As confidentially submitted to the Securities and Exchange Commission on December 20, 2017.

This draft registration statement has not been publicly filed with the Securities and

Exchange Commission and all information herein remains strictly confidential. 

Registration No. __________

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

 

THE LOVESAC COMPANY
(Exact name of registrant as specified in its charter)

 

Delaware   5712   32-0514958
(State or other jurisdiction of
incorporation or organization
)
  (Primary Standard Industrial
Classification Code
)
  (I.R.S. Employer
Identification Number
)

 

Two Landmark Square, Suite 300
Stamford, Connecticut 06901
(207) 273-9733
 (Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

 

Shawn Nelson
Chief Executive Officer

The Lovesac Company

Two Landmark Square, Suite 300
Stamford, Connecticut 06901
(207) 273-9733
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

 

With copies to:

 

David N. Feldman, Esq.

Duane Morris LLP

1540 Broadway

New York, New York 10036-4086

(212) 692-1036

Steven D. Pidgeon, Esq.

Sidney Burke, Esq.

DLA Piper LLP (US)

2525 E. Camelback Road, Suite 1000

Phoenix, Arizona 85016

(480) 606-5100

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ☐

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
Non-accelerated filer  (Do not check if a smaller reporting company) Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered  Proposed Maximum
Aggregate Offering
Price(1)
   Amount of
Registration Fee
 
Common stock, $0.00001 par value per share(2)  $   $      
Underwriter Warrant to Purchase Common Stock(3)                 
Common Stock Underlying Underwriter Warrant, $0.0001 par value per share(4)          

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1993, as amended (the “Securities Act”).
(2) Includes the aggregate offering price of additional shares the underwriter has the option to purchase in this offering to cover over-allotments, if any.
(3) In accordance with Rule 457(g) under the Securities Act, because the shares of the registrant’s common stock underlying the Underwriter Warrant are registered hereby, no separate registration fee is required with respect to the warrants registered hereby.
(4) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act.  We have agreed to issue to Roth Capital Partners, LLC a warrant to purchase up to [●] shares of our common stock, which equates to 7% of the number of shares of our common stock to be issued and sold in this offering (including shares issuable upon exercise of the over-allotment option described herein), exercisable within five (5) years after the effective date of this registration statement.  The warrant is exercisable at a price per share equal to 120% of the public offering price.  The initial issuance of the Underwriter Warrant and resales of shares of common stock issuable upon exercise of the Underwriter Warrant are registered hereby.  See “Underwriting – Underwriter Warrant.”

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

In reliance on Question 101.04 of Compliance and Disclosure Interpretations of the Securities Act Forms, the Registration omits from this Registration Statement certain financial statements that it reasonably believes will not be included in its public filings. In its initial public filing, the Registrant will include in this Registration Statement financial information that complies with Regulation S-X. This Registrant has included financial information with respect to the first twenty-six week periods of the Registrants fiscal years ended January 29, 2017 and January 28, 2018 for illustrative purposes only.

 

 

 

 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated [●], 2018

 

PRELIMINARY PROSPECTUS

 

[●] Shares

 

 

The Lovesac Company

 

Common Stock

$[●] per share

 

This is the initial public offering of shares of common stock of The Lovesac Company. We are offering [●] shares of our common stock.

 

We expect the public offering price to be between $[●] and $[●] per share. Currently, no public market exists for our common stock. We plan to apply for listing of our common stock on the on the Nasdaq Global Market under the symbol “LSAC.” 

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company disclosure standards.  See “Prospectus Summary – Implications of Being an Emerging Growth Company.” We will also be a “controlled company” under the corporate governance standards for Nasdaq listed companies and would be exempt from certain corporate governance requirements of the rules. See “Risk Factors—Risks Relating to this Offering and Ownership of Our Common Stock”.

 

The offering is being underwritten on a firm commitment basis. We have granted the underwriter an option to buy up to an additional [●] shares of common stock from us to cover over-allotments. The underwriter may exercise this option at any time and from time to time during the 30-day period from the date of this prospectus.

 

       Total 
   Per Share   No Exercise of
Over- Allotment
   Full Exercise of 
Over- Allotment
 
Public offering price  $   $     $             
Underwriting discounts  $   $   $       
Proceeds to us, before expenses  $        $             $      

 

We have also agreed to issue to Roth Capital Partners, LLC a warrant to purchase up to [●] shares of our common stock, which equates to 7% of the number of shares of our common stock to be issued and sold in this offering. In addition, we have agreed to reimburse the underwriter for certain expenses. See “Underwriting” on page 84 of this prospectus for additional information.

