UNITED STATES
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 February 2, 2020
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
State or Other Jurisdiction of
Incorporation or Organization
Two Landmark Square, Suite 300
Stamford, Connecticut
Address of Principal Executive Offices
16-1685692
I.R.S. Employer Identification No.
06901
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
Common Stock, $0.00001 par value per share
Trading Symbol(s)
LOVE
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ 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 ☐ 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 ☒ 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 ☒ 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 ☐
Non-accelerated filer ☐
Emerging growth company ☒
Accelerated filer ☒
Smaller reporting 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. ☐
As of August 2, 2019 (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 $173,298,214.
As of April 15, 2020, there were 14,472,611 shares of common stock, $0.00001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 or an amendment to this Annual Report
on Form 10-K, to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III of this Annual Report on Form 10-K.
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Item 16.
TABLE OF CONTENTS
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accounting Fees and Services.
Exhibits, Financial Statement Schedules.
Form 10-K Summary.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which statements involve substantial risk and uncertainties. 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. Forward-looking statements contained in this Annual Report on Form 10- K
include, but are not limited to, statements about:
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the effect and consequences of the novel coronavirus (“COVID-19”) public health crisis on matters including U.S. and local economies; our business operations and
continuity; the availability of corporate and consumer financing; the health and productivity of our associates; the ability of third-party providers to continue
uninterrupted service; and the regulatory environment in which we operate;
our ability to sustain recent growth rates;
our ability to manage the growth of our operations over time;
our ability to maintain, grow and enforce our brand and trademark rights;
our ability to improve our products and develop new products;
our ability to obtain, grow and enforce intellectual property related to our business and avoid infringement or other violation of the intellectual property rights of others;
our ability to successfully open and operate new showrooms;
our ability to increase our Internet sales; and
our ability to compete and succeed in a highly competitive and evolving industry.
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.
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Item 1. Business.
Company Overview
PART I.
We are a technology driven, omni-channel company that designs, manufactures and sells unique, high quality furniture comprised of modular couches called Sactionals and
premium foam beanbag chairs called Sacs. We market and sell our products through modern and efficient showrooms and, increasingly, through online sales. We believe that
our ecommerce centric approach, coupled with our ability to deliver our large upholstered products through nationwide 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 17.0% and 24.8% of our sales for fiscal years 2020 and 2019, 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 80.7% and 72.5% of our sales for fiscal years 2020 and 2019, respectively. We are
currently reviewing our allocation methodology of the application of product discounts to each product segment of our business which we believe will provide a more
comparative view of product category growth on a go forward basis.
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.
We believe the strength of our brand is reflected in the number of customers who routinely share their purchases of Lovesac products with their friends through social media,
often displaying our logos or company name in their posts. Our customers include celebrities and other influencers who support our brand through postings made on an
uncompensated and unsolicited basis.
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We currently market and sell our products through 91 showrooms at top tier malls, lifestyle centers and street locations in 35 states in the U.S. Our modern, efficient showrooms
are designed to appeal to millennials and other purchasers looking for comfortable, enduring, premium furniture. They showcase the different sizes of our Sacs, the myriad
forms into which our Sactionals can be configured, and the large variety of fabrics that can be used to cover our products. Our retail showrooms are technology driven and
focused on educating prospective customers about the many benefits of our unique products, enabling us to require just 498 to 1,794 square feet for each showroom.
As part of our direct to consumer sales approach, we also sell our products through our ecommerce platform. We believe our products are uniquely suited to this channel. Our
foam-based Sacs can be reduced to one-eighth of their normal size and each of our Sactionals components weighs less than 50 pounds upon shipping. With furniture especially
suited to ecommerce applications, our sales completed through this channel accounted for 23.9% and 19.9% of our total fiscal 2020 and fiscal 2019 sales, respectively. Our
showrooms and other direct advertising and marketing efforts work in concert to drive customer conversion in ecommerce.
Despite the increase in sales, net losses were $15.2 million and $6.7 million for fiscal 2020 and 2019, respectively primarily due to increased spending on tariffs, showrooms,
advertising, marketing and financing related costs.
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, and, in the following weeks, many U.S. states and localities issued
lockdown orders impacting the operations of our stores and consumer demand. Since then, the COVID-19 situation within the U.S. has rapidly escalated. On April 1, 2020, we
announced that all showroom locations will remain closed until further notice. We will follow the guidance of local, state and federal governments, as well as health
organizations, to determine when we can safely reopen our showrooms. Additionally, we implemented a reduction in workforce of approximately 445 part time employees
(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 and Chief Financial Officer. The base salaries of all other
senior management and full-time headquarter team members has been temporarily reduced by graduated amounts. Our Board of Directors has also agreed to a temporary
reduction of its retainer and monitoring fees and an extension of the associated payment timeline. We continue to monitor the situation closely and it is possible that we will
implement further measures.
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Company History
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
We challenge the notion that a piece of furniture is static by offering a dynamic product line built to last and evolve throughout a customer’s life. 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.
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Sactionals. We believe our Sactionals platform is unlike competing products in its adaptability yet is comparable aesthetically to similarly priced premium couches and
sectionals. Our Sactional products include a number of patented features relating to their geometry and modularity, coupling mechanisms and other features. Utilizing
only two, standardized pieces, “seats” and “sides,” and over 250 high quality, tight-fitting covers that are removable, washable, and changeable, customers can create
numerous permutations of a sectional couch with minimal effort. Customization is further enhanced with our specialty-shaped modular offerings, such as our wedge seat
and roll arm side. Our custom features and accessories can be added easily and quickly to a Sactional to meet endless design, style and utility preferences, reflecting our
Designed for Life philosophy. Sactionals are built to meet the highest durability and structural standards applicable to fixed couches. Sactionals are comprised of
standardized units and we guarantee their compatibility over time, which we believe is a major pillar of their value proposition to the consumer.
Sacs. We believe that our Sacs product line is a category leader in oversized beanbags. The Sac product line offers 6 different sizes ranging from 22 pounds to 95
pounds with capacity to seat 3+ people on the larger model Sacs. Filled with Durafoam, a blend of shredded foam, Sacs provide serene comfort and guaranteed
durability. Their removable covers are machine washable and may be easily replaced with a wide selection of cover offerings.
● Accessories. Our accessories complement our Sacs and Sactionals by increasing their adaptability to meet evolving consumer demands and preferences. Our current
product line offers Sactional-specific drink holders, footsac blankets, decorative pillows, fitted seat tables and ottomans in varying styles and finishes and our unique
Sactionals Power Hub, providing our customers with the flexibility to customize their furnishings with decorative and practical add-ons to meet evolving style
preferences.
Sales Channels
We offer our products through an omni-channel platform that provides a seamless and meaningful experience to our customers online and in-store. Compared to traditional
retailers, our showrooms require significantly less square footage because of our need to have only a few in-store sample configurations for display and our ability to stack our
inventory for immediate sale. Our retail showrooms are technology driven and focused on educating prospective customers about the many benefits of our unique products,
enabling us to require just 498 to 1,794 square feet for each showroom. The small footprint requirement provides a cost advantage and flexibility in locating our showrooms
strategically in A-rated malls and street locations in our target markets. These logistical advantages underlie our broader tech-driven, Internet-based business model, where we
leverage our showrooms as both a traditional retail channel to purchase our products and an educational center for prospective online customers to learn about and interact with
our products in real time.
Through our fast growing mobile and ecommerce channel, we are able to significantly enhance the consumer shopping experience for home furnishings, driving deeper brand
engagement and loyalty, while simultaneously driving favorable margin expansion. Our technology capabilities are robust, and we are well positioned to benefit from the
growing consumer preference to transact via mobile devices. We leverage our strong social media presence and showroom footprint to drive traffic toward our ecommerce
platform, where product testimonials and inspirational stories from our Lovesac community create a more engaging consumer experience for our customers. Additionally, our
products’ compact packaging facilitates consistent production scheduling, outsourcing of delivery and lower shipping costs, allowing us to quickly and cost-effectively deliver
online orders.
We have also enhanced our sales through the use of pop-up shops and shop in shops. The pop-up shop showrooms display select Sacs and Sactionals and are staffed with
associates trained to demonstrate and sell our products. We have an ongoing working relationship with Costco to operate pop-up shop showrooms that typically average ten
days at a time. Due to the success of our pop-up shops, we worked with Costco to bring an eighteen-day Internet pop-up shops to Costco.com, in which our products were
offered for purchase through the Costco.com website. The Costco.com Internet pop-up shops generated nearly $600,000 in the eighteen days and due to the success, four more
were scheduled and generated $1.6 million before the end of fiscal 2020. We hosted over 553 and 756 pop-up shop showrooms at Costco locations for fiscal 2020 and 2019,
respectively. Unlike the pop-up shops which are 10-day shows, and pop-up locations, shop in shops are designed to be in permanent locations carrying the same digital
technology of our showrooms and will be staffed with associates trained to demonstrate and sell our products. We have an ongoing working relationship with Macy’s to operate
shop-in-shop showrooms and are currently expanding the use of this shop-in-shop platform and currently testing with Best Buy. We plan to increase the number of locations
where customers can experience and purchase our products at a lower cost to us than our permanent showrooms. We continue to explore other pop-up and shop in shop
partnerships and opportunities to promote our products and facilitate customers interacting with our products in the real world. Other sales which includes pop-up and shop-in-
shop sales accounted for 12.7% and 11.9% of our total sales for fiscal 2020 and 2019, respectively.
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Customers
● Robust customer lifetime value. The fiscal 2020 cohort had an average first year value of $1,835 per new customer, and this is the highest first year value of all
cohorts we have tracked since fiscal 2015 and 28.4% higher than the 3 year benchmark fiscal 2015 cohort whose Customer Lifetime Value (CLV) is currently $1,314
which increased from $1,277 in fiscal 2019. We believe this is an outcome of our decision to focus on driving penetration of Sactionals. We calculated our fiscal 2020
cohort CLV by dividing the aggregate gross profits through fiscal 2020 attributed to the fiscal 2020 cohort (approximately $145,458,580) by the total number of new
customers from fiscal 2020 (79,252).
In addition, our Customer Acquisition Cost (CAC) was $319.71 for fiscal 2020. This is an increase from our fiscal 2019 CAC which was $309.46. This increase is
attributable to our increase in marketing spend targeted at Sactional customers. We expect our CAC to continue to increase as we continue to target Sactional
customers. We expect this increase in CAC to correspond with a continued increase in CLV. Our CLV/CAC ratio for fiscal 2020 was 4.68 compared to 4.98 for fiscal
2019.
● Target Demographics. Based on our internal data, our typical customer is 25 to 45 years in age with an annual household income of over $100,000. We consider this to
be an attractive demographic because of its higher than average rates of household formation and furniture purchasing. Members of the millennial demographic, our
primary target market, are entering this age group daily. Our customers have different tastes, styles, purchasing goals and budgets when shopping for couches, and our
Sactionals platform’s modularity addresses this wide array of needs.
Competitive Strengths
Our consumers often cross-shop Lovesac with companies such as Crate and Barrel, Pottery Barn, Arhaus, Restoration Hardware, Ikea, Joybird and Wayfair. We believe that the
following strengths are central to the power of our brand and business model:
Innovative Business Model
● Merchandising Strategy. Many home furnishings retailers, online or offline, rely on an assortment of new offerings each season to drive their business and to refashion
their offerings. We have avoided this “merchandising” approach in favor of a product platform-based approach that reduces the need for seasonal introductions, designer
collections, or broad in-stock assortments. We optimize our in-stock assortment of covers and accessories by limiting them to those that sell in large quantity and
therefore present lower risk. We also provide a broad assortment of made-to-order items, which we manufacture after the consumer has purchased and paid for them.
This business model yields little to no surplus inventory, less margin erosion due to overstock write-downs, higher than average annual inventory turns, increased focus
at the showroom management level, and simplicity at merchandising-display execution.
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Product Platform Approach. We have two primary platforms upon which we develop, manufacture and sell our fundamental Sacs and Sactionals products. We market
our product platforms as a long term investment that our customers can continually update with new arrangements, coverings and accessories. In turn, these changes and
updates provide a recurring revenue source for our business. In addition, our Sactionals platform is an environmentally conscious alternative to fixed couches that tend to
be discarded when they go out of style or wear out, a by-product of our Designed for Life approach and an important feature to some consumers.
● Ecommerce Focus. We build our business processes, systems, compensation structures, and logistical models with an ecommerce-first approach. We continually
innovate to make shopping online easier for our customers, and we use social media to drive increased traffic to our web-based sales applications. From a product
standpoint, the open-cell nature of the Durafoam filler in our Sacs allows them to be compressed for shipping to one-eighth of their normal size. To facilitate shipping,
Sactionals seat cushions and back pillows are compressed to fit inside an otherwise hollow hardwood upholstered seat frame.
● A Culture of Innovation. From inception, we have focused on developing unique, innovative and proprietary product platforms. We are continuously expanding and
introducing new extensions to these platforms to broaden the appeal and grow the addressable market of our product offerings. We continually evaluate new products to
complement our Sactionals and Sac lines and are currently developing accessories for the tech-savvy consumer. We have 18 issued U.S. utility patents and 21 issued
foreign utility patents, 9 pending U.S. utility patent applications, 33 pending foreign utility patent applications and 3 pending international patent applications. We expect
to file U.S. and international 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.
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Strong Brand Loyalty
We believe our brand, products, and Designed for Life philosophy encourage people to share their stories and develop a personal relationship with Lovesac and its community.
We foster these interactions through active direct engagement using all of the most prolific social media platforms. These are products that move, and change, and rearrange.
They are soft, and comfortable, and fun to jump on. We believe that all of this causes our customers to uniquely be active ambassadors, providing organic public relations, word
of mouth advertising, and customer testimonials and endorsements. In addition, our customers have a high repeat purchasing rate and high expected lifetime engagement.
● High repeat purchasing rates. We believe our focus on customer interaction and data driven analysis of their behavior and projected needs, drives our high customer
repeat rates. In fiscal 2020, our repeat customers accounted for 35% of all transactions. This represents 1pt of the mix of transactions moving into new customer
transactions. We expect new transactions to continue to become a larger portion of our transaction mix as we spend on acquisition.
● Robust Customer Lifetime Value. Once customers invest in our products, they tend to stay with them, grow with them, and add to them. We believe our customers’
loyalty is an important driver of our CLV. An example of this is that our fiscal 2015 cohort has increased its CLV by 22.7% since year end fiscal 2015. We calculated
our fiscal 2015 CLV by dividing the aggregate gross profits through fiscal 2020 attributable to the 2015 cohort (approximately $50,480,490) by the total number of
customers in the 2015 cohort (38,423 customers).
Omni-Channel Approach
Our distribution strategy allows us to reach customers through four distinct, brand-enhancing channels, which we refer to as our omni-channel approach.
● Ecommerce. Through our mobile and ecommerce channel, we believe we are able to significantly enhance the consumer shopping experience, driving deeper brand
engagement and loyalty, while also realizing margins than our showroom locations. We believe our robust technological capabilities position us well to benefit from the
growing consumer preference to transact at home and via mobile devices.
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Showrooms. We carefully select the best small-footprint retail locations in high-end malls and lifestyle centers for our showrooms. The architecture and layout of these
showrooms is designed to communicate our brand personality and key product features. Our goal is to educate first-time customers, creating an environment where
people can touch, feel, read, and understand the technology behind our products. We are updating and remodeling many of our showrooms to reflect our new showroom
concept, which emphasizes our unique product platform, and will be the standard for future showrooms. Our new showroom concept, introduced in 2016, utilizes
technology in more experiential ways to increase traffic and sales.
Pop-up shops. We are expanding the use of lower cost pop-up shops to increase the number of locations where customers can experience and purchase our products. We
have an ongoing working relationship with Costco to operate pop-up shop programs, or “roadshows,” that usually run for 10 days at a time. These pop-up shops are
staffed similarly to our showrooms with associates trained to demonstrate and sell our products and promote our brand. We also believe our pop-up shops provide a low
cost alternative to drive brand awareness, in store sales, and ecommerce sales.
