||||||||||
Software | 3 Years | 3,625 | 3,628 | ||||||||||||||
Leasehold improvements | Shorter of estimated useful life or lease term | 40,788 | 33,828 | ||||||||||||||
Computers | 3 Years | 2,138 | 2,926 | ||||||||||||||
Tools, Dies, Molds | 5 Years | 764 | 215 | ||||||||||||||
Vehicles | 5 Years | 497 | — | ||||||||||||||
Construction in process | NA | 2,765 | 2,098 | ||||||||||||||
57,074 | 47,498 | ||||||||||||||||
Accumulated depreciation and amortization | (22,937) | (21,630) | |||||||||||||||
$ | 34,137 | $ | 25,868 |
A summary of other intangible assets follows:
January 31, 2021 | ||||||||||||||
Estimated Life | Gross Carrying Amount | Accumulated Amortization | Net carrying amount | |||||||||||
Patents | 10 Years | $ | 2,387,328 | $ | (1,128,997 | ) | $ | 1,258,331 | ||||||
Trademarks | 3 Years | 1,239,334 | (980,633 | ) | 258,701 | |||||||||
Other intangibles | 5 Years | 839,737 | (839,737 | ) | - | |||||||||
Total | $ | 4,466,399 | $ | (2,949,367 | ) | $ | 1,517,032 |
January 30, 2022 | |||||||||||||||||||||||
Estimated Life | Gross Carrying Amount | Accumulated Amortization | Net carrying amount | ||||||||||||||||||||
Patents | 10 Years | $ | 2,838 | $ | (1,626) | $ | 1,212 | ||||||||||||||||
Trademarks | 3 Years | 1,390 | (1,189) | 201 | |||||||||||||||||||
Other intangibles | 5 Years | 840 | (840) | — | |||||||||||||||||||
Total | $ | 5,068 | $ | (3,655) | $ | 1,413 |
February 2, 2020 | ||||||||||||||
Estimated Life | Gross Carrying Amount | Accumulated Amortization | Net carrying amount | |||||||||||
Patents | 10 Years | $ | 1,965,794 | $ | (846,898 | ) | $ | 1,118,896 | ||||||
Trademarks | 3 Years | 982,800 | (749,535 | ) | 233,265 | |||||||||
Other intangibles | 5 Years | 839,737 | (839,737 | ) | - | |||||||||
Total | $ | 3,788,331 | $ | (2,436,170 | ) | $ | 1,352,161 |
January 31, 2021 | |||||||||||||||||||||||
Estimated Life | Gross Carrying Amount | Accumulated Amortization | Net carrying amount | ||||||||||||||||||||
Patents | 10 years | $ | 2,388 | $ | (1,129) | $ | 1,259 | ||||||||||||||||
Trademarks | 3 years | 1,239 | (981) | 258 | |||||||||||||||||||
Other intangibles | 5 years | 840 | (840) | — | |||||||||||||||||||
Total | $ | 4,467 | $ | (2,950) | $ | 1,517 |
Amortization expense on other intangible assets was $513,197$0.7 million in fiscal 2022, $0.5 million in fiscal 2021, and $263,842$0.3 million in fiscal 2020.