 

Investing in our securities involves a high degree of risk. See the section entitled “Risk Factors” starting on page 14 of this prospectus and elsewhere in this prospectus for information that should be considered in connection with an investment in our securities.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

Delivery of the shares is expected to be made to the purchasers on or about [●], 2018.

  

Roth Capital Partners

 

The date of this prospectus is [●], 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

Prospectus Summary 1
Risk Factors 14
Cautionary Note Regarding Forward-Looking Statements 30
Use of Proceeds 31
Dividend Policy 31
Capitalization 32
Dilution 33
Selected Consolidated Financial Information 34
Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
Business 48
Management 59
Executive Compensation 64
Security Ownership of Certain Beneficial Owners and Management 71
Certain Relationships and Related Party Transactions 73
Description of Capital Stock 75
Shares Eligible for Future Sale 80
Material United States Federal Income Tax Consequences To Non-U.S. Holders of Our Common Stock 81
Underwriting 84
Legal Matters 88
Experts 88
Where You Can Find More Information 89
Index to Financial Statements F-1 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus that we may specifically authorize to be delivered or made available to you. Neither we nor the underwriter have authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus may only be used where it is legal to offer and sell our securities. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of securities. Our business, financial condition, results of operations and prospects may have changed since that date. We are not making an offer of these securities in any jurisdiction where the offer is not permitted.

 

For investors outside the United States: We and the underwriter have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of securities and the distribution of this prospectus outside the United States.

 

As used in this prospectus, the terms “we”, “us”, “our”, “our Company”, “the Company” and “Lovesac” refer to The Lovesac Company, our wholly-owned subsidiary, Lovesac, LLC, and our predecessor entities, as applicable, unless the context clearly indicates otherwise.

 

We do not have a calendar year end fiscal year, instead we use a 52 or 53 week fiscal year ending on the last Sunday closest to January 31st. Fiscal years are identified in this prospectus according to the calendar year in which they end. For example, references to “fiscal 2017” or “fiscal year 2017” or similar references refer to the fiscal year ended January 29, 2017, and “fiscal 2016” or “fiscal year 2016” or similar references refer to the fiscal year ended January 31, 2016. Alternatively, references to “2017” and “2016” refer to the calendar years ended December 31, 2017 and December 31, 2016, respectively.

 

In this prospectus, unless otherwise specified, all references to “common stock” refer to shares of our common stock.

 

i

Table of Contents 

 

Trademarks, Trade Names and Service Marks

 

We own various U.S. federal trademark registrations and applications, certain foreign trademark registrations and applications, and unregistered trademarks, including the following marks referred to in this prospectus: Lovesac®, Lovesoft®, Sactionals®, Durafoam®, SAC® and Designed For Life®. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the symbols ® and ™, but such references are not intended to indicate that we or their respective owners will not assert, to the fullest extent possible under applicable law, our or their rights thereto. 

 

Market, Industry and Other Data

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on reports from various third-party sources. We believe this information to be reasonable based on the information available to us as of the date of this prospectus. However, we have not independently verified market and industry data from third-party sources. Because this information involves a number of assumptions and limitations, you are cautioned not to give undue weight to such information. The content of the sources, except to the extent specifically set forth in this prospectus, does not constitute a portion of this prospectus and is not incorporated herein.

 

In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those discussed under the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by third parties and by us.

 

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Table of Contents 

 

Prospectus Summary

 

This summary highlights certain information contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information you should consider before investing in shares of our common stock. You should read the entire prospectus carefully, including “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements and related notes included in this prospectus before deciding to invest in our common stock.

 

Our Business

 

We are a technology driven omni-channel company that designs, manufactures and sells unique, high quality furniture comprised of patented modular couches called Sactionals and proprietary, premium foam beanbag chairs called Sacs.  We market and sell our products through modern and efficient showrooms and, increasingly, through online sales. We believe that our ecommerce centric approach, coupled with our ability to deliver our large upholstered products through nationwide express couriers, are unique to the furniture industry.


 

The name “Lovesac” was derived from our original innovative product, a premium foam beanbag chair, the Sac. The Sac was developed in 1995 and provided the foundation for the company. Sales of this product have been increasing, representing $9.5 million for the first six months of fiscal 2018, as compared to $6.4 million for the same period of fiscal 2017. We believe that the large size, comfortable foam filling and irreverent branding of our Sacs products have been instrumental in growing a loyal customer base and our positive, fun image.