Shop-in-shops. We have an ongoing working relationship with Macy’s to operate shop in shop showrooms and are currently expanding the use of this shop-in-shop
platform and currently testing with Best Buy. We continued to test shop-in-shops with partners that have a similar customer and adjacent or similar categories. These
shop-in-shops require less capital expenditure to open and productive space to demonstrate and sell our products. We believe that these shop-in-shops will also serve as
a way to drive brand awareness and provide points of demonstration of our product.
Strong Millennial Appeal
We have targeted the millennial generation because we believe the desire brand products, coupled with transparent business practices, innovative solutions and the convenience
of on-demand commerce. Additionally, members of the millennial generation, currently the most populous age group in the U.S., are completing their educations, getting
married, and starting or expanding their households. The peak ages for home furnishings purchases are 35-54. We believe home furnishings will thrive as millennials and their
children need larger residences and the necessary furnishings for household and family formation. The modularity of our Sactionals and ease of cleaning and replacing covers
on Sactionals and Sacs provide our customers who are moving and expanding their households with the ability to evolve their purchases to accommodate the changes in their
family and housing situations, offering us a competitive advantage.
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Unique Distribution Capability
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.
Growth Strategies
In order to position Lovesac for future growth, in the last several years we made significant investments in overhead, optimized and integrated our business technologies and
processes, and further developed our marketing tactics. In addition, we have refocused our strategy regarding our showrooms, moving to higher end malls and lifestyle centers,
to support digital sales, our primary growth channel. We have also altered a number of our lease arrangements to fixed versus variable rent structures. Finally, we have
committed to a new showroom design creating a much more interactive, technology driven experience that has resulted in higher traffic levels and conversion than previous
showroom models.
These long-term initiatives have required significant amount of management’s attention, which has shifted management’s focus away from short-term sales growth. As a result
of these efforts, along with the implementation of the strategies noted below, we believe Lovesac is poised for meaningful sales growth. Our goal is to further improve our
leadership in the home furnishings market by pursuing the following key strategies:
Continue to Build on Our Brand
Despite our loyal following, we believe there is a significant opportunity to increase our brand awareness. Based on our own internal study that was concluded in April 2017,
we estimate that our brand awareness is less than 1% among all consumers nationally. Before 2017, we invested minimally in advertising. Since then, we have aggressively
invested 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 45.9% in fiscal 2020.
Update Showrooms and Add Other Locations
We intend to continue to renovate our current showroom locations, open new showrooms across the country in lifestyle centers, top tier shopping malls, and high street and
urban locations, and expand product touch-feel points through the increased use of shop in shop locations. Because of their small size and above average productivity, we
believe our approach to our showrooms creates a compelling opportunity to open more showrooms in a wide variety of retail spaces across North America.
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Showrooms. In our showrooms, we focus on offering potential customers the opportunity to experience the considerable flexibility they have in selecting fabrics and
configurations. We are evolving our model for new showrooms and renovating our existing showrooms to reflect the standards of our new model. Our new showroom
concept utilizes technology in more experiential ways to increase traffic and sales and communicate our brand personality and key product features. To attract customer
traffic, our new model features two giant LED screens embedded in the walls that play videos demonstrating the Sactionals technology in motion. The entire architecture
and layout of these new showrooms have been redesigned to communicate the brand personality and key product features, with the goal to educate first-time customers
and create a self-service environment where people can touch, feel, read, and understand the technology behind our products. LED screens on the walls and iPads in the
hands of the staff enhance what we believe is a “virtually merchandised” showroom in a very small footprint. In connection with these renovations, we have experienced
increased sales and negotiated more favorable lease terms.
Pop-up shops. We have an ongoing working relationship with Costco to operate pop-up shop showrooms. We have been expanding the use of these pop-up shop
showrooms, and plan to seek other partners to operate similar concept showrooms, to increase the number of locations where customers can experience and purchase our
products at a lower cost to us than our permanent showrooms.
Shop-in-shops. We have an ongoing working relationship with Macy’s to operate shop-in-shop showrooms and are currently expanding the use of this shop-in-shop
platform and currently testing with Best Buy. We plan to increase the number of locations where customers can experience and purchase our products at a lower cost to
us than our permanent showrooms.
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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.
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Premium market position and pricing. Lovesac’s 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 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.
Supply Chain and Sourcing
Our products are manufactured in both domestic and overseas facilities located in US, China, Vietnam, India, Taiwan and Malaysia. We engage with local third parties for the
manufacture of our products in each of those facilities. Lovesac does not own any of the manufacturing facilities where our products are assembled as we believe that our
suppliers’ facilities are sufficient to meet our current needs. We believe that additional space will be available as needed to accommodate any needed expansion of our
operations.
Seasonality
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 2020
quarters in sequential order equaled 17.6%, 20.6%, 22.3% and 39.5% of total sales respectively.
Intellectual Property
We own 24 U.S. federal trademark registrations, 80 foreign trademark registrations, 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 ® and Designed For Life ® trademarks. Our trademarks, if
not renewed, are scheduled to expire between 2020 and 2028.
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 18 issued U.S. utility patents and 21 issued foreign utility patents, that are scheduled to expire between 2022 and 2037. We have 9 pending U.S. utility patent
applications, 33 pending foreign utility patent applications and 3 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.
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Employees
As of February 2, 2020, we employed a total of 322 full time and 459 part time employees, and we contracted with 18 independent contractors. As described under the section
“Impact of COVID-19”, we no longer have any part time employees. All employees 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.
Item 1A. Risk Factors.
An investment in the common stock of The Lovesac Company (the “Company,” “Lovesac,” “we,” “us” or “our”) 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, before making a decision to invest in our common stock. 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. Further, our actual results could differ materially and adversely from those anticipated in our forward-looking
statements as a result of certain factors.
Risks Relating to Our Business and Industry
The recent outbreak of COVID-19 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. We have closed all of our showroom locations since March 2020 and the ultimate scope and duration of these
closures is not known. In response to the store closure and to help mitigate the impact of the pandemic, we have increased marketing of our website and e-commerce platform.
Our business is also dependent on the continued health and productivity of our associates, including store, region and corporate management teams, throughout this crisis.
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. Currently 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 the COVID-19 outbreak 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, its severity, the actions to contain the virus or treat its impact,
and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience
significant impacts to our business as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future.
We have historically operated at a loss, and 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 can be no assurance the current retailer with whom we
partner will continue to house them or that we will be able to enter into similar arrangements with other retailers, which could hinder 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 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. 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.
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If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and
completeness of our financial reports 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 SOX
requires that we furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with the fiscal year ending
January 2019. This assessment will need to include 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 required to attest to the effectiveness of our internal control over financial reporting until our first annual report
required to be filed with the SEC following the later of the date we are deemed to be an “accelerated filer” or a “large accelerated filer,” each as defined in the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), or the date we are no longer an “emerging growth company,” as defined in the JOBS Act. If we have a material
weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are in the
process of designing and implementing the internal control over financial reporting required to comply with this obligation, which process will be time-consuming, costly and
complicated. If we identify material weaknesses in our internal control over financial reporting, are unable to comply with the requirements of Section 404 of SOX in a timely
manner, are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion
as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, and the market
price of our common stock could be adversely affected. In addition, we could become subject to investigations by the stock exchange on which our common stock is listed, the
SEC or other regulatory authorities, which could require additional financial and management resources.
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.
If we fail to manage our growth effectively, our business, financial condition, operating results and prospects could be harmed.
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 employee base. As we grow, we will need to find, train, and monitor additional employees
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.
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. 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.
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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 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:
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the size and composition of our customer base;
our selling and marketing efforts;
the quality, price, reliability and uniqueness of products we offer;
the convenience of the shopping experience that we provide;
our ability to distribute our products and manage our operations; and
our reputation and brand strength.
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.
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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 employees, 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, Jack Krause, our President and Chief Operating Officer, Donna Dellomo, our Executive Vice President and Chief Financial Officer, 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 employees.
The market for such employees 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 employees, 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 employees are at-will employees, 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 employees or attracting well-qualified employees, 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 relationship
management, payment processing, and inventory management software technologies deployed by numerous retailers and wholesalers in a variety of industries, must work
seamlessly in order for information to flow correctly and update accurately across these systems. Any failure in this regard could result in negative customer experiences,
putting our brand and growth at risk.
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, consumer preferences and payment card information, 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.
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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, 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. Deterioration in economic conditions 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 at any of our suppliers’ manufacturing facilities could prevent us
from meeting 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 17% of our revenues in fiscal 2020 and 25% of our revenues in
fiscal 2019, are currently manufactured by a single manufacturer in Texas. Sactionals, which represented approximately 81% of our revenues in fiscal 2020 and 72% of our
revenues in fiscal 2019, are manufactured by suppliers in USA, China, Taiwan, India, Malaysia and Vietnam.
Any of our suppliers’ manufacturing facilities, or any of the machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events,
which could materially and adversely impact our business, operations and financial condition. These events include but are not limited to:
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equipment failure;
fires, floods, earthquakes, hurricanes, or other catastrophes;
unscheduled maintenance outages;
utility and transportation infrastructure disruptions;
labor difficulties;
other operational problems;
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political, social or economic instability; or
financial instability or bankruptcy of any such supplier.
Our reliance on international suppliers increases our risk of supply chain disruption, which 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.
Our current suppliers are located in China, Vietnam 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:
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the imposition of additional trade laws or regulations;
the imposition of additional duties, tariffs and other charges on imports and exports;
foreign currency fluctuations;
theft; and
restrictions on the transfer of funds.
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.
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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 or 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.
Many of our imported products are subject to existing duties, tariffs, anti-dumping duties and quotas that may limit the quantity or affect the price of some types of goods that
we import into the United States. In addition, substantial regulatory uncertainty exists regarding international trade and trade policy, both in the United States and abroad.
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, there are pending increases in tariffs, including a proposed
increase in the 10 percent ad valorem duty to the rate of 25 percent. 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. Due to broad uncertainty regarding the timing, content and extent of any regulatory
changes in the U.S. 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, 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 these
shipping companies to deliver our products to us or lack of capacity in the shipping industry could lead to delays in receipt of our products or increased expense in the delivery
of our products. Any of these developments could have a material adverse effect on our business, financial condition, operating results and prospects.
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 and other unpredictable factors. In
addition, our sourcing costs may fluctuate due to labor conditions, transportation or freight costs, energy prices, currency fluctuations 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.
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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 missed sales and lost revenues. 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 inability to manage the complexities created by our omni-channel operations may 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.
We may be subject to product liability claims if people or property are harmed by the products we sell.
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.
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 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:
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economic downturns in a particular area;
competition from nearby retailers selling similar products;
changing consumer demographics in a particular market;
changing preferences of consumers in a particular market;
the closing or decline in popularity of other businesses located near our store;
reduced customer foot traffic outside a showroom location; and
store impairments due to acts of God or terrorism.
Even if a showroom location becomes unsuitable, we will generally be unable to cancel the long term lease associated with such showroom.
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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 February 2, 2020, we had 91 showrooms, 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:
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identify new markets where our products and brand image will be accepted or the performance of our showrooms will be successful;
obtain desired locations, including showroom size and adjacencies, in targeted high street and urban locations and top tier malls;
negotiate acceptable lease terms, including desired rent and tenant improvement allowances;
achieve brand awareness, affinity and purchaser intent in new markets;
hire, train and retain showroom associates and field management;
assimilate new showroom associates and field management into our corporate culture;
source and supply sufficient inventory levels;
successfully integrate new showrooms into our existing operations and information technology systems; and
have the capital necessary to fund new showrooms.
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 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.
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 and weather conditions. 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.
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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 lease expenses and require significant capital expenditures. Our substantial lease obligations could have
significant negative consequences, including, among others:
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increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional financing;
requiring a substantial portion of our available cash to pay our rental obligations, reducing cash available for other purposes;
limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we compete; and
placing us at a disadvantage with respect to some of our competitors who sell their products exclusively online.
Many of our leases contain relocation clauses that allow the landlord to move the location of our showrooms. Moreover, as our leases expire, we may be unable to negotiate
acceptable renewals. If either of these events occur, our business, sales and results of operations may be harmed.
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.
Changes in lease accounting standards may materially and adversely affect us.
The Financial Accounting Standards Board (“FASB”) issued 2016-02, Leases (Topic 842), which established new accounting rules that will apply to annual reporting periods
beginning after December 15, 2018, including interim reporting periods within that reporting period. In fiscal 2020, the FASB delayed the adoption of these rules by one year.
As an “emerging growth company,” we have elected to defer compliance with new or revised financial accounting standards and, as a result, the new accounting rule will apply
to annual reporting periods beginning after December 15, 2020, and interim reporting periods within annual reporting periods beginning after December 15, 2021. When the
rules are effective, we will be required to capitalize all leases 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 be recorded on our balance sheet, and we may be
required to make other changes to the recording and classification of our lease-related expenses. These changes will not directly impact 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.
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:
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the failure of our technology infrastructure or the computer systems that operate our website and their related support systems, causing, among other things, website
downtimes, telecommunications issues or other technical failures;
the reliance on third-party computer hardware/software providers;
rapid technological change;
liability for online content;
violations of federal, state, foreign or other applicable laws, including those relating to data protection;
credit card fraud;
cyber security and vulnerability to electronic break-ins and other similar disruptions; and
diversion of traffic and sales from our stores.
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.
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, on our ability to anticipate 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 reason we are unable to continue to implement our omni-channel initiatives or provide a
convenient 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:
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concerns about buying products, and in particular larger products, with a limited physical storefront, face-to-face interaction with sales personnel and the ability to
physically examine products;
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actual or perceived lack of security of online transactions and concerns regarding the privacy of personal information;
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inconvenience associated with returning or exchanging items purchased online; and
usability, functionality and features of our website.
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.
Product warranty claims could have a material adverse effect on our business.
We provide a lifetime warranty on most components of our products, 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 material adversely affect 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, if 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 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.
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.
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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, there can be no assurance that the actions we have
taken to establish and protect our trademarks will be adequate to prevent counterfeiting or infringement of our trademarks by others. We may not be able to claim or assert
trademark or unfair competition claims against third parties for any number of reasons, and our trademarks may be found invalid or unenforceable. A judge, jury or other
adjudicative body may find that the conduct of competitors does not infringe or violate our trademark rights. Third parties may claim that the use of our trademarks and
branding infringe, dilute or otherwise violate the common law or registered marks of that party, or that our sales and marketing efforts constitute unfair competition. Such
claims could result in injunctive relief prohibiting the use of our marks, branding and marketing activities, and significant damages, treble damages and attorneys’ fees and costs
could be awarded as a result of such claims. Moreover, U.S. and foreign trademark offices may refuse to grant existing and future trademark applications and may cancel or
partially cancel trademark registrations.
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 employees and others to protect our proprietary rights. We have 16 issued U.S. utility
patents and 21 issued foreign utility patents, that are scheduled to expire between 2022 and 2037. We have 6 pending U.S. utility patent applications, 36 pending foreign utility
patent applications and 3 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, employees, 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 proprietary rights or to establish the
validity of such rights. Despite our efforts, we may be unable to prevent third parties, former employees, consultants or independent contractors from infringing upon,
misappropriating, disclosing or otherwise violating our intellectual property rights, confidential information and other proprietary rights. In addition, initiating claims or
litigations against others for infringement, misappropriation, disclosure or violation of our intellectual property rights, confidential information or proprietary rights will be
expensive, and may be prohibitively expensive. Any litigation or other dispute resolution mechanism, whether or not it is resolved in our favor, could result in significant
expense to us and divert the efforts of our technical and management personnel, which may materially adversely affect our business, financial condition, operating results and
prospects.
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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:
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obtain licenses to use such intellectual property rights, which may not be available on commercially reasonable terms, or at all;
redesign our products or change our marketing activities to avoid infringement or other violations of the intellectual property rights of others;
stop using the subject matter protected by the intellectual property held by others;
pay significant compensatory and/or enhanced damages, attorneys’ fees and costs; and/or
defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of our time, financial and
management resources.
