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(Exact
Name of Registrant as Specified in Its Charter)
iDelaware
i32-0514958
State
or Other Jurisdiction of Incorporation or Organization
I.R.S. Employer Identification No.
iTwo Landmark Square,iSuite
300
iStamford,iConnecticut
i06901
Address
of Principal Executive Offices
Zip Code
Registrant’s telephone number, including area code (i888) i636-1223
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.00001 par value per share
iLOVE
The
iNasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes oiNox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes oiNox
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. iYesx No o
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). iYesx No o
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
☐
iAccelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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. o
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. ix
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. x
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to § 240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No i☒
As of July 29, 2022 (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 $i439,821,967.
As
of March 15, 2023, there were i15,195,566 shares of common stock, $0.00001 par value per share, outstanding.
i
EXPLANATORY
NOTE
The Lovesac Company (“Lovesac”, the “Company”, “we”, “our” and similar terms) is filing this Amendment No. 2 on Form 10-K/A (“Amendment No. 2”) to amend the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2023 (the “Original 10-K”), originally filed with the Securities and Exchange Commission (“SEC”) on March 29, 2023, as amended by Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) filed on November 2, 2023, solely to include certain footnote disclosures to our audited restated annual financial statements as of and for the year ended January
29, 2023 (the “Restated Financial Statements”), that were included in the audited financial statements in the Original 10-K, but were inadvertently omitted from the Restated Financial Statements included in Part II, Item 8 of Amendment No. 1.
The restatement is further described in Amendment No. 1 and in Note 2. Restatement and Other Corrections of Previously Issued Financial Statements to the Restated Financial Statements in Part II. Item 8 contained herein.
In accordance with applicable SEC rules, this Amendment No. 2 includes new certifications specified in Rule 13a-14 under the Exchange Act from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing. This Amendment No. 2 also contains a new consent of each of Deloitte
& Touche LLP (“Deloitte”), the Company’s independent registered public accounting firm, and Marcum LLP (“Marcum”), the Company’s prior independent registered public accounting firm.
Except as described above, no other amendments are being made to the Original 10-K, as amended by Amendment No. 1. This Amendment No. 2 does not reflect events occurring after the filing of the Original 10-K, as amended by Amendment No. 1, or modify or update the disclosure contained therein in any way other than as required to reflect the amendments discussed above.
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.
± Indicates a management contract or compensatory plan.
† Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon its request.
* This certification is deemed not filed for purposes of section 18 of the Securities Exchange
Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act.
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors ofThe Lovesac
Company
Opinion on the Financial Statements
We have audited the accompanying balance sheet of The Lovesac Company (the "Company") as of January 29, 2023, the related statements of operations, changes in stockholders' equity, and cash flows, for the year ended January 29, 2023, and the related notes (collectively referred to as the "financial statements").In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 29, 2023, and the results of its operations and its cash flows for the year ended January
29, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 29, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 29, 2023 (November 2, 2023, as to the effects of the material weaknesses described in Management's Annual Report
on Internal Control over Financial Reporting (as revised)), which report expressed an adverse opinion on the Company’s internal control over financial reporting because of material weaknesses.
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 audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit 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 audit 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 audit provides a reasonable basis for our opinion.
Restatement of the 2023 Financial Statements
As discussed in Note 2 to the financial statements, the accompanying 2023 financial statements have been restated to correct for errors.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Barter Arrangements — Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company has a bartering arrangement with a third-party vendor, in which the Company sells returned open-box inventory in exchange for media credits. Barter sale transactions with commercial substance are recorded at a transaction price based on the estimated fair value of the non-cash consideration
of the media credits to be received and the revenue is recognized when control of inventory is transferred, which is when the inventory is picked up from the Company’s warehouse. Fair value is estimated using various considerations including the cost of similar media advertising if transacted directly, the expected sales price of product given up in exchange for the media credits, and the expected usage
of media credits prior to expiration based on a marketing spend forecast. For the year ended January 29, 2023,
the Company recognized $i21.3 million of barter sales in exchange for media credits. The Company recognizes an asset for media credits which is subsequently evaluated for impairment at each reporting period for any changes in circumstances. As of January 29, 2023, the Company had $i25.2
million of unused media credits and did not recognize any impairment.
We identified the barter arrangement as a critical audit matter because of the significant estimate and assumptions management makes to determine the transaction price based on the estimated fair value of the non-cash consideration received in exchange for the media credits. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimate of the fair value of the sale transaction price.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to barter arrangement included the following, among others:
•We tested the effectiveness of controls over the determination of
the transaction price
•We read the underlying barter transaction agreement
•For a sample of barter sale transactions, we tested that the sale occurred and the estimated fair value of the sale transaction price, as follows:
◦Obtained shipping documents that evidenced the transfer of control of the related inventory
◦Compared management’s independent estimate of advertising costs to the actual advertising costs incurred under the barter arrangement from the third-party vendor
◦Compared the transaction price of the inventory sold through the bartering agreement to the transaction price of like inventory sold to other
third-party customers
◦Tested the underlying assumptions to management’s analysis to determine their ability to utilize media credits by 1) making inquiries of management related to their projected advertising and media spend, 2) performing a lookback analysis of total marketing spend and specific marketing spend with the third-party vendor, and 3) comparing the forecasts to the amounts included in the overall business forecast as communicated to the Board of Directors
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Lovesac Company
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Lovesac Company (the “Company”) as of January 29, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria,
the Company has not maintained effective internal control over financial reporting as of January 29, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
In our report dated March 29, 2023, we expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. As described below, material weaknesses were subsequently identified as a result of the restatement of the previously issued financial statements. Accordingly, management has revised its assessment about the effectiveness of the
Company’s internal control over financial reporting and our present opinion on the effectiveness of the Company’s internal control over financial reporting as of January 29, 2023, as expressed herein, is different from that expressed in our previous report.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the financial statements as of and for the year ended January 29, 2023, of the Company and our report dated March 29, 2023, (November 2,
2023, as to the restatement described in Note 2 to the financial statements), expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the restatement.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) 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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim
financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment:
The errors identified as to the restatement described in Note 2 to the financial statements resulted from material weaknesses in the control environment, as follows:
a.The Company lacked a sufficient number of professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. Additionally, management did not establish formal reporting lines in pursuit of its objectives. Further, the lack of a sufficient number of professionals
resulted in an inability to consistently establish appropriate authorities and responsibilities in pursuit of its financial reporting objectives in its finance and accounting functions. These items collectively led to an ineffective control environment commensurate with its financial reporting requirements.
b. The Company did not maintain appropriate oversight and monitoring activities over accounting processes related to certain accruals and estimates. Specifically, management did not sufficiently promote, monitor or enforce appropriate accounting policies and procedures, thereby resulting in an inappropriate and unsupported adjustments to shipping expenses, including the accrual methodology and estimates for the accurate recording of last mile freight expenses.
The
control environment material weaknesses contributed to a material weakness within The Company's system of internal control over financial reporting at the control activity level. The Company did not have control activities that were designed and operating effectively related to establishing controls over journal entries operated by competent personnel to identify and correct, in a timely manner, erroneous manual journal entries, and the shipping accrual process, that when aggregated resulted in a material weakness.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the financial statements as of and for the year ended January
29, 2023, of the Company, and this report does not affect our report on such financial statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Lovesac Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of The Lovesac Company (the “Company”) as of January 30, 2022, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended January 30, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of January 30, 2022, and the results of its operations and its cash flows for each of the two years in the period ended January 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of January 30, 2022, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 30, 2022, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of a material weakness.
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 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. 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for leases in accordance with ASC 842
Description of the matter
As described in Note 1 to the financial statements, the Company changed its method of accounting for leases in 2021 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842), and the related amendments.
The adoption of ASC 842 resulted in the recognition of right-of-use operating lease assets of $90 million and operating lease liabilities of approximately
$97 million, and the reclassification of deferred rent of $6.7 million as a reduction of the right-of-use assets as of February 1, 2022. There was no cumulative effect of adopting the standard to retained earnings.
Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term discounted using the incremental borrowing rate.
Auditing the
Company’s adoption of ASC 842 was complex and involved subjective auditor judgment because the Company is a party to a significant number of lease contracts and certain aspects of adopting ASC 842 required management to exercise judgment in applying the new standard to its portfolio of lease contracts. In particular, the estimates of the incremental borrowing rate were complex due to the significant management estimates required to determine the appropriate incremental borrowing rate and the resulting impact on the financial statements.
How We Addressed the Matter in Our Audit
We
obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s accounting for the adoption of ASC 842.
This included testing controls over management’s review of the incremental borrowing rate and models used to estimate the fair value of the right-of-use asset, including the related data and assumption.
To test the adoption of ASC 842, we performed audit procedures that included, among others, selecting a sample of lease contracts from the overall population to evaluate the completeness, accuracy, and proper application of the accounting standard, testing the accuracy of
lease terms within the lease IT system by comparison of the data for a sample of leases to the underlying lease contract, and testing the accuracy of the Company’s system calculations of initial operating lease right-of use-assets and operating lease liabilities.
Additionally, we evaluated management’s methodology and model for developing the incremental borrowing rate by performing comparative independent calculations.
