UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2021
or
☐TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-38555
THE LOVESAC COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Two Landmark Square, Suite 300 Stamford, Connecticut 06901
Address of Principal Executive Offices Zip Code
Registrant’s telephone number, including
area code (888) 636-1223
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.00001 par value per share LOVE The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g)
of the Act: None
Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files). Yes ☒ No ☐
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Indicate by check mark whether
the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
As of August 2, 2020 (last
business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the voting common
stock held by non-affiliates of the Registrant (without admitting that any person whose shares are not included in such calculation is
an affiliate) was approximately $347,969,675.
As of April 12, 2021, there
were 15,018,030 shares of common stock, $0.00001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's
definitive proxy statement relating to its 2021 Annual Meeting of Stockholders, or the 2021 Proxy Statement, to be filed with the Securities
and Exchange Commission, are incorporated by reference into Part III of this Annual Report on Form 10-K. Such
2021 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year
to which this report relates. Except with respect to information specifically incorporated by reference in this Form 10-K, the proxy
statement is not deemed to be filed as part of this Form 10-K.
TABLE OF CONTENTS
Page
PART I.
Item 1. Business. 1
Item 1A. Risk Factors. 7
Item 1B. Unresolved Staff Comments. 23
Item 2. Properties. 23
Item 3. Legal Proceedings. 23
Item 4. Mine Safety Disclosures. 23
PART II.
Item 6. Selected Financial Data. 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 32
Item 8. Financial Statements and Supplementary Data. 32
Item 9A. Controls and Procedures. 33
Item 9B. Other Information. 33
PART III.
Item 10. Directors, Executive Officers and Corporate Governance. 34
Item 11. Executive Compensation. 35
Item 14. Principal Accounting Fees and Services. 35
PART IV.
Item 15. Exhibits, Financial Statement Schedules. 36
i
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other legal authority. Forward-looking statements
generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements
because they contain words such as “may,” “will,” “should,” “expects,” “plans,”
“anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,”
“believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative
of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions.
You should not place undue reliance on forward
looking statements. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved
or occur. The cautionary statements set forth in this Annual Report on Form 10-K, including in “Risk Factors” and elsewhere,
identify important factors which you should consider in evaluating our forward-looking statements. These factors include, among other
things:
● our ability to sustain recent growth rates;
● our ability to sustain the recent increase in our Internet sales;
● our ability to manage the growth of our operations over time;
● our ability to maintain, grow and enforce our brand and trademark rights;
● our ability to improve our products and develop new products;
● our ability to successfully open and operate new showrooms;
We caution you that the foregoing list may
not contain all the forward-looking statements made in this Annual Report on Form 10-K.
You should not rely upon forward-looking statements
as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on
our current expectations and projections about future events and trends that we believe may affect our business, financial condition,
results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties,
and other factors described in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover,
we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not
possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual
Report on Form 10-K. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will
be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking
statements.
The forward-looking statements made in this
Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update
any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual
Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually
achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on
our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers,
dispositions, joint ventures, or investments we may make.
ii
PART I.
Item 1. Business.
When used in this report, the terms “we,”
“us,” “our,” “Lovesac” and the “Company” mean The Lovesac Company.
Company Overview
We are a technology driven company that designs,
manufactures and sells unique, high quality furniture derived through our proprietary Designed for Life philosophy which results in products
that are built to last a lifetime and designed to evolve as our customers’ lives do. Our current product offering is comprised
of modular couches called Sactionals, premium foam beanbag chairs called Sacs, and their associated home decor accessories. Innovation
is at the center of our design philosophy with all of our core products protected by a robust portfolio of utility patents. We market
and sell our products primarily online directly at www.lovesac.com, supported by direct-to-consumer touch-feel points in the form of
our own showrooms as well as through shop-in-shops and pop-up-shops with third party retailers. We believe that our ecommerce centric
approach, coupled with our ability to deliver our large upholstered products through express couriers, is unique to the furniture industry.
The name “Lovesac” was derived from
our original innovative product, a premium foam beanbag chair, the Sac. The Sac was developed in 1995 and provided the foundation for
the Company. We believe that the large size, comfortable foam filling and irreverent branding of our Sacs products have been instrumental
in growing a loyal customer base and our positive, fun image. Our Sacs represented 14.0% and 17.0% of our sales for fiscal years 2021
and 2020, respectively.
