LOVESAC CO Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Annual Report on Form
10-K. As discussed in the section titled "Forward-Looking Statements," the
following discussion and analysis contains forward-looking statements that
involve risks and uncertainties, as well as assumptions that, if they never
materialize or prove incorrect, could cause our results to differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause or contribute to these differences include, but are not limited to,
those identified below and those discussed in the section titled "Risk Factors"
under Part I, Item 1A in this Annual Report on Form 10-K.
We operate on a 52- or 53-week fiscal year that ends on the Sunday closest to
February 1. Each fiscal year generally is comprised of four 13-week fiscal
quarters, although in the years with 53 weeks, the fourth quarter represents a
14-week period.
Overview
We are a technology driven company that designs, manufactures and sells unique,
high quality furniture derived through our proprietary "Designed for Life"
approach which results in products that are built to last a lifetime and
designed to evolve as our customers' lives do. Our current product offering is
comprised of modular couches called Sactionals, premium foam beanbag chairs
called Sacs, and their associated home decor accessories. Innovation is at the
center of our design philosophy with all of our core products protected by a
robust portfolio of utility patents. We market and sell our products online
directly at www.lovesac.com, supported by direct-to-consumer touch-feel points
in the form of our own showrooms, which include our newly created mobile
concierge and kiosks, as well as through shop-in-shops and online pop-up-shops
with third party retailers. We believe that our ecommerce centric approach,
coupled with our ability to deliver our large, upholstered products through
express couriers, is unique to the furniture industry.

Our Operations

See “Item 1. Business” for information on our products, customers, business
model, channels, growth strategies, seasonality and other factors describing our
business.

Factors Affecting Our Operating Results

While our growth strategy has contributed to our improving operating results, it
also presents significant risks and challenges. The timing and magnitude of new
showroom openings, existing showroom renovations, and marketing activities may
affect our results of operations in future periods. These strategic initiatives
will require substantial expenditures.

Other factors that could affect our results of operations in future periods
include:

COVID-19

Although there has been a general improvement in conditions related to the
COVID-19 pandemic, there continues to be uncertainties around the scope and
severity of the pandemic, its impact on the global economy, including supply
chains, and other business disruptions that may impact our operating results and
financial condition. We continue to follow the
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guidance issued by federal, state and local governments and health organizations
and have taken measures to protect the safety of our associates and customers.

While the COVID-19 pandemic has led to shifts in the way in which we operate, we
continue 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. In
fiscal 2022, our showroom net sales have increased, other channel including net
sales from shop-in-shop and pop-up-shops also increased, while our internet net
sales have only decreased slightly demonstrating a customer shift back to
in-store purchases. As our showrooms are fully reopen, we continue to experience
growth as our net sales increased $177.5 million, or 55.3%, to $498.2 million
for the fiscal year ended 2022, compared to $320.7 million for the fiscal year
ended 2021. Retail sales drove an increase of $152.8 million, or 104.6%, to
$299.0 million for the fiscal year ended 2022, compared to $146.2 million for
the fiscal year ended 2021. The increase in retail sales over fiscal 2021 was
mainly due to the limited showroom operations related to COVID-19 in fiscal
2021, which more than offset the slight decrease in our internet net sales (net
sales made directly to customers through our ecommerce channel) of $0.4 million
or 0.3% in the fiscal year ended 2022. Other channel net sales increased $25.1
million, or 106.7%, to $48.6 million for the fiscal year ended 2022, compared to
$23.5 million for the fiscal year ended 2021. This increase was due to hosting 2
additional online pop-up-shops on Costco.com with higher productivity compared
to the prior year period and the addition of 18 new Best Buy shop-in-shops in
fiscal 2022, partially offset by sales decrease from shop-in-shop locations
related to Macy's closures. New customers increased by 14.3% for the fiscal year
ended 2022, as compared to 32.9% for the fiscal year ended 2021. The increase is
driven by the large number of new retail customers as showrooms are now fully
reopened, partially offset by the decrease in new internet customers related to
the shift back to in-store purchases and the large number of new internet
customers acquired from the Heroes campaign in prior year period.
The industry in which we operate is cyclical. In addition, our revenues are
affected by general economic conditions. Purchases of our products are sensitive
to a number of factors that influence the levels of consumer spending, including
economic conditions, consumer disposable income, housing market conditions,
consumer debt, interest rates and consumer confidence.