We have served as the Company’s auditor from 2017-2022
(amounts in thousands, except share and per share amounts)
2023
2022
(As
Restated)
(As Revised)
Assets
Current Assets
Cash and cash equivalents
$
i43,533
$
i92,392
Trade
accounts receivable
i9,103
i8,547
Merchandise
inventories, net
i119,627
i108,493
Prepaid
expenses and other current assets
i15,452
i12,299
Total
Current Assets
i187,715
i221,731
Property and equipment,
net
i52,904
i34,137
Operating
lease right-of-use assets
i135,411
i100,891
Other
Assets
Goodwill
i144
i144
Intangible
assets, net
i1,411
i1,413
Deferred
tax asset
i8,677
i9,721
Other
assets
i22,364
i1,047
Total
Other Assets
i32,596
i12,325
Total
Assets
$
i408,626
$
i369,084
Liabilities
and Stockholders’ Equity
Current Liabilities
Accounts payable
$
i24,576
$
i33,247
Accrued
expenses
i25,417
i40,859
Payroll
payable
i6,783
i9,978
Customer
deposits
i6,760
i13,316
Current
operating lease liabilities
i13,075
i11,937
Sales
taxes payable
i5,430
i5,359
Total
Current Liabilities
i82,041
i114,696
Operating
Lease Liabilities, long term
i133,491
i96,574
Line
of Credit
i—
i—
Total Liabilities
$
i215,532
$
i211,270
Commitments
and Contingencies (See Note 9)
i
i
Stockholders’ Equity
Preferred
Stock $ii0.00001/ par value, ii10,000,000/
shares authorized, iiiino///
shares issued or outstanding as of Jan 29, 2023 and Jan 30, 2022.
i—
i—
Common
Stock $ii0.00001/ par value, ii40,000,000/
shares authorized, ii15,195,698/ shares issued and outstanding as of Jan 29, 2023 and ii15,123,338/
shares issued and outstanding as of Jan 30, 2022.
i—
i—
Additional
paid-in capital
i182,554
i173,762
Accumulated
earnings (deficit)
i10,540
(i15,948)
Stockholders’
Equity
i193,094
i157,814
Total Liabilities
and Stockholders’ Equity
$
i408,626
$
i369,084
The
accompanying notes are an integral part of these financial statements
Note
1. iBasis of Presentation, and Summary of Significant Accounting Policies
Nature of Operations
The Lovesac Company (the “Company”, “we”, “us” or “our”) is a technology driven company that designs, manufactures and sells unique, high quality furniture derived through its proprietary "Designed for Life" approach which results in products that are built to last a lifetime
and designed to evolve as our customers’ lives do. The Company markets and sells its products through modern and efficient showrooms and, increasingly, through online sales directly at www.lovesac.com, supported by direct-to-consumer touch-feel points in the form of our own showrooms, which include our newly created mobile concierge and kiosks, as well as through shop-in-shops and online pop-up-shops with third party retailers. As of January 29, 2023, the Company operated i195
showrooms including kiosks and mobile concierges located throughout the United States. The Company was formed as a Delaware corporation on January 3, 2017, in connection with a corporate reorganization with SAC Acquisition LLC, a Delaware limited liability company (“SAC LLC”), the predecessor entity to the Company.
i
Basis of Presentation
The
financial statements of the Company as of January 29, 2023 and January 30, 2022 and for the years ended January 29, 2023, January 30, 2022 and January 31, 2021 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission.
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Fiscal
Year
The Company’s fiscal year is determined on a 52/53 week basis ending on the Sunday closest to February 1. Hereinafter, fiscal years ended January 29, 2023, January 30, 2022 and January 31, 2021 are referred to as fiscal 2023, 2022 and 2021, respectively. Fiscal 2023, 2022 and 2021 were 52-week fiscal years.
i
Use of Estimates
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The Company evaluates its estimates and judgements on an ongoing basis based on historical experience, expectations of future events and various other factors we believe to be reasonable under the circumstances and revise them when necessary in the period the change is determined. Actual results may differ from the original or revised estimates.
i
Revenue
Recognition
Our revenue consists substantially of product sales. The Company reports product sales net of discounts and recognized at a point in time when control transfers to the customer, which occurs when products are shipped. The Company excludes from the measurement of the transaction price all taxes assessed by governmental authorities collected from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes). The Company applies the practical expedient for contracts with duration of one year or less and therefore does
not consider the effects of the time value of money.
Shipping and handling charges billed to customers are included in revenue. The Company recognizes shipping and handling expense as fulfillment activities (rather than a promised good or service) when the activities are performed. Accordingly, the Company records the expenses for shipping and handling activities at the same time the Company recognizes revenue. Shipping and handling costs incurred are included in cost of merchandise sold and include inbound freight and tariff costs relative to inventory sold, warehousing, and last mile shipping to our customers. Shipping and handling costs were $i159.7
million in fiscal 2023, $i112.7 million in fiscal 2022, and $i63.1 million in fiscal 2021.
Estimated refunds for returns are recorded using our historical return patterns, adjusting for any changes in returns policies and current product performance.
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 return liability on the balance sheet. As of January 29, 2023 and January 30, 2022, we recorded a return liability of $i4.5
million and $i2.0 million within accrued expenses, and a corresponding asset for the net realizable value of inventory to be returned for $i1.0 million and $i0.4
million, respectively, in merchandise inventories on our Balance Sheet.
In some cases, deposits are received before the Company transfers control, resulting in the recognition of contract liabilities, reported as customer deposits on our Balance Sheet. As of January 29, 2023, and January 30, 2022, the Company recorded customer deposit liabilities the amount of $i6.8
million and $i13.3 million, respectively. During the years ended January 29, 2023, and January 30, 2022, the Company recognized $i13.3
million and $i6.0 million related to customer deposits from fiscal 2022 and 2021.
The Company offers its products through showrooms and through the Internet. The other channel predominantly represents sales through the use of online and in store pop-up shops, shop-in-shops, and barter inventory transactions. In store pop-up-shops are staffed with associates trained to demonstrate and sell our product. iThe
following represents sales disaggregated by channel:
(in thousands)
2023
2022
2021
(As Restated)
Showrooms
$
i398,184
$
i298,989
$
i146,150
Internet
i176,519
i150,622
i151,065
Other
i76,476
i48,628
i23,523
Total
net sales
$
i651,179
$
i498,239
$
i320,738
The
Company has no foreign operations and its sales to foreign countries was less than iii.01//%
of total net sales in fiscal 2023, 2022, and 2021.
The Company had no customers in fiscal 2023, 2022, or 2021 that comprise more than 10% of total net sales. See Note 12. Segment Information for net sales disaggregated by product.
i
Barter Arrangements
The Company has a bartering
arrangement with a third-party vendor. The Company repurposes returned open-box inventory in exchange for media credits, which are being used to support our advertising initiatives to create brand awareness and drive net sales growth. Barter transactions with commercial substance are recorded at a transaction price based on the estimated fair value of the non-cash consideration of the media credits to be received and the revenue is recognized when control of inventory is transferred, which is when the inventory is picked up in our warehouse. Fair value is estimated using various considerations, including the cost of similar media advertising if transacted directly, the expected sales price of product given up in exchange for the media credits, and the expected usage of media credits prior to expiration based on a marketing spend forecast. The
Company recognizes an asset for media credits which is subsequently evaluated for impairment at each reporting period for any changes in circumstances. As the barter credits are expected to be utilized at various dates through their expiration dates, the Company will classify the amount expected to be utilized in the next fiscal year as current, which is included in Prepaid and Other Current Assets, with the remaining balance included as part of Other Assets on the balance sheet.
For the year ended January 29, 2023, and January 30, 2022, the Company recognized $i21.3 million
and $i3.5 million, respectively, of barter sales in exchange for media credits. The Company had $i25.2 million and $i3.4
million of unused media credits as of January 29, 2023, and January 30, 2022, respectively, and did not recognize any impairment. The difference between the opening and closing balances of the Company's prepaid barter credit primarily results from the inventory exchanged for media credits during the period, offset by utilization of those credits.
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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 are stated at their estimated realizable amount and do not bear interest for which collectability is reasonably assured. 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 receivables are evaluated for collectability on a regular basis and an allowance is recorded, if necessary. 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 two wholesale customers. The Company recognized $ii0.4/
million related to bad debt write-offs for fiscal 2023,and 2022, and recognized $i0.8 million for fiscal 2021, respectively.
/i
Breakdown
of trade accounts receivable is as follows:
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, deposits, prepaid rent, prepaid inventory, and other costs.
i
Merchandise Inventories, net
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.
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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 2023, fiscal 2022 or fiscal 2021 as the Company continues to honor all outstanding gift certificates.
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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. The disposals generally relate to the decommissioning of aged assets, remodeled showrooms, and fixtures used during pop-up-shops. Expenditures for major betterments that extend the useful lives of property and equipment
are capitalized.
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. There were iiino//
impairments during fiscal 2023, 2022, or 2021.
/i
Intangible Assets, net
Intangible assets with finite useful lives, including patents, trademarks, and other intangible assets are being amortized on a straight-line basis over their estimated lives of i10
years, i3 years, and i5 years, respectively. 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. There were iiino//
impairments during fiscal 2023, 2022, or 2021.
/i
Impairment of Long Lived Assets
Our long-lived assets consist of property and equipment and right-of-use assets from leases. Property and equipment includes leasehold improvements, and other tangible 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. We evaluate for impairment at the individual showroom level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, we 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 is measured as the excess of the carrying value over its fair value. We estimate fair value based on future discounted cash flow based on our historical operations of the showroom and estimates of future showroom profitability and economic conditions. These estimates include factors such as sales growth, gross margin, employment costs, lease escalation, and overall macroeconomic conditions, and are therefore subject to variability. Actual future results may differ from those estimates. If required, an impairment loss is recorded
for that portion of the assets' carrying value in excess of fair value.
In fiscal 2023, the Company did inotrecognize any impairment charges associated with showroom-level right of use lease assets. During fiscals 2022 and 2021, the Company recorded impairment charges of $i0.6 million
and $i0.2 million, respectively, associated with the assets of an underperforming retail locations. The impairments were recorded in selling, general and administrative in the Company’s Statements of Operations.
/i
Product
Warranty
Depending on the type of merchandise, the Company offers either a ithree-year limited warranty or a lifetime warranty. The Company’s warranties require it to repair or replace defective products at no cost to the customer. At the time product revenue is recognized, the Company reserves for estimated future costs that may be incurred under its warranties based on historical experience. The
Company periodically reviews the adequacy of its recorded warranty liability. Product warranty expense, without any reserve adjustments, was approximately $i0.7 million, $i0.5 million, and $i0.7
million in fiscal 2023, 2022, and 2021. The increase in fiscal 2023 is related to an increase in warranty claims related to an increase in net sales. Warranty reserve was $ii0.7/ million as of January 29,
2023 and January 30, 2022.