If any of the foregoing occur, our business, financial condition, operating results and prospects could be materially adversely affected.
Risks Relating to Ownership of Our Common Stock
Our equity sponsor, Mistral, has significant influence over us and its interests could conflict with those of our other stockholders.
Our equity sponsor, Mistral, currently controls approximately 19% of our common stock. Mistral beneficially owns shares of our common stock through various investment
vehicles affiliated with Mistral. Currently, Messrs. Heyer and Phoenix are directors of the Company and are also principals of Mistral. As a result, Mistral is able to influence
matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. Mistral may have interests
that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may also have the effect of
delaying, preventing or deterring a change of control of the Company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of
a sale of our Company and might ultimately affect the market price of our common stock.
Holders of our outstanding warrants to purchase common stock will own a significant portion of our common stock following the exercise of such warrants.
Holders of our outstanding warrants to purchase common stock would own a significant portion of our common stock following the exercise of such warrants 7% after giving
effect to exercise of the warrants). During the three-year period following our IPO, holders of our outstanding warrants have the right to exercise such warrants and purchase
shares of our common stock at the price per share of $16.00 (except for the warrant granted to Roth Capital Partners, LLC in connection with our IPO which as a five-year
term).
An active trading market for our common stock may not be sustained and investors may not be able to resell their shares at or above the price at which they purchased
them.
We have a limited history as a public company. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or
above the price they paid or at the time that they would like to sell. In addition, an inactive market may impair our ability to raise capital by selling shares and may impair our
ability to acquire other companies or technologies by using our shares as consideration, which, in turn, could harm our business.
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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:
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actual or anticipated fluctuations in our customer growth, sales, or other operating results;
variations between our actual operating results and the expectations of securities analysts, investors, and the financial community;
any forward-looking financial or operating information we may provide to the public or securities analysts, any changes in this information, or our failure to meet
expectations based on this information;
actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our Company, or our failure to
meet these estimates or the expectations of investors;
additional shares of our common stock being sold into the market by us or our existing stockholders, or the anticipation of such sales, including if existing stockholders
sell shares into the market when applicable “lock-up” periods end;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
announcements by us or our competitors of significant products, acquisitions, strategic partnerships, joint ventures, or capital commitments;
lawsuits threatened or filed against us;
developments in new legislation or rulings by judicial or regulatory bodies; and
other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
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.
Our failure to meet the continued listing requirements of Nasdaq Global Market could result in a delisting of our common stock.
If we fail to satisfy the continued listing requirements of Nasdaq Global Market (Nasdaq), such as minimum financial and other continued listing requirements and standards,
including those regarding minimum stockholders’ equity, minimum share price, and certain corporate governance requirements, Nasdaq may take steps to delist our common
stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you
wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that
any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our
common stock from dropping below the Nasdaq minimum bid price requirement, or prevent future non-compliance with Nasdaq’s listing requirements.
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 depends in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently
have, and may never obtain, research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our Company, the trading price
for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who cover us downgrades our
common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or
fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.
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The requirements of being a public company may strain our resources, result in more litigation, and divert the attention of Company management.
As a public company, we are subject to the reporting requirements of the Exchange Act, SOX, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing
requirements of Nasdaq, and other applicable securities rules and regulations. Complying with these rules and regulations increases our legal and financial compliance costs,
makes some activities more difficult, time-consuming and costly, and increases demand on our systems and resources.
The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. By disclosing information
in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation,
including by competitors and other third parties. If those claims are successful, our business could be seriously harmed. Even if the claims do not result in litigation or are
resolved in our favor, the time and resources needed to resolve them could divert our management’s resources and seriously harm our business.
You may experience future dilution as a result of future equity offerings.
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.
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 price per share paid by current stockholders.
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:
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not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of SOX;
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not
previously approved.
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 certificate of incorporation and bylaws include provisions that:
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permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships by the affirmative vote of a majority of the
directors or stockholders holding at least 25% of the issued and outstanding shares of common stock;
provide that directors may only be removed by the majority of the shares of voting stock then outstanding entitled to vote generally in election of directors;
require a majority of all directors who constitute the Board of Directors or holders at least 25% of the issued and outstanding shares our common stock to adopt, amend
or repeal provisions of our bylaws;
require 50% of the voting power of all then outstanding shares of our capital stock entitled to vote generally in election of directors to amend, alter or repeal, or adopt
any provision inconsistent with certain sections of our certificate of incorporation;
except as otherwise provided by the terms of any series of preferred stock, special meetings of our stockholders may be called only by the board of directors, the
chairperson of the board of directors, the chief executive officer, the president (in the absence of a chief executive officer) or at least twenty-five percent (25%) of all
then outstanding shares of our capital stock entitled to vote generally in the election of directors, voting together as a single class; and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual
stockholder meetings.
22
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace
members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed
by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business
combinations with any holder of at least 15% of our capital stock for a period of three years following the date on which the stockholder became a 15% stockholder.
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 investors 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’ 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.
Holders of approximately 13% 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 shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the
Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See “Certain Relationships and
Related Party Transactions-Amended and Restated Stockholders Agreement.”
A significant disruption in, or breach in security of, our information technology systems or violations of data protection laws could materially adversely affect 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 employees. 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. We
may also be subject to security breaches caused by computer viruses, illegal break-ins or hacking, sabotage, or acts of vandalism by disgruntled employees or third parties. The
risk of a security breach or disruption, particularly through cyberattack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has
increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our information technology network and
systems have been and, we believe, continue to be under constant attack. Accordingly, despite our security measures or those of our third-party service providers, a security
breach may occur, including breaches that we may not be able to detect. Security breaches of our information technology systems could result in the misappropriation or
unauthorized disclosure of confidential.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
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 July 2024. We also lease retail space for our showrooms, in 91 locations throughout the majority of the U.S. states including Alabama, Arizona, California,
Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, 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 and Wisconsin.
Item 3. Legal Proceedings.
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 employees and may come with costly defense costs or unfavorable preliminary and interim rulings.
Item 4. Mine Safety Disclosures.
Not applicable.
23
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PART II.
Market Information
Our common stock is traded on Nasdaq under the symbol “LOVE.”
Holders
As of April 27, 2020, there were 122 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.
Item 6. Selected Financial Data.
The following tables represent our summary consolidated financial and other data as of and for the periods indicated. The summary consolidated statements of operations data
and the consolidated statement of cash flow data for the fiscal years ended February 2, 2020 and February 3, 2019, and the summary consolidated balance sheet data as of
February 2, 2020 and February 3, 2019 are derived from our audited consolidated financial statements included under Item 8, Financial Statements. Our historical audited
results are not necessarily indicative of the results that should be expected in any future period.
24
The summarized financial statement information presented below is derived from and should be read in conjunction with our audited consolidated financial statements
including the notes to those financial statements, which are included in this filing included under Item 8. Financial Statements along with Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
(dollars in thousands, except per share data)
Consolidated Statement of Operations Data:
Net Sales
Showrooms
Internet
Other
Total net sales
Cost of merchandise sold
Gross profit
Selling, general and administrative expenses
Advertising and marketing
Depreciation and amortization
Operating loss
Other
Interest income
Income taxes
Net Loss
Net Loss Attributable to Common Stockholders
Net Loss per Common Share:
Net loss per common share (basic and dilutive) (1)
Weighted-average shares used in computing net loss per common share
(dollars in thousands)
EBITDA (2)(3)
Adjusted EBITDA (2)(3)
(dollars in thousands)
Balance Sheet data:
Cash and cash equivalents
Working capital
Total assets
Total liabilities
Total stockholders’ equity
(dollars in thousands)
Consolidated Statement of Cash flow Data:
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at the end of the period
25
Fiscal Year End
February 2,
2020
February 3,
2019
$
$
$
$
148,004 $
55,781
29,592
233,377
116,687
116,690
98,147
29,194
5,158
(15,809)
647
(43)
(15,205) $
(15,205) $
113,105
33,024
19,752
165,881
75,000
90,881
76,427
18,363
3,134
(7,043)
355
(16)
(6,704)
(34,537)
(1.07) $
14,260,395
(3.28)
10,536,721
For the Fiscal
Year Ended
February 2,
2020
For the Fiscal
Year Ended
February 3,
2019
$
$
(10,651) $
(3,721) $
(3,909)
3,385
As of
February 2,
2020
As of
February 3,
2019
$
$
48,539 $
67,777
125,664
35,509
90,155
49,071
60,496
105,014
26,244
78,770
For the Fiscal Year Ended
February 2,
2020
February 3,
2019
(11,194) $
(10,650)
21,312
(532)
48,539
(7,008)
(11,362)
58,265
39,895
49,071
(1) For the fiscal year ended February 3, 2019, our net loss per common share increased as a result of the inducement offer made to preferred stockholders. The effect was
calculated as follows:
(dollars in thousands except per share data)
Net Loss Attributable to Common Stockholders
Preferred dividends and deemed dividends
Net Loss Attributable to Common Stockholders
Weighted average shares used in computing net loss per common share
Net loss per common share (basic and diluted)
Fiscal year
Ended
February 3,
2019
$
$
(6,704)
(27,833)
(34,537)
10,536,721
(3.28)
(2) EBITDA and Adjusted EBITDA (collectively, our Non-GAAP measures) are supplemental measures of financial performance that are not required by or presented in
accordance with GAAP. We believe that EBITDA and Adjusted EBITDA are useful measures of operating performance, as they eliminate expense that are not reflective of
the underlying business performance, facilitate a comparison of our operating performance on a consistent basis from period-to-period and provide for a more complete
understanding of the factors and trends affecting our business. We use EBITDA and Adjusted EBITDA, alongside GAAP measures such as gross profit, operating
income(loss) and net income (loss), to evaluate our operating performance and we believe these measures are useful to investors in evaluating our operating performance.
Our Non-GAAP Measures are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income (loss) or net income
(loss) per share as a measure of financial performance, cash flows from operating activities as a measure of liquidity, or any other performance measure derived in
accordance with GAAP. They should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, our Non-
GAAP Measures are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as tax
payments and debt service requirements and certain other cash costs that may recur in the future. Our Non-GAAP Measures contain certain other limitations, including the
failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In addition, our Non-
GAAP Measures exclude certain non-recurring and other charges.
You should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our Non-GAAP Measures. Our presentation of our
Non-GAAP Measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by
relying primarily on our GAAP results and by using our Non-GAAP Measures as supplemental information. Our Non-GAAP Measures are not necessarily comparable to
other similarly titled captions of other companies due to different methods of calculation.
(3) We define EBITDA as net income before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA adjusted for the impact of certain non-cash
and other items that we do not consider in our evaluation of ongoing operating performance. These items include sponsor fees, equity-based compensation expense, write-offs
or gains on of property and equipment, deferred rent, financing expenses and certain other charges and gains that we do not believe reflect our underlying business
performance. The following provides a reconciliation of net loss to EBITDA and Adjusted EBITDA for the Fiscal 2020 and Fiscal 2019.
26
(dollars in thousands)
Net loss
Interest income
Taxes
Depreciation and amortization
EBITDA
Management fees (a)
Deferred Rent (b)
Equity-based compensation (c)
Loss (gain) on disposal of property and equipment (d)
Other non-recurring expenses (e)
Adjusted EBITDA
For the Fiscal
Year Ended
February 2,
2020
For the Fiscal
Year Ended
February 3,
2019
$
$
(15,205) $
(647)
43
5,158
(10,651)
633
716
5,246
(167)
503
(3,721) $
(6,704)
(355)
16
3,134
(3,909)
1,177
531
3,310
255
2,021
3,385
(a) Represents management fees and expenses charged by our equity sponsors.
(b) Represents the difference between rent expense recorded and the amount paid by the Company. In accordance with generally accepted accounting principles, the Company
records monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease terms.
(c) Represents expenses associated with stock options and restricted stock units granted to our management and equity sponsors.
(d) Represents the net loss (gain) on the disposal of fixed assets.
(e) Other non-recurring expenses in fiscal 2020 are made up of: (1) $152 in recruitment fees to build executive management team and Board of Directors; (2) $268 in fees
associated with our primary and secondary shares offerings and (3) $83 in financing fees associated with our secondary offering. Other expenses in fiscal 2019 are made up
of: (1) $380 in fees and costs associated with our fundraising and reorganizing activities including the legal and professional services incurred in connection with such
activities; (2) $508 in fees paid for investor relations and public relations relating to the IPO; (3) $140 in executive recruitment fees to build executive management team; (4)
$261 in secondary offering legal fees; (5) $84 in travel and logistical costs associated with the offering; (6) $198 in accounting fees related to the offering; and (7) $450 in
IPO bonuses paid to executives.
27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements
and related notes appearing elsewhere in this Annual Report on Form 10-K. As discussed in the section titled “Note About 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, omni-channel company that designs, manufactures and sells unique, high quality furniture comprised of modular couches called Sactionals and
premium foam beanbag chairs called Sacs. We market and sell our products through modern and efficient showrooms and, increasingly, through online sales. We believe that
our ecommerce centric approach, coupled with our ability to deliver our large upholstered products through nationwide 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 17.0% and 24.8% of our sales for fiscal years 2020 and 2019, 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 80.7% and 72.5% of our sales for the for fiscal 2020 and 2019, respectively. We are
currently reviewing our allocation methodology of the application of product discounts to each product segment of our business which we believe will provide a more
comparative view of product category growth on a go forward basis.
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.
We believe the strength of our brand is reflected in the number of customers who routinely share their purchases of Lovesac products with their friends through social media,
often displaying our logos or company name in their posts. Our customers include celebrities and other influencers who support our brand through postings made on an
uncompensated and unsolicited basis.
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We currently market and sell our products through 91 showrooms at top tier malls, lifestyle centers and street locations in 35 states in the U.S. Our modern, efficient showrooms
are designed to appeal to millennials and other purchasers looking for comfortable, enduring, premium furniture. They showcase the different sizes of our Sacs, the myriad
forms into which our Sactionals can be configured, and the large variety of fabrics that can be used to cover our products. Our retail showrooms are technology driven and
focused on educating prospective customers about the many benefits of our unique products, enabling us to require just 498 to 1,794 square feet for each showroom.
As part of our direct to consumer sales approach, we also sell our products through our ecommerce platform. We believe our products are uniquely suited to this channel. Our
foam-based Sacs can be reduced to one-eighth of their normal size and each of our Sactionals components weighs less than 50 pounds upon shipping. With furniture especially
suited to ecommerce applications, our sales completed through this channel accounted for 23.9% and 19.9% of our total sales for fiscal 2020 and 2019, respectively. Our
showrooms and other direct advertising and marketing efforts work in concert to drive customer conversion in ecommerce.
Despite the increase in sales, net losses were $15.2 million and $6.7 million for fiscal 2020 and 2019 primarily due to increased spending on showrooms, advertising, marketing
and financing related costs.
Product Overview
We challenge the notion that a piece of furniture is static by offering a dynamic product line built to last and evolve throughout a customer’s life. 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.
●
●
Sactionals. We believe our Sactionals platform is unlike competing products in its adaptability yet is comparable aesthetically to similarly priced premium couches and
sectionals. Our Sactional products include a number of patented features relating to their geometry and modularity, coupling mechanisms and other features. Utilizing
only two, standardized pieces, “seats” and “sides,” and over 250 high quality, tight-fitting covers that are removable, washable, and changeable, customers can create
numerous permutations of a sectional couch with minimal effort. Customization is further enhanced with our specialty-shaped modular offerings, such as our wedge seat
and roll arm side. Our custom features and accessories can be added easily and quickly to a Sactional to meet endless design, style and utility preferences, reflecting our
Designed for Life philosophy. Sactionals are built to meet the highest durability and structural standards applicable to fixed couches. Sactionals are comprised of
standardized units and we guarantee their compatibility over time, which we believe is a major pillar of their value proposition to the consumer.