Our Sactionals product line currently represents
a majority of our sales. Sactionals are a couch system that consists of two components, seats and sides, which can be arranged, rearranged
and expanded into thousands of configurations easily and without tools. Our Sactional products include a number of patented features relating
to their geometry and modularity, coupling mechanisms and other features. We believe that these high quality premium priced products enhance
our brand image and customer loyalty and expect them to continue to garner a significant share of our sales.
Our Sactionals represented 84.5% and 80.7% of
our sales for fiscal years 2021 and 2020, respectively. Sacs and Sactionals come in a wide variety of colors and fabrics that allow consumers
to customize their purchases in numerous configurations and styles. We provide lifetime warranties on our Sactionals frames and the foam
used in both product lines, and 3-year warranties on our covers. Our Designed for Life trademark reflects our dynamic product line that
is built to last and evolve throughout a customer’s life. Customers can continually update their Sacs and Sactionals with new covers,
additions and configurations to accommodate changes in their family and housing situations.
The Company was formed in the State of Delaware
on January 3, 2017, in connection with a corporate reorganization with SAC Acquisition LLC, a Delaware limited liability company, the
predecessor entity to the Company. Our common stock began trading on Nasdaq under the symbol “LOVE” on June 27, 2018 and we
consummated our initial public offering of shares of our common stock, or our IPO, on June 29, 2018.
1
Product Overview
Our products serve as a set of building blocks
that can be rearranged, restyled and re-upholstered with any new setting, mitigating constant changes in fashion and style. They are built
to last and evolve throughout a customer’s life.
2
Sales Channels
We offer our products through an omni-channel
platform that provides a seamless and meaningful experience to our customers online and in-store. Our distribution strategy allows us
to reach customers through four distinct, brand-enhancing channels.
3
Customers
Our Designed for Life products
provide flexibility, upgradeability and sustainability, elements that attract a wide customer base and can change as their life changes.
Our customers have different tastes, styles, purchasing goals and budgets when shopping for couches, and our Sactionals platform’s
modularity addresses this array of needs.
Growth Strategies
To position Lovesac for future growth, in
the last several years we have made significant investments in overhead, optimized and integrated our business technologies and
processes, and further developed our marketing strategies. In addition, we have refocused our strategy regarding our showrooms,
moving to higher end malls and lifestyle centers, to support ecommerce sales, our primary growth channel. We have also moved to
fixed versus variable rent structures in many of our lease arrangements and have introduced a new interactive technology driven
showroom experience that has resulted in higher traffic levels and conversion.
We are also focused on the following key strategies
to drive sales growth:
Continue to Build on Our Brand
Based on our own internal study concluded in April
2017, we estimated that our brand awareness is less than 1% among all consumers nationally. Before 2017, we invested minimally in advertising.
Since then, we have aggressively invested in brand building and direct marketing efforts through a robust and diverse marketing mix. Our
focus on building the Lovesac and Sactional brands has led to an increase in our new Sactional customer base, which grew by 48.3% in fiscal
2021. Through our ecommerce channel, we believe we are able to significantly enhance the consumer shopping experience, driving deeper
brand engagement and loyalty, while also realizing more favorable margins than our showroom locations. We continue to invest into this
digital channel to improve user experience, enhancing their research, understanding and confidence in their purchase decision.
Our commitment to sustainability is central to our stated purpose and
strategy. Our Designed For Life philosophy calls for products that are built to last a lifetime and designed to evolve with our customers’
lives. Sactionals represent our Designed For Life philosophy in action and customers generally invest in them with a long-term focus.
We believe this is a competitive advantage and has helped us establish a unique brand and a successful culture.
New Strategy on Innovation
Innovation
and test-and-learn are engrained within our Company, from product to operations to marketing and distribution. From inception, we have
focused on developing unique, innovative and proprietary product platforms. We deploy a dual strategy of continuously researching and
product invention and designing. We are continuously expanding and introducing new extensions to these platforms to broaden the appeal,
grow the addressable market of our product offerings and ultimately continue to grow and evolve with our customers’ needs. We continually
evaluate new products to complement our Sactionals and Sac lines and are currently developing accessories for the tech-savvy consumer.
As
we continue to grow our business and add additional showrooms in strategic locations across the United States, we seek the ability to
service more customers locally with area-designated representatives who will shift their efforts between our showrooms and customers’
homes. Our concierge operators in the field will be able to assist customers via online chat services from home thereby creating more
touchpoints customers in new and existing locations, contributing to our efficient approach to growing our footprint and services to suit
the evolving needs of our customers.