/i
Leases
The Company adopted Accounting Standards Update (ASU) No.2016-02, Leases (ASC 842) during fiscal 2022. The Company leases its office, warehouse facilities
and retail showrooms under operating lease agreements which expire at various dates through January 2034. Leases with an initial term of twelve months or less are not recorded on the balance sheet and are expensed on a straight-line basis over the lease term in the Statements of Operations.
The Company determines if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of
the economic benefits from the use of that identified asset. Operating right-of-use assets represents the right to use an underlying asset pursuant to the lease for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease, both of which are recognized based on the present value of future minimum lease payments over the lease term at the commencement date, Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. We combine lease and non-lease components for our showroom real estate leases in determining the lease payments subject to the initial present value calculation.
The lease payments are discounted at the Company's incremental borrowing rate as the implicit rate in the lease is not readily determinable for most
of the Company's leases, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We determine incremental borrowing rates as of the first day of each fiscal year and analyze changes in interest rates and the Company's credit profile to determine if the rates need to be updated during the fiscal year.
We recognize operating lease cost over the estimated term of the lease, which includes options to extend lease terms that are reasonably certain of being exercised, starting when possession of the property is taken from the landlord, which normally includes a construction period prior to the showroom opening. When a lease contains a predetermined fixed escalation
of the fixed rent, we recognize the related operating lease cost on a straight-line basis over the lease term. In addition, certain of our lease agreements include variable lease payments, such as payments based on a percentage of net sales that are in excess of a predetermined level and/or increases based on a change in the consumer price index or fair market value. These variable lease payments are excluded from minimum lease payments and are included in the determination of net lease cost when it is probable that the expense has been incurred and the amount can be reasonably estimated. If an operating lease asset is impaired, the remaining operating lease asset will be amortized on a straight-line basis over the remaining lease term.
i
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.
i
Selling, General and Administrative Expenses
Selling, general and administrative expenses include all operating costs, other than advertising and marketing expense, not included
in cost of merchandise sold. These expenses include all payroll and payroll-related expenses; showroom expenses, including occupancy costs related to showroom operations, such as rent and common area maintenance; occupancy and expenses related to many of our operations at our headquarters, including utilities, equity based compensation, financing related expenses and public company expenses; and credit card transaction fees. 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.
i
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 in the month following one (1) month of service and the employee is over age 21. Participants are able to contribute up to i100%
of their eligible compensation to the 401(k) Plan subject to limitations with the IRS. Employer contributions to the 401(k) Plan for fiscal 2023, fiscal 2022, and fiscal 2021 were approximately $i1.3 million, $i0.8 million, and $i0.5
million, respectively.
/i
Advertising and Marketing Expenses
Advertising and marketing expense include digital, social, and traditional advertising and marketing initiatives, that cover all of our business channels. All advertising costs are expensed as incurred, or upon the release of the initial advertisement.
Total advertising expenses were $i79.9 million, $i65.1 million, and $i41.9
million in fiscal 2023, fiscal 2022, and fiscal 2021, respectively.
i
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.
i
Equity-Based Compensation
The
Company adopted the 2017 Equity 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 i10 years from the effective date of the 2017 Equity Plan. Vesting is typically over a three or ifour-year
period and is contingent upon continued employment with the Company on each vesting date.
The fair value of the restricted stock units is determined based on the closing price of the Company's common stock on the grant date and the expense is recognized over the service period. For performance based restricted stock units, the number of units received will depend on the achievement of financial metrics relative to the approved performance targets. For performance based restricted stock units, stock-based compensation expense is recognized based on expected achievement of performance targets. The Company recognizes forfeitures as they occur.
/i
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.
Deferred income taxes are provided on temporary differences between the income tax basis 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.
i
Basic
and Diluted Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding and common stock equivalents outstanding during the period. Diluted net income (loss) per common share includes, in periods in which they are dilutive, the effect of those potentially dilutive securities where the average market price of the common stock exceeds the exercise prices for the respective periods. In fiscal 2023, the effects of i640,256
unvested restricted stock units, and i281,750 common stock warrants were included in the diluted share calculation. The effects of i495,366
stock options were excluded in the diluted net income per common share calculation because the effects of including theses potentially dilutive shares was antidilutive.
In fiscal 2022, the effects of i533,333 unvested restricted stock units, i495,366
stock options and i281,750 common stock warrants were included in the diluted share calculation.
In fiscal 2021, the effects of i655,558
unvested restricted stock units and i293,973 common stock warrants were included in the diluted share calculation. The effects of i495,366
stock were excluded in the diluted net loss per common share calculation as the effects of including theses potentially dilutive shares was antidilutive.
The
Company has considered all recent accounting pronouncements issued by the Financial Accounting Standards Board and they were considered to be not applicable or the adoption of such pronouncements will not have a material impact on the financial statements.
Note 2. iRestatement and Other Corrections of Previously Issued Financial Statements
The Audit Committee of the Board of Directors of Lovesac completed
an independent investigation in August 2023 whereby the Company concluded $i2.2 million of last mile shipping expenses relating to the fiscal year ended January 29, 2023 were improperly capitalized during the quarter ended April 30, 2023. Through this investigation, the Company also determined that the methodology used to estimate an accrual of
last mile freight expenses at each period end was not accurate because the calculation did not use the correct number of shipments that were accepted by the shipper for delivery, but not yet invoiced to the Company. Management prepared a quantitative and qualitative analysis of these errors, along with certain other immaterial accounting errors, in accordance with the U.S. SEC Staff's Accounting Bulletin Nos. 99 and 108, Materiality, and concluded the aggregate impact of all the errors are material to the Company's previously reported interim, year-to-date, and annual financial statements as of and for the year ended January 29, 2023 and the Company’s previously
reported interim financial statements as of and for the three-month period ended April 30, 2023 and immaterial to the previously reported interim, year-to-date, and annual financial statements as of and for the year ended January 30, 2022 (collectively the "previously reported financial statements"). As a result, the accompanying financial statements as of and for the years ended January 29, 2023 and 2022, and related notes hereto, have been restated or revised, as applicable, to correct these errors. The errors had no impact on the Company's previously financial statements as of and for the year ended January31, 2021.
i
A
summary of the impacts of the adjustments on the previously reported financial statements are included below. Note 13. Quarterly Financial Data (Unaudited) discloses the impact of the adjustments on the Company’s unaudited condensed financial information for each interim period within the fiscal year ended January 29, 2023.
A description of the errors and their impacts on the previously issued financial statements are included below.
Description of Misstatement Adjustments
(a) Last Mile Freight
The Company recorded adjustments to correct misstatements identified in the internal investigation related to last mile freight expenses. The correction of this item represents the net impact of the findings from the investigation as noted above.
(b) Leases
The
Company recorded adjustments to correct certain misstatements related to its operating leases. In the fiscal year 2022, the Company recorded an incorrect entry that resulted in the double-counting of rent expense associated with operating leases, with a corresponding impact on prepaid rent and lease liabilities as of January 30, 2022. In addition, the Company recorded an incorrect entry pertaining to incremental borrowing rate that resulted in misstatements associated with operating leases, with a corresponding impact on prepaid rent, right-of-use assets, and the current and long-term portion of operating lease liabilities, as of and during the fiscal year ended January 29, 2023
(c)
Buyer’s Remorse
The Company recorded an adjustment to correct certain canceled sales orders related to buyer’s remorse, which resulted in an overstatement of net revenue and trade receivables as of and for the fiscal year ended January 29, 2023. The Company defines buyer's remorse as a customer who cancels an order within a short window of time after making a purchase.
(d) Supplier Rebates
During the quarter ended July 31, 2022, the
Company received rebates from certain of its suppliers which was incorrectly recorded to cost of goods sold for the entire amount of the rebate received instead of deferring a portion of the rebate to inventory and recognizing the rebate in cost of goods sold as the related inventory was sold. We corrected these misstatements to defer the up-front consideration from suppliers when the retention or receipt of that consideration was to recognize the consideration as a reduction of cost of goods sold over the sell through rate of the inventory.
(e) Balance Sheet Reclassifications
The Company recorded adjustments to correct the classification of certain balance sheet reclassifications between short and long-term assets. These
adjustments primarily related to the classification of prepaid expenses and other current assets and the classification of other assets (long-term). In addition, the Company recorded adjustments to correct the classification of tenant improvement allowances which resulted in a reclassification between prepaid expenses and other current assets and short-term lease liabilities.
(f) Income Taxes
The Company recorded adjustments to recognize the net impact on current and deferred income taxes associated with all the misstatements described herein. The adjustments to income taxes were recorded in the period corresponding with the respective misstatements.
The correction of these misstatements resulted in a decrease in provision for income taxes of $i0.3 million and a decrease in benefit from income taxes of $i0.5 million, respectively for the years ended January 29, 2023
and January 30, 2022.
(g) Inventory and Cost of Goods Sold
The Company recorded adjustments to correct for a misstatement of an accrual related to a duplicate recording of a vendor invoice for freight charges. The Company recorded another adjustment to correct for the misstatement of inventory related to partial returned goods.
The Company corrected the cash flow presentation related to purchases of property and equipment and patents and trademarks not yet paid for at period end. This resulted in a reclassification between cash flows from operating activities and investing activities for the fiscal year ended January 30, 2022 and for the fiscal periods ended October 30, 2022, July 31, 2022 and May 1, 2022. There was no impact to net change in cash and cash equivalents.