Sacs. We believe that our Sacs product line is a category leader in oversized beanbags. The Sac product line offers 6 different sizes ranging from 22 pounds to 95
pounds with capacity to seat 3+ people on the larger model Sacs. Filled with Durafoam, a blend of shredded foam, Sacs provide serene comfort and guaranteed
durability. Their removable covers are machine washable and may be easily replaced with a wide selection of cover offerings.
● Accessories. Our accessories complement our Sacs and Sactionals by increasing their adaptability to meet evolving consumer demands and preferences. Our current
product line offers Sactional-specific drink holders, footsac blankets, decorative pillows, fitted seat tables and ottomans in varying styles and finishes and our unique
Sactionals Power Hub, providing our customers with the flexibility to customize their furnishings with decorative and practical add-ons to meet evolving style
preferences.
Sales Channels
We offer our products through an omni-channel platform that provides a seamless and meaningful experience to our customers online and in-store. Compared to traditional
retailers, our showrooms require significantly less square footage because of our need to have only a few in-store sample configurations for display and our ability to stack our
inventory for immediate sale. Our retail showrooms are technology driven and focused on educating prospective customers about the many benefits of our unique products,
enabling us to require just 498 to 1,794 square feet for each showroom. The small footprint requirement provides a cost advantage and flexibility in locating our showrooms
strategically in A-rated malls and street locations in our target markets. These logistical advantages underlie our broader tech-driven, Internet-based business model, where we
leverage our showrooms as both a traditional retail channel to purchase our products and an educational center for prospective online customers to learn about and interact with
our products in real time.
29
Through our fast growing mobile and ecommerce channel, we are able to significantly enhance the consumer shopping experience for home furnishings, driving deeper brand
engagement and loyalty, while simultaneously driving favorable margin expansion. Our technology capabilities are robust, and we are well positioned to benefit from the
growing consumer preference to transact via mobile devices. We leverage our strong social media presence and showroom footprint to drive traffic toward our ecommerce
platform, where product testimonials and inspirational stories from our Lovesac community create a more engaging consumer experience for our customers. Additionally, our
products’ compact packaging facilitates consistent production scheduling, outsourcing of delivery and lower shipping costs, allowing us to quickly and cost-effectively deliver
online orders.
We have also enhanced our sales through the use of pop-up shops and shop in shops. The pop-up shop showrooms display select Sacs and Sactionals and are staffed with
associates trained to demonstrate and sell our products. We have an ongoing working relationship with Costco to operate pop-up shop showrooms that typically average ten
days at a time. Due to the success of our pop-up shops, we worked with Costco to bring an eighteen-day Internet pop-up shops to Costco.com, in which our products were
offered for purchase through the Costco.com website. The Costco.com Internet pop-up shops generated nearly $600,000 in the eighteen days and due to the success, four more
were scheduled and generated $1.6 million before the end of fiscal 2020. We hosted over 553 and 756 pop-up shop showrooms at Costco locations for fiscal 2020 and 2019,
respectively. Unlike the pop-up shops which are 10-day shows, and pop-up locations, shop in shops are designed to be in permanent locations carrying the same digital
technology of our showrooms and will be staffed with associates trained to demonstrate and sell our products. We have an ongoing working relationship with Macy’s to operate
shop-in-shop showrooms and are currently expanding the use of this shop-in-shop platform and currently testing with Best Buy. We plan to increase the number of locations
where customers can experience and purchase our products at a lower cost to us than our permanent showrooms. We continue to explore other pop-up and shop in shop
partnerships and opportunities to promote our products and facilitate customers interacting with our products in the real world. Other sales which includes pop-up and shop in
shop sales accounted for 12.7% and 11.9% of our total sales for fiscal 2020 and 2019, respectively.
Factors Affecting Our Operating Results
While our growth strategy has contributed to our improving operating results, it also presents significant risks and challenges. These strategic initiatives will require substantial
expenditures. The timing and magnitude of new showroom openings, existing showroom renovations, and marketing activities may affect our results of operations in future
periods.
Other factors that could affect our results of operations in future periods include:
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, and, in the following weeks, many U.S. states and localities issued
lockdown orders impacting the operations of our stores and consumer demand. Since then, the COVID-19 situation within the U.S. has rapidly escalated. On April 1, 2020, we
announced that all showroom locations will remain closed until further notice. We will follow the guidance of local, state and federal governments, as well as health
organizations, to determine when we can safely reopen our showrooms. Additionally, we implemented a reduction in workforce of approximately 445 part time employees
(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 and Chief Financial Officer. The base salaries of all other
senior management and full-time headquarter team members has been temporarily reduced by graduated amounts. Our Board of Directors has also agreed to a temporary
reduction of its retainer and monitoring fees and an extension of the associated payment timeline. We continue to monitor the situation closely and it is possible that we will
implement further measures.
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
In assessing the performance of our business, we consider a variety of financial and operating measures, including the following:
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 when
the goods are shipped.
30
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. For fiscal years 2020 and 2019, 14 and 6 showrooms, respectively were excluded
from comparable showroom sales. Comparable showroom sales allow us to evaluate how our showroom base is performing by measuring the change in period-over-period net
sales in showrooms that have been open for twelve months or more. While we review comparable showroom sales as one measure of our performance, this measure is less
relevant to us than it may be to other retailers due to our fully integrated, omni-channel, go-to-market strategy. As a result, measures that analyze a single channel are less
indicative of the performance of our business than they might be for other companies that operate their distribution channels as separate businesses. Further, certain of our
competitors and other retailers calculate comparable showroom sales (or similar measures) differently than we do. As a result, the reporting of our comparable showroom sales
may not be comparable to sales data made available by other companies.
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 2020 was equal to
12.5% of revenue as compared to fiscal 2019 at 11.1% of revenue and 9.0% of revenue for fiscal 2018. For fiscal 2020, our CAC was $391.71 per customer compared to a CAC
of $309.46 for fiscal 2019. 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 2020 cohorts CLV is $1,835. In addition, our
fiscal 2015 cohort has increased its CLV from $1,071 in fiscal 2015 to $1,314 in fiscal 2020, a 22.7% 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.
31
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. selling, general and administrative expenses as a percentage of net sales is
usually higher in lower volume quarters and lower in higher volume quarters because a significant portion of the costs are relatively fixed.
Our recent revenue growth has been accompanied by increased selling, general and administrative expenses. The most significant components of these increases are payroll and
rent 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.
As a result of our IPO, we incurred additional legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company
reporting and corporate governance requirements. These requirements include compliance with the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and
Consumer Protection Act, other rules implemented by the SEC and applicable Nasdaq stock exchange rules. These rules and regulations have substantially increased our legal
and financial compliance costs, made certain financial reporting and other activities more time-consuming and costly, and have required our management and other personnel
to devote substantial time to these requirements. In this regard, we have hired additional accounting and financial staff with appropriate public company experience and
technical accounting knowledge.
Advertising and Marketing
Advertising and marketing expense include digital, social, and traditional marketing initiatives, that cover all of our business channels. Advertising and marketing expense will
continue 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 2020 and 2019 which represent our fiscal years ended February 2, 2020, and February 3, 2019, respectively. Our
fiscal year ends on the Sunday closest to February 1. Both fiscal 2020 and fiscal 2019 were 52 week periods.
The following table sets forth, for the periods for fiscal 2020 and fiscal 2019, our consolidated statement of operations as a percentage of total revenues:
Statement of Operations Data:
Net sales
Cost of merchandise sold
Gross profit
Selling, general and administrative expenses
Advertising and marketing
Depreciation and amortization
Operating loss
Interest income
Loss before taxes
Provision for income taxes
Net loss
32
For the Fiscal Year Ended
February 2,
2020
February 3,
2019
100%
50%
50%
42%
13%
2%
-7%
0%
-7%
0%
-7%
100%
45%
55%
46%
11%
2%
-4%
0%
-4%
0%
-4%
Fiscal 2020 Compared to Fiscal 2019
Net sales
Net sales increased $67.5 million, or 40.7%, to $ 233.4 million in fiscal 2020 compared to $165.9 million in fiscal 2019. The increase in net sales is primarily due to an increase
in new customers, which grew by 22.5% in fiscal 2020 as compared to 24.7% in fiscal 2019 and was accompanied by an increase in the total number of units sold by 16.3% over
prior year. The fiscal 2020 average net sales based on point of transactions per showroom is $1,825,773 compared to $1,569,809 in fiscal 2019, which reflects a higher average
order volume per customer. We had 91 and 75 showrooms open as of February 2, 2020, and February 3, 2019, respectively. We opened 18 additional showrooms and closed 2
showrooms in fiscal 2020. Showroom sales increased $34.9 million, or 30.9%, to $148.0 million in fiscal 2020 compared to $113.1 million in fiscal 2019. This increase was due
in large part to our comparable showroom point of sales transaction increase of $31.8 million, or 34.4%, to $124.3 million in fiscal 2020 compared to $92.6 million in fiscal
2019. 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 increased $373, or 21.8%, to $2,083 in fiscal 2020 compared to $1,710 in fiscal 2019. Internet sales (sales made directly to customers through our ecommerce
channel) increased $22.8 million, or 68.9%, to $55.8 million in fiscal 2020 compared to $33.0 million in fiscal 2019. We believe that the increase in both showroom and Internet
sales was due primarily to our customers’ favorable reaction to our Sactionals products, the redesign of our showrooms and our increased marketing initiatives. We believe that
the increase in showroom sales in fiscal 2020 can also be attributed to the opening of additional showrooms. Other sales, which include pop-up shop and shop-in-shop sales,
increased $9.8 million, or 49.8%, to $29.6 million in fiscal 2020 compared to $19.8 million in fiscal 2019. This increase was due in large part to our increase in the use of pop-
up shops and the addition of shop-in-shops.
Gross profit
Gross profit increased $25.8 million, or 28.4%, to $116.7 million in fiscal 2020 from $90.9 million in fiscal 2019. Gross margin decreased to 50.0% of net sales in fiscal 2020
from 54.8% of net sales in fiscal 2019. The decrease in gross margin percentage of 4.8% was driven primarily by the impact of the 25% China tariffs. The decrease in gross
margin was partially offset by reduced costs of our Sactionals products. The decrease in costs of our Sactionals products was primarily related to cost savings from a change in
the sourcing of our Lovesoft and down blend fills in addition to an ongoing shift of manufacturing to Vietnam and other countries.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $21.7 million, or 28.4%, to $98.1 million for the fiscal year ended February 2, 2020 compared to $76.4 million for the
fiscal year ended February 3, 2019. The increase in selling, general and administrative expenses was primarily related to an increase in employment costs of $5.1 million, $3.4
million of increased rent associated with our net addition of 16 showrooms, $5.9 million of expenses related to the increase in sales such as $2.8 million of credit card fees, $0.7
million of web related selling expenses, $0.8 million of web affiliate program and web platform hosting commissions and $1.6 million of pop-up shop sales agent fees.
Overhead expenses increased $7.3 million consisting of an increase of $6.8 million in headquarters operating expenses as well as infrastructure investments, an increase in
insurance expense of $0.7 million related to the growth of the Company and an increase of $1.9 million in stock compensation offset by a decrease in IPO and financing related
expense of $2.1 million.
Selling, general and administrative expenses were 42.1% of net sales for fiscal year ended February 2, 2020 compared to 46.1% of net sales for fiscal year ended February 3,
2019. The decrease in selling, general and administrative expenses of 4.0% of net sales was driven largely by leverage in employment costs, rent expense, and financing related
costs. The leverage in these expenses was partially offset by increases in stock compensation headquarters operating expenses and infrastructure investments.
Advertising and marketing
Advertising and marketing expenses increased $10.8 million, or 59.0%, to $29.2 million for the fiscal year ended February 2, 2020 compared to $18.4 million for the fiscal year
ended February 3, 2019. 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. We expect to continue to maintain our advertising and marketing investments at 10%-12% of net sales on an annual basis. The investment by
quarter may vary.
Advertising and marketing expenses were 12.5% of net sales in fiscal 2020 compared to 11.1% of net sales in fiscal 2019. The increase in advertising and marketing expenses of
1.4% of net sales was driven largely by a shift to national media with a focus on holiday media and the introduction of 15 second sport into our television – advertising mix.
Depreciation and amortization expenses
Depreciation and amortization expenses increased $2.0 million or 65.6% in fiscal 2020 to $5.2 million compared to $3.1 million in fiscal 2019. The increase in depreciation and
amortization expense is principally related to capital investments for new and remodeled showrooms.
33
Interest income, net
Interest income 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
Income tax expense was less than 0.02% of sales for both fiscal 2020 and fiscal 2019.
Repeat customers
Repeat customers accounted for approximately 35% of all transactions in fiscal 2020 compared to 38% in fiscal 2019. We expect this shift into new customer transactions to
continue as we focus on driving acquisition due to our favorable CAC/CLV ratio.
Quarterly Results and Seasonality
The following table sets forth our historical quarterly consolidated statements of income for each of the last eight fiscal quarters for the period ended February 2, 2020. This
unaudited quarterly information has been prepared on the same basis as our annual audited financial statements appearing elsewhere in this Annual Report on Form 10-K and
includes all adjustments, consisting of only normal recurring adjustments that we consider necessary to present fairly the financial information for the fiscal quarters presented.
The unaudited quarterly data should be read in conjunction with our audited consolidated financial statements and the related notes appearing elsewhere in this Annual Report
on Form 10-K.
Net sales
Cost of merchandise sold
Gross profit
Operating expenses
Selling, general and administrative expenses
Advertising and marketing
Depreciation and amortization
Total operating expenses
Operating income (loss)
Interest income (expense)
Net income (loss) before taxes
(Provision) benefit for income taxes
Net income (loss)
Net sales
Cost of merchandise sold
Gross profit
Selling, general and administrative expenses
Advertising and marketing
Depreciation and amortization
Total operating expenses
Operating income (loss)
Interest income (expense)
Net income (loss) before income taxes
Provision for income taxes
Net income (loss)
Quarter
ended
February 2,
2020
Quarter
ended
November 3,
2019
Quarter
ended
August 4,
2019
Quarter
ended
May 5,
2019
Quarter
ended
February 3,
2019
Quarter
ended
November 4,
2018
Quarter
ended
August 5,
2018
Quarter
ended
May 6,
2018
$ 92,175,369 $ 52,097,232 $ 48,146,415 $ 40,958,363 $ 64,177,558 $ 41,685,929 $ 33,249,012 $ 26,768,798
47,016,413 25,843,532 23,861,242 19,965,868 28,669,301 18,799,108 15,410,442 12,121,625
45,158,956 26,253,700 24,285,173 20,992,495 35,508,257 22,886,821 17,838,570 14,647,173
7,258,284 6,069,903 5,389,330 5,196,137
620,742
1,377,659 1,205,796 1,065,617
27,843,745 24,484,791 21,956,376 23,861,612 21,448,783 19,329,422 20,454,183 15,194,504
5,164,699 3,594,868 4,407,787
10,476,772
1,508,990
670,145
1,084,180
39,829,507 33,120,734 29,232,075 30,316,559 27,265,662 25,578,301 24,807,735 20,272,436
(5,625,263)
5,329,449
108,538
(57,985)
(5,683,248)
5,437,987
-
(21,920)
$ 5,416,067 $ (6,748,310) $ (4,770,999) $ (9,101,777) $ 8,439,110 $ (2,490,618) $ (6,969,600) $ (5,683,248)
(9,324,064) 8,242,595
212,922
(9,089,501) 8,455,517
(16,407)
(6,969,165)
(435)
(6,969,600)
-
(4,946,902)
169,327
(4,777,575)
6,576
(6,867,034)
134,416
(6,732,618)
(15,692)
(2,691,480)
200,862
(2,490,618)
-
758,684
234,563
(12,276)
Quarter
ended
February 2,
2020
Quarter
ended
November 3,
2019
Quarter
ended
August 4,
2019
Quarter
ended
May 5,
2019
Quarter
ended
February 3,
2019
Quarter
ended
November 4,
2018
Quarter
ended
August 5,
2018
Quarter
ended
May 6,
2018
100%
51%
49%
30%
11%
2%
43%
6%
0%
6%
0%
6%
100%
50%
50%
47%
14%
3%
64%
-13%
0%
-13%
0%
-13%
34
100%
50%
50%
46%
13%
3%
61%
-10%
0%
-10%
0%
-10%
100%
49%
51%
58%
13%
3%
74%
-23%
1%
-22%
0%
-22%
100%
45%
55%
33%
8%
1%
42%
13%
0%
13%
0%
13%
100%
45%
55%
46%
12%
3%
61%
-6%
0%
-6%
0%
-6%
100%
46%
54%
62%
11%
2%
75%
-21%
0%
-21%
0%
-21%
100%
45%
55%
57%
16%
3%
76%
-21%
0%
-21%
0%
-21%
Non-GAAP Quarterly Results
Net income (loss)
Interest (income) expense, net
Provision for income taxes
Depreciation and amortization
Deferred rent
Equity-based compensation
Net (gain) loss on disposal of property and
equipment
Management fees
Other expenses
Adjusted EBITDA
Quarter
ended
February 2,
2020
Quarter
ended
November 3,
2019
Quarter
ended
August 4,
2019
Quarter
ended
May 5,
2019
Quarter
ended
February 3,
2019
Quarter
ended
November 4,
2018
Quarter
ended
August 5,
2018
Quarter
ended
May 6,
2018
$ 5,416,067 $ (6,748,310) $ (4,770,999) $ (9,101,777) $ 8,439,110 $ (2,490,618) $ (6,969,600) $ (5,683,248)
57,985
$
-
670,145
123,244
295,239
(134,416) $ (169,327) $ (234,563) $
12,276
(6,576)
1,377,659 1,205,796 1,065,617
77,002
11,772
170,538 3,222,563
435 $
(200,862) $
-
-
758,684
1,084,180
130,710
128,398
516,000 2,038,865
(108,538) $
21,920
1,508,990
(187,951)
1,224,609
(212,922) $
16,407
620,742
148,355
460,176
815,171
627,878
15,692
-
194,261
(95,000)
248,581
185,082
70,134
$ 7,974,358 $ (3,731,391) $ (3,299,383) $ (4,663,427) $ 9,975,665 $
(213,722)
133,341
274,564
46,857
163,828
150,000
-
141,114
173,821
6,139
-
-
125,000
742,000
125,000
444,000 1,291,573
215,715
(391,590) $ (2,009,645) $ (4,189,781)
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. When borrowing, our 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 and cash generated from
our IPO and primary share offerings are sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.