Seasonality

Our business is seasonal. As a result, our revenues fluctuate from quarter to
quarter, which often affects the comparability of our results between periods.
Net sales are historically higher in the fourth fiscal quarter due primarily to
the impact of the holiday selling season.

Competition

The retail industry is highly competitive and retailers compete based on a
variety of factors, including design, quality, price and customer service.
Levels of competition and the ability of our competitors to attract customers
through competitive pricing or other factors may impact our results of
operations.

How We Assess the Performance of Our Business

We consider a variety of financial and operating measures, including the
following, to evaluate our business, measure our performance, identify trends
affecting our business, formulate business plans, and make strategic decisions.

Net Sales

Net sales reflect our sale of merchandise plus shipping and handling revenue
less returns and discounts. Sales made at Company operated showrooms, including
shop-in-shops and pop-up-shops, and via the web are recognized in accordance
with the guidance set forth in ASC 606, which is typically at the point of
transference of title when the goods are shipped.

Comparable Showroom Sales

Comparable showroom sales are calculated based on point of sale transactions
from showrooms that were open at least fifty-two weeks as of the end of the
reporting period. These sales will differ from sales on our income statement
which are reported when goods are shipped and title has transferred to the
customer. A showroom is not considered a part of the comparable showroom sales
base if the square footage of the showroom changed or if the showroom was
relocated. If a showroom was closed for any period of time during the
measurement period, that showroom is excluded from comparable showroom sales. We
made an exception to this calculation in fiscal 2021 when all of our showrooms
were temporarily closed due to government regulations in response to the
COVID-19 pandemic. For fiscal years 2022 and 2021, 29 and 19
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respectively were excluded from comparable showroom sales. Comparable showroom
sales allow us to evaluate how our showroom base is performing by measuring the
change in period-over-period net sales in showrooms that have been open for
twelve months or more. While we review comparable showroom sales as one measure
of our performance, this measure is less relevant to us than it may be to other
retailers due to our fully integrated, omni-channel, go-to-market strategy. As a
result, measures that analyze a single channel are less indicative of the
performance of our business than they might be for other companies that operate
their distribution channels as separate businesses. Further, certain of our
competitors and other retailers calculate comparable showroom sales (or similar
measures) differently than we do. As a result, the reporting of our comparable
showroom sales may not be comparable to sales data made available by other
companies.

Customer Lifetime Value and Customer Acquisition Cost

We calculate CAC on an annual basis by dividing our expenses associated with
acquiring new customers for a fiscal year by the number of new customers we
acquire in that fiscal year. We include premium rent for locations above
commercial rates, media costs to new customers, and a portion of showroom
merchandising costs in our marketing expenses associated with acquiring new
customers when calculating our CAC. Our marketing expenses for fiscal 2022 and
fiscal 2021 were both equal to 13.1% of revenue. For fiscal 2022, our CAC was
$548.74 per customer compared to a CAC of $434.61 for fiscal 2021. This increase
was a result of our increased marketing spend that targeted Sactional customers.
We expect our CAC to continue to increase over the next few years as a result of
our continued focus on increasing marketing efforts. We expect this increase in
CAC to correspond with a continued increase in CLV.
We monitor repeat customer transactions in aggregate through our point of sale
platform and in groups based upon the year in which customers first made a
purchase from us, which we refer to as cohorts, as a way to measure our
customer's engagement with our products over their lifetime. Our fiscal 2022
cohorts CLV is $2,840 compared to $2,044 in fiscal 2021. In addition, our fiscal
2015 cohort has increased its CLV from $1,071 in fiscal 2015 to $1,385 in fiscal
2022, a 29.3% increase in customer value since the fiscal 2015 cohorts' first
purchases with Lovesac.

Retail Sales Per Selling Square Foot

Retail sales per selling square foot is calculated by dividing the total point
of sales transactions for all comparable showrooms, by the average selling
square footage for the period. Selling square footage is retail space at our
showrooms used to sell our products. Selling square footage excludes backrooms
at showrooms used for storage, office space or similar matters.