4
Increase Sales and Operating Margins
We seek to increase sales and operating margins
through our premium market position and pricing strategy and omni-channel platform, which we believe will require relatively small near
term increases in fixed overhead.
Supply Chain and Sourcing
We manage a global supply chain of highly vetted
and qualified, third-party manufacturing partners to produce our products. Our partners operate facilities located in the UnitedStates,
China, Vietnam, Malaysia, Taiwan, Indonesia, and India. We do not own or operate any manufacturing facilities as we believe our partners’
facilities are sufficient to meet our current demand and will be able to meet any additional demand in the future. Additionally, we work
closely with our manufacturing partners regarding product quality and manufacturing process efficiency. To mitigate the concentration
risk in our supply chain, we have and continue to pursue a higher diversification of manufacturing partners, with both sourcing, tariff,
and geographical advantages.
Logistics and Distribution
We are able to efficiently distribute and ship
our products to our customers. Due to the unique modularity of our Sactionals products and the shrinkability of our Sacs, we are able
to distribute our products through nationwide express couriers and efficiently utilize warehouse space and international shipping routes.
We believe our Sactionals are the only product in its category that enjoys this logistical advantage.
Seasonality
We experience seasonal fluctuations in our sales.
A larger percentage of our sales occur in the fourth quarter of our fiscal year, which coincides with Cyber Monday (the first Monday after
Thanksgiving, when online retailers typically offer holiday discounts), the holiday season and our related promotional and marketing campaigns.
Our fiscal 2021 quarters in sequential order equaled 17.0%, 19.3%, 23.3% and 40.4% of total sales respectively.
Intellectual Property
We own 27 U.S. federal trademark registrations,
134 foreign trademark registrations, and a number of U.S. and foreign trademark applications and common law trademark rights. Our registered
U.S. trademarks include registrations for the Lovesac®, Lovesoft ®, Sactionals ®, Durafoam
®, SAC ® and Designed For Life® trademarks. Our trademarks, if not renewed, are scheduled
to expire between 2021 and 2029.
In order to maintain our U.S. trademark registrations,
we must continue to use the marks in commerce on the goods and services identified in the registrations and must make required filings
with the U.S. Patent and Trademark Office at intervals specified by applicable statutes and regulations. Failure to comply with these
requirements may result in abandonment or cancellation of the registrations.
We have 19 issued U.S. utility patents and 26
issued foreign utility patents, that are scheduled to expire between 2022 and 2037. We have 12 pending U.S. utility patent applications,
36 pending foreign utility patent applications and 2 pending international patent applications. Our Sactional technology patents include
our proprietary geometric modular system and segmented bi-coupling technology. We also have multiple patents pending and expect to file
patent applications for future innovations. We believe that our patent portfolio, combined with our innovative design approach may deter
others from attempting to imitate or replicate our products.
Competition
Our business is rapidly evolving and intensely
competitive. Retailers compete based on a variety of factors, including design, quality, price and customer service. Levels of competition
and the ability of our competitors to attract customers through competitive pricing or other factors may impact our results of operations.
Our competition includes furniture stores, big box retailers, department stores, specialty retailers and online furniture retailers and
marketplaces.
We believe our combination of proprietary products,
brand strength, loyal customer base, omni-channel approach, technological platform, unique consumer experience, logistical advantages
and seasoned management team allow us to compete effectively against and differentiate ourselves from the competition.
5
COVID-19 Update
While the COVID-19 pandemic led to shifts in the
way in which we operate, including temporarily closing all of our showroom locations and a reduction in workforce, we continued to serve
our customers through our online channels. As our products can be easily configured, shopped online and delivered quickly in a touchless
way, coupled with consumers’ demand for home related products and solutions, we experienced increased growth during this period.
Our net sales increased $87.4 million, or 37.4%, to $320.7 million for the fiscal year ended 2021, compared to $233.4 million for the
fiscal year ended 2020 which was driven by internet sales (sales made directly to customers through our ecommerce channel) which increased
$95.3 million, or 170.8%, to $151.1 million for the fiscal year ended 2021 compared to $55.8 million for the fiscal year ended 2020 which
more than offset the decrease in our showroom net sales of $1.9 million, or 1.3% in the same time periods. New customers increased by
32.9% as of the fiscal year ended 2021 as compared to 22.5% as of the fiscal year ended 2020. We redeployed 218 full-time field
associates, leveraging numerous forms of one-on-one virtual customer interactions such as Facebook live events, Facetime, text messaging
and Podium chat systems. We believe that these tactics, which bolster our ongoing direct-to-consumer core competencies, allow us to capitalize
on the accelerated growth and demand. Due to the significant growth of our ecommerce platform, we have adapted our systems, technology
and supply chain and logistics capabilities to manage the increase in online demand. We plan to continue to develop our digital capabilities
and invest in our technological infrastructure.