Cash Flow Analysis
A summary of operating, investing, and financing activities during the periods indicated are shown in the following table:
Used in operating activities
Used in investing activities
Provided by financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at end of period
Net Cash Used in Operating Activities
Fiscal Year Ended
February 2,
2020
February 3,
2019
$
(11,194) $
(10,650)
21,312
(532)
48,539
(7,008)
(11,362)
58,265
39,895
49,071
Cash from operating activities consists primarily of net loss adjusted for certain non-cash items, including depreciation, amortization, (gain) loss on disposal of property and
equipment, equity-based compensation, non-cash interest expense, deferred rent and the effect of changes in working capital and other activities.
In fiscal 2020, net cash used by 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.
35
Net Cash Used In Investing Activities
Investing activities consist primarily of investment in supply chain and systems infrastructure and capital expenditures related to new showroom openings and the remodeling of
existing showrooms.
For fiscal 2020, capital expenditures were $10.7 million as a result of investments in new and remolded showrooms and intangibles which included $0.3 million in proceeds
from the disposal of property and equipment.
For fiscal 2019, capital expenditures were $11.4 million as a result of investments in new and remolded showrooms and intangibles.
Net Cash Provided By Financing Activities
Financing activities consist primarily of the net proceeds from public offerings, borrowings and repayments related to the existing revolving line of credit and capital
contributions from securities issuances.
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.
For fiscal 2019, net cash provided by financing activities was $58.3 million, primarily due to $58.9 million net proceeds from our IPO net of $0.3 million for the payment of
financing costs on the new revolving credit facility with Wells Fargo Bank, National Association (“Wells”) and $0.4 million of taxes paid for net share settlement of equity
awards.
Revolving Line of Credit
On February 6, 2018, we entered a four-year, secured revolving credit facility with Wells. The credit facility with Wells permits borrowings of up to $25.0 million, subject to
borrowing base and availability restrictions. For additional information regarding our line of credit with Wells, see Note 9 to our consolidated financial statements. As of
February 2, 2020, the Company’s borrowing availability under the line of credit with Wells was $12.5 million. As of February 2, 2020, there were no borrowings outstanding on
this line of credit.
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 February 2, 2020, our contractual cash obligations over the next several periods were as follows:
Employment agreements
Operating leases
Total
Total
Less than
1 year
1 - 3 years
3 - 5 Years
More than
5 years
Payments due by period
$
3,670,533
68,636,867
$
3,670,533 $
11,169,268
- $
19,851,102
- $
17,683,530
-
19,932,967
$
72,307,400
$
14,839,801 $
19,851,102 $
17,683,530 $
19,932,967
36
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements as of February 2, 2020, except for operating leases and employment agreements entered into in the ordinary course of
business.
Critical Accounting Policies and Estimates
The discussion and analysis of financial condition and results of operations is based upon our condensed 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 significant
accounting policies. There have been no material changes to the significant accounting policies during fiscal 2020.
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 transfers control, resulting in contract liabilities. These contract’s liabilities are reported as deposits on the Company’s
balance sheet.
37
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 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 offers its 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’s long-lived assets consist of property and equipment, which includes leasehold improvements. 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 assets 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 individual showroom’s estimated future undiscounted cash flows. 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. There were no impairments of long-lived assets during fiscal 2020 or fiscal 2019.
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 February 2, 2020 and February 3, 2019 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
February 2, 2020 or February 3, 2019.
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 $29,194,289 in fiscal 2020 and $18,363,491 in fiscal 2019.
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 (first-in, first out). 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.
Equity-based Compensation
The Company accounts for equity-based compensation for employees and directors by recognizing the fair value of equity-based compensation as an expense in the calculation
of net income, based on the grant-date fair value. The Company recognizes equity-based compensation expense in the periods in which the employee or director is required to
provide service, which is generally over the vesting period of the individual equity instruments. The fair value of the equity-based awards is determined using the Black-Scholes
option pricing model or the stock price on the date of grant.
38
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.
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. 2019-10 extended the effective date to
fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021, with early adoption permitted. We will adopt this
standard beginning in fiscal 2022. Management has evaluated the impact ASU No. 2016-02 will have on these consolidated financial statements. Based on the initial evaluation,
we have determined that adopting this standard will have a material impact on our consolidated balance sheet as we have a significant number of operating leases.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718). ASU 2018-07 eliminates the separate accounting
model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as
share-based payment transactions with employees. The accounting remains different for attribution, which represents how the equity-based payment cost is recognized over the
vesting period, and a contractual term election for valuing nonemployee equity share options. ASU 2018-07 is effective for fiscal years beginning after December 15, 2019, and
interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption of Topic 606. Management is
currently evaluating the impact ASU 2018-07 will have on these consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company” as defined by Item 10(f)(1) of Regulation S-K, we are not required to provide information required by this Item.
Item 8. Financial Statements and Supplementary Data.
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.
39
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Our principal
executive officer and principal financial officer have concluded, based on their evaluation, that our disclosure controls and procedures were effective as of February 2, 2020.
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm. Our independent registered public accounting firm
will not be required to formally attest to the effectiveness of our internal control over financial reporting as long as we are an “emerging growth company” pursuant to the
provisions of the JOBS Act.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Our
management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as
such term is 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 on Form 10-K. 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.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of February 2, 2020. In making this assessment, management used the
criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework.” Based on
management’s assessment using the COSO criteria, management has concluded that the Company’s internal control over financial reporting was effective as of February 2,
2020.
Changes in on Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal year that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
40
Item 10. Directors, Executive Officers and Corporate Governance.
PART III.
We will file with the SEC a definitive proxy statement pursuant to Regulation 14A no later than 120 days after February 2, 2020. The information required by this Item will
appear in that definitive proxy statement and is incorporated by reference herein.
Item 11. Executive Compensation.
We will file with the SEC a definitive proxy statement pursuant to Regulation 14A no later than 120 days after February 2, 2020. The information required by this Item will
appear in that definitive proxy statement and is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
We will file with the SEC a definitive proxy statement pursuant to Regulation 14A no later than 120 days after February 2, 2020. The information required by this Item will
appear in that definitive proxy statement and is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
We will file with the SEC a definitive proxy statement pursuant to Regulation 14A no later than 120 days after February 2, 2020. The information required by this Item will
appear in that definitive proxy statement and is incorporated by reference herein.
Item 14. Principal Accounting Fees and Services.
We will file with the SEC a definitive proxy statement pursuant to Regulation 14A no later than 120 days after February 2, 2020. The information required by this Item will
appear in that definitive proxy statement and is incorporated by reference herein.
41
Item 15. Exhibits, Financial Statement Schedules.
Financial Statements
PART IV.
Consolidated Financial Statements of The Lovesac Company are incorporated under Item 8 of this Form 10-K.
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.
Exhibits
The following exhibits are incorporated by reference or filed herewith.
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2±
10.3±
10.4
10.5±
10.6±
10.7±
23.1
31.1
31.2
32.1
Description of Exhibit
Assignment and Assumption Agreement (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-1, filed with the SEC on
April 20, 2018)
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the Company’s Amendment No. 4 to the Registration Statement
on Form S-1, filed with the SEC on June 25, 2018)
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Amendment No. 2 to the Registration Statement on Form S-1, filed
with the SEC on June 8, 2018)
Form of Amended and Restated Series A Warrant Agreement (incorporated by reference to Exhibit 4.2 to the Company’s Amendment No. 1 to the Registration
Statement on Form S-1, filed with the SEC on May 23, 2018)
Form of Amended and Restated Series A-1 Warrant Agreement (incorporated by reference to Exhibit 4.3 to the Company’s Amendment No. 1 to the Registration
Statement on Form S-1, filed with the SEC on May 23, 2018)
Form of Amended and Restated Series A-2 Warrant Agreement (incorporated by reference to Exhibit 4.4 to the Company’s Amendment No. 1 to the Registration
Statement on Form S-1, filed with the SEC on May 23, 2018)
Form of Representative’s Warrant (incorporated by reference to Exhibit 4.4 to the Company’s Amendment No. 4 to the Registration Statement on Form S-1, filed
with the SEC on June 25, 2018)
Description of the Company’s securities registered pursuant to Section 12 of the Exchange Act of 1934*
Wells Fargo Credit Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1, filed with the SEC on April 20,
2018)
2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1, filed with the SEC on April 20,
2018)
Form of Restricted Stock Units Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Amendment No. 1 to the Registration Statement on Form
S-1, filed with the SEC on May 23, 2018)
Amended and Restated Registration Rights Agreement (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1, filed
with the SEC on April 20, 2018)
Employment Agreement dated October 26, 2017, by and between The Lovesac Company and Shawn Nelson (incorporated by reference to Exhibit 10.6 to the
Company’s Registration Statement on Form S-1, filed with the SEC on April 20, 2018)
Employment Agreement dated October 26, 2017, by and between The Lovesac Company and Jack Krause (incorporated by reference to Exhibit 10.7 to the
Company’s Registration Statement on Form S-1, filed with the SEC on April 20, 2018)
Employment Agreement dated October 26, 2017, by and between The Lovesac Company and Donna Dellomo (incorporated by reference to Exhibit 10.8 to the
Company’s Registration Statement on Form S-1, filed with the SEC on April 20, 2018)
Consent of Marcum LLP*
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.*
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.*
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.*
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.*
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith.
± ± Indicates a management contract or compensatory plan.
Item 16. Form 10-K Summary.
Optional disclosure not included in this Annual Report on Form 10-K.
42
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 29, 2020.
SIGNATURES
Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons in the capacities and on the dates indicated.
THE LOVESAC COMPANY
By:
/s/ Shawn Nelson
Shawn Nelson
Chief Executive Officer
(Principal Executive Officer)
/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/ Jack Krause
Jack Krause
President and Chief Operating Officer
/s/ Andrew Heyer
Andrew Heyer
Chairman and Director
/s/ Walter McLallen
Walter McLallen
Director
/s/ William Phoenix
William Phoenix
Director
/s/ Mary Fox
Mary Fox
Director
/s/ Shirley Romig
Shirley Romig
Director
/s/ John Grafer
John Grafer
Director
43
April 29, 2020
April 29, 2020
April 29, 2020
April 29, 2020
April 29, 2020
April 29, 2020
April 29, 2020
April 29, 2020
April 29, 2020
THE LOVESAC COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
F-1
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
THE LOVESAC COMPANY
CONTENTS
F-2
F-3
F-4
F-5
F-6
F-7
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
The Lovesac Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Lovesac Company (the “Company”) as of February 2, 2020 and February 3, 2019, and the related
consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended February 2, 2020, 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
February 2, 2020 and February 3, 2019, and the results of its operations and its cash flows for each of the two years in the period ended February 2, 2020, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2017.
Hartford, CT
April 29, 2020
F-3
THE LOVESAC COMPANY
CONSOLIDATED BALANCE SHEETS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
Assets
Current Assets
Cash and cash equivalents
Trade accounts receivable
Merchandise inventories
Prepaid expenses and other current assets
Total Current Assets
Property and Equipment, Net
Other Assets
Goodwill
Intangible assets, net
Deferred financing costs, net
Total Other Assets
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable
Accrued expenses
Payroll payable
Customer deposits
Sales taxes payable
Total Current Liabilities
Deferred rent
Line of credit
Total Liabilities
Commitments and contingencies (see Note 6)
Stockholders’ Equity
Preferred Stock $.00001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of February 2, 2020 and February
3, 2019.
Common Stock $.00001 par value, 40,000,000 shares authorized, 14,472,611 shares issued and outstanding as of February 2, 2020 and
13,588,568 shares issued and outstanding as of February 3, 2019.