Cost of Merchandise Sold

Cost of merchandise sold includes the direct cost of sold merchandise; inventory
shrinkage; inventory adjustments due to obsolescence, including excess and
slow-moving inventory and lower of cost or net realizable value reserves;
inbound freight; all freight costs to ship merchandise to our showrooms; design,
buying and allocation costs, warehousing and all logistics costs associated with
shipping product to our customers. Certain of our competitors and other
retailers may report gross profit differently than we do, by excluding from
gross profit some or all of the costs related to their distribution network and
instead including them in selling, general and administrative expenses. As a
result, the reporting of our gross profit and profit margin may not be
comparable to other companies.
The primary drivers of our cost of merchandise sold are raw materials costs,
labor costs in the countries where we source our merchandise, and logistics
costs. We expect gross profit to increase to the extent that we successfully
grow our net sales and continue to realize scale economics with our
manufacturing partners. We review our inventory levels on an ongoing basis in
order to identify slow-moving merchandise and use product markdowns to
efficiently sell these products. The timing and level of markdowns are driven
primarily by customer acceptance of our merchandise.

Gross Profit

Gross profit is equal to our net sales less cost of merchandise sold. Gross
profit as a percentage of our net sales is referred to as gross margin.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include all operating costs, other
than advertising and marketing expense, not included in cost of merchandise
sold. These expenses include all payroll and payroll-related expenses; showroom
expenses, including occupancy costs related to showroom operations, such as rent
and common area maintenance; occupancy and expenses related to many of our
operations at our headquarters, including utilities, equity based compensation,
financing
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related expenses and public company expenses; and credit card transaction fees.
Selling, general and administrative expenses as a percentage of net sales is
usually higher in lower volume quarters and lower in higher volume quarters
because a significant portion of the costs are relatively fixed.
Our recent revenue growth has been accompanied by increased selling, general and
administrative expenses. The most significant components of these increases are
payroll, rent and selling related costs. We expect these expenses, as well as
rent expense associated with the opening of new showrooms, to increase as we
grow our business. We expect to leverage total selling, general and
administrative expenses as a percentage of sales as sales volumes continue to
grow. We expect to continue to invest in infrastructure to support the Company's
growth. These investments will lessen the impact of expense leveraging during
the period of investment with the greater impact of expense leveraging happening
after the period of investment. However, total selling, general and
administrative expenses generally will leverage during the periods of
investments with the most deleverage occurring in the first three quarters of
the fiscal year, and the greatest leverage occurring in the fourth quarter.

Advertising and Marketing Expense

Advertising and marketing expense include digital, social, and traditional
advertising and marketing initiatives, that cover all of our business channels.
We expect to continue to maintain our advertising and marketing investments at
12% to 14% of net sales on an annual basis. The investment by quarter may vary.

Basis of Presentation and Results of Operations

The following discussion contains references to fiscal years 2022, 2021 and 2020
which represent our fiscal years ended January 30, 2022, January 31, 2021 and
February 2, 2020, respectively. Our fiscal year ends on the Sunday closest to
February 1. Fiscal 2022, 2021 and 2020 were all 52-week periods.

The following table sets forth, for the periods for fiscal 2022, 2021 and 2020,
our consolidated statement of operations as a percentage of total revenues:

                                                                           For the Fiscal Year Ended
                                                            January 30,          January 31,
                                                               2022                  2021            February 2, 2020
Statement of Operations Data:
Net sales                                                            100  %                 100  %               100  %
Cost of merchandise sold                                              45  %                  46  %                50  %
Gross profit                                                          55  %                  54  %                50  %
Selling, general and administrative expenses                          32  %                  35  %                42  %
Advertising and marketing                                             13  %                  13  %                13  %
Depreciation and amortization                                          2  %                   2  %                 2  %
Operating income (loss)                                                8  %                   4  %                (7) %
Interest (expense) income, net                                         0  %                   0  %                 0  %
Net income (loss) before taxes                                         8  %                   4  %                (7) %
Benefit from (provision for) income taxes                              1  %                   0  %                 0  %
Net income (loss)                                                      9  %                   4  %                (7) %