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2021 AND FEBRUARY 2, 2020
NOTE 3 - OTHER INTANGIBLE ASSETS, NET (CONTINUED)
Expected amortization expense by fiscal year for these other intangible assets follows:
2023 | $ | 246 | |||
2024 | 231 | ||||
2025 | 178 | ||||
2026 | 161 | ||||
2027 | 151 | ||||
Thereafter | 446 | ||||
$ | 1,413 |
2022 | $ | 281,527 | ||
2023 | 227,727 | |||
2024 | 190,365 | |||
2025 | 156,028 | |||
2026 | 155,027 | |||
Thereafter | 506,358 | |||
$ | 1,517,032 |
A summary of other prepaid and other current assets follows:
2021 | 2020 | |||||||
Prepaid insurance | $ | 1,235,866 | $ | 1,174,920 | ||||
Prepaid catalogue costs and related | 588,305 | 3,067,302 | ||||||
Barter credits | 2,521,271 | 374,423 | ||||||
Deposits | 997,428 | 892,611 | ||||||
Prepaid rent | 1,704,364 | 1,297,511 | ||||||
Prepaid inventory | 102,263 | 511,100 | ||||||
Prepaid software licenses | 967,045 | 580,247 | ||||||
Tenant allowance receivable | 1,464,206 | - | ||||||
Other | 547,605 | 152,008 | ||||||
$ | 10,128,353 | $ | 8,050,122 |
2022 | 2021 | ||||||||||
Prepaid insurance | $ | 1,667 | $ | 1,236 | |||||||
Prepaid catalogue costs and related | 4,794 | 588 | |||||||||
Barter credits | 3,407 | 2,521 | |||||||||
Deposits | 421 | 997 | |||||||||
Prepaid rent | 62 | 1,704 | |||||||||
Prepaid inventory | 475 | 102 | |||||||||
Prepaid software licenses | 790 | 967 | |||||||||
Tenant allowance receivable | 2,781 | 1,464 | |||||||||
Other | 1,329 | 549 | |||||||||
$ | 15,726 | $ | 10,128 |
2022 | 2021 | ||||||||||
Accrued freight and shipping | $ | 23,683 | $ | 4,524 | |||||||
Accrued advertising fees | 4,150 | 2,015 | |||||||||
Accrued warehouse expenses | 2,671 | 1,288 | |||||||||
Accrued professional fees | 2,268 | 1,590 | |||||||||
Customer return liability | 2,026 | 2,227 | |||||||||
Accrued occupancy | 1,284 | 937 | |||||||||
Accrued state income taxes | 1,007 | 7 | |||||||||
Accrued insurance | 973 | 541 | |||||||||
Warranty liability | 689 | 606 | |||||||||
Accrued credit card fees | 542 | 425 | |||||||||
Other accrued expenses | 1,204 | 3,027 | |||||||||
$ | 40,497 | $ | 17,187 |
JANUARY 31, 2021 AND FEBRUARY 2, 2020
NOTE 56 - INCOME TAXES
On March 27, 2020, the Federal government of the United States enacted the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) which includes a number of significant changes to the existing U.S. tax laws including postponing the filing date of specific federal income tax returns and payments from April 15, 2020 to July 15, 2020, temporarily increasing the 30% limitation on the interest deduction to 50%, introduction of a capital investment deduction for Qualified Improvement Property (“QIP”), and change in the use of net operating losses. The Company’s federal net operating losses that have been incurred in tax years beginning on or before December 31, 2017 will have a 20-year carryforward limitation, a two-year carryback period and can offset 100% of future taxable income. Net operating losses incurred in tax years beginning after December 31, 2017 and before January 1, 2021 will have an indefinite life, a five-year carryback period and can offset 100% of future taxable income prior to 2021 and 80% of future taxable income after 2020. Net operating losses incurred in tax years beginning on or after January 1, 2021 will have an indefinite life, generally no carryback period and can offset 80% of future taxable income.
State taxes for the fiscal years ended January 30, 2022, January 31, 2021 and February 2, 2020, were approximately $86,000$2.2 million, $0.1 million and $43,000less than $0.1 million respectively.
2021 | 2020 | |||||||
Deferred Income Tax Assets | ||||||||
Federal net operating loss carryforward | $ | 7,762,784 | $ | 12,455,237 | ||||
State net operating loss carryforward | 1,817,622 | 2,485,074 | ||||||
Intangible assets | 286,297 | 244,053 | ||||||
Accrued liabilities | 4,422,738 | 1,833,549 | ||||||
Equity-based compensation | 1,082,820 | 503,201 | ||||||
Property and equipment | 640,581 | 1,748,593 | ||||||
Merchandise inventories | 330,333 | 254,034 | ||||||
Charitable Contributions | 9,615 | - | ||||||
Total Deferred Income Tax Assets | 16,352,790 | 19,523,741 | ||||||
Valuation Allowance | (16,352,790 | ) | (19,523,741 | ) | ||||
Net Deferred Income Tax Asset | $ | - | $ | - |
2022 | 2021 | ||||||||||
Deferred Income Tax Assets | |||||||||||
Federal net operating loss carryforward | $ | 2,082 | $ | 7,763 | |||||||
State net operating loss carryforward | 1,403 | 1,818 | |||||||||
Intangible assets | 397 | 286 | |||||||||
Accrued liabilities | 5,646 | 4,423 | |||||||||
Equity-based compensation | 2,032 | 1,083 | |||||||||
Property and equipment | — | 640 | |||||||||