Additional paid-in capital
Accumulated deficit
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements
F-4
2020
2019
$
48,538,827 $
7,188,925
36,399,862
8,050,122
49,070,952
3,955,124
26,154,314
5,933,872
100,177,736
85,114,262
23,844,261
18,595,079
143,562
1,352,161
146,047
143,562
942,331
219,071
1,641,770
1,304,964
$
125,663,767 $
105,014,305
$
19,887,611 $
8,567,580
887,415
1,653,597
1,404,792
32,400,995
16,836,816
3,701,090
2,269,834
1,059,957
750,922
24,618,619
3,108,245
1,594,179
-
31,373
35,509,240
26,244,171
-
-
145
168,317,210
(78,162,828)
136
141,727,807
(62,957,809)
90,154,527
78,770,134
$
125,663,767 $
105,014,305
THE LOVESAC COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
Net sales
Cost of merchandise sold
Gross profit
Operating expenses
Selling, general and administration expenses
Advertising and marketing
Depreciation and amortization
Total operating expenses
Operating loss
Interest income, net
Net loss before taxes
Provision for income taxes
Net loss
Net loss per common share:
Basic and diluted
Weighted average number of common shares outstanding:
Basic and diluted
2020
233,377,379 $
2019
165,881,297
$
116,687,055
75,000,476
116,690,324
90,880,821
98,146,524
29,194,289
5,158,062
76,426,892
18,363,491
3,133,751
132,498,875
97,924,134
(15,808,551)
(7,043,313)
646,844
355,364
(15,161,707)
(6,687,949)
(43,312)
(16,407)
$
(15,205,019) $
(6,704,356)
$
(1.07) $
(3.28)
14,260,395
10,536,721
The accompanying notes are an integral part of these consolidated financial statements
F-5
THE LOVESAC COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
Common
Preferred
Shares
Amount
Shares
61 1,018,600 $
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Total
10 79,891,835 $ (56,253,453) $ 23,638,453
Balance - February 5, 2018
Net loss
Equity based compensation
Vested restricted stock units
Exercise of warrants
Preferred stock conversion
Initial public offering, net
Balance - February 3, 2019
Net loss
Equity based compensation
Issuance of common shares, net
Vested restricted stock units
Taxes paid for net share settlement of equity awards
Exercise of warrants
Cancelation of shares
Balance - February 2, 2020
6,064,500 $
-
50,000
125,633
35,994
3,287,441
4,025,000
13,588,568
-
101,883
750,000
180,304
27,246
(175,390)
14,472,611 $
-
-
2
-
-
-
-
-
33 (1,018,600)
-
40
-
136
-
-
-
-
(10)
-
3,310,018
(382,535)
-
(23)
- 58,908,512
- 141,727,807
(6,704,356)
(6,704,356)
3,310,018
-
(382,533)
-
-
-
-
-
- 58,908,552
(62,957,809) 78,770,134
-
1
8
2
-
(2)
145
-
-
-
-
-
-
- $
-
-
5,245,587
-
- 25,609,992
(2)
-
(4,278,176)
12,000
2
(15,205,019) (15,205,019)
5,245,588
-
- 25,610,000
-
-
(4,278,176)
12,000
-
-
-
- 168,317,210 $ (78,162,828) $ 90,154,527
-
-
The accompanying notes are an integral part of these consolidated financial statements
F-6
THE LOVESAC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
Cash Flows from Operating Activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment
Amortization of other intangible assets
Amortization of deferred financing fees
Net (gain) loss on disposal of property and equipment
Equity based compensation
Deferred rent
Changes in operating assets and liabilities:
Accounts receivable
Merchandise inventories
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Customer deposits
Net Cash Used in Operating Activities
Cash Flows from Investing Activities
Purchase of property and equipment
Payments for patents and trademarks
Proceeds from disposal of property and equipment
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Proceeds from the issuance of common shares, net
Taxes paid for net share settlement of equity awards
Proceeds from the issuance of warrants, net
(Paydowns of) proceeds from line of credit
Payments of deferred financing costs
Net Cash Provided by Financing Activities
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning
Cash and Cash Equivalents - End
Supplemental Cash Flow Disclosures
Cash paid for taxes
Cash paid for interest
The accompanying notes are an integral part of these consolidated financial statements
F-7
2020
2019
$
(15,205,019) $
(6,704,356)
4,894,220
263,842
73,024
(166,865)
5,245,588
1,514,066
2,935,202
198,549
121,173
254,720
3,310,018
530,707
(3,233,801)
(10,245,548)
(2,116,250)
7,188,736
593,640
(1,149,938)
(14,512,832)
129,074
7,729,293
150,721
(11,194,367)
(7,007,669)
(10,276,537)
(673,672)
300,000
(10,747,712)
(614,510)
-
(10,650,209)
(11,362,222)
25,610,000
(4,278,176)
12,000
(31,373)
-
21,312,451
58,908,552
(382,533)
-
30,968
(292,095)
58,264,892
(532,125)
39,895,001
49,070,952
9,175,951
$
48,538,827 $
49,070,952
$
$
43,312 $
62,670 $
18,246
61,436
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND LIQUIDITY
The Lovesac Company (the “Company”) designs and sells foam filled furniture, sectional couches, and related accessories throughout the world. As of February 2, 2020, the
Company operated 91 leased retail showrooms located throughout the United States. In addition, the Company operates a retail internet website and does business to business
transactions through its wholesale operations. 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.
The Company has incurred significant operating losses and used cash in its operating activities since inception. Operating losses have resulted from inadequate sales levels
for the cost structure and expenses as a result of expanding into new markets, opening new showrooms, investments into marketing and infrastructure to support increase in
revenues. The Company continues to enter into new retail showrooms in larger markets to increase sales levels and invest in marketing initiatives to increase brand awareness.
Of course, 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, projections
for the next twelve months, the credit facility with Wells Fargo Bank, see Note 9, and the proceeds from the IPO and recently completed offering in May 2019, the Company
will have sufficient working capital to cover operating cash needs through the twelve month period from the financial statement issuance date.
On June 22, 2018, the board of directors of the Company approved a 1-for-2.5 reverse stock split of the Company’s shares of common stock. The reverse stock split became
effective immediately prior to the closing of its initial public offering (“IPO”). All stock amounts included in these financial statements have been adjusted to reflect this
reverse stock split.
On June 27, 2018, the Company completed its IPO, selling 4,025,000 shares of common stock at a price of $16.00 per share. Net proceeds to the Company from the offering
was approximately $58.9 million after legal and underwriting expenses.
On October 29, 2018, certain selling stockholders conducted a secondary offering of 2,220,000 shares of common stock of the Company. The Company did not sell any
shares or receive any proceeds from the sale of the common stock by the selling stockholders.
On May 21, 2019, the Company and certain of the Company’s stockholders completed a primary and secondary public offering of an aggregate of 2,500,000 shares of
common stock, which included 750,000 shares offered by the Company and 1,750,000 shares offered by certain selling stockholders of the Company, at a public offering
price of $36.00 per share. Net proceeds to the Company from the offering were approximately $25.6 million after legal and underwriting expenses. On May 29, 2019, the
underwriters also exercised an option to purchase up to an additional 375,000 shares of common stock from the selling stockholders. The Company did not receive any
proceeds from the sale of the common stock by the selling stockholders.
Immediately prior to the follow-on offerings in October 2018 and May 2019, various investment vehicles affiliated with our equity sponsor Mistral Capital Managements,
LLC (“Mistral”), which included SAC LLC, owned approximately 56% and 41% of our common stock, respectively. Immediately after the completion of the follow-on
offerings, such entities owned approximately 41% and 29% of the Company’s common stock, respectively. As a result, the Company is no longer a “controlled company”
within the meaning of the corporate governance standards of Nasdaq, the Company may no longer rely on exemptions from corporate governance requirements that are
available to controlled companies. In December 2019, SAC LLC distributed the shares of the Company’s common stock to its members, which included certain affiliates of
Mistral. Following the distribution by SAC LLC, Mistral and its affiliates owned approximately 19% of the Company’s common stock. See Note 7.
F-8
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FISCAL YEAR
The Company’s fiscal year is determined on a 52/53 week basis ending on the Sunday closest to January 31st. Hereinafter, the periods from February 4, 2019 through
February 2, 2020 and February 5, 2018, through February 3, 2019 are referred to as fiscal 2020 and fiscal 2019, respectively. Both fiscal 2020 and fiscal 2019 were a 52 week
fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US 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.
REVENUE RECOGNITION
The Company implemented 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 company 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 condensed consolidated financial statements but did result in enhanced presentation and disclosures.
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 February 2, 2020, there was a returns allowance recorded on the balance sheet in the amount $2,177,715 which was in accrued expenses
and $442,390 associated with sales returns in merchandise inventories.
In some cases, deposits are received before the company transfers control, resulting in contract liabilities. These contract liabilities are reported as deposits on the Company’s
balance sheet. As of February 2, 2020, and February 3, 2019, the Company recorded under customer deposit liabilities the amount of $1,653,597 and $1,059,957
respectively. During fiscal year ended February 2, 2020, the Company recognized $1,059,957 related to its customer deposits from fiscal 2019.
F-9
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Upon adoption of ASC 606, the Company has elected the following accounting policies and practical expedients:
The Company recognizes shipping and handling expense as fulfilment 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, the Company records the expenses for shipping and handling activities at
the same time the Company recognizes revenue.
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 offers its 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. The following represents sales disaggregated by channel:
Showrooms
Internet
Other
Total net sales
For the fiscal years ended
February 2,
2020
148,003,995 $
55,781,186
29,592,198
233,377,379 $
February 3,
2019
113,105,029
33,024,079
19,752,189
165,881,297
$
$
The Company has no foreign operations and its sales to foreign countries was less than .05% of total net sales in both fiscal 2020 and 2019.
The Company had no customers in fiscal 2020 or 2019 that comprise more than 10% of total net sales.
See Note 10 for sales disaggregated by product.
F-10
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 one wholesale customer for which the
Company has no history of collection losses. Management has concluded that an allowance was not necessary at February 2, 2020 and February 3, 2019, respectively.
Breakdown of accounts receivable is as follows:
Credit card receivables
Wholesale receivables
Other receivables
As of
February 2,
2020
As of
February 3,
2019
$
$
1,073,855 $
4,724,154
1,390,916
7,188,925 $
838,373
2,850,000
266,751
3,955,124
The Company has one wholesale customer that comprised approximately 97% and 100% of wholesale receivables at February 2, 2020 and February 3, 2019, respectively.
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, catalogue costs, barter credits, deposits, prepaid rent, prepaid inventory, and other costs.
F-11
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 2020 or fiscal
2019 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.
F-12
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL (CONTINUED)
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 either fiscal 2020 or 2019.
The fair value of the Company’s reporting unit is determined by using a discounted cash flow analysis. The determination of fair value requires assumptions and estimates of
many critical factors, including among others, the nature and history of the Company, financial and economic conditions affecting the Company, the industry and the general
economy, past results, current operations and future prospects, sales of similar businesses or capital stock of publicly held similar businesses, as well as prices, terms and
conditions affecting past sales of similar businesses. Forecasts of future operations are based, in part, on operating results and management’s expectations as to future market
conditions. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgments to estimate industry economic
factors and the profitability of future business strategies. However, if actual results are not consistent with the Company’s estimates and assumptions, there may be exposure
to future impairment losses that could be material.
PATENTS AND LICENSES
Patents 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.
INTANGIBLE ASSETS
Intangible assets with finite useful lives, including a vendor relationship, and patents and trade names, 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.
If the estimates of the useful lives should change, the Company will amortize the remaining book value over the remaining useful life, or it is deemed to be impaired a write-
down of the value of the asset may be required at such time.
There were no impairments during either fiscal 2020 or 2019.
F-13
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
The 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. Previously acquired debt discounts were amortized over the life of the loans as interest expense. The debt discounts were fully amortized in fiscal
2019. In 2019, the Company paid $292,095 in connection with the renegotiated terms of its line of credit. The Company amortized to interest expense $73,024 in 2020 and
$121,173 in 2019 of financing costs.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company’s long-lived assets consist of property and equipment, which 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.
There were no impairments of long-lived assets during fiscal 2020 or 2019.
ADVERTISING AND CATALOG COSTS
The Company capitalizes direct response advertising costs, which consist primarily of catalog production and 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 2020 and 2019 the Company did not have any capitalized deferred direct-response television, postcard and catalogue costs.
F-14
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING AND CATALOG COSTS (CONTINUED)
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
February 2, 2020 or February 3, 2019.
Advertising costs not associated with direct-response advertising are expensed as incurred and were $29,194,289 in 2020 and $18,363,491 in 2019.
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 was approximately
$933,000 in fiscal 2020 and $414,000 in fiscal 2019. Warranty reserve was $1,180,000 in fiscal 2020 and $212,000 in fiscal 2019.
F-15
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OPERATING LEASES
Minimum operating lease expenses are recognized on a straight-line basis over the terms of the leases. Tenant allowances are recorded as a receivable when 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 deferred and are amortized over the underlying lease term on a straight-line basis as a reduction
to rent expense. When 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 difference of the 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 subject to straight-line of expense and is expensed as incurred.
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 Incentive Plan provides for awards in the form of options, stock appreciation rights, restricted stock awards, restricted stock, performance
shares, cash-based awards and other stock-based awards. The plan allows for the issuance of up to 1,414,889 shares at February 2, 2020 and 615,066 at February 3, 2019. 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 7 for additional disclosure.
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 sold. Shipping and
handling costs were $47,148,918 in fiscal 2020 and $25,132,736 in fiscal 2019.
F-16
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 realized. Accordingly, 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 February 3, 2019 there are NOLs of approximately $10.8
million identified as an uncertain tax position. As of February 2, 2020, there were no uncertain tax positions. See Note 5 for additional disclosures.
Deferred income taxes are provided on temporary differences between the income tax bases of assets and liabilities and the amounts reported in the financial statements and
on net operating loss and tax credit carry forwards.
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 LOSS PER SHARE
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. As a result of the
Company’s net loss for both years presented, potentially dilutive securities were excluded from the computation of diluted loss per share, as their effect would be anti-
dilutive. Potentially dilutive securities include unvested restricted stock units in the amounts of 183,053 and 377,286 for fiscal 2020 and 2019, respectively, common stock
warrants outstanding of 1,039,120 and 1,067,475 for fiscal 2020 and 2019, respectively and stock options of 495,366 for fiscal 2020. For fiscal 2020, the warrants and the
options have an exercise price that exceeds the market price.
F-17
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIC AND DILUTED NET LOSS PER SHARE (CONTINUED)
Basic and diluted net loss per common share is computed as follows:
Numerator:
Net loss - Basic and diluted
Preferred dividends and deemed dividends
Net loss attributable to common shares
Denominator:
Weighted average number of common shares for basic and diluted net loss per share
Basic and diluted net loss per share
NEW ACCOUNTING PRONOUNCEMENTS
For the year
ended
February 2,
2020
For the year
ended
February 3,
2019
$
(15,205,019) $
-
(15,205,019)
(6,704,356)
(27,832,998)
(34,537,354)
14,260,395
(1.07) $
10,536,721
(3.28)
$
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 2020:
In August 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2015-14, which defers the effective date of ASU No.
2014-09, Revenue from Contracts with Customers (Topic 606) by one year. ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to
recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or
services. As a result, ASU 2015-14 is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, which for the Company is
fiscal 2020. The Company reviewed substantially all of its contracts and other revenue streams and determined that while the application of the new standard did not have a
material change in the amount of or timing for recognizing revenue, it did have a significant impact on our financial statement disclosures which are further discussed in Note
1 - Revenue Recognition.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments, which eliminates the diversity in practice
related to classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. ASU 2016-
15 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted,
including adoption in an interim period. The Company adopted the guidance retrospectively effective February 4, 2019, which did not have a material effect on the
Company’s condensed consolidated financial position and results of operations.
F-18
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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. 2019-10 extended the effective date to
fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021, 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 condensed consolidated financial
statements. Based on the initial evaluation, the Company has determined that adopting this standard will have a material impact on our condensed consolidated balance sheet
as the Company has a significant number of operating leases.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718). ASU 2018-07 eliminates the separate
accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the
same way as share-based payment transactions with employees. The accounting remains different for attribution, which represents how the equity-based payment cost is
recognized over the vesting period, and a contractual term election for valuing nonemployee equity share options. ASU 2018-07 is effective for fiscal years beginning after
December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption of Topic
606. Management is currently evaluating the impact ASU 2018-07 will have on these condensed consolidated financial statements.
F-19
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 2 - PROPERTY AND EQUIPMENT, NET
Property and equipment as of February 2, 2020 and February 3, 2019 consists of:
Office and store furniture, and equipment
Software
Leasehold improvements
Tools, Dies, Molds
Construction in process
Accumulated depreciation and amortization
Depreciation expense was $4,894,220 in fiscal 2020 and $2,935,202 in fiscal 2019.
NOTE 3 - OTHER INTANGIBLE ASSETS, NET
A summary of other intangible assets follows:
Patents
Trademarks
Other intangibles
Total
Patents
Trademarks
Other intangibles
Total
Estimated Life
5 Years
3 Years
Shorter of estimated useful life or
lease term
5 Years
NA
2020
$
6,674,950 $
2,652,960
28,071,912
97,876
2,193,218
39,690,916
(15,846,655)
23,844,261 $
$
2019
4,798,414
2,707,666
20,088,812
-
2,222,218
29,817,110
(11,222,031)
18,595,079
Estimated Life
10 Years
3 Years
5 Years
Estimated Life
10 Years
3 Years
5 Years
February 2, 2020
Gross
Carrying
Amount
Accumulated
Amortization
Net
carrying
amount
1,965,794 $
982,800
839,737
3,788,331 $
(846,898) $ 1,118,896
233,265
(749,535)
-
(839,737)
(2,436,170) $ 1,352,161
February 3, 2019
Gross
Carrying
Amount
Accumulated
Amortization
Net
carrying
amount
1,406,336 $
868,586
839,737
3,114,659 $
(744,715) $
(589,248)
(838,365)
(2,172,328) $
661,621
279,338
1,372
942,331
$
$
$
$
Amortization expense on other intangible assets was $263,842 in fiscal 2020 and $198,549 in fiscal 2019.
