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.
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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.
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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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Most of our products are shipped from our
suppliers by ocean vessel. If a disruption occurs in the operation of ports through which our products are imported, we may incur increased
costs and suffer delays, which could have a material adverse effect on our business, financial condition, operating results and prospects.
Most of our products are shipped from our suppliers
by ocean vessel. If a disruption occurs in the operation of ports through which our products are imported, we may incur increased costs
related to air freight or use of alternative ports. Shipping by air is significantly more expensive than shipping by ocean and our margins
could be reduced. Shipping to alternative ports could also lead to delays in receipt of our products. We rely on third-party shipping
companies to deliver our products to us. Failures by these shipping companies to deliver our products to us or lack of capacity in the
shipping industry could lead to delays in receipt of our products or increased expense in the delivery of our products. Any of these developments
could have a material adverse effect on our business, financial condition, operating results and prospects.
Increases in the demand for, or the price
of, raw materials used to manufacture our products or other fluctuations in sourcing or distribution costs could increase our costs and
negatively impact our gross margin.
We believe that we have strong supplier relationships,
and we work with our suppliers to manage cost increases. Our gross margin depends, in part, on our ability to mitigate rising costs or
shortages of raw materials used to manufacture our products. Raw materials used to manufacture our products are subject to availability
constraints and price volatility impacted by a number of factors, including supply and demand for fabrics, weather, government regulations,
economic conditions and other unpredictable factors. In addition, our sourcing costs may fluctuate due to labor conditions, transportation
or freight costs, energy prices, currency fluctuations, public health crises, such as the COVID-19 pandemic, or other unpredictable factors.
The occurrence of any of the foregoing could increase our costs, delay or reduce the availability of our products and negatively impact
our gross margin.
Our inability to manage our inventory levels
and products, including with respect to our omni-channel operations, could have a material adverse effect on our business, financial condition,
operating results and prospects.
Inventory levels in excess of customer demand
may result in lower than planned financial performance. Alternatively, if we underestimate demand for our products, we may experience
inventory shortages resulting in missed sales and lost revenues. Either of these events could significantly affect our operating results
and brand image and loyalty. Our financial performance may also be impacted by changes in our products and pricing. These changes could
have a material adverse effect on our business, financial condition, operating results and prospects.
Our inability to manage the complexities
created by our omni-channel operations may have a material adverse effect on our business, financial condition, operating results and
prospects.
Our omni-channel operations create additional
complexities in our ability to manage inventory levels, as well as certain operational issues, including timely shipping and returns.
Accordingly, our success depends to a large degree on continually evolving the processes and technology that enable us to plan and manage
inventory levels and fulfill orders, address any related operational issues and further align channels to optimize our omni-channel operations.
If we are unable to successfully manage these complexities, it may have a material adverse effect on our business, financial condition,
operating results and prospects.
Our ability to attract customers to our
showrooms depends heavily on successfully locating our showrooms in suitable locations. Any impairment of a showroom location, including
any decrease in customer traffic, could cause our sales to be lower than expected.
We plan to open new showrooms in high traffic
street and urban locations and historically we have favored top tier mall locations near luxury and contemporary retailers that we believe
are consistent with our key customers’ demographics and shopping preferences. Sales at these showrooms are derived, in part, from
the volume of foot traffic in these locations. Showroom locations may become unsuitable due to, and our sales volume and customer traffic
generally may be harmed by, among other things:
● economic downturns in a particular area;
● competition from nearby retailers selling similar products;
● changing consumer demographics in a particular market;
● changing preferences of consumers in a particular market;
● reduced customer foot traffic outside a showroom location; and
Even if a showroom location becomes unsuitable,
we will generally be unable to cancel the long-term lease associated with such showroom.
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We may be unable to successfully open and
operate new showrooms, which could have a material adverse effect on our business, financial condition, operating results and prospects.
As of January 31, 2021, we had 108 showrooms,
but our growth strategy requires us to increase our showroom base. There can be no assurance that we will succeed in opening additional
showrooms. If we are unable to successfully open and operate new showrooms, it could have a material adverse effect on our business, financial
condition, operating results and prospects.
Our ability to successfully open and operate new
showrooms depends on many factors, including, among other things, our ability to:
● achieve brand awareness, affinity and purchaser intent in new markets;
● hire, train and retain showroom associates and field management;
● source and supply sufficient inventory levels;
● have the capital necessary to fund new showrooms.