Merchandise inventories | 689 | 330 | |||||||||
Charitable Contributions | 12 | 10 | |||||||||
Total Deferred Income Tax Assets | 12,261 | 16,353 | |||||||||
Deferred Income Tax Liabilities | |||||||||||
Property and equipment | (2,425) | — | |||||||||
Valuation Allowance | — | (16,353) | |||||||||
Net Deferred Income Tax Asset | $ | 9,836 | $ | — |
2021 | 2020 | |||||||
Provision (benefit) at Federal Statutory rates | $ | 3,110,696 | $ | (3,183,958 | ) | |||
Permanent adjustments | (410,550 | ) | (847,531 | ) | ||||
State tax, net of Federal provision (benefit) | 495,442 | (582,572 | ) | |||||
Federal True-ups | 61,052 | (393,702 | ) | |||||
Uncertain tax positions- NOLS | - | (10,753,384 | ) | |||||
Change in valuation allowance | (3,170,951 | ) | 15,804,459 | |||||
Income tax provision | $ | 85,689 | $ | 43,312 |
2022 | 2021 | 2020 | |||||||||||||||
Provision (benefit) at Federal Statutory rates | $ | 8,035 | $ | 3,111 | $ | (3,184) | |||||||||||
Permanent adjustments | (1,039) | (411) | (848) | ||||||||||||||
State tax, net of Federal provision (benefit) | 1,737 | 496 | (582) | ||||||||||||||
Change in state deferred tax | 146 | — | — | ||||||||||||||
Federal True-ups | (164) | 61 | (394) | ||||||||||||||
Uncertain tax positions- NOLS | — | — | (10,753) | ||||||||||||||
Change in valuation allowance | (16,353) | (3,171) | 15,804 | ||||||||||||||
Income (benefit) tax provision | $ | (7,638) | $ | 86 | $ | 43 |
The Company is subject to federal, state and local corporate income taxes. The components of the provision for income taxes reflected on the consolidated statements of operations are set forth below:
2021 | 2020 | |||||||
Current taxes: | ||||||||
U.S. federal | $ | - | $ | - | ||||
State and local | 85,689 | 43,312 | ||||||
Total current tax expense | $ | 85,689 | $ | 43,312 | ||||
Deferred taxes: | ||||||||
U.S. federal | $ | - | $ | - | ||||
State and local | - | - | ||||||
Total deferred tax expense (benefit) | $ | - | $ | - | ||||
Total tax provision | $ | 85,689 | $ | 43,312 |
2022 | 2021 | 2020 | |||||||||||||||
Current taxes: | |||||||||||||||||
U.S. federal | $ | — | $ | — | $ | — | |||||||||||
State and local | 2,198 | 86 | 43 | ||||||||||||||
Total current tax expense | $ | 2,198 | $ | 86 | $ | 43 | |||||||||||
Deferred taxes: | |||||||||||||||||
U.S. federal | $ | (7,254) | $ | — | $ | — | |||||||||||
State and local | (2,582) | — | — | ||||||||||||||
Total deferred tax expense (benefit) | (9,836) | — | — | ||||||||||||||
Total tax provision | $ | (7,638) | $ | 86 | $ | 43 |
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2021 AND FEBRUARY 2, 2020
NOTE 5 - INCOME TAXES (CONTINUED)
Differences in terms of percentages are as follows:
2021 | 2020 | |||||||
Provision (benefit) at Federal Statutory rates | 21.0 | % | -21.0 | % | ||||
Permanent adjustments | -2.8 | % | -5.6 | % | ||||
State tax, net of Federal provision (benefit) | 3.4 | % | -3.8 | % | ||||
Federal True-ups | 0.4 | % | -2.6 | % | ||||
Uncertain tax positions- NOLS | 0.0 | % | -70.9 | % | ||||
Change in valuation allowance | -21.4 | % | 104.2 | % | ||||
Income tax provision | 0.60 | % | 0.30 | % |
2022 | 2021 | 2020 | |||||||||||||||
Provision (benefit) at Federal Statutory rates | 21.0 | % | 21.0 | % | (21.0) | % | |||||||||||
Permanent adjustments | (2.7) | % | (2.8) | % | (5.6) | % | |||||||||||
State tax, net of Federal provision (benefit) | 4.5 | % | 3.4 | % | (3.8) | % | |||||||||||
Change in state deferreds | 0.4 | % | — | % | — | % | |||||||||||
Federal True-ups | (0.4) | % | 0.4 | % | (2.6) | % | |||||||||||
Uncertain tax positions- NOLS | — | % | — | % | (70.9) | % | |||||||||||
Change in valuation allowance | (42.7) | % | (21.4) | % | 104.2 | % | |||||||||||
Income tax provision | (20.0) | % | 0.6 | % | 0.3 | % |
As defined in Section 382 of the Internal Revenue Code, certain ownership changes limit the annual utilization of federal net operating losses. As a result of issuance, sales and other transactions involving the Company’s stock, the Company experienced an ownership change during fiscal years ended January 31, 2011, February 3, 2019,2, 2020, and January 31, 202130, 2022 which have caused such federal net operating losses to be subject to limitation under Section 382. The annual base limitation from 2011, 2019, and 20212022 are approximately $302,000, $5,888,000,$0.3 million, $5.9 million, and $7,665,000$7.7 million respectively. The Company is entitled to additional limitation based on the net unrealized built-in gain computation, which results in additional limitation of approximately $40,000,000$40.0 million over the next 5 years. There is no impact on the overall provision since the Company has a full valuation allowance against its deferred tax assets.