 

Our patent protected Sactionals product line currently represents a majority of our sales.  Sactionals are a couch system that consists of two components, seats and sides, which can be arranged, rearranged and expanded into thousands of configurations easily and without tools. Our Sactionals represented 72.9% of our sales for the first six months of fiscal 2018 (or $28.0 million) as compared to 73.8% of sales for the comparable period in fiscal 2017 (or $22.5 million). We believe that these high quality premium priced products enhance our brand image and customer loyalty and expect them to continue to garner a significant share of our sales.

 

Sacs and Sactionals come in a wide variety of colors and fabrics that allow consumers to customize their purchases in numerous configurations and styles.  We provide lifetime warranties on our Sactionals frames and the proprietary foam used in both product lines, and 3 year warranties on our covers. Our Designed for Life trademark reflects our dynamic product line that is built to last and evolve throughout a customer’s life. Customers can continually update their Sacs and Sactionals with new covers, additions and configurations to accommodate the changes in their family and housing situations.

 

We believe that our products complement one another and have generated a loyal customer base, evidenced by our recent estimate that up to 37% of our sales transactions are to repeat customers.  We believe the strength of our brand is reflected in the number of customers who routinely share their purchases of Lovesac products with their friends through social media, often displaying our logos or company name in their posts. Our customers include celebrities and other influencers who support our brand through postings made on an uncompensated and unsolicited basis. As of October 1, 2017, we had 519,000 followers on Facebook and 123,000 followers on Instagram, representing increases of 764% and 215%, respectively, from the same date in the prior year.

 

We market and sell our products through more than 60 showrooms at top tier malls and lifestyle centers in 29 states in the U.S. Our modern, efficient showrooms are designed to appeal to millennials and other purchasers looking for comfortable, enduring, premium furniture. They showcase the different sizes of our Sacs, the myriad forms into which our Sactionals can be configured, and the large variety of fabrics that can be used to cover our products. According to Furniture Today, our showrooms generated the highest sales per square foot in the industry in 2016, reflecting our efficient, small-footprint showroom model.

 

As part of our direct to consumer sales approach, we also sell our products through our fast growing ecommerce platform.  We believe our products are uniquely suited to this channel.  Our foam based Sacs can be reduced to one-eighth of their normal size and each of our Sactionals components weighs less than 40 pounds upon shipping.  With furniture especially suited to ecommerce applications, our sales completed through this channel accounted for 16.4% of our total sales in the first half of fiscal 2018, up from 13.2% for the same period of fiscal 2017. Our showrooms and other direct marketing efforts work in concert to drive customer conversion in ecommerce.

 

 1 

Table of Contents 

 

Product Overview

 

We challenge the notion that a piece of furniture is static by offering a dynamic product line built to last and evolve throughout a customer’s life. Our products serve as a set of building blocks that can be rearranged, restyled and re-upholstered with any new setting, mitigating constant changes in fashion and style.

 

  Sactionals. We believe our patent protected Sactionals platform is unlike competing products in its adaptability, yet is comparable aesthetically to similarly priced premium couches and sectionals. Utilizing only two, standardized pieces, “seats” and “sides,” and over 300 high quality, tight-fitting covers that are removable, washable, and changeable, customers can create numerous permutations of a sectional couch with minimal effort. Customization is further enhanced with our specialty-shaped modular offerings, such as our wedge seat and roll arm side. Our custom features and accessories can be added easily and quickly to a Sactional to meet endless design, style and utility preferences, reflecting our Designed for Life philosophy. Sactionals are built to meet the highest durability and structural standards applicable to fixed couches. Sactionals are comprised of standardized units and we guarantee their compatibility over time, a major pillar of their value proposition to the consumer.

 

  Sacs. We believe that our Sacs product line is a category leader in oversized beanbags. The Sac product line offers 6 different sizes ranging from 22 pounds to 95 pounds with capacity to seat 3+ people on the larger model Sacs. Filled with Durafoam, a proprietary blend of shredded foam, Sacs provide serene comfort and guaranteed durability. Their removable covers are machine washable, and may be easily replaced with a wide selection of cover offerings.

 

  Accessories. Our accessories complement our proprietary Sacs and Sactionals by increasing their adaptability to meet evolving consumer demands and preferences. Our current product line offers Sactional-specific drink holders, footsac blankets, decorative pillows, fitted seat tables and ottomans in varying styles and finishes, providing our customers with the flexibility to customize their furnishings with decorative and practical add-ons to meet evolving style preferences. We are in the process of developing additional accessories for the tech-savvy consumer.