(amounts
in thousands, except share and per share amounts)
As Previously Reported
Corrections
Reference
As Restated
Assets
Current Assets
Trade
accounts receivable
i9,469
(i366)
(c)
i9,103
Merchandise
inventories, net
i119,962
(i335)
(g)
i119,627
Prepaid
expenses and other current assets
i21,077
(i5,625)
(a)(b)(e)(f)
i15,452
Total
Current Assets
i194,041
(i6,326)
i187,715
Operating
lease right-of-use assets
i138,271
(i2,860)
(b)
i135,411
Other
Assets
Deferred
tax asset
i9,420
(i743)
(f)
i8,677
Other
assets
i21,863
i501
(e)
i22,364
Total
Other Assets
i32,838
(i242)
i32,596
Total
Assets
$
i418,054
$
(i9,428)
$
i408,626
Liabilities
and Stockholders' Equity
Current Liabilities
Accrued expenses
i23,392
i2,025
(a)(b)(f)
i25,417
Current
operating lease liabilities
i21,898
(i8,823)
(b)(e)
i13,075
Total
Current Liabilities
i88,839
(i6,798)
i82,041
Operating
Lease Liability, long-term
i135,955
(i2,464)
(b)
i133,491
Total
Liabilities
i224,794
(i9,262)
i215,532
Stockholders’
Equity
Accumulated
earnings (deficit)
i10,706
(i166)
(a)(b)(c)(f)(g)
i10,540
Stockholders'
Equity
i193,260
(i166)
i193,094
Total
Liabilities and Stockholders' Equity
$
i418,054
$
(i9,428)
$
i408,626
The
description of each error is described above. The impact of each error for the corresponding period in the above table is described below:
(a) Last Mile Freight - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $i1.0 million, an increase to accrued expenses of $i2.3 million,
and a decrease to accumulated earnings of $i1.3 million at January 29, 2023.
(b) Leases - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of less than $i0.1 million,
a decrease to operating lease right-of-use assets of $i2.9 million, an increase to accrued expenses of $i0.2 million, a decrease to current operating lease liabilities of $i2.7 million,
a decrease to operating lease liability, long-term of $i2.5 million, and an increase to accumulated earnings of $i2.1 million at January 29, 2023.
(c)
Buyer’s Remorse - The correction of these misstatements resulted in a decrease to trade accounts receivable of $i0.4 million and a decrease to accumulated earnings of $i0.4 million at January
29, 2023.
(e) Balance Sheet Reclassifications - The correction of these misstatements resulted in a decrease to prepaid expenses and other current assets of $i6.7 million, a decrease to current operating lease liabilities of $i6.2 million,
and an increase to other assets of $i0.5 million at January 29, 2023.
(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to prepaid expenses and other current assets of less than $i0.1 million,
a decrease to deferred tax asset of $i0.7 million, a decrease to accrued expenses of $i0.5 million, and a decrease to accumulated earnings of $i0.2 million
at January 29, 2023.
(g) Inventory and Cost of Goods Sold - The correction of these misstatements resulted in a decrease to merchandise inventories, net of $i0.3 million and a decrease to accumulated earnings of $i0.3 million
at January 29, 2023.
(amounts in thousands, except per share data and share amounts)
As Previously Reported
Corrections
Reference
As Restated
Net sales
$
i651,545
$
(i366)
(c)
$
i651,179
Cost
of merchandise sold
i305,719
i1,809
(a)(g)
i307,528
Gross
profit
i345,826
(i2,175)
i343,651
Operating
expenses
Selling, general and administration expenses
i216,103
(i124)
(b)
i215,979
Total
operating expenses
i306,809
(i124)
i306,685
Operating
income (loss)
i39,017
(i2,051)
i36,966
Net
income (loss) before taxes
i38,900
(i2,051)
i36,849
(Provision
for) benefit from income taxes
(i10,658)
i297
(f)
(i10,361)
Net
income (loss)
$
i28,242
$
(i1,754)
$
i26,488
Net
income (loss) per common share:
Basic
$
i1.86
$
(i0.12)
$
i1.74
Diluted
$
i1.77
$
(i0.11)
$
i1.66
The
description of each error is described above. The impact of each error for the corresponding period in the above table is described below:
(a) Last Mile Freight - The correction of these misstatements resulted in an increase to cost of merchandise sold of $i1.5 million for the year ended January 29, 2023.
(b) Leases - The correction of these misstatements resulted in a decrease to selling, general and administrative expenses of $i0.1 million
for the year ended January 29, 2023.
(c) Buyer’s Remorse - The correction of these misstatements resulted in a decrease to net sales of $i0.4 million for the year ended January 29, 2023.
(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to provision for income taxes of $i0.3 million
for the year ended January 29, 2023.
(g) Inventory and Cost of Goods Sold - The correction of these misstatements resulted in an increase to cost of merchandise sold of $i0.3 million for the year ended January 29, 2023.
Adjustments
to reconcile net income (loss) to cash used in operating activities:
Deferred
income taxes
i416
i628
(f)
i1,044
Change
in operating assets and liabilities:
Trade accounts receivable
(i921)
i366
(c)
(i555)
Merchandise
inventories
(i11,470)
i335
(g)
(i11,135)
Prepaid
expenses and other current assets
i890
i2,197
(a)(b)(e)(f)
i3,087
Other
assets
(i21,459)
i546
(e)
(i20,913)
Accounts
payable and accrued expenses
(i33,002)
i1,664
(a)(b)(f)
(i31,338)
Operating
lease liabilities
(i18,281)
(i3,982)
(b)(e)
(i22,263)
Net
cash used in operating activities
(i21,375)
i—
(i21,375)
Cash
Flows from Investing Activities
Net cash used in investing activities
(i25,549)
i—
(i25,549)
Cash
Flows from Financing Activities
Net
cash used in financing activities
(i1,935)
i—
(i1,935)
Net
change in cash and cash equivalents
(i48,859)
i—
(i48,859)
Cash
and cash equivalents - Beginning
i92,392
i—
i92,392
Cash
and cash equivalents - Ending
$
i43,533
$
i—
$
i43,533
See
descriptions of the net income (loss) impacts in the statement of operations for the year ended January 29, 2023 section above.
No other misstatements impacted the classifications between net operating, net investing, or net financing cash flow activities for the year ended January 29, 2023.
(amounts in thousands, except share and per share amounts)
As Previously Reported
Revisions
Reference
As Revised
Assets
Current Assets
Prepaid
expenses and other current assets
i15,726
(i3,427)
(a)(b)(e)(f)
i12,299
Total
Current Assets
i225,158
(i3,427)
i221,731
Other
Assets
Deferred
tax asset
i9,836
(i115)
(f)
i9,721
Other
assets
i—
i1,047
(e)
i1,047
Total
Other Assets
i11,393
i932
i12,325
Total
Assets
$
i371,579
$
(i2,495)
$
i369,084
Liabilities
and Stockholders' Equity
Current Liabilities
Accrued expenses
i40,497
i362
(a)(f)
i40,859
Current
operating lease liabilities
i16,382
(i4,445)
(b)(e)
i11,937
Total
Current Liabilities
i118,779
(i4,083)
i114,696
Total
Liabilities
i215,353
(i4,083)
i211,270
Stockholders’
Equity
Accumulated
(deficit) earnings
(i17,536)
i1,588
(a)(b)(f)
(i15,948)
Stockholders'
Equity
i156,226
i1,588
i157,814
Total
Liabilities and Stockholders' Equity
$
i371,579
$
(i2,495)
$
i369,084
The
description of each error is described above. The impact of each error for the corresponding period in the above table is described below:
(a) Last Mile Freight - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $i0.1 million, a decrease to accrued expenses of $i0.1 million,
and a decrease to accumulated deficit of $i0.2 million at January 30, 2022.
(b) Leases - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $i0.3 million,
a decrease to current operating lease liabilities of $i1.7 million, and a decrease to accumulated deficit of $i2.0 million at January 30, 2022.
(e)
Balance Sheet Reclassifications - The correction of these misstatements resulted in a decrease to prepaid expenses and other current assets of $i3.8 million, a decrease to current operating lease liabilities of $i2.8 million,
and an increase to other assets of $i1.0 million at January 30, 2022.
(f) Income Taxes - The tax impact of all misstatements resulted in an increase to prepaid expenses and other current assets of less than $i0.1 million,
a decrease to deferred tax asset of $i0.1 million, an increase to accrued expenses of $i0.5 million, and an increase to accumulated deficit of $i0.5 million
at January 30, 2022.
(amounts in thousands, except per share data and share amounts)
As Previously Reported
Revisions
Reference
As Revised
Cost of merchandise sold
i224,894
(i187)
(a)
i224,707
Gross
profit
i273,345
i187
i273,532
Operating
expenses
Selling, general and administration expenses
i161,967
(i1,950)
(b)
i160,017
Total
operating expenses
i234,904
(i1,950)
i232,954
Operating
income
i38,441
i2,137
i40,578
Net
income before taxes
i38,262
i2,137
i40,399
Benefit
from (provision for) income taxes
i7,638
(i549)
(f)
i7,089
Net
income
$
i45,900
$
i1,588
$
i47,488
Net
income per common share:
Basic
$
i3.04
$
i0.10
$
i3.14
Diluted
$
i2.86
$
i0.10
$
i2.96
The
description of each error is described above. The impact of each error for the corresponding period in the above table is described below:
(a) Last Mile Freight - The correction of these misstatements resulted in a decrease to cost of merchandise sold of $i0.2 million for the year ended January 30, 2022.
(b) Leases - The correction of these misstatements resulted in a decrease to selling, general and administrative expenses of $i2.0 million
for the year ended January 30, 2022.
(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to benefit from income taxes of $i0.5 million for the year ended January 30, 2022.
Adjustments
to reconcile net income to cash provided by (used in) operating activities:
Deferred
income taxes
(i9,836)
i115
(f)
(i9,721)
Change
in operating assets and liabilities:
Prepaid expenses and other current assets
(i2,459)
i3,427
(a)(b)(e)(f)
i968
Other
assets
i—
(i1,047)
(e)
(i1,047)
Accounts
payable and accrued expenses
i39,195
(i1,008)
(a)(f)(h)
i38,187
Operating
lease liabilities
(i14,400)
(i4,445)
(b)(e)
(i18,845)
Net
cash provided by (used in) operating activities
i34,018
(i1,370)
i32,648
Cash
Flows from Investing Activities
Purchase of property and equipment
(i15,887)
i1,272
(h)
(i14,615)
Payments
for patents and trademarks
(i601)
i98
(h)
(i503)
Net
cash (used in) provided by investing activities
(i16,488)
i1,370
(i15,118)
Cash
Flows from Financing Activities
Net
cash used in financing activities
(i3,479)
i—
(i3,479)
Net
change in cash and cash equivalents
i14,051
i—
i14,051
Cash
and cash equivalents - Beginning
i78,341
i—
i78,341
Cash
and cash equivalents - Ending
$
i92,392
$
i—
$
i92,392
Supplemental
Cash Flow Data:
Non-cash investing activities:
Asset
acquisitions not yet paid for at period end
$
i—
$
i1,370
(h)
$
i1,370
See
descriptions of the net income (loss) impacts in the statement of operations for the year ended January 30, 2022 section above.