During fiscal yearyears ending January 30, 2022, January 31, 2021, and February 2, 2020, the Company increased/(decreased) the valuation allowance by approximately ($3,171,000)$(16.4) million, $(3.2) million, and $15,804,000$15.8 million, respectively.
The changes in the amount of unrecognized tax benefits inCompany reversed its valuation allowance during the fiscal years endingyear ended January 31, 2021 and February 2, 2020 were as follows:
2021 | 2020 | |||||||
Beginning balance | $ | - | $ | 10,753,384 | ||||
Additions for tax positions acquired | - | - | ||||||
Additions for tax positions related to current year | - | - | ||||||
Tax positions of prior years: | ||||||||
Payments | - | - | ||||||
Settlements | - | - | ||||||
Release | - | (10,753,384 | ) | |||||
Ending balance | $ | - | $ | - |
The Company adopted FAS Accounting Standard 2013-11. The pronouncement requires30, 2022 since it is more likely than not that the Company to offset its uncertain tax positions against certainremaining net deferred tax assets inwill be realized. As of January 30, 2022, the same jurisdiction.
2022 | 2021 | 2020 | |||||||||||||||
Beginning balance | $ | — | $ | — | $ | 10,753 | |||||||||||
Additions for tax positions acquired | — | — | — | ||||||||||||||
Additions for tax positions related to current year | — | — | — | ||||||||||||||
Tax positions of prior years: | |||||||||||||||||
Payments | — | — | — | ||||||||||||||
Settlements | — | — | — | ||||||||||||||
Release | — | — | (10,753) | ||||||||||||||
Ending balance | $ | — | $ | — | $ | — |
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2021 AND FEBRUARY 2, 2020
OPERATING LEASE COMMITMENTS
The Company leases its office, warehouse facilities and retail showrooms under operating lease agreements which expire at various dates through November 2027. MonthlyJanuary 2032. The Company determines if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of the economic benefits from the use of that identified asset. Certain operating leases have renewal options and rent escalation clauses. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement.
January 30, 2022 | |||||
Weighted average remaining lease term (in years) | |||||
Operating Leases | 6.29 | ||||
Weighted average discount rate | 3.44 | % | |||
Operating Leases |
(amounts in thousands) | Balance sheet location | January 30, 2022 | |||||||||
Assets | |||||||||||
Operating leases | Operating lease right-of-use assets (non-current) | $ | 100,891 | ||||||||
Liabilities | |||||||||||
Current: | |||||||||||
Operating leases | Current operating lease liabilities | $ | 16,382 | ||||||||
Noncurrent: | |||||||||||
Operating leases | Operating lease liability, long term | $ | 96,574 | ||||||||
Total lease liabilities | $ | 112,956 |
(amounts in thousands) | |||||
2023 | $ | 20,493 | |||
2024 | 20,020 | ||||
2025 | 18,756 | ||||
2026 | 16,904 | ||||
2027 | 14,459 | ||||
Thereafter | 40,329 | ||||
Total undiscounted future minimum lease payments | 130,961 | ||||
Less: imputed interest | (18,005) | ||||
Total present value of lease obligations | 112,956 | ||||
Less: current operating lease liability | (16,382) | ||||
Operating lease liability- long term | $ | 96,574 |
Expected future annual minimum rental payments under these
2022 | $ | 14,312,251 | ||
2023 | 13,220,110 | |||
2024 | 13,038,353 | |||
2025 | 12,125,283 | |||
2026 | 10,762,696 | |||
2027 | 8,883,670 | |||
Thereafter | 20,093,465 | |||
$ | 92,435,828 |
(amounts in thousands) | For the year ended January 30, 2022 | ||||
Operating cash flow information: | |||||
Amounts paid on operating lease liabilities | $ | 14,400 | |||
Non-cash activities | |||||
Right-of-use assets obtained in exchange for lease obligations | $ | 116,048 |
The above disclosure includes lease extensions for various retail showrooms the Company entered into after year end.