Fiscal 2022 Compared to Fiscal 2021

Net sales

Net sales increased $177.5 million, or 55.3%, to $498.2 million in fiscal 2022
as compared to $320.7 million in fiscal 2021. The increase in overall net sales
was driven by our Showroom sales, Other sales and partially offset by a slight
decrease in our Internet Sales. New customers increased by 14.3% in fiscal 2022
as compared to 32.9% in fiscal 2021 driven by the successful Internet Heroes'
campaign in the prior year period. We had 146 total showrooms including kiosks
and mobile concierges open as of January 30, 2022 compared to 108 total
showrooms as of January 31, 2021. We opened 28 additional showrooms, 8 kiosks, 2
mobile concierges, and remodeled 2 showrooms and did not close any showrooms in
fiscal 2022, as compared to opening 19 showrooms and closing 2 showrooms in
fiscal 2021. There were no showroom remodels in
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fiscal 2021. Showroom sales increased $152.8 million, or 104.6%, to $299.0
million in fiscal 2022 as compared to $146.2 million in fiscal 2021, related to
higher point of sales transactions driven by limited showroom operations due to
COVID-19 in the prior year period, lower promotional discounting and new
showroom sales. This increase was due in large part to our comparable showroom
point of sales transaction increase of $129.6 million, or 104.1%, to
$254.1 million in fiscal 2022 as compared to $124.5 million in fiscal 2021.
Point of sales transactions represent orders placed through our showrooms which
does not always reflect the point at which control transfers to the customer,
which occurs upon shipment being confirmed. See Note 11 to the consolidated
financial statements. We believe point of sales transactions is a more accurate
way to measure showroom performance and how our showroom associates are
incentivized. Retail sales per selling square foot increased $1,067, or 63.7%,
to $2,742 in fiscal 2022 as compared to $1,675 in fiscal 2021. Total number of
units sold at point of transaction increased by approximately 62.3%. The
increase in comparable point of sales transactions, retail sales per selling
square foot and number of units sold in fiscal 2022 was principally driven by
the limited showroom operations due to COVID-19 in the prior year period. Other
sales, which include pop-up-shop sales, shop-in-shop sales, and barter inventory
transactions, increased $25.1 million, or 106.7%, to $48.6 million in fiscal
2022 as compared to $23.5 million in fiscal 2021. This increase was principally
due to hosting 2 additional online pop-up-shops on Costco.com with higher
productivity compared to the prior year period and the addition of 18 new Best
Buy shop-in-shops in fiscal 2022, partially offset by sales decrease from
shop-in-shop locations related to Macy's closures. Internet sales (sales made
directly to customers through our ecommerce channel) decreased $0.4 million, or
0.3%, to $150.6 million in fiscal 2022 as compared to $151.1 million in the
fiscal 2021. The slight decrease in Internet sales was due primarily to the
sales shift into the internet channel in fiscal 2021 as a result of the limited
showroom operations due to COVID-19 in fiscal 2021.

Gross profit

Gross profit increased $98.6 million, or 56.4%, to $273.3 million in fiscal 2022
from $174.8 million in fiscal 2021. Gross margin increased to 54.9% of net sales
in fiscal 2022 from 54.5% of net sales in fiscal 2021. The increase in gross
margin percentage of 40 basis points was primarily driven by an increase of 330
basis points improvement due to lower promotional discounts and continuing
vendor negotiations to assist with the mitigation of tariffs, partially offset
by an increase of 290 basis points in total freight including tariff expenses
and warehousing costs. The increase in total freight including tariffs and
warehousing costs over the prior year period is principally related to the
increase of 720 basis points in inbound container freight costs, partially
offset by higher leverage of 430 basis points in warehousing and outbound
freight costs.

Selling, general and administrative expenses

Selling, general and administrative expenses increased 45.5%, or $50.6 million,
to $162.0 million for the fiscal year ended January 30, 2022 compared to
$111.4 million for the fiscal year ended January 31, 2021. The increase in
selling, general and administrative expenses in fiscal 2022 was primarily
related to an increase in employment costs, rent, overhead expenses, and selling
related expenses. Employment costs increased by $22.8 million driven by an
increase in new hires and variable compensation. Rent increased by $10.3 million
related to $5.4 million rent expense primarily related to our net addition of 28
showrooms and $4.9 million in higher percentage rent from the increase in sales.
Overhead expenses increased $9.6 million consisting of an increase of $7.3
million in infrastructure investments, an increase of $1.3 million in
equity-based compensation, an increase of $0.6 million in travel expenses, and
an increase of $0.4 million in insurance expenses. Selling related expenses
increased $7.9 million due to an increase of $7.2 million in credit card fees
and an increase of $0.7 million in selling agent fees which includes $2.0
million in fees to terminate an agreement with vendor partners, higher sales
volume, partially offset by new lower rates of selling related fees compared to
the prior year period.
Selling, general and administrative expenses were 32.5% of net sales for fiscal
year ended January 30, 2022 compared to 34.7% of net sales for fiscal year ended
January 31, 2021. SG&A expense as a percent of net sales decreased 221 basis
points in fiscal 2022 due to a higher leverage within infrastructure
investments, rent, equity-based compensation, insurance, and selling related
expenses, partially offset by deleverage in employment costs and travel. The
deleverage in certain expenses relate to the investments we are making into the
business that were put on hold in the prior year relating to COVID-19 financial
resilience measures.