The cash flow classification, as described in item (h) in the description of misstatement adjustments section above, resulted in a decrease of $i1.4 million in net cash provided by operating activities and an increase of $i1.4 million
in net cash provided by investing activities for the year ended January 30, 2022.
No other misstatements impacted the classifications between net operating, net investing, or net financing cash flow activities for the year ended January 30, 2022.
Expected amortization expense by fiscal year for these other intangible assets follows (in thousands):
2024
$
i356
2025
i299
2026
i225
2027
i178
2028
i139
Thereafter
i214
$
i1,411
/
Note
5. iPrepaid Expenses and Other Current Assets
Certain balances herein reflect the restatements described in Note 2. Restatement and Other Corrections of Previously Issued Financial Statements.
i
A summary of other prepaid and other current assets
follows (in thousands):
2023
2022
(As Restated)
(As Revised)
Barter credits
i3,770
i3,407
Rebate
receivable
i2,780
i226
Prepaid insurance
i2,009
i1,667
Prepaid
catalog costs and related
i1,557
i4,794
Prepaid
taxes
i1,000
i—
Prepaid software licenses
i945
i790
Deposits
i662
i16
Prepaid
rent
i536
i348
Prepaid inventory
i49
i475
Other
i2,144
i576
$
i15,452
$
i12,299
/
F-31
Note
6. iAccrued Expenses
Certain balances herein reflect the restatements described in Note 2. Restatement and Other Corrections of Previously Issued Financial Statements.
i
A
summary of accrued expenses follows (in thousands):
2023
2022
(As Restated)
(As Revised)
Accrued warehouse expenses
$
i5,625
$
i2,671
Customer
return liability
i4,483
i2,026
Accrued
professional fees
i2,167
i2,268
Accrued
freight and shipping
i4,432
i23,594
Accrued
occupancy
i1,278
i1,284
Accrued income taxes
i687
i1,458
Accrued
insurance
i1,026
i973
Accrued credit card fees
i770
i542
Accrued
advertising fees
i739
i4,150
Warranty liability
i721
i689
Other
accrued expenses
i3,489
i1,204
$
i25,417
$
i40,859
/
Note
7. iIncome Taxes
Certain balances herein reflect the restatements described in Note 2. Restatement and Other Corrections of Previously Issued Financial Statements.
The Company is subject to federal, state and local corporate income taxes. iThe
components of the provision for income taxes reflected on the statements of operations are set forth below:
2023
2022
2021
(As Restated)
(As Revised)
Current
taxes:
U.S. federal
$
i6,127
$
i412
$
i—
State
and local
i3,190
i2,220
i86
Total
current tax expense
$
i9,317
$
i2,632
$
i86
Deferred
taxes:
U.S. federal
$
i1,767
$
(i7,222)
$
i—
State
and local
(i723)
(i2,499)
i—
Total
deferred tax expense (benefit)
i1,044
(i9,721)
i—
Total
tax provision
$
i10,361
$
(i7,089)
$
i86
i
A
reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows:
Significant
components of the Company's deferred tax assets are as follows (in thousands):
2023
2022
(As Restated)
(As Revised)
Deferred Income Tax Assets
Federal
net operating loss carryforward
$
i—
$
i2,399
State
net operating loss carryforward
i440
i1,399
Intangible
assets
i403
i397
Accrued
liabilities
i2,952
i3,242
Equity-based
compensation
i3,247
i2,032
Merchandise
inventories
i724
i689
Charitable Contributions
i—
i12
R&D
Capitalization
i1,920
i—
Operating
Lease Liabilities
i39,488
i28,702
Total
Deferred Income Tax Assets
i49,174
i38,872
Deferred
Income Tax Liabilities
Operating Lease Right of Use Asset
(i35,484)
(i26,726)
Property
and equipment
(i5,013)
(i2,425)
Total
Deferred Tax Liabilities
(i40,497)
(i29,151)
Net
Deferred Income Tax Asset
$
i8,677
$
i9,721
/
At
January 29, 2023, the Company did not have any net operating loss carryforwards available for federal income tax purposes. At January 30, 2022, the Company had net operating loss carryforwards available for federal income tax purposes of approximately $i11.4 million. In addition, the
Company has approximately $i7.1 million and $i22.2 million of state net operating loss carryforwards as of January 29, 2023 and January 30,
2022, respectively. The state net operating losses expire at various times between 2031 and 2040. The statute of limitations has expired for all tax years prior to 2019 for federal and state tax purposes. However, the net operating losses generated on the Company's federal and state tax returns in prior years may be subject to adjustments by the federal and state tax authorities.
Prior to the fiscal 2022 year-end, the Company recorded a full valuation allowance on its net deferred tax assets, as it did not meet the more likely than not threshold required under ASC 740-10-30. For the year ended January 30, 2022, the
Company reversed its full valuation allowance of $i16.4 million, as it assessed and concluded that it met the more likely than not threshold of realizing its net deferred tax assets. The main forms of positive evidence to support the valuation allowance release were the substantial realization of its net operating loss carryforwards and cumulative three years of income. As of January 29, 2023, the Company
did not record a valuation allowance against its net deferred tax assets, due to its assessment and conclusion that it is more likely than not that it would realize its net deferred tax assets.
As of January 29, 2023 and January 30, 2022, the Company assessed and concluded that it does not have any unrecognized tax benefits. The
Company does not anticipate any material adjustments relating to unrecognized tax benefits within the next twelve months; however, the ultimate outcome of tax matters is uncertain and unforeseen results can occur. We had no interest or penalties during fiscal years 2023, 2022, and 2021, and we do not anticipate any such items during the next twelve months. Our policy is to record interest and penalties directly related to uncertain tax positions as income tax expense in the statements of operations. The IRS is auditing the Company's fiscal 2019 federal income tax return. The Company has been responding to information requests and at this time, the Internal Revenue Service (IRS) has not proposed any adjustments.
On
August 16, 2022, the Inflation Reduction Act was signed into law. The Inflation Reduction Act includes various tax provisions, which are effective for tax years beginning on or after January 1, 2023. The Company assessed and concluded that the Inflation Reduction Act did not have an impact to the financials as of January 29, 2023, and will continue to monitor the impact of the changes.
For tax years beginning after December 31, 2021, the Tax Cuts & Jobs Act of 2017 eliminated the option to deduct research and development expenditures as incurred and instead required taxpayers to capitalize and amortize
them over five or 15 years beginning in 2022. These changes in tax laws did not have a material impact on the Company’s results of operations for the year ended January 30, 2022. For the year ended January 29, 2023 due to the capitalization of research and development expenditures, the Company’s current federal taxable income increased by approximately $i7.7 million
with a corresponding increase in the Company’s deferred tax assets. The Company will continue to monitor the impact of changes in tax legislation.
Note 8. iLeases
Certain balances herein reflect the restatements described in Note 2. Restatement and Other Corrections of Previously
Issued Financial Statements.
During fiscal 2022, the Company adopted ASC No. 2016-02, Leases (Topic 842). iComponents of lease expense were as follows (in thousands):
2023
2022
(As
Restated)
(As Revised)
Operating lease expense
$
i24,173
$
i18,902
Variable
lease expense
i16,082
i10,489
Short term lease expense
i721
i336
Total
lease expense
$
i40,976
$
i29,727
Variable lease expense includes
index-based changes in rent, maintenance, real estate taxes, insurance and other variable charges included in the lease as well as rental expenses related to short term leases.
i
The Company’s weighted average lease term and weighted average discount rates are as follows:
For
the year ended
2023
2022
Weighted average remaining lease term (in years)
Operating Leases
i7.4
i6.29
Weighted
average discount rate
Operating Leases
i4.10
%
i3.44
%
/
During
the fiscal year ended January 29, 2023, we did inot recognize any impairment charges associated with showroom-level right-of-use assets. During the fiscal year ended January 30, 2022, we recognized impairment charges totaling $i0.6 million
associated with showroom-level ROU assets that were included as part of selling, general and administrative expenses. We did inot recognize any impairment charges with showroom-level right-of-use assets during the fiscal year ended January 31, 2021 as we did not adopt ASC 842 until fiscal year 2022.
Future minimum lease payments under non-cancelable leases as of January 29, 2023 were as follows (in thousands):
(As Restated)
2024
$
i21,511
2025
i26,759
2026
i24,447
2027
i22,083
2028
i19,747
Thereafter
i57,705
Total
undiscounted future minimum lease payments
i172,252
Less: imputed interest
(i25,686)
Total
present value of lease obligations
i146,566
Less: current operating lease liability
(i13,075)
Operating
lease liability- long term
$
i133,491
/
Supplemental cash flow information and non-cash activity related to our operating leases is as follows (in thousands):
2023
2022
(As
Restated)
Operating cash flow information:
Cash paid for operating lease liabilities
$
i23,724
$
i14,400
Non-cash
activities
Net additions to right-of-use assets obtained in exchange for lease obligations
$
i53,239
$
i116,048
Note
9. iCommitments, Contingencies and Related Parties
Contingencies
The Company received management services from Mistral Capital Management, LLC (“Mistral”) under a contractual agreement that ended on January 31, 2021. One of our directors is a member and principal of Mistral. There were iino/
management fees incurred in fiscal 2023 or fiscal 2022, and management fees totaled approximately $i0.4 million in fiscal 2021, and are included in selling, general and administrative expenses. There were iino/
amounts payable to Mistral as of January 29, 2023 or January 30, 2022. There were less than $i0.1 million in amounts payable to Mistral as of January 31, 2021.
The Company also received management services from Satori Capital, LLC (“Satori”) under a contractual agreement that ended on January
31, 2021. One of our directors is a partner at Satori. There were iino/ management fees incurred in fiscal 2023 or fiscal 2022 and management fees totaled approximately $i0.1
millions in fiscal 2021 and are included in selling, general and administrative expenses. There were iino/
amounts payable to Satori as of January 29, 2023 or January 30, 2022. Amounts payable to Satori as of January 31, 2021 were less than $i0.1 million consisting of management fees which were included in accounts payable in the accompanying balance sheet as of January 31, 2021.