The Company has various employment agreements with its senior level executives. A number of these agreements have severance provisions, ranging from 12 to 18 months of salary, in the event those associatesexecutives are terminated without cause.cause or resign for good reason. The total amount of exposure to the Company under these agreements was $4,009,943$5.5 million at January 31, 202130, 2022 if all executives with employment agreements were terminated without cause or were to resign for good reason and the full amount of severance was payable.
Our equity sponsor Mistral Capital Management, LLC (“Mistral”) Our equity sponsor Satori Capital, LLC (“Satori”) The Company engaged Blueport Commerce (“Blueport”), a company owned in part by investment vehicles affiliated with Mistral, as an ecommerce platform in February 2018. COMMON STOCK WARRANTS In fiscal In fiscal 2021, 738,897 warrants exercised were cashless, whereby the holders received fewer shares of common stock in lieu of a cash payment to the Company. Warrants exercised in fiscal EQUITY INCENTIVE PLANS The Company adopted the 2017 Equity Plan which provides for In June 2020, the stockholders of the Company approved an amendment to the 2017 Equity Plan that increased the number of shares of common stock reserved for issuance under the 2017 Equity Plan by 690,000 shares of common stock. The number of shares of common stock reserved for issuance under the 2017 Equity Plan increased from 1,414,889 to 2,104,889 shares of common stock. A summary of the status of our stock options as of January 30, 2022, January 31, 2021, and February 2, 2020 and the changes during fiscal years then ended, is presented below: CONSOLIDATED NOTES TO FINANCIAL STATEMENTS NOTE performsperformed management services for the Company under a contractual agreement. Certainagreement that ended on January 31, 2021. One of our directors are membersis a member and principalsprincipal of Mistral. There were no management fees incurred in fiscal 2022. Management fees incurred weretotaled approximately $400,000$0.4 million in both fiscal 2021 and 2020 and are included in selling, general and administrative expenses. There was $0were no amounts payable to Mistral as of January 30, 2022. There were less than $0.1 million in amounts payable to Mistral as of January 31, 2021 and $2,000 payable to Mistral as of February 2, 2020. The amount payable to Mistral as of February 2, 2020 is included in accrued liabilities in the accompanying consolidated balance sheet.2021. In addition, the Company reimbursed Mistral for expenses incurred in the amount of $1,959 and $44,140for less than $0.1 million for out-of-pocket expenses for fiscal 2021 and 2020, respectively. The Company’s contractual agreement with Mistral ended on January 31, 2021.performsperformed management services for the Company under a contractual agreement.agreement that ended on January 31, 2021. There were no management fees incurred in fiscal 2022. Management fees totaled approximately $100,000$0.1 millions in both fiscal 2021 and 2020 and are included in selling, general and administrative expenses. There were 0 amounts payable to Satori as of January 30, 2022. Amounts payable to Satori as of January 31, 2021 were $8,333less than $0.1 million consisting of management fees which were included in accounts payable in the accompanying consolidated balance sheet as of January 31, 2021. Amounts payable to Satori as of February 2, 2020 were $95,000 consisting of $25,000 in management fees and $70,000 of reimbursable expenses which were included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. In addition, the Company reimbursed Satori for expenses incurred in the amount of $51,614 and $70,000for less than $0.1 million for out-of-pocket expenses forin both fiscal 2021 and 2020, respectively. The Company’s contractual agreement with Satori ended on January 31, 2021.One of our directors is alsoThe Company terminated the Blueport contract in fiscal 2021 in order to launch a director of Blueport.new enhanced ecommerce platform. There were $2,143,392no fees incurred in fiscal 2022. There were $2.1 million and $1,833,154$1.8 million of fees incurred with Blueport that were related to sales transacted through the Blueport platform during fiscal 2021 and 2020, respectively. There was an additional $663,572$0.7 million of fees incurred with Blueport during fiscal 2021 related to Lovesac’s early termination of our contract in order to launch a new enhanced