In an effort to appropriately manage the business
in this uncertain environment, we tightly managed our cash outlays. In addition to temporary reduction in compensation of associates and
Board of Directors, we also tightly managed inventory purchases, marketing and promotion spend, working capital and capital expenditures.
As a result, we had a cash and cash equivalent position of $78.3 million as of the fiscal year ended January 31, 2021.
Human Capital
The long-term success
of our business depends on attracting, developing and retaining top talent to drive our growth strategy and support our guiding principles.
These principles are the foundation of our business and grounded in true sustainability, a singular focus on high quality execution of
fewer core products, consideration of all stakeholder perspectives in our decision-making, and championing meaningful relationships through
the development of products that bring people together.
Our corporate culture
celebrates our associates at online rallies and annual events designed to engage our associates and reward them for exemplary work and
embodiment of our values. We support our associates’ professional development through annual training programs on topics relevant
to our business, functional areas, or policies and procedures. Our associates participate in quarterly coaching sessions with their managers
four times per year where they are evaluated on their performance relative to certain key performance indicators and alignment with our
values and given actionable feedback. We engage our associates on many levels to share learnings, educate, and foster community
and connection.
Our talent acquisition
strategy is to attract top talent and become a sought-after U.S. employer focused on our Designed For Life philosophy and a culture of
diversity, equality and inclusivity. We have initiated this strategy by expanding the areas from which source talent and offering
flexible remote working opportunities for eligible associates. We will continue to build on this strategy, working in parallel with
our evolving future work strategy. We also offer a robust and immersive onboarding plan to create a strong foundation for our new
associates and timely, effective integration.
Due to the COVID-19 pandemic,
in fiscal 2021 a majority of our workforce began, and in most cases continue, to work remotely. To support our headquarters-based associates,
we took measures to ensure our associates had the technology to support remote work and are redefining our future working environment
to offer flexible working solutions. For associates supporting our showrooms, we implemented specific protocols to ensure the safety of
our associates and our customers.
As of January 31, 2021, we had 369 full-time associates
and 409 part-time associates, and we contracted with 7 independent contractors. Our workforce was 58% female, and women hold 60% of the
available leadership roles within the Company.
All associates and contractors are subject to
contractual agreements that specify, among other things, requirements for confidentiality, ownership of newly developed intellectual property
and restrictions on working for competitors as well as other matters.
6
Diversity, Equality and Inclusion
In fiscal 2021, we prioritized
developing a strategic diversity, equality and inclusion plan to ensure a diverse workforce composition, operating in an inclusive and
transparent workplace culture, to leverage all of our talents. We engaged with partners to guide our diversity, equality and inclusion
strategy, and elicited feedback from our associates on factors affecting diverse individuals and communities. We also established
a steering committee of senior leaders and a Diversity and Inclusion Council of associates to drive our program’s objectives. We
have expanded our diversity recruiting practices, deployed training programs to increase awareness of diversity, equality and inclusion
issues, and are developing tools to drive accountability toward achieving the Company’s goals.
Product Development
Lovesac designs and sells non-seasonally driven,
Designed For Life products, that are focused on driving incremental value for our customer. The process leverages numerous inputs
to shape our product roadmap, sequencing of product launches, and prioritization of product projects. A few examples of these sources
of information are consumer insights generated by research commissioned by Lovesac, patterning our category and key competitors, and product
opportunities developed to address customer satisfaction. All products that we bring to market must adhere to our Designed For Life
design philosophy which calls for products that are built to last a lifetime and designed to evolve as life changes. This ensures that
our products not only leverage responsible inputs when possible, but also create a sustainable product that is built to last and designed
to evolve.
Government Regulation
We are subject to numerous U.S. and international
trade laws and regulations, and U.S. federal, state and foreign laws and regulations covering a variety of subject matters, many of which
are evolving. These laws and regulations involve matters including privacy, data use, data protection and personal information, intellectual
property, product liability, ecommerce, taxation, economic or other trade prohibitions or sanctions, anti-corruption and political law
compliance, securities law compliance, and online payment services. Our compliance with these laws and regulations may be onerous and
could, individually or in the aggregate, increase our cost of doing business and/or otherwise have an adverse impact on our business,
reputation, financial condition, and operating results.
For additional information about government regulation
applicable to our business, see Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K.