Advertising and marketing expenses

Advertising and marketing expenses increased $23.2 million, or 55.2%, to
$65.1 million for the fiscal year ended January 30, 2022 compared to $41.9
million for the fiscal year ended January 31, 2021. The increase in advertising
and marketing costs relates to ongoing investments in marketing spends to
support our sales growth.

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Advertising and marketing expenses were 13.1% of net sales in both fiscal year
2022 and fiscal 2021. We expect to continue to maintain our advertising and
marketing investments at 12% to 14% of net sales on an annual basis. The
investment by quarter may vary.

Depreciation and amortization expenses

Depreciation and amortization expenses increased 19%, or $1.2 million to
$7.9 million in fiscal 2022 compared to $6.6 million in fiscal 2021. The
increase in depreciation and amortization expense is principally related to
capital investments for new and remodeled showrooms in fiscal 2022.

Interest expense

Interest expense, net was $0.2 million in fiscal 2022, principally related to
the interest expense for unused line fees and amortization of deferred financing
fees on the asset-based loan. Interest expense, net in fiscal 2021 was $0.1
million, which reflects $0.1 million of interest income on cash and cash
equivalents, offset by $0.2 million of interest expense related to unused line
fees, interest on borrowings and amortization of deferred financing fees on the
asset-based loan for the fiscal year ended January 31, 2021.

Provision for income taxes

During fiscal 2022, the Company recorded an income tax benefit of $7.6 million
compared to income tax expense of $0.1 million in fiscal 2021. During fiscal
2022 the company recognized a reversal of the valuation allowance on deferred
tax assets of $16.4 million offset by recognition of deferred tax expense of
$9.8 million.
Repeat customers
Repeat customers accounted for approximately 41.6% of all transactions in fiscal
2022 compared to 37.5% in fiscal 2021. We expect new transactions to continue to
become a larger portion of our transaction mix as we spend on acquisition.

Quarterly Results

Our business is seasonal and we have historically realized a higher portion of
our net sales and net income in the fourth fiscal quarter due primarily to the
holiday selling season. Working capital requirements are typically higher in the
third fiscal quarter due to inventory built-up in advance of the holiday selling
season. During these peak periods we have historically increased our borrowings
under our line of credit. As such, results of a period shorter than a full year
may not be indicative of results expected for the entire year, and the seasonal
nature of our business may affect comparisons between periods.
For a comparison of Fiscal 2021 to Fiscal 2020 please refer to Item 7 within the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2021
filed with the Securities and Exchange Commission on April 14, 2021.

Liquidity and Capital Resources

General

Our business relies on cash flows from operations, our revolving line of credit
(see "Revolving Line of Credit" below) and securities issuances as our primary
sources of liquidity. Our primary cash needs are for marketing and advertising,
inventory, payroll, showroom rent, capital expenditures associated with opening
new showrooms and updating existing showrooms, as well as infrastructure and
information technology. The most significant components of our working capital
are cash and cash equivalents, inventory, accounts receivable, accounts payable
and other current liabilities and customer deposits. Borrowings generally
increase in our third fiscal quarter as we prepare for the holiday selling
season, which is in our fourth fiscal quarter. We believe that cash expected to
be generated from operations, the availability under our revolving line of
credit and our existing cash balances are sufficient to meet working capital
requirements and anticipated capital expenditures for at least the next 12
months.
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Cash Flow Analysis

A summary of operating, investing, and financing activities during the periods
indicated are shown in the following table:

in thousands                                                            Fiscal Year Ended
                                                           January 30,     January 31,     February 2,
                                                              2022            2021            2020
Provided by (used in) operating activities               $     34,018    $     40,521    $    (11,194)
Used in investing activities                                  (16,488)         (9,052)        (10,651)
(Used in) provided by financing activities                     (3,479)         (1,667)         21,313
Increase (decrease) in cash and cash equivalents               14,051          29,802            (532)
Cash and cash equivalents at end of period                     92,392       