The Company
engaged Blueport Commerce (“Blueport”), a company owned in part by investment vehicles affiliated with Mistral, as an ecommerce platform in February 2018. The Company terminated the Blueport contract in fiscal 2021 in order to launch a new enhanced ecommerce platform. There were iino/
fees incurred in fiscal 2023 or 2022. There was $i2.1 million of fees incurred with Blueport for sales transacted through the platform and an early termination fee of $i0.7 million during fiscal 2021. There were iiino//
amounts payable as of January 29, 2023, January 30, 2022, or January 31, 2021.
Recovery of Insurance Proceeds
During fiscal year 2022, a warehouse the Company had inventory in was damaged by fire and qualified for a loss recovery claim. The Company disposed of inventory of approximately $i0.6 million.
The Company reached an agreement with its insurance carrier and the Company received a cash insurance recovery of approximately $i1.2 million for the
reimbursement of lost inventory and profit margin. Accordingly, the Company recognized a gain of approximately $i0.6 million related to the recovery of lost profit margin and is included in the accompanying statements of operations as a reduction to cost of goods sold. No other insurance proceeds were received during the periods presented.
Legal
Proceedings
The Company is involved in various legal proceedings in the ordinary course of business. Where appropriate, the Company has made accruals with respect to these matters, however, for cases where liability is not probable or the amount cannot be reasonably estimated, accruals have not been made. Management cannot presently predict the outcome of these matters, although management believes, based in part on the advice of counsel, that the ultimate resolution of these matters will not have a materially adverse effect on the Company’s financial position, results of operations or cash flows.
The
Company has voluntarily self-reported to the SEC information concerning the internal investigation of the accounting matters described in the Explanatory Note and in Note 2. Restatement and Other Corrections of Previously Issued Financial Statements. As a result of self-reporting, the Company is the subject of an ongoing, non-public investigation by the SEC. The Company is cooperating fully with the SEC in its investigation and continues to respond to requests in connection with this matter. The investigation could result in the SEC seeking various penalties and relief including, without limitation, civil injunctive relief and/or civil monetary penalties or administrative relief. The nature of the relief or remedies the SEC may seek with respect to
the Company, if any, cannot be predicted at this time.
Note 10. iStockholders' Equity
Common Stock Warrants
On June 29, 2018, the
Company issued i281,750 warrants with a ifive-year term to Roth Capital Partners, LLC as part of the underwriting agreement in connection with the Company's IPO. The
warrants remain outstanding as of January 29, 2023. Warrants may be exercised on a cashless basis, where the holders receive fewer shares of common stock in lieu of a cash payment to the Company. In fiscal 2023, there were ino exercises of warrants. In fiscal 2022, i5,625
warrants were exercised, which resulted in the issuance of i10,956 common shares. There were i98 warrants that expired as of January 30, 2022. In fiscal 2021, i738,897
warrants were exercised on a cashless basis and resulted in the issuance of i439,447 common shares.
i
The following represents warrant activity during fiscal 2023, 2022, and 2021:
Average
exercise price
Number of warrants
Weighted average remaining contractual life (in years)
The Company adopted the 2017 Equity 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 i10 years from the effective date of the 2017 Equity Plan. In June 2020, the stockholders of the
Company approved an amendment to the 2017 Equity Plan that increased the number of shares of common stock reserved for issuance under the 2017 Equity Plan by i690,000 shares of common stock. The number of shares of common stock reserved for issuance under the 2017 Equity Plan increased from i1,414,889
to i2,104,889 shares of common stock. In fiscal 2023, the 2017 Equity Plan was amended and restated to, among other things, increase the shares of our common stock authorized and reserved for issuance by i550,000
shares, which increased the number of shares of common stock reserved for issuance under the 2017 Equity Plan to i2,654,889 shares of common stock.
Stock Options
In June 2019, the Company granted i495,366
nonstatutory stock options to certain officers of the Company with an option price of $i38.10 per share. i100% of the
stock options are subject to vesting on the third anniversary of the date of grant if the officers are still employed by the Company and the average closing price of the Company’s common stock for the prior i40 consecutive trading days has been at least $i75
by the third anniversary of the grant. Both the employment and the market condition were required to be satisfied no later than June 5, 2022 or the options would terminate. These options were valued using a Monte Carlo simulation model to account for the path dependent market conditions that stipulate when and whether or not the options shall vest. The stock options were modified to extend the term of the options through June 5, 2024. This resulted in additional compensation of approximately $i0.9
million, of which, $i0.3 million was recorded upon modification and the remaining expense was recognized over the remaining expected term. The market condition was met on June 5, 2021, which was the date on which the average closing price of the Company’s common stock had been at least $i75
for i40 consecutive trading days. As a result of the market condition being met, the Company accelerated the amortization and recognized additional stock-based compensation expense during fiscal year 2022 of approximately $i0.9
million. The awards vested and became exercisable on June 5, 2022.
i
The following summarizes the activity of our stock options as of January 29, 2023, January 30, 2022, and January 31, 2021 and the changes during fiscal years then ended (in thousands, except share and per share amounts) :
Number
of options
Weighted average exercise price
Weighted average remaining contractual life (in years)
Equity-based
compensation expense was approximately $i10.5 million, $i5.9 million, and $i4.7
million for fiscal 2023, 2022, and 2021 respectively. In fiscal 2023, The Company recognized $i4.3 million related to performance stock units granted in fiscal 2021 with a ithree
year term, which met the performance target of $i550 million in net sales and $i50 million in Adjusted EBITDA for fiscal 2023.
The
total unrecognized equity based compensation cost related to unvested restricted stock unit awards was approximately $i4.2 million as of January 29, 2023 and will be recognized in operations over a weighted average period of i1.95
years.
Note 11. iFinancing Arrangements
Credit Line
On February 6, 2018, the Company established a line of credit with Wells Fargo Bank. The line of credit allowed the Company to borrow up to $i25.0
million and matured on February 2023. As of January 30, 2022, the Company’s borrowing availability under the line of credit was $i22.5 million, and there were no borrowings outstanding on this line of credit.
On March 25, 2022, the Company amended the credit
agreement to extend the maturity date to March 25, 2024, and among other things, increase the maximum revolver commitment to $i40.0 million, subject to borrowing base and availability restrictions. Availability is based on eligible accounts receivable and inventory. The amended agreement contains a financial covenant that requires us to maintain undrawn availability under the credit facility of at least i10%
of the lesser of (i) the aggregate commitments in the amount of $i40.0 million and (ii) the amounts available under the credit facility based on eligible accounts receivable and inventory.
Under the amended line of credit, the Company may elect that revolving loans bear interest at either a base rate or a term SOFR based rate, plus, in either case, a margin determined by reference to our quarterly average excess availability under the line of
credit and ranging from i0.50% to i0.75% for borrowings accruing interest at a base rate and from i1.625%
to i1.850% for borrowings accruing interest at term SOFR. Swing line loans will at all times accrue interest at a base rate plus the applicable margin. The lower margins described above will apply initially and will adjust thereafter from time to time based on the quarterly average excess availability under the line of credit. As of January 29, 2023, the Company’s borrowing availability under the line of credit was $i36.0
million, ino borrowings outstanding, and the Company was in compliance with required covenants.
Certain
balances herein reflect the restatements described in Note 2. Restatement and Other Corrections of Previously Issued Financial Statements.
Segments are reflective of how the chief operating decision maker ("CODM") reviews operating results for the purpose of allocating resources and assessing performance. The CODM group of the Company are the Chief Executive Officer and the President and Chief Operating Officer. The Company's operating segments are the sales channels, which share similar economic and other qualitative characteristics, and are aggregated together as ione
reportable segment.
i
The Company’s sales by product which are considered one segment are as follows:
2023
2022
2021
(As
Restated)
Sactionals
$
i584,449
$
i436,588
$
i271,018
Sacs
i55,145
i52,478
i44,975
Other
i11,585
i9,173
i4,745
Total
net sales
$
i651,179
$
i498,239
$
i320,738
/
Note
13. iQuarterly Financial Data (Unaudited)
The following tables present net impact of the restatement described in Note 2. Restatement and Other Corrections of Previously Issued Financial Statements on our previously reported unaudited condensed financial statements for each interim period ended October 30, 2022, July 31, 2022 and May 1, 2022, respectively.
The
restated periods presented below will be effective with the filing of our future 2024 unaudited interim condensed financial statement filings in Quarterly Reports on Form 10-Q. The previously reported amounts presented in the tables below have been derived from our Quarterly Reports on Form 10-Q filed on December 8, 2022, September 9, 2022 and June, 8, 2022 respectively. See Note 2. Restatement and Other Corrections of Previously Issued Financial Statements for a description of the misstatements in each category of restatements referenced by (a) through (h).
i
The
net impact of the restatement on our quarterly financial data for 2023 is summarized as follows:
The net impact of the restatement on our quarterly and year-to-date unaudited condensed financial statements as of and for the thirteen weeks and thirty-nine weeks ended October 30, 2022, as of and for the thirteen and twenty-six weeks ended July 31, 2023 and as of and for the thirteen weeks ended May 1, 2022 is summarized as follows:
The description of each error is described in Note 2. The impact of each error for the corresponding period in the above table is described below:
(a) Last Mile Freight - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $i0.7 million, an increase to accrued expenses of $i1.1 million,
and an increase to accumulated deficit of $i0.4 million at October 30, 2022.
(b) Leases - The correction of these misstatements resulted in an decease to prepaid expenses and other current assets of less than $i0.1 million,
a decrease to operating lease right-of-use assets of $i1.1 million, a decrease to current operating lease liabilities of $i3.3 million, and a decrease to accumulated deficit of
$i2.2 million at October 30, 2022.
(e) Balance Sheet Reclassifications - The correction of these misstatements resulted in a decrease to prepaid expenses and other current assets of $i6.9 million,
a decrease to current operating lease liabilities of $i5.9 million and an increase to other assets of $i1.0 million at October 30, 2022.