Available Information
Copies of our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our Proxy Statements and amendments to these reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)
are available, free of charge, on our investor relations website (https://investor.lovesac.com) as soon as reasonably practicable after
we file such materials electronically with or furnish it to the SEC. Information contained on, or that can be accessed through,
our website does not constitute part of this Annual Report on Form 10-K and the inclusion of our website address in this Annual Report
is for reference only. The SEC also maintains a website that contains our SEC filings at www.sec.gov.
Item 1A. Risk Factors.
An investment in our common stock involves
a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information
contained in this Annual Report on Form 10-K, including our financial statements and the related notes thereto. The risks and uncertainties
described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently believe
are not material, also may become important factors that affect us and impair our business operations. The occurrence of any of the events
or developments discussed in the risk factors below could have a material and adverse impact on our business, results of operations, financial
condition and cash flows, and in such case, our future prospects would likely be materially and adversely affected. If any of such events
or developments were to happen, the trading price of our common stock could decline.
7
Summary
Our business is subject to numerous risks and uncertainties, as described
below, that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of
operations, cash flows, and prospects. The principal factors and uncertainties that make investing in our common stock risky include,
among others:
● our ability to achieve or sustain profitability, and raise capital;
● our ability to compete successfully;
● our ability to successfully adapt to consumer shopping preferences;
COVID-19 Risks
The impact of COVID-19 continues to create
uncertainty for our business and may have a significant negative impact on our business, sales, results of operations and financial condition.
The global outbreak of COVID-19 has led to severe
disruptions in general economic activities, particularly retail operations, as businesses and federal, state, and local governments take
increasingly broad actions to mitigate this public health crisis. We have experienced significant disruption to our business, both in
terms of disruption of our operations and the adverse effect on overall economic conditions. On March 18, 2020, the Company closed all
showroom locations. All of our showrooms have since fully reopened to the walk-in phase; however, there is no guarantee that there will
not be additional closures. We have seen and may continue to see changes in consumer demand as a result of COVID-19, including the inability
of consumers to purchase our products due to factors such as quarantine or other restrictions, store closures, or financial hardship.
We also continue to see shifts in product and channel preferences and an increase in demand in ecommerce. To help mitigate the impact
of the pandemic on showroom and in-person sales, we have increased marketing of our website and ecommerce platform as we believe that
the pandemic has contributed to an acceleration in the shift of commerce to online sales. However, it is possible that this increased
ecommerce demand may not continue in future periods and may even recede as the effects of the pandemic subside, which could adversely
affect our revenue growth. Our business is also dependent on the continued health and productivity of our associates, including store,
region and corporate management teams, throughout this crisis. Individually and collectively, the consequences of the COVID-19 outbreak
could have a material adverse effect on our business, sales, results of operations and financial condition.
8
Additionally, our liquidity could be negatively
impacted if these conditions continue for a significant period of time and we may be required to pursue additional sources of financing
to obtain working capital, maintain appropriate inventory levels, and meet our financial obligations. The capital and credit markets have
been disrupted by the crisis and our ability to obtain any required financing is not guaranteed and largely dependent upon evolving market
conditions and other factors. Depending on the continued impact of the crisis, further actions may be required.
The extent to which COVID-19 ultimately impacts
our business, sales, results of operations and financial condition will depend on future developments, which are highly uncertain and
cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the development and availability
of effective treatments and vaccines, the actions to contain the virus or treat its impact, and how quickly and to what extent normal
economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience significant
impacts to our business as a result of its global economic impact, including any economic downturn or recession that has occurred or may
occur in the future. For example, significant shifts in consumer spending behavior resulting from the outbreak, especially around key
purchase triggers like moving into new dwellings, remodeling spaces, or replacing or upgrading home furnishings, which we believe increased
sales may decline after the pandemic has abated and cause a significant impact on our business and operations.
Business Risks
We have historically operated at a loss,
and we may never achieve or sustain profitability.
While we have experienced recent growth, maintaining
that growth is dependent on a number of factors, including increased traffic to our website and showrooms, our sales conversion rate,
and our ability to open new showrooms. We also rely on shop-in-shops and pop-up-shops, and there can be no assurance the current retailer
with whom we partner will continue to house them or that we will be able to enter into similar arrangements with other retailers, which
could hinder our anticipated sales growth. Our business is highly competitive, and there can be no assurance that we will be able to sustain
or improve our recent growth rates.
Our inability to maintain our brand image,
engage new and existing customers and gain market share could have a material adverse effect on our growth strategy and our business,
financial condition, operating results and prospects.