78,341 48,539

Net Cash Provided by (Used in) Operating Activities

Cash from operating activities consists primarily of net income (loss) adjusted
for certain non-cash items, including depreciation, amortization, loss (gain) on
disposal of property and equipment, impairment of property and equipment, equity
based compensation, deferred rent, and non-cash interest expense and the effect
of changes in working capital and other activities.
In fiscal 2022, net cash provided by operating activities was $34.0 million and
consisted of changes in operating assets and liabilities of $31.2 million, a net
income of $45.9 million, and non-cash items of $19.9 million. Working capital
and other activities consisted primarily of increases in inventory of
$56.8 million, trade accounts receivable of $4.0 million, customer deposits of
$7.3 million, accounts payable and accrued expenses of $39.2 million, and
prepaid expenses and other current assets of $2.5 million, partially offset by a
decrease in operating lease liabilities of $14.4 million.
In fiscal 2021, net cash provided by operating activities was $40.5 million and
consisted of changes in operating assets and liabilities of $10.5 million, a net
income of $14.7 million, and non-cash items of $15.3 million. Working capital
and other activities consisted primarily of increases in inventory of $14.0
million and prepaid expenses and other current assets of $2.1 million, partially
offset by a decrease in accounts receivable of $2.7 million and increases in
accrued liabilities and accounts payable of $19.6 million, and customer deposits
of $4.3 million.
In fiscal 2020, net cash used in operating activities was $11.2 million and
consisted of changes in operating assets and liabilities of $7.8 million, a net
loss of $15.2 million, and non-cash items of $11.8 million. Working capital and
other activities consisted primarily of increases in inventory of $10.2 million,
accounts receivable of $3.2 million, and prepaid expenses of $2.2 million,
partially offset by increases in accrued liabilities and accounts payable of
$7.2 million, and other current liabilities of $0.6 million.

Net Cash Used In Investing Activities

Investing activities consist primarily of investments related to capital
expenditures for new showroom openings, the remodeling of existing showrooms,
and the acquisition of intangible assets .

For fiscal 2022, capital expenditures were $16.5 million as a result of
investments in new and remodeled showrooms and intangibles.

For fiscal 2021, capital expenditures were $9.1 million as a result of
investments in new and remodeled showrooms and intangibles.

For fiscal 2020, capital expenditures were $10.7 million as a result of
investments in new and remodeled showrooms and intangibles which included $0.3
million in proceeds from the disposal of property and equipment.

Net Cash (Used in) Provided By Financing Activities

Financing activities consist primarily of taxes paid for the net settlement of
equity awards.

For fiscal 2022, net cash used in financing activities was $3.5 million
primarily due to taxes paid for net share settlement of equity awards of
$3.6 million offset by proceeds from the exercise of warrants of $0.1 million .

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For fiscal 2021, net cash used in financing activities was $1.7 million which is
mainly attributable taxes paid for net share settlement of equity awards.

For fiscal 2020, net cash provided by financing activities was $21.3 million,
primarily due to $25.6 million of net proceeds from a primary share offering net
of $4.3 million of taxes paid for net share settlement of equity awards.

Revolving Line of Credit

On March 25, 2022, we amended our existing credit agreement providing for an
asset-based revolving credit facility with the lenders party thereto, and Wells
Fargo Bank, National Association, as administrative agent. The maturity date of
our credit agreement was extended to March 25, 2024 and, among other things, the
maximum revolver commitment was increased from $25.0 million to $40.0 million,
subject to borrowing base and availability restrictions. Our credit agreement
includes a $1,000,000 sublimit for the issuance of letters of credit and a
$4,000,000 sublimit for swing line loans. There were no outstanding borrowings
under our credit facility as of January 30, 2022 and March 30, 2022.
We are required to pay a commitment fee of 0.30% based on the daily unused
portion of the credit facility. Amounts outstanding under the credit facility,
at our option, bear interest at either a base rate or a term SOFR based rate,
plus, in either case, a margin determined by reference to our quarterly average
excess availability under the credit facility and ranging from 0.50% to 0.75%
for borrowings accruing interest at base rate and from 1.625% to 1.850% for
borrowings accruing interest at term SOFR. Swing line loans will at all times
accrue interest at a base rate plus the applicable margin. The lower margins
described above will apply initially and will adjust thereafter from time to
time based on the quarterly average excess availability under the credit
facility. For additional information regarding our line of credit with Wells,
see Note 10 to our consolidated financial statements.
Severance Contingency
We have employment agreements with our senior level executives. These agreements
have severance provisions, ranging from 12 to 18 months of salary, in the event
those associates are terminated without cause or resign for good reason. The
total amount of exposure to us under these agreements was $5.5 million at
January 30, 2022 if all executives with employment agreements were terminated
without cause or resign for good reason and the full amount of severance was
payable.
Contractual Obligations
We generally enter into long-term contractual obligations and commitments in the
normal course of business, primarily debt obligations and non-cancelable
operating leases. As of January 30, 2022, our contractual cash obligations over
the next several periods were as follows:
                                                   Payments due by period
                                                               1 - 3         3 - 5        More than
                           Total        Less than 1 year       years         Years         5 years