In addition, our new showrooms may not be immediately
profitable, and we may incur significant losses until these showrooms become profitable. Unavailability of desired showroom locations,
delays in the acquisition or opening of new showrooms, delays or costs resulting from a decrease in commercial development due to capital
restraints, difficulties in staffing and operating new showroom locations or a lack of customer acceptance of showrooms in new market
areas may negatively impact our new showroom growth and the costs or the profitability associated with new showrooms. While we are seeking
to mitigate some of the risks related to our mall-based showrooms by opening high traffic street and lifestyle center-based showrooms
and continuing to build our online sales, there can be no assurance that this strategy will be successful or lead to greater sales.
As we expand our showroom base, we may not
be able to achieve the showroom sales growth rates that we have achieved in the past, which could cause our share price to decline.
As we expand our showroom base, we may not be
able to achieve the showroom sales growth rates that we have achieved historically. If our showroom sales growth rates decline or fail
to meet market expectations, the value of our common stock could decline. While our focus is to continue the expansion of our showrooms,
this may result in the closure of underperforming showroom locations or locations with declining profitability in order to pursue more
productive opportunities that are in line with our real estate strategy. The closure of these showrooms and transition to new showroom
locations as part of our strategy may impact our sales and productivity.
In addition, the results of operations of our
showroom locations have fluctuated in the past and can be expected to continue to fluctuate in the future. A variety of factors affect
showroom sales, including, among others, consumer spending patterns, fashion trends, competition, current economic conditions, pricing,
inflation, the timing of the release of new merchandise and promotional events, changes in our product assortment, the success of marketing
programs, weather conditions and public health crises, such as the COVID-19 pandemic. If we misjudge the market for our products, we may
have excess inventory of some of our products and miss opportunities for other products. These factors may cause our showroom sales results
in the future to be materially lower than recent periods or our expectations, which could harm our results of operations and result in
a decline in the price of our common stock.
We have and will continue to expend capital
remodeling our existing showrooms, and there is no guarantee that this will result in incremental showroom traffic or sales.
We intend to continue remodeling our existing
showroom base to reflect our new showroom design, and we intend to expend capital doing so. While preliminary results appear promising,
there is no guarantee that the capital spent on these remodeled showrooms will result in increased showroom traffic or increased sales.
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Our lease obligations are substantial and
expose us to increased risks.
We do not own any of our showrooms. Instead, we
rent all of our showroom spaces pursuant to leases. Nearly all of our leases require a fixed annual rent, and many of them require the
payment of additional rent if showroom sales exceed a negotiated amount. Most of our leases are “net” leases that require
us to pay all costs of insurance, maintenance and utilities, as well as applicable taxes.
Our required payments under these leases are substantial
and account for a significant portion of our selling, general and administrative expenses. We expect that any new showrooms we open will
also be leased, which will further increase our lease expenses and require significant capital expenditures. Our substantial lease obligations
could have significant negative consequences, including, among others:
● limiting our ability to obtain additional financing;
Many of our leases contain relocation clauses
that allow the landlord to move the location of our showrooms. Moreover, as our leases expire, we may be unable to negotiate acceptable
renewals. If either of these events occur, our business, sales and results of operations may be harmed.
Many of our leases include relocation clauses
that allow the landlord to move the location of our showrooms. If any of our showrooms are relocated, there can be no assurance that the
new location will experience the same levels of customer traffic or success that the prior location experienced. In addition, as our leases
expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close showrooms
in desirable locations. We may also be unable to enter into new leases on terms acceptable to us or in desirable locations. If any of
the foregoing occur, our business, sales and results of operations may be harmed.
We are required to make substantial lease
payments under our leases, and any failure to make these lease payments when due would likely harm our business.
We depend on cash flow from operations to pay
our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities,
and sufficient funds are not otherwise available to us from other sources, we may not be able to service our substantial lease expenses,
which would harm our business.
Moreover, our showroom leases are generally long
term and non-cancelable, and we generally expect future showrooms to be subject to similar long term, non-cancelable leases. If an existing
or future showroom is not profitable, and we decide to close it, we may nonetheless be required to perform our obligations under the applicable
lease including, among other things, paying the base rent for the balance of the lease term if we cannot negotiate a mutually acceptable
termination payment.
Our inability to successfully optimize our
omni-channel operations and maintain a relevant and reliable omni-channel experience for our customers could have a material adverse effect
on our growth strategy and our business, financial condition, operating results and prospects.