Our ability to maintain our brand image and reputation
is integral to our business and implementation of our growth strategy. Maintaining, promoting and growing our brand will depend largely
on the success of our design, merchandising and marketing efforts and our ability to provide a consistent, high-quality product and customer
experience. Our reputation could be jeopardized if we fail to maintain high standards for product quality and integrity and any negative
publicity about these types of concerns may reduce demand for our products. While we believe our brand enjoys a loyal customer base, the
success of our growth strategy depends, in part, on our ability to keep existing customers engaged and attract new customers to our brand.
If we experience damage to our reputation or loss of consumer confidence, we may not be able to retain existing customers or acquire new
customers, which could have a material adverse effect on our business, financial condition, operating results and prospects.
If we fail to acquire new customers, or
fail to do so in a cost-effective manner, we may not be able to achieve revenue growth or profitability.
To acquire new customers, we must appeal to prospects
who have historically used other means of commerce to purchase furniture, such as traditional furniture retailers. To date, we have reached
new customers primarily through our showroom presence in various markets, and through social media, digital content, third-party advocates
for our brand and products and by word of mouth, and now through national television advertisements. Until now, these efforts have allowed
us to acquire new customers at what we believe is a reasonable cost and rate. However, there is no guarantee that these methods will continue
to be successful or will drive customer acquisition rates necessary for us to achieve revenue growth or profitability.
Our business is highly competitive. Competition
presents an ongoing threat to the success of our business.
Our business is rapidly evolving and intensely
competitive, and we have many competitors in different industries. We compete with furniture stores, big box retailers, department stores,
specialty retailers and online furniture retailers and marketplaces.
We expect competition in both retail stores and
ecommerce to continue to increase. Our ability to compete successfully depends on many factors both within and beyond our control, including:
● the size and composition of our customer base;
● our selling and marketing efforts;
● the quality, price, reliability and uniqueness of products we offer;
● the convenience of the shopping experience that we provide;
● our ability to distribute our products and manage our operations; and
● our reputation and brand strength.
Many of our current and potential competitors
have longer operating histories, greater brand recognition, larger fulfillment infrastructures, greater technological capabilities, faster
and less costly shipping, significantly greater financial, marketing and other resources and larger customer bases than we do. These factors
may allow our competitors to, among other things, derive greater sales from their existing customer base, acquire customers at lower costs
and respond more quickly than we can to new or emerging technologies and changes in consumer habits. These competitors may engage in more
extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies.
If we are unable to successfully compete, our business, financial condition, operating results and prospects could be materially adversely
affected.
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Our business depends on effective marketing
and increased customer traffic.
We rely on a variety of marketing strategies to
compete for customers and increase sales. If our competitors increase their spending on marketing, if our marketing is less effective
than that of our competitors, or if we do not adequately leverage the technology and data analytics needed to generate concise competitive
insight, our business, financial condition, operating results and prospects could be adversely affected.
Our increased use of social media poses
reputational risks.
As use of social media becomes more prevalent,
our susceptibility to risks related to social media increases. The immediacy of social media precludes us from having real-time control
over postings made regarding us via social media, whether matters of fact or opinion. Information distributed via social media could result
in immediate unfavorable publicity we may not be able to reverse. This unfavorable publicity could result in damage to our reputation
and therefore have a material adverse effect on our business, financial condition, operating results and prospects.
Our efforts to launch new products may not
be successful.
We plan to expand our product line in the future.
We may not be able to develop products which are attractive to our customers, and our costs to develop new products may be significant.
It may take longer than we might expect for a product, even if ultimately successful, to achieve attractive sales results. Failure to
successfully develop or market new products or delays in the development of new products could have a material adverse effect on our financial
condition, results of operations and business.
We rely on the performance of members of
management and highly skilled personnel. If we are unable to attract, develop, motivate and retain well-qualified associates, our business
could be harmed.
We believe our success has depended, and continues
to depend, on the efforts and talents of Shawn Nelson, our founder, member of the Board of Directors and Chief Executive Officer, Andrew
Heyer, our Chairman of the Board, Jack Krause, our President and Chief Operating Officer, Donna Dellomo, our Executive Vice President,
Chief Financial Officer, Treasurer and Secretary and other members of our management team. Our future success depends on our continuing
ability to attract, develop, motivate and retain highly qualified and skilled associates. The market for such associates in the cities
in which we operate is competitive. Qualified individuals are in high demand, and we may incur significant costs to attract and retain
them. The loss of any of our key associates, including members of our senior management team, could materially adversely affect our ability
to execute our business plan, and we may not be able to find adequate replacements. Our inability to recruit and develop mid-level managers
could have similar adverse effects on our ability to execute our business plan.