(f)
Income Taxes - The tax impact of all misstatements resulted in an increase to prepaid expenses and other current assets of less than $i0.1 million, a decrease to deferred tax asset of less than $i0.1 million, an increase to accrued expenses
of $i0.4 million, and an increase to accumulated deficit of $i0.4 million at October 30, 2022.
(amounts in thousands, except per share data and share amounts)
As Previously Reported
Corrections
Reference
As Restated
Net sales
$
i134,784
$
i—
$
i134,784
Cost
of merchandise sold
i71,212
(i1,332)
(a)(d)
i69,880
Gross
profit
i63,572
i1,332
i64,904
Operating
expenses
Selling, general and administration expenses
i53,658
(i138)
(b)
i53,520
Advertising
and marketing
i19,050
i—
i19,050
Depreciation
and amortization
i2,459
i—
i2,459
Total
operating expenses
i75,167
(i138)
i75,029
Operating
(loss) income
(i11,595)
i1,470
(i10,125)
Interest
expense, net
(i69)
i—
(i69)
Net
(loss) income before taxes
(i11,664)
i1,470
(i10,194)
Benefit
from (provision for) income taxes
i3,245
(i413)
(f)
i2,832
Net
(loss) income
$
(i8,419)
$
i1,057
$
(i7,362)
Net
(loss) income per common share:
Basic
$
(i0.55)
$
i0.07
$
(i0.48)
Diluted
$
(i0.55)
$
i0.07
$
(i0.48)
Weighted
average number of common shares outstanding:
Basic
i15,220,593
i—
i15,220,593
Diluted
i15,220,593
i—
i15,220,593
The
description of each error is described in Note 2. The impact of each error for the corresponding period in the above table is described below:
(a) Last Mile Freight - The correction of these misstatements resulted in a decrease to cost of merchandise sold of $i0.4 million for the thirteen weeks ended October 30, 2022.
(b) Leases - The correction of these misstatements resulted in a decrease to selling, general and administrative expenses
of $i0.1 million for the thirteen weeks ended October 30, 2022.
(d) Supplier Rebates - The correction of these misstatements resulted in a decrease to cost of merchandise sold of $i0.9 million
for the thirteen weeks ended October 30, 2022.
(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to benefit from income taxes of $i0.4 million for the thirteen weeks ended October 30, 2022.
(amounts in thousands, except per share data and share amounts)
As Previously Reported
Corrections
Reference
As Restated
Net sales
$
i412,698
$
i—
$
i412,698
Cost
of merchandise sold
i202,092
i629
(a)
i202,721
Gross
profit
i210,606
(i629)
i209,977
Operating
expenses
Selling, general and administration expenses
i147,425
(i172)
(b)
i147,253
Advertising
and marketing
i54,039
i—
i54,039
Depreciation
and amortization
i8,196
i—
i8,196
Total
operating expenses
i209,660
(i172)
i209,488
Operating
income (loss)
i946
(i457)
i489
Interest
expense, net
(i101)
i—
(i101)
Net
income (loss) before taxes
i845
(i457)
i388
(Provision
for) benefit from income taxes
(i247)
i132
(f)
(i115)
Net
income (loss)
$
i598
$
(i325)
$
i273
Net
income (loss) per common share:
Basic
$
i0.04
$
(i0.02)
$
i0.02
Diluted
$
i0.04
$
(i0.02)
$
i0.02
Weighted
average number of common shares outstanding:
Basic
i15,190,079
i—
i15,190,079
Diluted
i16,067,066
i—
i16,067,066
The
description of each error is described in Note 2. The impact of each error for the corresponding period in the above table is described below:
(a) Last Mile Freight - The correction of these misstatements resulted in an increase to cost of merchandise sold of $i0.6 million for the thirty-nine weeks ended October 30, 2022.
(b) Leases - The correction of these misstatements resulted in a decrease to selling, general and administrative expenses of $i0.2 million
for the thirty-nine weeks ended October 30, 2022.
(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to provision for income taxes of $i0.1 million for the thirty-nine weeks ended October 30, 2022.
See
descriptions of the net income (loss) impacts in the statements of operations for the thirteen and thirty-nine weeks ended October 30, 2022 sections above.
Adjustments
to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization of property and equipment
i7,911
i—
i7,911
Amortization
of other intangible assets
i285
i—
i285
Amortization
of deferred financing fees
i117
i—
i117
Net
loss on disposal of property and equipment
i41
i—
i41
Equity
based compensation
i2,929
i—
i2,929
Non-cash
operating lease cost
i13,582
i—
i13,582
Deferred
income taxes
i141
(i103)
(f)
i38
Change
in operating assets and liabilities:
Trade accounts receivable
(i6,810)
i—
(i6,810)
Merchandise
inventories
(i45,988)
i—
(i45,988)
Prepaid
expenses and other current assets
(i20,547)
i2,846
(a)(b)(e)(f)
(i17,701)
Other
assets
i—
i7
(e)
i7
Accounts
payable and accrued expenses
i3,281
(i2,073)
(a)(f)(h)
i1,208
Operating
lease liabilities
(i13,227)
(i3,596)
(b)(e)
(i16,823)
Customer
deposits
(i7,455)
i—
(i7,455)
Net
cash used in operating activities
(i65,142)
(i3,244)
(i68,386)
Cash
Flows from Investing Activities
Purchase of property and equipment
(i21,292)
i3,177
(h)
(i18,115)
Payments
for patents and trademarks
(i267)
i67
(h)
(i200)
Net
cash (used in) provided by investing activities
(i21,559)
i3,244
(i18,315)
Cash
Flows from Financing Activities
Taxes paid for net share settlement of equity awards
(i1,583)
i—
(i1,583)
Payment
of deferred financing costs
(i276)
i—
(i276)
Net
cash used in financing activities
(i1,859)
i—
(i1,859)
Net
change in cash and cash equivalents
(i88,560)
i—
(i88,560)
Cash
and cash equivalents - Beginning
i92,392
i—
i92,392
Cash
and cash equivalents - Ending
$
i3,832
$
i—
$
i3,832
Supplemental
Cash Flow Data:
Cash paid for taxes
$
i9,811
$
i—
$
i9,811
Cash
paid for interest
$
i65
$
i—
$
i65
Non-cash
investing activities:
Asset acquisitions not yet paid for at period end
$
i—
$
i3,244
(h)
$
i3,244
See
descriptions of the net income (loss) impacts in the statement of operations for the thirty-nine weeks ended October 30, 2022 section above.
The cash flow classification, as described in item (h) in the description of misstatement adjustments section above, resulted in a decrease of $i3.2 million in net cash provided by operating activities and an increase of $i3.2 million
in net cash provided by investing activities for the thirty-nine weeks ended October 30, 2022.
No other misstatements impacted the classifications between net operating, net investing, or net financing cash flow activities for the thirty-nine weeks ended October 30, 2022.
The description of each error is described in Note 2. The impact of each error for the corresponding period in the above table is described below:
(a) Last Mile Freight - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $i0.2 million, an increase to accrued expenses of $i1.0 million,
and an increase to accumulated deficit of $i0.8 million at July 31, 2022.
(b) Leases - The correction of these misstatements resulted in an decease to prepaid expenses and other current assets of less than $i0.1 million,
a decrease to operating lease right-of-use assets of $i0.6 million, a decrease to current operating lease liabilities of $i2.6 million, and a decrease to accumulated deficit of
$i2.0 million at July 31, 2022.
(d) Supplier Rebates - The correction of these misstatements resulted in a decrease to merchandise inventories, net of $i0.9 million
and an increase to accumulated deficit of $i0.9 million at July 31, 2022.
(e) Balance Sheet Reclassifications - The correction of these misstatements resulted in a decrease to prepaid expenses and other current assets of $i5.1 million,
a decrease to current operating lease liabilities of $i4.0 million and an increase to other assets of $i1.1 million at July 31, 2022.
(f)
Income Taxes - The tax impact of all misstatements resulted in an increase to prepaid expenses and other current assets of less than $i0.1 million, an increase to deferred tax asset of $i0.3 million, an increase to accrued expenses of $i0.3 million,
and an increase to accumulated deficit of less than $i0.1 million at July 31, 2022.
(amounts in thousands, except per share data and share amounts)
As
Previously Reported
Corrections
Reference
As Restated
Net sales
$
i148,534
$
i—
$
i148,534
Cost
of merchandise sold
i67,608
i1,827
(a)(d)
i69,435
Gross
profit
i80,926
(i1,827)
i79,099
Operating
expenses
Selling, general and administration expenses
i48,866
(i51)
(b)
i48,815
Advertising
and marketing
i19,088
i—
i19,088
Depreciation
and amortization
i3,076
i—
i3,076
Total
operating expenses
i71,030
(i51)
i70,979
Operating
income (loss)
i9,896
(i1,776)
i8,120
Interest
income, net
i3
i—
i3
Net
income (loss) before taxes
i9,899
(i1,776)
i8,123
(Provision
for) benefit from income taxes
(i2,777)
i503
(f)
(i2,274)
Net
income (loss)
$
i7,122
$
(i1,273)
$
i5,849
Net
income (loss) per common share:
Basic
$
i0.47
$
(i0.09)
$
i0.38
Diluted
$
i0.45
$
(i0.08)
$
i0.37
Weighted
average number of common shares outstanding:
Basic
i15,195,116
i—
i15,195,116
Diluted
i16,004,061
i—
i16,004,061
The
description of each error is described in Note 2. The impact of each error for the corresponding period in the above table is described below:
(a) Last Mile Freight - The correction of these misstatements resulted in an increase to cost of merchandise sold of $i0.9 million for the thirteen weeks ended July 31, 2022.
(b) Leases - The correction of these misstatements resulted in a decrease to selling, general and administrative expenses of less than $i0.1 million
for the thirteen weeks ended July 31, 2022.
(d) Supplier Rebates - The correction of these misstatements resulted in an increase to cost of merchandise sold of $i0.9 million for the thirteen weeks ended July 31, 2022.
(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to provision for income taxes of $i0.5 million
for the thirteen weeks ended July 31, 2022.