ecommerce platform.contract. There were no amounts payable as of January 30, 2022 or January 31, 2021. Amount payableBlueport asthe recovery of February 2, 2020 was $150,508lost profit margin and is included in accounts payable in the accompanying consolidated balance sheets.JANUARY 31, 2021 AND FEBRUARY 2, 202078 - STOCKHOLDERS’ EQUITY2020, the Company issued 18,1662022, a total of 5,625 warrants to a third party in connection with previous equity raise. These warrants were valued using the Black-Scholes model, with similar assumptions to the June 2018 warrants. The warrants had a fair value of approximately $130,000. Of these warrants, 17,396 were exercised on May 14, 2019.The warrants may be exercised at any time following the date of issuance during the period prior to their expiration date. The fair value of each warrant is estimated on the date of grant using the Black-Scholes model. Expected volatilities are based on the Company’s historical volatility and comparable Companies’ historical volatility for periods when there is not sufficient historical pricing to base the estimate of volatility, which management believes represents the most accurate basis for estimating expected future volatility under the current circumstances. The risk-free rate is based on the U.S. treasury yield in effect at the time of the grant. May 2019 Warrants 18,166 Expected volatility 44 % Expected dividend yield 0 % Expected term (in years) 3.00 Risk-free interest rate 2.69 % Exercise price $ 16.00 Calculated fair value of warrant $ 7.16 The following represents warrant activity during fiscal 2021 and 2020: Average exercise price Number of warrants Weighted average remaining contractual life (in years) Warrants Outstanding at February 3, 2019 $ 16.83 1,067,475 2.93 Warrants issued 16.00 18,166 2.40 Expired and canceled - - - Exercised 16.00 (46,521 ) (2.15 ) Warrants outstanding at February 2, 2020 16.83 1,039,120 1.93 Warrants issued - - - Expired and canceled - - - Exercised 16.00 (745,147 ) (0.41 ) Outstanding at January 31, 2021 $ 19.07 293,973 2.57 2021resulted2021 resulted in the issuance of 439,447 common shares. Warrants exercised in fiscal 2020 resulted in the issuance of 27,246 common shares.Average exercise price Number of warrants Weighted average remaining contractual life (in years) Outstanding at February 3, 2019 16.83 1,067,475 2.93 Warrants issued 16.00 18,166 2.40 Expired and canceled — — — Exercised 16.00 (46,521) 2.15 Outstanding at February 2, 2020 16.83 1,039,120 1.93 Warrants issued — — — Expired and canceled — 0 — Exercised 16.00 (745,147) 0.41 Outstanding at January 31, 2021 19.07 293,973 2.57 Warrants issued — — — Expired and canceled 9.83 (98) — Exercised 16.00 (12,125) 0.09 Outstanding at January 30, 2022 $ 19.20 281,750 1.41 THE LOVESAC COMPANYCONSOLIDATED NOTES TO FINANCIAL STATEMENTSJANUARY 31, 2021 AND FEBRUARY 2, 2020NOTE 7 - STOCKHOLDERS’ EQUITY (CONTINUED)Awardsawards in the form of Options, Stock Appreciationoptions, stock appreciation rights, Restricted Stock Awards, Restricted Stock Units, Performancerestricted stock awards, restricted stock units, performance shares, Performance Units, Cash-Based Awardsperformance units, cash-based awards and Other Stock-Based Awards.other stock-based awards. All awards shall be granted within 10 years from the effective date of the Plan.On June 5, 2019, the stockholders approved an amendment and restatement of the 2017 Equity Plan that among other things increased the numberPlan.Non statutorynonstatutory Stock options to certain officers of the Company with an option price of $38.10 per share. 100% of the stock options are subject to vesting on the first trading day afterthird anniversary of the date on whichof grant if the officers are still employed by the Company and the average closing price of the Company’s common stock pricefor the prior 40 consecutive trading days has been at least $75 for 60 consecutive trading days so long as this goal has been attained by the third anniversary of the grant. Both the employment and the market condition must be satisfied no later than June 5, 20222024 or the options will terminate. These options were valued using a Monte Carlo simulation model to account for the path dependent market conditions that stipulate when and whether or not the options shall vest. The 495,366 stock options were modified to extend the term of the options through June 5, 2024. This resulted in additional compensation of approximately $874,000,$0.9 