Some of our officers and other key associates
are employed at-will, meaning that they may terminate their employment relationship with us at any time, and their knowledge of our business
and industry would be extremely difficult to replace. While others have employment agreements with stated terms, they could still leave
our employ. If we do not succeed in retaining and motivating existing associates or attracting well-qualified associates, our business,
financial condition, operating results and prospects may be materially adversely affected.
System interruptions that impair customer
access to our sites or other performance failures in our technology infrastructure could damage our business, reputation and brand, and
substantially harm our business and results of operations.
The satisfactory performance, reliability and
availability of our website, transaction processing systems and technology infrastructure are critical to our reputation, and our ability
to acquire and retain customers and maintain adequate customer service levels. We currently rely on a variety of third party service providers
to support mission critical systems and the efficient flow of merchandise from and between warehouses and showrooms to customers. For
example, we rely on common carriers for the delivery of merchandise purchased by customers through our website and in our showrooms, and
the systems we employ to communicate delivery schedules and update customers about order tracking interface with the information systems
of these common carriers. Our own systems, which are customized versions of ecommerce, customer relationship management, payment processing,
and inventory management software technologies deployed by numerous retailers and wholesalers in a variety of industries, must work seamlessly
in order for information to flow correctly and update accurately across these systems. Any failure in this regard could result in negative
customer experiences, putting our brand and growth at risk.
Through third parties that underwrite customer
risk, we offer financing options in order to increase the market demand for our products among customers who may not be able to buy them
using cash. The systems of these third parties must work efficiently in order to give customers real-time credit availability. Changes
in the risk underwriting or technologies of these third parties may result in lower credit availability to our potential customers and
therefore reduced sales. The occurrence of any of the foregoing could substantially harm our business and results of operations.
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Unauthorized disclosure of sensitive or
confidential information, whether through a breach of our computer system or otherwise, could severely hurt our business.
Certain aspects of our business involve the receipt,
storage and transmission of customers’ personal information and consumer preferences, as well as confidential information about
our associates, our suppliers and our Company, some of which is entrusted to third-party service providers and vendors. Despite the security
measures we have in place, our facilities and systems, and those of third parties with which we do business, may be vulnerable to security
breaches, acts of vandalism and theft, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events.
An electronic security breach in our systems (or
in the systems of third parties with which we do business) that results in the unauthorized release of individually identifiable information
about customers or other sensitive data could occur and have a material adverse effect on our reputation, lead to substantial financial
losses from remedial actions, and lead to a substantial loss of business and other liabilities, including possible punitive damages. In
addition, as the regulatory environment relating to retailers and other companies’ obligation to protect such sensitive data becomes
increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could
result in additional costs, and a material failure on our part to comply could subject us to fines, other regulatory sanctions and lawsuits.
Our business is sensitive to economic conditions
and consumer spending.
We face numerous business risks relating to macroeconomic
factors. Consumer purchases of discretionary items, including our products, generally decline during recessionary periods and other times
when disposable income is lower. Factors impacting discretionary consumer spending include general economic conditions, wages and employment,
consumer debt, reductions in net worth based on severe market declines, residential real estate and mortgage markets, taxation, volatility
of fuel and energy prices, interest rates, consumer confidence, political and economic uncertainty and other macroeconomic factors, including
the COVID-19 pandemic. Deterioration in economic conditions or increasing unemployment levels may reduce the level of consumer spending
and inhibit consumers’ use of credit, which may adversely affect our sales. In recessionary periods and other periods where disposable
income is adversely affected, we may have to increase the number of promotional sales or otherwise dispose of inventory for which we have
previously paid to manufacture, which could further adversely affect our financial performance. It is difficult to predict when or for
how long any of these conditions could affect our business and a prolonged economic downturn could have a material adverse effect on our
business, financial condition, operating results and prospects.
A substantial portion of our business is
dependent on a small number of suppliers. A material disruption at any of our suppliers’ manufacturing facilities could prevent
us from meeting customer demand, reduce our sales, and/or negatively affect our financial results.