F-20
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 3 - OTHER INTANGIBLE ASSETS, NET (CONTINUED)
Expected amortization expense by fiscal year for these other intangible assets follows:
2021
2022
2023
2024
2025
Thereafter
NOTE 4 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
A summary of other prepaid and other current assets follows:
Prepaid insurance
Prepaid catalogue costs and related
Barter credits
Deposits
Prepaid rent
Prepaid inventory
Other
F-21
$
$
282,716
242,086
136,870
132,973
132,917
424,599
1,352,161
2020
2019
$
$
1,174,920 $
3,067,302
374,423
892,611
1,297,511
511,100
732,255
8,050,122 $
760,974
1,633,960
-
732,938
1,036,647
575,397
1,193,956
5,933,872
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 5 - 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.
The components of deferred income taxes follow:
Deferred Income Tax Assets
Federal net operating loss carry forward
State net operating loss carry forward
Intangible assets
Accrued liabilities
Equity based compensation
Property and equipment
Merchandise inventories
Total Deferred Income Tax Assets
Valuation Allowance
Net Deferred Income Tax Asset
2020
2019
$
$
12,455,237 $
2,485,074
244,053
1,833,549
503,201
1,748,593
254,034
19,523,741
(19,523,741)
- $
708,865
130,924
248,731
1,139,686
171,120
1,165,359
154,599
3,719,284
(3,719,284)
-
The income tax provision differs from the amount obtained by applying the statutory Federal income tax rate to pre-tax income as follows:
Benefit at Federal Statutory rates
Permanent adjustments
State tax, net of Federal benefit
Change in Federal rate from 34% to 21%
Federal and deferred true-ups
Uncertain tax positions - NOLS
Change in valuation allowance
Income tax provision
2020
(3,183,958) $
(847,531)
(582,572)
-
(393,702)
(10,753,384)
15,804,459
43,312 $
$
$
2019
(1,397,881)
406,674
(15,086)
-
(175,845)
10,753,384
(9,554,839)
16,407
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:
Current taxes:
U.S. federal
State and local
Total current tax expense
Deferred taxes:
U.S. federal
State and local
Total deferred tax expense (benefit)
Total tax provision
F-22
2020
2019
- $
43,312
43,312 $
- $
-
- $
43,312 $
-
16,407
16,407
-
-
-
16,407
$
$
$
$
$
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 5 - INCOME TAXES (CONTINUED)
Differences in terms of percentages are as follows:
Benefit at Federal Statutory rates
Permanent adjustments
State tax, net of Federal benefit
Change in Federal rate from 34% to 21%
Federal True-ups
Uncertain tax positions- NOLS
Change in valuation allowance
Income tax provision
2020
2019
-21.0%
-5.6%
-3.8%
0.0%
-2.6%
-70.9%
104.2%
0.3%
-21.0%
6.1%
-0.2%
0.0%
-2.6%
161.5%
-143.5%
0.3%
At February 2, 2020 and February 3, 2019, the Company has net operating loss carryforwards available for federal income tax purposes of approximately $59,311,000 and
$45,190,000, respectively, which are scheduled to expire in varying amounts from fiscal 2027 to fiscal 2037. In addition, the Company has approximately $42,618,000 and
$35,674,000 of state net operating loss carryforwards as of February 2, 2020 and February 3, 2019, respectively. In fiscal year February 2, 2020 a reserve has been released
that was previously recorded against the net operating losses in accordance with ASC 740-10 due to a Private Letter Ruling (“PLR”) that was issued by the IRS. The PLR
approved the late filing of Form 8832, “Entity Classification Election”. Due to the filing of this form, the Company believes that the Federal and State NOLs will be available
for future utilization. The reserves were recorded against the net operating losses as of the fiscal year ended February 3, 2019.
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 and February 3, 2019
which have caused such federal net operating losses to be subject to limitation under Section 382. The annual limitation varies between $302,000 and $5,888,000. There is no
impact on the overall provision limited since the Company has a full valuation allowance against its deferred tax assets.
During fiscal year ending February 2, 2020 and February 3, 2019, the Company increased/(decreased) the valuation allowance by approximately $15,804,000 and
($9,555,000) respectively.
The changes in the amount of unrecognized tax benefits in the Fiscal years ending February 2, 2020 and February 3, 2019 were as follows:
Beginning balance
Additions for tax positions acquired
Additions for tax positions related to current year
Tax positions of prior years:
Payments
Settlements
Release
Ending balance
2020
10,753,384 $
-
-
2019
-
-
10,753,284
-
-
(10,753,384)
- $
-
-
-
10,753,284
$
$
The Company adopted FAS Accounting Standard 2013-11. The pronouncement requires the Company to offset its uncertain tax positions against certain deferred tax assets
in the same jurisdiction. As of February 2, 2020 the Company has released the uncertain tax position of $10,753,384 and has reversed the netting of its uncertain tax positions
against its related deferred tax assets.
F-23
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 6 - COMMITMENTS, CONTINGENCIES AND RELATED PARTIES
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. Monthly
payments related to these leases range from $2,500 to $45,600. Total rent expense including common area maintenance charges sales percentage rent and deferred rent
expense was $19,676,958 in fiscal 2020 and $16,245,590 in fiscal 2019.
Expected future annual minimum rental payments under these leases follow:
2021
2022
2023
2024
2025
Thereafter
$
$
11,169,268
10,197,116
9,653,986
9,350,604
8,332,926
19,932,967
68,636,867
The above disclosure includes lease extensions for various retail showrooms the Company entered into after year end.
SEVERANCE CONTINGENCY
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 employees are terminated without cause. The total amount of exposure to the Company under these agreements was $3,670,533 at February 2,
2020 if all executives with employment agreements were terminated without cause and the full amount of severance was payable.
F-24
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 6 - COMMITMENTS, CONTINGENCIES AND RELATED PARTIES (CONTINUED)
RELATED PARTIES
Mistral performs management services for the Company under a contractual agreement. Management fees totaled approximately $400,000 in both fiscal 2020 and in fiscal
2019 and are included in selling, general and administrative expenses. There was $2,000 payable to Mistral as of February 2, 2020 and no amounts payable to Mistral as of
February 3, 2019. The amounts payable to Mistral as of February 2, 2020 are included in accrued liabilities in the accompanying consolidated balance sheet. In addition, the
Company reimbursed Mistral for expenses incurred in the amount of $44,140 and $55,015 for out of pocket expenses for fiscal 2020 and fiscal 2019, respectively.
Transaction fees related to the IPO were $500,000 in fiscal 2019 and are included in selling, general and administrative expenses. There were no such transactions fees related
to the IPO for fiscal 2020.
Satori Capital, LLC (“Satori”), an affiliate of two stockholders of the Company since April 2017, performs management services for the Company under a contractual
agreement. Management fees totaled approximately $100,000 in both fiscal 2020 and fiscal 2019 and are included in selling, general and administrative expenses. 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 sheet as of February 2, 2020, respectively. A one-time stock bonus of 50,000 shares of common
stock at $14.83 per share, or $741,500, is included in equity-based compensation on the accompanying consolidated statement of changes in stockholders’ equity and issued
on June 22, 2018. The bonus was issued to Satori in three installments; two equal installments of 5,000 shares of common stock in August 2018 and September 2018 and the
remainder of the shares were issued in October 2018. All fees and the stock bonus are included in selling, general and administrative expenses in the accompanying
condensed statements of operations. There were no amounts payable to Satori as of February 3, 2019. In addition, the Company reimbursed Satori for expenses incurred in
the amount of $70,000 and $0 for out of pocket expenses for fiscal 2020 and fiscal 2019, respectively. Transaction fees related to the IPO were $125,000 fiscal 2019 and are
included in selling, general and administrative expenses. There were no such transactions fees related to the IPO for fiscal 2020.
The Company engaged Blueport Commerce (“Blueport”), a company owned in part by investment vehicles affiliated with Mistral and an affiliate of Schottenstein Stores
Corporation, an indirect investor in SAC Acquisition LLC, our largest shareholder, to evaluate a transition plan to convert to the Blueport platform. Certain directors are
members and principals of Mistral or employees of Schottenstein Stores Corporation. The Company launched the Blueport platform in February 2018. There were
$1,833,154 and $1,153,844 of fees incurred with Blueport sales transacted through the Commerce platform and on the conversion of the Commerce platform during fiscal
2020 and fiscal 2019, respectively. Amounts payable to Blueport as of February 2, 2020 and February 3, 2019 were $150,508 and $93,211, respectively, and are included in
accounts payable in the accompanying consolidated balance sheets.
NOTE 7 - STOCKHOLDERS’ EQUITY
On June 22, 2018, the board of directors of the Company approved a 1-for-2.5 reverse stock split of the Company’s shares of common stock. The reverse stock split became
effective immediately prior to the closing of its initial public offering (“IPO”). All stock amounts included in these financial statements have been adjusted to reflect this
reverse stock split.
On June 27, 2018, the Company completed its IPO, selling 4,025,000 shares of common stock at a price of $16.00 per share. Net proceeds to the Company from the offering
was approximately $59.2 million after legal and underwriting expenses.
On October 29, 2018, certain selling stockholders conducted a secondary offering of 2,220,000 shares of common stock of the Company. The Company did not sell any
shares or receive any proceeds from the sale of the common stock by the selling stockholders.
F-25
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 7 - STOCKHOLDERS’ EQUITY (CONTINUED)
PREFERRED STOCK
In fiscal 2018, the Company completed financing transactions with funds and investment vehicles advised by Mistral, Satori, executive management and third-party
investors. As part of the transactions, the Company received $21,139,845 in cash (net of issuance costs of $1,325,156) in exchange for a total of 899 Series A, A-1 and A-2
Preferred Units (preferred stock equivalent of 898,600 shares) and warrants to purchase 798,975 shares of common stock, subject to adjustments in the exercise price. The
preferred stock carried an annual dividend of 8% compounded and conversion rights dependent upon certain events occurring.
In order to eliminate all outstanding preferred stock upon completion of the IPO, on April 19, 2018, the Company and the majority holders of each of the Series A Preferred
Stock, the Series A-1 Preferred Stock and the Series A-2 Preferred Stock agreed to amend and restate each series of preferred stock to, among other things, revise the
conversion features of the preferred stock to provide that, immediately prior to the closing of an initial public offering, the preferred stock:
(1) will accrue an additional amount of dividends equal to the amount of dividends that would have accrued and accumulated through and including the one-year anniversary
of the completion of the initial public offering,
(2) will, along with the aggregate accrued or accumulated and unpaid dividends thereon, automatically convert into shares of common stock at a price per share equal to the
lesser of (a) 70% of the offering price, or (b) the applicable calculation set forth pursuant to the terms of their respective certificates of designation.
All outstanding preferred stock totaling $25,645,000, including the additional year of dividends of $2,037,200 and accumulated dividends at 8% through June 29, 2018 of
$2,495,704 was converted into 3,287,441 shares of common stock upon completion of the Company’s IPO on June 29, 2018. The preferred stock converted to common stock
at $9.13 per share resulting in a deemed dividend of $22,601,161 related to the conversion.
F-26
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 7 - STOCKHOLDERS’ EQUITY (CONTINUED)
COMMON STOCK WARRANTS
In fiscal 2018, the Company completed financing transactions with funds and investment vehicles advised by Mistral, Satori, and executive management in which the
Company originally issued 930,054 warrants to purchase common stock subject to adjustments in the exercise price as defined below. In consideration for agreeing to amend
the outstanding preferred stock to automatically convert immediately prior to the completion of the IPO, on April 19, 2018, the Company and a majority of the holders of the
warrants issued along with the preferred stock, agreed to amend and restate the warrants to replace the aggregate dollar value of each warrant with a fixed number of warrant
shares. In order to prevent dilution of the purchase rights granted under the warrants, the exercise price was calculated based on certain factors described in the amendment.
On April 19, 2018, the above warrants were modified, and the Company updated the fair value of the warrants using the assumptions detailed below using a probability-
weighted expected return. As the total fair value of the modified warrants was less than the total fair value of the original warrants, there was no financial statement impact on
April 19, 2018. The modification resulted in the cancellation of the 930,054 warrants and the reissuance of 798,975 warrants.
On June 29, 2018, the Company completed a Qualified IPO and the exercise price was adjusted to equal the purchase price per share of common stock of $16.00. The
Company computed the value of the warrants with the updated assumptions using the Black-Scholes Model, as described below, and recorded the difference between the fair
value of the new warrants compared to the old warrants as a deemed dividend of $1,498,079.
There were 281,750 warrants, with a five-year term, issued to Roth Capital Partners, LLC as part of the underwriting agreement in connection with the Company’s IPO. These
warrants were valued using the Black-Scholes model, and remain outstanding as of February 2, 2020.
In the third quarter of fiscal 2019, the Company amended and restated warrants totaling 56,077 with a three-year term, valued using the Black-Scholes model. The Company
recorded the difference between the fair value of the new warrants compared to the old warrants as a deemed dividend of $408,919. These warrants were exercised in
September 2018.
In fiscal 2020, the Company issued 18,166 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 comparable Companies’ historical volatility, with consideration of the Company’s 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.
Warrants
Expected volatility
Expected dividend yield
Expected term (in years)
Risk-free interest rate
Exercise price
Calculated fair value of warrant
April
2018
798,795
41.4% - 43.7%
0%
3.10
1.7% - 2.0%
$
14.80
$
3.12
F-27
$
$
June
2018
June
2018
September
2018
May
2019
798,795
281,750
42.0%
0%
3.00
2.6%
$
$
16.00
5.00
41%
0%
5.00
2.7%
$
$
19.20
8.84
56,077
44%
0%
3.00
2.69%
$
9.13
$
12.87
18,166
44%
0%
3.00
2.69%
16.00
7.16
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 7 - STOCKHOLDERS’ EQUITY (CONTINUED)
COMMON STOCK WARRANTS (CONTINUED)
The following represents warrant activity during fiscal 2020 and fiscal 2019:
Warrants outstanding at February 4, 2018
Warrants issued
Expired and canceled
Exercised
Warrants Outstanding at February 3, 2019
Warrants issued
Expired and canceled
Exercised
Outstanding at February 2, 2020
Average
exercise
price
Number of
warrants
$
$
17.18
18.56
17.18
10.44
16.83
16.00
-
16.00
16.83
930,054
1,136,802
(930,054)
(69,327)
1,067,475
18,166
-
(46,521)
1,039,120 $
Weighted
average
remaining
contractual
life (in years)
3.24
3.65
(3.20)
(2.68)
2.93
2.40
-
(2.15)
1.93
The majority of the 46,521 warrants exercised in fiscal 2020 were cashless, whereby the holders received less shares of common stock in lieu of a cash payment the
Company, which resulted in the issuance of 27,246 common shares.
F-28
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 7 - STOCKHOLDERS’ EQUITY (CONTINUED)
EQUITY INCENTIVE PLANS
The Company adopted the 2017 Equity Incentive Plan (the “Plan”) which provides for Awards in the form of Options, Stock Appreciation rights, Restricted Stock Awards,
Restricted Stock Units, Performance shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards. All awards shall be granted within 10 years from the
effective date of the Plan.
In April 2018, the board of directors of the Company approved an increase in shares of common stock reserved for issuance under the Plan from 420,000 to 604,612 shares
of common stock.
On May 10, 2018, the Board of Directors approved an increase in shares of common stock reserved for issuance under the Plan from 604,612 to 615,066 shares of common
stock.
On June 5, 2019, the stockholders approved an amendment and restatement of the Plan that among other things increased the number of shares of common stock reserved for
issuance under the Plan from 615,066 to 1,414,889 share of common stock.
In June 2019, the Company granted 495,366 Non statutory 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 after the date on which the closing price of the Company’s stock price has been at least $75 for 60 consecutive trading
days so long as this goal has been attained by June 5, 2022 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.