(amounts in thousands, except per share data and share amounts)
As Previously Reported
Corrections
Reference
As Restated
Net sales
$
i277,914
$
i—
$
i277,914
Cost
of merchandise sold
i130,880
i1,961
(a)(d)
i132,841
Gross
profit
i147,034
(i1,961)
i145,073
Operating
expenses
Selling, general and administration expenses
i93,767
(i34)
(b)
i93,733
Advertising
and marketing
i34,989
i—
i34,989
Depreciation
and amortization
i5,737
i—
i5,737
Total
operating expenses
i134,493
(i34)
i134,459
Operating
income (loss)
i12,541
(i1,927)
i10,614
Interest
expense, net
(i32)
i—
(i32)
Net
income (loss) before taxes
i12,509
(i1,927)
i10,582
(Provision
for) benefit from income taxes
(i3,492)
i545
(f)
(i2,947)
Net
income (loss)
$
i9,017
$
(i1,382)
$
i7,635
Net
income (loss) per common share:
Basic
$
i0.59
$
(i0.09)
$
i0.50
Diluted
$
i0.56
$
(i0.08)
$
i0.48
Weighted
average number of common shares outstanding:
Basic
i15,175,247
i—
i15,175,247
Diluted
i16,032,731
i—
i16,032,731
The
description of each error is described in Note 2. The impact of each error for the corresponding period in the above table is described below:
(a) Last Mile Freight - The correction of these misstatements resulted in an increase to cost of merchandise sold of $i1.0 million for the twenty-six weeks ended July 31, 2022.
(b) Leases - The correction of these misstatements resulted in a decrease to selling, general and administrative expenses of less than $i0.1 million
for the twenty-six weeks ended July 31, 2022.
(d) Supplier Rebates - The correction of these misstatements resulted in an increase to cost of merchandise sold of $i0.9 million for the twenty-six weeks ended July 31, 2022.
(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to provision for income taxes of $i0.5 million
for the twenty-six weeks ended July 31, 2022.
See
descriptions of the net income (loss) impacts in the statements of operations for the thirteen and twenty-six weeks ended July 31, 2022 sections above.
Adjustments
to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization of property and equipment
i5,549
i—
i5,549
Amortization
of other intangible assets
i188
i—
i188
Amortization
of deferred financing fees
i71
i—
i71
Equity
based compensation
i2,197
i—
i2,197
Non-cash
operating lease cost
i8,711
i—
i8,711
Deferred
income taxes
i2,738
(i425)
(f)
i2,313
Change
in operating assets and liabilities:
Trade accounts receivable
(i423)
i—
(i423)
Merchandise
inventories
(i38,133)
i934
(d)
(i37,199)
Prepaid
expenses and other current assets
(i17,916)
i1,406
(a)(b)(e)(f)
(i16,510)
Other
assets
i—
(i10)
(e)
(i10)
Accounts
payable and accrued expenses
(i16,024)
(i2,496)
(a)(f)(h)
(i18,520)
Operating
lease liabilities
(i8,501)
(i1,563)
(b)(e)
(i10,064)
Customer
deposits
(i6,828)
i—
(i6,828)
Net
cash used in operating activities
(i59,354)
(i3,536)
(i62,890)
Cash
Flows from Investing Activities
Purchase of property and equipment
(i13,461)
i3,496
(h)
(i9,965)
Payments
for patents and trademarks
(i200)
i40
(h)
(i160)
Net
cash (used in) provided by investing activities
(i13,661)
i3,536
(i10,125)
Cash
Flows from Financing Activities
Taxes paid for net share settlement of equity awards
(i1,449)
i—
(i1,449)
Payment
of deferred financing costs
(i276)
i—
(i276)
Net
cash used in financing activities
(i1,725)
i—
(i1,725)
Net
change in cash and cash equivalents
(i74,740)
i—
(i74,740)
Cash
and cash equivalents - Beginning
i92,392
i—
i92,392
Cash
and cash equivalents - Ending
$
i17,652
$
i—
$
i17,652
Supplemental
Cash Flow Data:
Cash paid for taxes
$
i9,393
$
i—
$
i9,393
Cash
paid for interest
$
i34
$
i—
$
i34
Non-cash
investing activities:
Asset acquisitions not yet paid for at period end
$
i—
$
i3,536
(h)
$
i3,536
See
descriptions of the net income (loss) impacts in the statement of operations for the twenty-six weeks ended July 31, 2022 section above.
The cash flow classification, as described in item (h) in the description of misstatement adjustments section above, resulted in a decrease of $i3.5 million in net cash provided by operating activities and an increase of $i3.5 million
in net cash provided by investing activities for the twenty-six weeks ended July 31, 2022.
No other misstatements impacted the classifications between net operating, net investing, or net financing cash flow activities for the twenty-six weeks ended July 31, 2022.
The description of each error is described in Note 2. The impact of each error for the corresponding period in the above table is described below:
(a) Last Mile Freight - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $i0.1 million, an increase to accrued expenses of less than $i0.1 million,
and a decrease to accumulated deficit of less than $i0.1 million at May 1, 2022.
(b) Leases - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $i0.3 million,
a decrease to current operating lease liabilities of $i1.7 million, and a decrease to accumulated deficit of $i2.0 million at May 1, 2022.
(e)
Balance Sheet Reclassifications - The correction of these misstatements resulted in a decrease to prepaid expenses and other current assets of $i4.4 million, a decrease to current operating lease liabilities of $i3.3 million
and an increase to other assets of $i1.1 million at May 1, 2022.
(f) Income Taxes - The tax impact of all misstatements resulted in an increase to prepaid expenses and other current assets of less than $i0.1 million,
a decrease to deferred tax asset of $i0.1 million, an increase to accrued expenses of $i0.4 million, and an increase to accumulated deficit of $i0.5 million
at May 1, 2022.
(amounts in thousands, except per share data and share amounts)
As Previously Reported
Corrections
Reference
As Restated
Net sales
$
i129,380
$
i—
$
i129,380
Cost
of merchandise sold
i63,272
i134
(a)
i63,406
Gross
profit
i66,108
(i134)
i65,974
Operating
expenses
Selling, general and administration expenses
i44,901
i17
(b)
i44,918
Advertising
and marketing
i15,901
i—
i15,901
Depreciation
and amortization
i2,661
i—
i2,661
Total
operating expenses
i63,463
i17
i63,480
Operating
income (loss)
i2,645
(i151)
i2,494
Interest
expense, net
(i35)
i—
(i35)
Net
income (loss) before taxes
i2,610
(i151)
i2,459
(Provision
for) benefit from income taxes
(i715)
i42
(f)
(i673)
Net
income (loss)
$
i1,895
$
(i109)
$
i1,786
Net
income (loss) per common share:
Basic
$
i0.13
$
(i0.01)
$
i0.12
Diluted
$
i0.12
$
(i0.01)
$
i0.11
Weighted
average number of common shares outstanding:
Basic
i15,155,378
i—
i15,155,378
Diluted
i16,173,339
i—
i16,173,339
The
description of each error is described in Note 2. The impact of each error for the corresponding period in the above table is described below:
(a) Last Mile Freight - The correction of these misstatements resulted in an increase to cost of merchandise sold of $i0.1 million for the thirteen weeks ended May 1, 2022.
(b) Leases - The correction of these misstatements resulted in an increase to selling, general and administrative expenses of less than $i0.1 million
for the thirteen weeks ended May 1, 2022.
(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to provision for income taxes of less than $i0.1 million for the thirteen weeks ended May 1, 2022.
Adjustments
to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization of property and equipment
i2,575
i—
i2,575
Amortization
of other intangible assets
i86
i—
i86
Amortization
of deferred financing fees
i29
i—
i29
Equity
based compensation
i1,163
i—
i1,163
Non-cash
operating lease cost
i4,184
i—
i4,184
Deferred
income taxes
i523
(i31)
(f)
i492
Change
in operating assets and liabilities:
Trade accounts receivable
i2,134
i—
i2,134
Merchandise
inventories
(i14,515)
i—
(i14,515)
Prepaid
expenses and other current assets
i270
i543
(a)(b)(e)(f)
i813
Other
assets
i—
(i26)
(e)
(i26)
Accounts
payable and accrued expenses
(i10,359)
(i1,409)
(a)(f)(h)
(i11,768)
Operating
lease liabilities
(i4,062)
(i509)
(b)(e)
(i4,571)
Customer
deposits
(i5,709)
i—
(i5,709)
Net
cash used in operating activities
(i21,786)
(i1,541)
(i23,327)
Cash
Flows from Investing Activities
Purchase of property and equipment
(i5,893)
i1,443
(h)
(i4,450)
Payments
for patents and trademarks
(i125)
i98
(h)
(i27)
Net
cash (used in) provided by investing activities
(i6,018)
i1,541
(i4,477)
Cash
Flows from Financing Activities
Taxes paid for net share settlement of equity awards
(i47)
i—
(i47)
Payment
of deferred financing costs
(i161)
i—
(i161)
Net
cash used in financing activities
(i208)
i—
(i208)
Net
change in cash and cash equivalents
(i28,012)
i—
(i28,012)
Cash
and cash equivalents - Beginning
i92,392
i—
i92,392
Cash
and cash equivalents - Ending
$
i64,380
$
i—
$
i64,380
Supplemental
Cash Flow Data:
Cash paid for taxes
$
i905
$
i—
$
i905
Cash
paid for interest
$
i33
$
i—
$
i33
Non-cash
investing activities:
Asset acquisitions not yet paid for at period end
$
i—
$
i1,541
(h)
$
i1,541
See
descriptions of the net income (loss) impacts in the statement of operations for the thirteen weeks ended May 1, 2022 section above.
The cash flow classification, as described in item (h) in the description of misstatement adjustments section above, resulted in a decrease of $i1.5 million in net cash provided by operating activities and an increase of $i1.5 million
in net cash provided by investing activities for the thirteen weeks ended May 1, 2022.
No other misstatements impacted the classifications between net operating, net investing, or net financing cash flow activities for the thirteen weeks ended May 1, 2022.
F-58
Dates Referenced Herein and Documents Incorporated by Reference