million, of which, $315,000$0.3 million was recorded upon modification and the remaining expense was recognized over the remaining expected term.In December 2019, SAC LLC distributed The market condition was met on June 5, 2021, which was the sharesdate on which the average closing price of the Company’s common stock it held. In connection withhad been at least $75 for 40 consecutive trading days. The options will vest and become exercisable on June 5, 2022 as long as the distribution officers are still employed on that date. As a result of the Company agreed to exchange and modify options that were held at SAC LLC for shares of vested common stock of the Company. Pursuant to the exchange SAC LLC transferred 175,478 shares of common stock tomarket condition being met, the Company accelerated the amortization and the Company immediately cancelled these shares. The Company then issued to the former option holders the numberrecognized additional stock-based compensation expense during fiscal year 2022 of those shares pursuant to the 2017 Equity Plan and withheld 73,507 shares to satisfy taxes associated with the issuance. For the years ended January 31, 2021 and February 2, 2020 Number of options Weighted average exercise price Weighted average remaining contractual life (in years) Average intrinsic value Outstanding at February 3, 2019 - $ - - - Granted 495,366 38.10 Exercised - - Expired and canceled - - Vested - - Outstanding at February 2, 2020 495,366 $ 38.10 2.34 - Granted - $ - Exercised - - Expired and canceled - - Vested - - Outstanding at January 31, 2021 495,366 $ 38.10 3.35 - Exercisable at the end of the period - - - - For the years ended January 30, 2022, January 31, 2021, and February 2, 2020 Number of options Weighted average exercise price Weighted average remaining contractual life (in years) Average intrinsic value Outstanding at February 3, 2019 — $ — 0 — Granted 495,366 38.10 Canceled and forfeited — $ — Outstanding at February 2, 2020 495,366 $ 38.10 2.34 — Granted — — Canceled and forfeited — — Outstanding at January 31, 2021 495,366 $ 38.10 3.35 — Granted — $ — Canceled and forfeited — — Outstanding at January 30, 2022 495,366 $ 38.10 2.35 $ 28.68 Exercisable at the end of the period — — — — JANUARY 31, 2021 AND FEBRUARY 2, 202078 - STOCKHOLDERS’ EQUITY (CONTINUED)
EQUITY INCENTIVE PLANS (CONTINUED)
A summary of the status of our unvested restricted stock units as of January 30, 2022, January 31, 2021, and February 2, 2020, and and changes during fiscal years then ended, is presented below:
Number of shares | Weighted average grant date fair value | |||||||
Unvested at February 3, 2019 | 377,286 | $ | 11.16 | |||||
Granted | 130,898 | 23.63 | ||||||
Forfeited | (20,470 | ) | 16.21 | |||||
Vested | (304,661 | ) | 12.75 | |||||
Unvested at February 2, 2020 | 183,053 | 21.34 | ||||||
Granted | 627,940 | 16.94 | ||||||
Forfeited | (5,701 | ) | 11.86 | |||||
Vested | (149,734 | ) | 16.24 | |||||
Unvested at January 31, 2021 | 655,558 | $ | 18.86 |
Number of shares | Weighted average grant date fair value | ||||||||||
Unvested at February 3, 2019 | 377,286 | $ | 11.16 | ||||||||
Granted | 130,898 | 23.63 | |||||||||
Forfeited | (20,470) | 16.21 | |||||||||
Vested | (304,661) | 12.75 | |||||||||
Unvested at February 2, 2020 | 183,053 | $ | 21.34 | ||||||||
Granted | 627,940 | 16.94 | |||||||||
Forfeited | (5,701) | 11.86 | |||||||||
Vested | (149,734) | 16.24 | |||||||||
Unvested at January 31, 2021 | 655,558 | 18.86 | |||||||||
Granted | 94,985 | 78.53 | |||||||||
Forfeited | (42,516) | 22.67 | |||||||||
Vested | (174,694) | 19.57 | |||||||||
Unvested at January 30, 2022 | 533,333 | $ | 28.41 |
Equity-based compensation expense was approximately $5.9 million, $4.7 million, and $4.9 million for fiscal 2022, 2021, and 2020 respectively. In fiscal 2020, all the unvested restricted stock units for certain senior executives of the Company that were granted prior to the accelerated vesting trigger, vested according to the accelerated vesting trigger in their restricted stock unit agreements. The triggering event was the market capitalization of the Company post-IPO, exceeding $300 million for 60 consecutive trading days and the expiration of the lock-up period. This accelerated vesting resulted in equity based compensation in the amount of $2.9 million. In December 2019, the exchange and modification of options that were held at SAC LLC resulted in approximately $313,000 of equity-based compensation expense.