In December 2019, SAC LLC distributed the shares of the Company’s common stock it held. In connection with the distribution officers 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 to the Company and the Company immediately cancelled these shares. The Company then issued to the former option holders the number of those shares
pursuant to the Plan and withheld 73,507 shares to satisfy taxes associated with the issuance.
A summary of the status of our stock options February 2, 2020, and the changes during fiscal 2020 is presented below:
Outstanding at February 3, 2019
Granted
Exercised
Canceled and forfeited
Expired and canceled
Vested
Outstanding at February 2, 2020
Exercisable at the end of the period
For the year ended February 2, 2020
Weighted
average
exercise
price
Weighted
average
remaining
contractual
life (in years)
Average
intrinsic
value
-
38.10
-
-
-
-
38.10
-
2.34
-
-
-
Number of
options
-
495,366
-
-
-
-
495,366
-
$
$
F-29
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 7 - STOCKHOLDERS’ EQUITY (CONTINUED)
EQUITY INCENTIVE PLANS (CONTINUED)
A summary of the status of our unvested restricted stock units as of February 2, 2020 and February 3, 2019, and changes during fiscal years then ended, is presented below:
Unvested at February 4, 2018
Granted
Forfeited
Vested
Unvested at February 3, 2019
Granted
Forfeited
Vested
Unvested at February 2, 2020
Number of
shares
Weighted
average
grant date
fair value
193,500 $
330,799
(4,629)
(142,384)
377,286
130,898
(20,470)
(304,661)
183,053 $
10.83
14.76
14.83
13.62
11.16
23.63
16.21
12.75
21.34
Equity based compensation expense was approximately $4.9 million and $3.3 million and for fiscal 2020 and fiscal 2019, respectively. In fiscal 2020, all the unvested
restricted stock units for certain senior executives of the Company that were granted prior 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 lockup- 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 restricted stock unit compensation cost related to non-vested awards was $4,393,453 as of February 2, 2020 and will be recognized in operations over
a weighted average period of 2.3 years.
F-30
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 8 - EMPLOYEE BENEFIT PLAN
In February 2017, the Company established The Lovesac Company 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 employees 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 plan subject to limitations with the IRS. The employer contributions to the 401(k) Plan for fiscal 2020 and
2019 were approximately $406,000 and $303,000, respectively.
NOTE 9 - FINANCING ARRANGEMENTS
CREDIT LINES
The Company had a line of credit with Siena Lending Group, LLC to borrow up to $7.0 million, which matured on May 14, 2018. Borrowings were limited to the lesser of
75% of inventory or 85% of the net orderly liquidation value of inventory and may be reduced by certain liabilities of the Company. All amounts outstanding bore interest at
the base rate, defined as the greatest of (i) Prime Rate published by The Wall Street Journal, (ii) Federal Funds Rate plus 0.5% or (iii) 3.25%, plus 3% (7.00% at February 4,
2018). The line was subject to a monthly unused line fee of .75%. The agreement was secured by the first lien on substantially all assets of the Company. In February 2018,
the Company paid the outstanding loan balance of $405, an early termination fee of $70,000 and fully amortized the remaining deferred financing fees of $48,149 on its line
of credit with Siena Lending Group, LLC.
On February 6, 2018, the Company established a line of credit with Wells Fargo Bank, National Association (“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 February 2, 2020, the Company’s borrowing availability under the
line of credit with Wells Fargo was $12.5 million. As of February 2, 2020, there was no outstanding balance on this line of credit.
Under the line of credit with Wells, the Company may elect that 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 loan agreement calls for certain covenants including a timing of the financial statements threshold and a minimum excess availability threshold. On May 3, 2018, the
Company elected a one-month revolving loan with a maturity date of June 4, 2018, that bears interest at the LIBOR rate plus the applicable margin for an all-in-rate of
3.1875%. The one-month revolving loan matured and was paid in full on June 4, 2018.
F-31
THE LOVESAC COMPANY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FEBRUARY 2, 2020 AND FEBRUARY 3, 2019
NOTE 10 - SEGMENT INFORMATION
The Company operates within a single reporting segment. The chief operating decision makers of the Company are the Chief Executive Officer and 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.
The Company’s sales by product which are considered one segment are as follows:
Sactionals
Sacs
Other
NOTE 11 - BARTER ARRANGEMENTS
Fiscal year ending
February 2,
2020
February 3,
2019
$
188,436,976 $
39,640,676
5,299,727
120,205,061
41,174,831
4,501,405
$
233,377,379 $
165,881,297
In fiscal 2018, the Company entered into a bartering arrangement with Icon International, Inc., a vendor, whereas the Company will provide inventory in exchange for media
credits. During fiscal 2018, the Company exchanged $577,326 of inventory plus the cost of freight for certain media credits. To account for the exchange, the Company
recorded the transfer of the inventory asset as a reduction of inventory and an increase to a prepaid media asset of $534,407 which is included in “Prepaid and other current
assets” on the accompanying consolidated balance sheet. The Company had $307,417 of unused media credits remaining as of February 4, 2018 that were used in full during
fiscal 2019. During fiscal 2020, the Company exchanged $1,097,488 of inventory plus the cost of freight for certain media credits. To account for the exchange, the
Company recorded the transfer of the inventory asset as a reduction of inventory and an increase to a prepaid media asset of $1,055,185 which is included in “Prepaid and
other current assets” on the accompanying consolidated balance sheet. The Company had $374,423 of unused media credits remaining as of February 2, 2020.
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.
NOTE 12 - SUBSEQUENT EVENTS
The Company has evaluated events and transactions subsequent to February 2, 2020 through the date the consolidated financial statements were issued.
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, and, in the following weeks, many U.S. states and localities issued
lockdown orders impacting consumer demand and resulting in the closing of all of the Company’s showrooms. Since then, the COVID-19 situation within the U.S. has
rapidly escalated. On April 1, 2020, the Company announced that all showroom locations will remain closed until further notice. The Company will follow the guidance of
local, state and federal governments, as well as health organizations, to determine when the Company can safely reopen its showrooms. Additionally, the Company
implemented a reduction in workforce of approximately 445 part time employees (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 and Chief Financial Officer. The base salaries of all other senior management and full-time headquarter team members has been
temporarily reduced by graduated amounts. Our Board of Directors has also agreed to a temporary reduction of its retainer and monitoring fees and an extension of the
associated payment timeline. The Company continues to monitor the situation closely and it is possible that the Company will implement further measures to provide
additional financial flexibility as it works work to protect its cash position and liquidity.
F-32
DESCRIPTION OF REGISTRANT’S SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
The following description of our capital stock is intended as a summary only and therefore is not a complete description of our capital stock. This description is based
upon, and is qualified by reference to, our amended and restated certificate of incorporation (the “Amended Certificate”), our amended and restated bylaws (the “Amended
Bylaws”) and applicable provisions of Delaware corporate law. You should read our Amended Certificate and Amended Bylaws, which are filed as exhibits to our Annual
Report on Form 10-K, to which this exhibit is also appended.
Our authorized capital stock consists of 40,000,000 shares of common stock, par value $0.00001 per share, and 10,000,000 shares of preferred stock, par value
$0.00001 per share.
Our common stock is the only class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Exhibit 4.5
Common Stock
Voting Rights
The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, including the election of
directors, and do not have cumulative voting rights.
Dividends
Subject to limitations under Delaware law and preferences that may be applicable to any then outstanding preferred stock, holders of common stock are entitled to
receive ratably those dividends, if any, as may be declared by our board of directors out of legally available funds.
Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the holders of our common stock will be entitled to share ratably in
the net assets legally available for distribution to stockholders after the payment of or provision for all of our debts and other liabilities, subject to the prior rights of any
preferred stock then outstanding.
Rights and Preferences
Holders of common stock have no preemptive or conversion rights or other subscription rights and there are no redemption or sinking funds provisions applicable to
the common stock.
Fully Paid and Non-assessable
All outstanding shares of common stock are duly authorized, validly issued, fully paid and non-assessable.
Preferred Stock
Under the terms of our Amended Certificate our board of directors is authorized to direct us to issue shares of preferred stock in one or more series without stockholder
approval. Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder
vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes,
could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting
stock.
Warrant to Purchase Common Stock
We have issued and outstanding three series of common stock warrants in connection with prior preferred stock financings: (i) Series A Warrants, as amended, to
purchase 187,704 shares of common stock, (ii) Series A-1 Warrants, as amended, to purchase 350,000 shares of common stock, and (iii) Series A-2 Warrants, as amended, to
purchase 218,225 shares of common stock, (collectively, the “Warrants”). Upon, exercise, the holders of the Warrants can purchase shares of common stock at a price equal to
$16.00 per share.
Each Warrant expires on the earlier of (a) the third (3rd) anniversary of June 29, 2018, (b) the fifth (5th) anniversary of the applicable Warrant issue date, or (c) the
occurrence of a deemed liquidation of the Company. The Warrants allow for cashless exercise only in the event that the underlying shares are not registered or qualified for
resale. The Company may force the holders to exercise their Warrant or the Company may redeem each Warrant for a nominal price if, at any time following the one-
year anniversary of the issuance of such Warrant, (i) the Company has been listed on a national securities exchange, (ii) the common stock underlying the warrants have been
registered or qualified for resale or the holders otherwise have the ability to trade the underlying common shares without restriction following a cash exercise, (iii) the 30-
day volume-weighted daily average price of the Company’s common stock exceeds 200% of the exercise price of the Warrants, as equitably adjusted for any stock splits,
dividends or transactions having a similar effect, and (iv) the average daily trading volume is at least 200,000 shares of common stock during the 30-day period prior to the
forced exercise or redemption.
In connection with our IPO, we issued to Roth Capital Partners, LLC, as the representative of the underwriters, a warrant initially exercisable for up to 281,750 shares
of common stock. The warrant is exercisable at a per share price equal to $19.20. The warrant is exercisable at any time, and from time to time, in whole or in part, until the
fifth anniversary of our IPO, in compliance with FINRA Rule 5110(f)(2)(G)(i). The warrant and the shares of common stock underlying the warrant have been deemed
compensation by FINRA and were therefore subject to a 180 day lock-up. Roth Capital Partners, LLC (or its permitted assignees) were not permitted to sell, transfer, assign,
pledge or hypothecate the warrant or the securities underlying the warrant, nor engage in any hedging, short sale, derivative, put, or call transaction that would result in the
effective economic disposition of the warrant or the underlying securities for the period ending on, and including, December 23, 2018. The exercise price and number of shares
of common stock issuable upon exercise of the warrant will be adjusted in certain circumstances, including in the event of a stock dividend, cash dividend or our
recapitalization, reorganization, merger or consolidation.
Anti-Takeover Effects of Delaware Law and Our Amended Certificate and Amended Bylaws
Certain provisions of Delaware law, our Amended Certificate of incorporation and our Amended Bylaws contain provisions that could make the following transactions
more difficult: an acquisition of us by means of a tender offer; a proxy contest; or the removal of our incumbent officers and directors. It is possible that these provisions could
make it more difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best interest, including transactions
which provide for payment of a premium over the market price for our shares.
These provisions, summarized below, are intended to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of the increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because
negotiation of these proposals could result in an improvement of their terms.
2
Authorized but Unissued Shares
Our authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval. These additional shares may
be utilized for a variety of corporate purposes, including future public offerings to raise additional capital and corporate acquisitions. The existence of authorized but unissued
shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of a majority of our common stock by means of a proxy
contest, tender offer, merger or otherwise.
Appointment and Removal of Directors
Our Amended Certificate and our Amended Bylaws provide that any vacancies resulting from death, resignation, disqualification, removal or other causes and newly
created directorships resulting from any increase in the number of directors shall be filled only by the affirmative vote of a majority vote of the directors then in office, unless
the board of directors determines such vacancy shall be filled by stockholders. This provision restricting the filling of vacancies will prevent a stockholder from increasing the
size of our board of directors and gaining control of our board of directors by filling the resulting vacancies with its own nominees. In addition, Amended Certificate and our
Amended Bylaws provide that a member of our board of directors may be removed with or without cause by the vote of the holders of a majority of the voting power of all
then-outstanding shares of capital stock of the Company entitled to vote generally at an election of directors.
Advance Notice Procedures
Our Amended Certificate and our Amended Bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our
stockholders, including proposed nominations of persons for election to the board of directors. Stockholders at an annual meeting will only be able to consider proposals or
nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors or by a stockholder who was a stockholder of record
on the record date for the meeting, who is entitled to vote at the meeting and who has given our Secretary timely written notice, in proper form, of the stockholder’s intention to
bring that business before the meeting. Although our Amended Bylaws do not give the board of directors the power to approve or disapprove stockholder nominations of
candidates or proposals regarding other business to be conducted at a special or annual meeting, our Amended Bylaws may have the effect of precluding the conduct of certain
business at a meeting if the proper procedures are not followed or may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law (“DGCL”), which prohibits persons deemed to be “interested stockholders” from engaging in
a “business combination” with a publicly held Delaware corporation for three years following the date these persons become interested stockholders unless the business
combination is, or the transaction in which the person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies.
Generally, an “interested stockholder” is a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder
status did own, 15% or more of a corporation’s voting stock. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a
financial benefit to the interested stockholder. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the board
of directors. A Delaware corporation may “opt out” of these provisions with an express provision in its original certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from a stockholders’ amendment approved by at least a majority of the outstanding voting shares. We have not opted out of these
provisions. As a result, mergers or other takeover or change in control attempts of us may be discouraged or prevented.
3
Limitation on Director’s Liability
Our Amended Certificate and our Amended Bylaws require us to indemnify our directors to the fullest extent permitted by the DGCL. The DGCL permits a
corporation to limit or eliminate a director’s personal liability to the corporation or the holders of its capital stock for breach of duty. This limitation is generally unavailable for
acts or omissions by a director which (i) were in bad faith, (ii) were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated or (iii)
involved a financial profit or other advantage to which such director was not legally entitled. The DGCL also prohibits limitations on director liability for acts or omissions
which result in a violation of a statute prohibiting certain dividend declarations, certain payments to stockholders after dissolution and particular types of loans. We adopted
these limitations on our directors’ personal liability to the Company and our stockholders to the maximum extent permitted under Delaware law. The effect of these provisions
is to eliminate the rights of our Company and our stockholders (through stockholders’ derivative suits on behalf of our Company) to recover monetary damages against a
director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. These provisions do
not limit the liability of directors under the federal securities laws of the United States.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC.
National Securities Exchange Listing
Our common stock listed on Nasdaq under the symbol “LOVE.”
4
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statement of The Lovesac Company on Form S-8 File No. 333-232674 of our report dated April 29, 2020, with
respect to our audits of the consolidated financial statements of The Lovesac Company as of February 2, 2020 and February 3, 2019 and for the fiscal years then ended, which
report is included in this Annual Report on Form 10-K of The Lovesac Company for the fiscal year ended February 2, 2020.
Exhibit 23.1
/s/ Marcum llp
Marcum llp
Hartford, Connecticut
April 29, 2020
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Shawn Nelson, certify that:
1.
I have reviewed this Annual Report on Form 10-K of The Lovesac Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting.
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: April 29, 2020
Signed: /s/ Shawn Nelson
Name: Shawn Nelson
Title:
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Donna Dellomo certify that:
1.
I have reviewed this Annual Report on Form 10-K of The Lovesac Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting.
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: April 29, 2020
Signed: /s/ Donna Dellomo
Name: Donna Dellomo
Title:
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Shawn Nelson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-
K of The Lovesac Company for the fiscal year ended February 2, 2020, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of The Lovesac
Company.
Date: April 29, 2020
Signed: /s/ Shawn Nelson
Name: Shawn Nelson
Title:
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, Donna Dellomo, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form
10-K of The Lovesac Company for the fiscal year ended February 2, 2020, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of The Lovesac
Company.
Date: April 29, 2020
Signed: /s/ Donna Dellomo
Name: Donna Dellomo
Title:
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)