Employment agreements $ 5,543 $ 5,543 $ – $ – $ –
Operating leases 130,962

                20,493        38,776        31,364         40,329
Total                   $ 136,505      $         26,036      $ 38,776      $ 31,364      $  40,329

Critical Accounting Policies and Estimates

The management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in conformity with GAAP. Certain accounting policies and estimates are
particularly important to the understanding of our financial position and
results of operations and require the application of significant judgment by our
management or can be materially affected by changes from period to period in
economic factors or conditions that are outside of our control. As a result,
they are subject to an inherent degree of uncertainty. In applying these
policies, management uses their judgment to determine the appropriate
assumptions to be used in the determination of certain estimates. Those
estimates are based on our historical operations, our future business plans and
projected financial results, the terms of existing contracts, observance of
trends in the industry, information provided by our customers and information
available from other outside sources, as appropriate. Please see Note 1 to our
audited consolidated financial statements included in this Annual Report on Form
10-K for a complete description of our
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significant accounting policies. There have been no material changes to the
significant accounting policies during fiscal 2022.

Revenue Recognition

Our revenue consists substantially of product sales. We report product sales net
of discounts and recognize them at the point in time when control transfers to
the customer, which occurs when shipment is confirmed.
Estimated refunds for returns and allowances are recorded using our historical
return patterns, adjusting for any changes in returns policies. We record
estimated refunds for net sales returns on a monthly basis as a reduction of net
sales and cost of sales on the statement of operations and an increase in
inventory and customers returns liability on the balance sheet.
In some cases, deposits are received before we transfer control, resulting in
contract liabilities. These contract's liabilities are reported as deposits on
the Company's balance sheet.

Upon adoption of ASC 606, we have elected the following accounting policies and
practical expedients:

We recognize shipping and handling expense as fulfillment activities (rather
than as a promised good or service) when the activities are performed even if
those activities are performed after the control of the good has been
transferred. Accordingly, we record the expenses for shipping and handling
activities at the same time we recognize revenue.
We exclude from the measurement of the transaction price all taxes imposed on
and concurrent with a specific revenue- producing transaction and collected by
the entity from a customer, including sales, use, excise, value-added, and
franchise taxes (collectively referred to as sales taxes).

We do not adjust revenue for the effects of any financing components if the
contract has a duration of one year or less, as we receive payment from the
customer within one year from when we transferred control of the related goods.

We offer our products through an inventory lean omni-channel platform that
provides a seamless and meaningful experience to its customers in showrooms and
through the internet. The other channel predominantly represents sales through
the use of pop-up-shops that typically average ten days at a time and are
staffed with associates trained to demonstrate and sell our product.

Impairment of Long-Lived Assets

Our long-lived assets consist of property and equipment and right of use assets
from leases. Property and equipment includes leasehold improvements, and other
intangible assets. Long-lived assets are reviewed for potential impairment at
such time that events or changes in circumstances indicate that the carrying
amount of an asset might not be recovered. We evaluate for impairment at the
individual showroom level, which is the lowest level at which individual cash
flows can be identified. When evaluating long-lived assets for potential
impairment, we will first compare the carrying amount of the assets to the
future undiscounted cash flows for the respective long-lived asset. If the
estimated future cash flows are less than the carrying amounts of the assets, an
impairment loss calculation is prepared. An impairment loss is measured based
upon the excess of the carrying value of the asset over its estimated fair value
which is generally based on an estimated future discounted cash flow. If
required, an impairment loss is recorded for that portion of the asset's
carrying value in excess of fair value.
In fiscal 2022, we recognized impairment charges totaling $0.6 million
associated with showroom-level right of use lease assets. During fiscal 2021, we
recorded impairment charges of $0.2 million, associated with the assets of an
underperforming retail location. The impairments in fiscal 2022 and fiscal were
2021 calculated using a discounted cash flow model and were recorded in selling,
general and administrative in our Consolidated Statements of Operations.