Growing our business through our omni-channel
operations is key to our growth strategy. Our goal is to offer our customers seamless access to our products across our channels, and
our success depends on our ability to anticipate and implement innovations in sales and marketing strategies to appeal to existing and
potential customers who increasingly rely on multiple channels, such as ecommerce, to meet their shopping needs. Failure to enhance our
technology and marketing efforts to align with our customers’ developing shopping preferences could significantly impair our ability
to meet our strategic business and financial goals. If we do not successfully optimize our omni-channel operations, or if they do not
achieve their intended objectives, it could have a material adverse effect on our business, financial condition, operating results and
prospects.
If we are unable to successfully adapt to
consumer shopping preferences or develop and maintain a relevant and reliable omni-channel experience for our customers, our financial
performance and brand image could be adversely affected.
We are continuing to grow our omni-channel business
model. While we interact with many of our customers through our showrooms, our customers are increasingly using computers, tablets and
smartphones to make purchases online and to help them make purchasing decisions when in our showrooms. Our customers also engage with
us online through our social media channels, including Facebook and Instagram, by providing feedback and public commentary about aspects
of our business. Omni-channel retailing is rapidly evolving. Our success depends, in part, on our ability to anticipate and implement
innovations in customer experience and logistics in order to appeal to customers who increasingly rely on multiple channels to meet their
shopping needs. If for any reason we are unable to continue to implement our omni-channel initiatives or provide a convenient and consistent
experience for our customers across all channels that delivers the products they want, when and where they want them, our financial performance
and brand image could be adversely affected.
Purchasers of furniture may choose not to
shop online, which could affect the growth of our business.
The online market for furniture is less developed
than the online market for apparel, consumer electronics and other consumer products in the United States. While we believe this market
is growing, it still accounts for a small percentage of the market as a whole. We are relying on online sales for our continued success
and growth. If the online market for furniture does not gain wider acceptance, our growth and business may suffer.
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In addition, our success in the online market
will depend, in part, on our ability to attract consumers who have historically purchased furniture through traditional retailers. We
may have to incur significantly higher and more sustained advertising and promotional expenditures in order to attract additional online
consumers to our website and convert them into purchasing customers. Specific factors that could impact consumers’ willingness to
purchase furniture from us online include:
● usability, functionality and features of our website.
If the online shopping experience we provide does
not appeal to consumers or meet the expectations of existing customers, we may not acquire new customers at rates consistent with historical
periods, and existing customers’ buying patterns may not be consistent with historical buying patterns. If either of these events
occur, our business, sales and results of operations may be harmed.
We depend on our ecommerce business and
failure to successfully manage this business and deliver a seamless omni-channel shopping experience to our customers could have an adverse
effect on our growth strategy, business, financial condition, operating results and prospects.
Sales through our ecommerce channel account for
a significant portion of our revenues. Our business, financial condition, operating results and prospects are dependent on maintaining
our ecommerce business. Dependence on our ecommerce business and the continued growth of our direct and retail channels subjects us to
certain risks, including:
● the reliance on third-party computer hardware/software providers;
● rapid technological change;
● liability for online content;
● credit card fraud;
● diversion of traffic and sales from our stores.
Our failure to successfully address and respond
to these risks and uncertainties could negatively impact sales, increase costs, diminish our growth prospects and damage the reputation
of our brand, each of which could have a material adverse effect on our business, financial condition, operating results and prospects.
Significant merchandise returns could harm
our business.
We allow our customers to return products, subject
to our return policy. While we have experienced relatively few product returns, this could change, and, if customer returns are significant,
our business, financial condition, operating results and prospects could be harmed. Further, we modify our policies relating to returns
from time to time, which may result in customer dissatisfaction or an increase in the number of product returns.
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We are subject to risks related to online
payment methods.
We accept payment using a variety of methods,
including credit card, debit card, PayPal and gift cards. As we offer new payment options to consumers, we may become subject to additional
regulations, compliance requirements and fraud. For certain payment methods, including credit and debit cards, we pay interchange and
other fees, which may increase over time and increase our operating costs. We are also subject to payment card association operating rules
and certification requirements, including the Payment Card Industry Data Security Standard and rules governing electronic funds transfers,
which could change or be reinterpreted to make it difficult or impossible for us to comply.
As our business changes, we may also be subject
to different rules under existing standards, which may require new assessments that involve costs above what we currently pay for compliance.