We do not own or operate any manufacturing facilities
and therefore depend on third-party suppliers for the manufacturing of all of our products. Moreover, a substantial portion of our business
is dependent on a small number of suppliers. Sacs, which represented approximately 14% of our revenues in fiscal 2021 and 17% of our revenues
in fiscal 2020, are currently manufactured by a single manufacturer in Texas. Sactionals, which represented approximately 85% of our revenues
in fiscal 2021 and 81% of our revenues in fiscal 2020, are manufactured by suppliers in the United States, China, Vietnam, Malaysia, Taiwan,
Indonesia, and India
Any of our suppliers’ manufacturing facilities,
or any of the machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, which
could materially and adversely impact our business, operations and financial condition. These events include but are not limited to:
● equipment failure;
● public health crises, such as the COVID-19 pandemic;
● fires, floods, earthquakes, hurricanes, or other catastrophes;
● unscheduled maintenance outages;
● utility and transportation infrastructure disruptions;
● labor difficulties;
● other operational problems;
● war or terrorism;
● political, social or economic instability; or
● financial instability or bankruptcy of any such supplier.
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Our reliance on international suppliers
increases our risk of supply chain disruption, which could materially increase the cost and reduce or delay the supply of our products,
which could adversely affect our business, financial condition, operating results and prospects.
Our current suppliers are located in China, Vietnam,
Taiwan, India, Indonesia, Malaysia and the United States. Our reliance on international suppliers increases our risk of supply chain disruption.
Events that could cause disruptions to our supply chain include but are not limited to:
● the imposition of additional trade laws or regulations;
● public health crises, such as the COVID-19 pandemic;
● foreign currency fluctuations;
● theft; and
● restrictions on the transfer of funds.
The occurrence of any of the foregoing could materially
increase the cost and reduce or delay the supply of our products, which could adversely affect our business, financial condition, operating
results and prospects.
We are subject to risks associated with
our dependence on foreign manufacturing and imports for our products.
Our business highly depends on global trade, as
well as trade and other factors that impact the specific countries where our vendors’ production facilities are located. Our future
success will depend in large part upon our ability to maintain our existing foreign vendor relationships and to develop new ones based
on the requirements of our business and any changes in trade dynamics that might dictate changes in the locations for sourcing of products.
While we rely on long-term relationships with many of our vendors, we have no long-term contracts with them and generally transact business
with them on an order-by-order basis.
Many of our imported products are subject to existing
duties, tariffs, anti-dumping duties and quotas that may limit the quantity or affect the price of some types of goods that we import
into the United States. In addition, substantial regulatory uncertainty exists regarding international trade and trade policy, both in
the United States and abroad.
All of our goods imported from China are subject
to additional tariffs. In September 2018, the Office of the U.S. Trade Representative began imposing a 10 percent ad valorem duty on a
subset of products imported from China, inclusive of various furniture product categories. In addition, effective May 10, 2019, the Office
of the U.S. Trade Representative began imposing an additional 15 percent ad valorem duty on a subset of products imported from China,
inclusive of various furniture product categories. We believe that nearly all of our products sourced from China are, and will continue
to be, affected by the tariffs. While we are continuing to assess these proposed tariffs on Chinese imports and are evaluating strategies
to mitigate the effects of the tariffs, there can be no assurance that we will not experience disruption in our business.
Further, these changes to tariffs or other rules
related to cross border trade, could materially increase our cost of goods sold with respect to products that we purchase from vendors
who manufacture products in China, which could in turn require us to increase our prices and, in the event consumer demand declines as
a result, negatively impact our financial performance. Certain of our competitors may be better positioned than us to withstand or react
to these kinds of changes including border taxes, tariffs or other restrictions on global trade and as a result we may lose market share
to such competitors. Due to broad uncertainty regarding the timing, content and extent of any regulatory changes in the United States
or abroad, we cannot predict the impact, if any, that these changes could have to our business, financial condition and results of operations.
Our reliance on suppliers in developing
countries increases our risk with respect to available manufacturing infrastructure, labor and employee relations, political and economic
stability, corruption, and regulatory, environmental, health and safety compliance.
Our reliance on suppliers in developing countries
increases our risk with respect to infrastructure available to support manufacturing, labor and employee relations, political and economic
stability, corruption, and regulatory, environmental, health and safety compliance. Any failure of our suppliers to comply with ethical
sourcing standards or labor or other local laws in the country of manufacture, or the divergence of a supplier’s labor practices
from those generally accepted as ethical in the United States, could disrupt the shipment of products, force us to locate alternative
manufacturing sources, reduce demand for our products, damage our reputation and/or expose us to potential liability for their wrongdoings.
Any of these events could have a material adverse effect on our reputation, business, financial condition, operating results and prospects.
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