Merchandise Inventories

Merchandise inventories are comprised of finished goods which are carried at the
lower of cost or net realizable value and capitalized freight and warehousing
costs. Cost is determined on a weighted-average method basis. Merchandise
inventories consist primarily of foam filled furniture, sectional couches, and
related accessories. We adjust our inventory for obsolescence based on
historical trends, aging reports, specific identification and its estimates of
future retail sales prices. In addition, we include capitalized freight and
warehousing costs in inventory related to the finished goods in inventory.
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Operating Leases

The Company determines if a long-term contractual obligation is a lease at
inception. The majority of our operating leases relate to company showrooms. We
also lease our corporate facilities. These operating leases expire at various
dates through fiscal 2032. Showroom leases may include options that allow us to
extend the lease term beyond the initial base period, subject to terms agreed
upon at lease inception. Some leases also include early termination options,
which can be exercised under specific conditions. Our lease agreements do not
contain any material residual value guarantees or material restrictive
covenants.
The Company records lease liabilities at the present value of the lease payments
not yet paid, discounted at the rate of interest that the Company would have to
pay to borrow on a collateralized basis over a similar term. As the Company's
leases do not provide an implicit interest rate, the Company uses an incremental
borrowing rate based on the information available at commencement date in
determining the present value of lease payments.
We recognize operating lease cost over the estimated term of the lease, which
includes options to extend lease terms that are reasonably certain of being
exercised, starting when possession of the property is taken from the landlord,
which normally includes a construction period prior to the showroom opening.
When a lease contains a predetermined fixed escalation of the fixed rent, we
recognize the related operating lease cost on a straight-line basis over the
lease term. In addition, certain of our lease agreements include variable lease
payments, such as payments based on a percentage of sales that are in excess of
a predetermined level and/or increases based on a change in the consumer price
index or fair market value. These variable lease payments are excluded from
minimum lease payments and are included in the determination of net lease cost
when it is probable that the expense has been incurred and the amount can be
reasonably estimated. If an operating lease asset is impaired, the remaining
operating lease asset will be amortized on a straight-line basis over the
remaining lease term.

Equity-based Compensation

We account for equity-based compensation for associates and directors by
recognizing the fair value of equity-based compensation as an expense in the
calculation of net income, based on the grant-date fair value. We recognize
equity-based compensation expense in the periods in which the associate or
director is required to provide service, which is generally over the vesting
period of the individual equity instruments. The fair value of the equity-based
awards is determined using the Black-Scholes option pricing model or the stock
price on the date of grant.

Recent Accounting Pronouncements

Except as described below, we have considered all other recently issued
accounting pronouncements and does not believe the adoption of such
pronouncements will have a material impact on its financial statements.

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) amending lease
guidance to increase transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet and
disclosing key information about leasing arrangements. ASU No. 2020-05 extended
the effective date to fiscal years beginning after December 15, 2021, and
interim periods within fiscal years beginning after December 15, 2022, with
early adoption permitted. We adopted the guidance in fiscal 2022 and there was
not a material effect on the Company's consolidated results of operations.
Adoption of this standard resulted in the recognition of operating lease
right-to-use ("ROU") assets and corresponding lease liabilities of approximately
$90 million and $97 million, respectively, and reclassification of deferred rent
of $6.7 million as a reduction of the right-of-use assets on the consolidated
balance sheet as of January 30, 2022. The new standard also provides practical
expedients for an entity's ongoing accounting. The Company elected the
short-term lease recognition exemption for all leases that qualify. This means,
for those leases that qualify, we will not recognize ROU assets or lease
liabilities, and this includes not recognizing ROU assets or lease liabilities
for existing short-term leases of those assets in transition. We also elected
the practical expedient to not separate lease and non-lease components for all
of our leases.
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In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee
Share-Based Payment Accounting (Topic 718). ASU 2018-07 eliminates the separate
accounting model for nonemployee share-based payment awards and generally
requires companies to account for share-based payment transactions with
nonemployees in the same way as share-based payment transactions with employees.
The accounting remains different for attribution, which represents how the
equity-based payment cost is recognized over the vesting period, and a
contractual term election for valuing nonemployee equity share options. ASU
2018-07 is effective for fiscal years beginning after December 15, 2019, and
interim periods within fiscal years beginning after December 15, 2020. We
adopted the guidance in fiscal 2022 and there was not a material effect on the
Company's consolidated results of operations.

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