If we fail to comply with the rules or requirements of any provider of a payment method we accept, if the volume of fraud in our transactions
limits or terminates our rights to use payment methods we currently accept, or if a data breach occurs relating to our payment systems,
we may, among other things, be subject to fines or higher transaction fees and may lose, or have restrictions placed upon, our ability
to accept credit card and debit card payments from consumers or our ability to facilitate other types of online payments. If any of these
events were to occur, our business, financial condition and operating results could be materially adversely affected.
In addition, we occasionally receive orders placed
with fraudulent credit card data. We may suffer losses as a result of orders placed with fraudulent credit card data even if the associated
financial institution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent credit card
transactions. If we are unable to detect or control credit card fraud, our liability for these transactions could harm our business, financial
condition, operating results and prospects.
Finance Risks
Our ability to raise capital in the future
may be limited. Our inability to raise capital when needed could prevent us from growing and could have a material adverse effect on our
business, financial condition, operating results and prospects.
If we continue to experience insufficient cash
flow from operations to support our operating and capital needs, we will be required to raise additional capital through public or private
financing or other arrangements. Such financing may not be available on acceptable terms, or at all. We may sell common stock, preferred
stock, convertible securities and other equity securities in one or more transactions at prices and in such a manner as we may determine
from time to time. If we sell any such equity securities in subsequent transactions, investors may be materially diluted. Debt financing,
if available, may involve restrictive covenants and could reduce, among other things, our operational flexibility. If we cannot raise
funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures. In addition, debt financings may
be blocked by our senior lender that provides an asset-backed revolving credit facility to fund our inventory purchases in advance of
customer sales. Our lender has, and any subsequent senior lender likely will have, the right to consent to any new debt financing. There
can be no assurance that our lender will provide such consent. Our inability to raise capital when needed could prevent us from growing
and have a material adverse effect on our business, financial condition, operating results and prospects.
If we are unable to implement and maintain
effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our
financial reports and the market price of our common stock may be adversely affected.
As a public company, we are required to maintain
internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of SOX requires
that we furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This
assessment requires disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial
reporting until our first annual report required to be filed with the SEC following the later of the date we are deemed to be an “accelerated
filer” or a “large accelerated filer,” each as defined in the Exchange Act, or the date we are no longer an “emerging
growth company,” as defined in the JOBS Act. If we have a material weakness in our internal control over financial reporting, we
may not detect errors on a timely basis and our financial statements may be materially misstated. If we identify material weaknesses in
our internal control over financial reporting, are unable to comply with the requirements of Section 404 of SOX in a timely manner, are
unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm
is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence
in the accuracy and completeness of our financial reports, and the market price of our common stock could be adversely affected. In addition,
we could become subject to investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities,
which could require additional financial and management resources.
If our internal control over financial reporting
or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud
or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and
may lead to a decline in our stock price.
We rely on financial reporting and data analytics
that must be accurate in order to make real-time management decisions, accurately manage our cash position, and maintain adequate inventory
levels while conserving adequate cash to fund operations. In the event of a systems failure, a process breakdown, the departure of key
management, or fraud, we would be unable to efficiently manage these items and may experience liquidity shortfalls that our cash position
or revolving credit facility may not be able to accommodate. In such a situation, we also may not be able to accurately report our financial
results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial
information and may lead to a decline in our stock price.
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We may be unable to accurately forecast
our operating results and growth rate, which may adversely affect our reported results and stock price.
We may not be able to accurately forecast our
operating results and growth rate. We use a variety of factors in our forecasting and planning processes, including historical results,
recent history and assessments of economic and market conditions. Our growth rates may not be sustainable, and our growth depends on the
continued growth of demand for the products we offer. Lower demand caused by changes in customer preferences, a weakening of the economy
or other factors may result in decreased revenues or growth. Furthermore, many of our expenses and investments are fixed, and we may not
be able to adjust our spending in a timely manner to compensate for any unexpected shortfall in our operating results. Failure to accurately
forecast our operating results and growth rate could cause our actual results to be materially lower than anticipated. If our growth rate
declines as a result, investors’ perceptions of our business may be adversely affected, and the market price of our common stock
could decline.
If we fail to manage our growth effectively,
our business, financial condition, operating results and prospects could be harmed.
To manage our anticipated growth effectively,
we must continue to implement our operational plans and strategies, improve and expand our corporate infrastructure, information systems,
and executive management and expand, train and manage our associate base. As we grow, we will need to find, train, and monitor additional
associates and continue to invest in information systems that support key functions such as accounting, human resources, sales analytics,
and marketing, all of which strain the time of our executive management team and our resources. If we fail to manage our growth effectively,
our business, financial condition, operating results and prospects could be harmed.