The total unrecognized equity based compensation cost related to unvested stock option and restricted unit awards was approximately $5.3$4.8 million as of January 31, 202130, 2022 and will be recognized in operations over a weighted average period of 2.652.11 years.
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2021 AND FEBRUARY 2, 2020
In February 2017, the Company established the TLC 401(k) Plan (the “401(k) Plan”) with Elective Deferrals beginning May 1, 2017. The 401(k) Plan calls for Elective Deferral Contributions, Safe Harbor Matching Contributions and Profit Sharing Contributions. All associates of the Company will be eligible to participate in the 401(k) Plan as of the day of the month which is coincident with or next follows the date on which they attain age 21 and complete 1 month of service. Participants will be able to contribute up to 100% of their eligible Compensation to the 401(k) Plan subject to limitations with the IRS. The employer contributions to the 401(k) Plan for fiscal 2022, fiscal 2021, and fiscal 2020 were approximately $482,000$0.8 million, $0.5 million, and $406,000,$0.4 million, respectively.
CREDIT LINE
On February 6, 2018, the Company established a line of credit with Wells. The line of credit with Wells allows the Company to borrow up to $25.0 million and will mature in February 2023. Borrowings are limited to 90% of eligible credit card receivables plus 85% of eligible wholesale receivables plus 85% of the net recovery percentage for the eligible inventory multiplied by the value of such eligible inventory of the Company for the period from December 16 of each year until October 14 of the immediately following year, with a seasonal increase to 90% of the net recovery percentage for the period from October 15 of each year until December 15 of such year, seasonal advance rate, minus applicable reserves established by Wells. As of January 30, 2022 and January 31, 2021, the Company’s borrowing availability under the line of credit with Wells Fargo was $22.5 million and $15.9 million.million respectively. As of January 30, 2022 and January 31, 2021, there waswere no borrowings outstanding balance on this line of credit.
Under the line of credit, with Wells, the Company may elect that the revolving loans bear interest at a rate per annum equal to the base rate plus the applicable margin or the LIBOR rate plus the applicable margin. The applicable margin is based on tier’s relating to the quarterly average excess availability. The tiers range from 2.00% to 2.25%.
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2021 AND FEBRUARY 2, 2020
The Company has determined that the Company operates within a single reporting segment. The chief operating decision makers of the Company are the Chief Executive Officer and the President. The Company’s operating segments are aggregated for financial reporting purposes because they are similar in each of the following areas including economic characteristics, class of consumer, nature of products and distribution method and products are a singular group of products which make up over 95% of total sales.
Fiscal year ending | |||||||||||||||||
January 30, 2022 | January 31, 2021 | February 2, 2020 | |||||||||||||||
Sactionals | $ | 436,588 | $ | 271,018 | $ | 188,436 | |||||||||||
Sacs | 52,478 | 44,975 | 39,641 | ||||||||||||||
Other | 9,173 | 4,745 | 5,300 | ||||||||||||||
$ | 498,239 | $ | 320,738 | $ | 233,377 | ||||||||||||
Fiscal year ending | ||||||||
January 31, 2021 | February 2, 2020 | |||||||
Sactionals | $ | 271,018,545 | $ | 188,436,976 | ||||
Sacs | 44,974,677 | 39,640,676 | ||||||
Other | 4,744,528 | 5,299,727 | ||||||
$ | 320,737,750 | $ | 233,377,379 |
The Company has a bartering arrangement with Icon International, Inc., or “Icon”, a third-party vendor, whereby the Company will provide inventory in exchange for media credits. During fiscal 2020, theThe Company exchanged $1,097,488$1.5 million, $3.2 million, and $1.1 million of inventory plus the cost of freight for certain media credits. To account for the exchange, thecredits during fiscal 2022, fiscal 2021, and fiscal 2020, respectively.
The Company accounts for barter transactions under ASC Topic No. 845 “Nonmonetary Transactions.” Barter transactions with commercial substance are recorded at the estimated fair value of the products exchanged, unless the products received have a more readily determinable estimated fair value. Revenue associated with barter transactions is recorded at the time of the exchange of the related assets.
F-27