Changes in lease accounting standards may
materially and adversely affect us.
The Financial Accounting Standards Board (“FASB”)
issued 2016-02, Leases (Topic 842). As an “emerging growth company,” we have elected to defer compliance with new or
revised financial accounting standards and, as a result we will adopt this standard beginning in fiscal 2022. When the rules are effective,
we will be required to capitalize all leases on our balance sheet and account for our showroom leases as assets and liabilities, where
we previously accounted for such leases on an “off balance sheet” basis. As a result, a significant amount of lease-related
assets and liabilities will be recorded on our balance sheet, and we may be required to make other changes to the recording and classification
of our lease-related expenses. These changes will not directly impact our overall financial condition. However, they could cause investors
or others to believe that we are highly leveraged and could change the calculations of financial metrics and covenants under our debt
facilities and third-party financial models regarding our financial condition.
Legal, Tax and Regulatory Risks
We may be subject to product liability claims
if people or property are harmed by the products we sell.
We have not had any significant product liability
claims to date. We place a high priority on designing our products to be safe for consumers and safety test our products in third-party
laboratories. Still, the products we sell or have manufactured may expose us to product liability claims, litigation and regulatory action
relating to personal injury, death and environmental or property damage. Some of our agreements with our suppliers and international manufacturers
may not indemnify us from product liability for a particular supplier’s or international manufacturer’s products, or our suppliers
or international manufacturers may not have sufficient resources or insurance to satisfy their indemnity and defense obligations. Although
we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance
will continue to be available to us on economically reasonable terms, or at all. Any product liability claims asserted against us could,
among other things, harm our reputation, damage our brand, cause us to incur significant costs, and have a material adverse effect on
our business, results of operations and financial condition.
Product warranty claims could have a material
adverse effect on our business.
We provide a lifetime warranty on most components
of our products, which, if deficient, could lead to warranty claims. The Company maintains a reserve for warranty claims. However, there
can be no assurance that our reserve for warranty claims will be adequate and additional or reduced warranty reserves may be required.
Material warranty claims could, among other things, harm our reputation and damage our brand, cause us to incur significant repair and/or
replacement costs, and have a material adverse affect our business, financial condition, operating results and prospects.
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A significant disruption in, or breach in
security of, our information technology systems or violations of data protection laws could have a material adverse affect on our business
and reputation.
In the ordinary course of business, we collect
and store confidential information, including proprietary business information belonging to us, our customers, suppliers, business partners
and other third parties and personally identifiable information of our associates. We rely on information technology systems to protect
this information and to keep financial records, process orders, manage inventory, coordinate shipments to customers, and operate other
critical functions. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware
failures, telecommunication failures and user errors. If we experience a disruption in our information technology systems, it could result
in the loss of sales and customers and significant incremental costs, which could materially adversely affect our business. We may also
be subject to security breaches caused by computer viruses, illegal break-ins or hacking, sabotage, or acts of vandalism by disgruntled
associates or third parties. The risk of a security breach or disruption, particularly through cyberattack or cyber intrusion, including
by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted
attacks and intrusions from around the world have increased. Our information technology network and systems have been and, we believe,
continue to be under constant attack. Accordingly, despite our security measures or those of our third-party service providers, a security
breach may occur, including breaches that we may not be able to detect. Security breaches of our information technology systems could
result in the misappropriation or unauthorized disclosure of confidential information which could have a material adverse on our business,
financial condition, operating results or prospects.
Government regulation of the Internet and
ecommerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business
and results of operations.
We are subject to general business regulations
and laws as well as regulations and laws specifically governing the Internet and ecommerce. Existing and future regulations and laws could
impede the growth of the Internet, ecommerce or mobile commerce. These regulations and laws may involve taxes, tariffs, privacy and data
security, anti-spam, content protection, electronic contracts and communications, consumer protection, Internet neutrality and gift cards.
It is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the
Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique
issues raised by the Internet or ecommerce. It is possible that general business regulations and laws, or those specifically governing
the Internet or ecommerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict
with other rules or our practices.
Though we seek at all times to be in full compliance
with all such laws, we cannot be sure that our practices have complied, comply or will comply fully with all such laws and regulations.
Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss
in business and proceedings or actions against us by governmental entities or others. Any such proceeding or action could damage our reputation
and brand, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing
business, decrease the use of our website by consumers and result in the imposition of monetary liability. We may also be contractually
liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations.
We may be unable to protect our trademarks
or brand image, which could harm our business.