 

Sales Channels

 

Lovesac offers its products through an inventory lean omni-channel platform that provides a seamless and meaningful experience to our customers in showrooms and online. In recent periods, we have increased our focus on providing a platform for the transaction of business online through digital and mobile applications. As consumers increasingly transact via various ecommerce channels, our robust and user-friendly technological platform is well positioned to benefit from this growth. Additionally, our products’ compact packaging facilitates production scheduling, lower shipping costs and the outsourcing of our shipping function to nationwide express couriers, allowing us to quickly and cost-effectively deliver online orders.

 

We leverage our showroom as both a traditional retail channel to purchase our products and an educational center for prospective online customers to learn about and interact with our products in real time. Compared to traditional retailers, our showrooms require significantly less square footage because we need to maintain only a few sample seats, sides and Sacs to demonstrate numerous configurations. Warehouse space is minimized by our ability to stack our inventory for immediate sale. In addition to providing a compelling customer experience, we believe that our showroom model provides a more efficient use of capital and logistical advantages over our competitors.

 

We recently partnered with Costco to operate shop in shop showrooms at select locations. We operate “roadshows” in Costco’s stores that display select Sacs and Sactionals and are staffed similarly to our more traditional showrooms with associates trained to demonstrate and sell the product. Between February 1, 2017 and October 1, 2017, we hosted 100+ roadshows that averaged sales of $4,200 per day. More importantly, our research disclosed that nearly 2% of our in-store purchasers and 3% of our online visitors cited Costco as their source of awareness for Lovesac, reflecting the efficacy of our shop in shop concept in generating strong revenue and driving brand awareness.

 

Target Customer

 

Our target customer earns a household income of at least $100,000, is between the ages of 24 and 45, is married and currently has or plans to form a household. While we seek to market our products to this target customer broadly, we especially target millennials (who we define as those persons born between 1983 and 2000) because we believe they desire the branding, transparent business practices, innovative solutions and convenience of the on-demand commerce we offer. Millennial heads of household have increasingly become a larger portion of our customer base as represented by a 19% share (based on internal sampling we conducted with one of our products). We believe our culture of innovation, superior product development capabilities and integrated omni-channel infrastructure enable us to offer our customers a value proposition superior to our competitors.  

 

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Table of Contents 

 

Our Market

 

Large and Growing Furniture Retailing Industry

 

We sell our products in the large and highly fragmented furniture retailing industry, which has been rebounding steadily since the global recession. According to Mintel, a market research firm, consumer furniture expenditures are expected to grow to $127.5 billion in 2021, representing an average annual growth rate of 3.4% between 2016 and 2021. Additionally, Mintel reported that the segment consisting of couches, chairs, and other seating products comprised nearly 30% of all U.S. consumer furniture expenditures in 2015, surpassing the next largest segment, mattresses and sleep equipment, which represented 17% of expenditures.

 

A Maturing Millennial Population with Favorable Furniture Purchasing Habits

 

Millennials, our target demographic, have surpassed Baby Boomers (persons generally born between 1946 and 1964) as the largest living generation in the U.S. The millennial population reached 83.1 million people in 2015, representing more than 25% of the U.S. population according to data from the U.S. Census Bureau. Moreover, tech savvy millennials are maturing to an age where their buying power coincides with larger discretionary purchases, including furniture products. Based on a survey conducted by Mintel, 73% of millennials (who Mintel defines as those persons born between 1977 and 1994) purchased furniture between April 2014 and April 2016. According to Mintel, of those purchasing furniture between April 2014 and April 2016, 47% of millennials reported that they had made the purchase online, compared to just 35% for Generation X and 17% for Baby Boomers.

 

Emergence of Online Sales in the Furniture Industry

 

According to Mintel, over one-third of furniture consumers have purchased products online, and this number is expected to continue to expand. Driving the market share growth of the online segment are retailers that offer fully supported shopping experiences across their web and mobile platforms. When purchasing their most recent home furnishing product, 30% of consumers made an online purchase using a computer and 9% of consumers made an online purchase using a mobile device, according to data from Mintel. While consumers are now more tech savvy and likely to browse for furniture products online, many consumers still prefer to see and feel products in-store before making their purchasing decision. Omni-channel retailers that offer a comprehensive shopping experience across all channels are well positioned to attract the growing portion of consumers who use multiple channels to browse, compare and purchase furniture products.

 

Our Competitive Strengths

 

We believe that the following strengths are central to the power of our brand and business model:

 

Innovative Business Model

 

  Merchandising Strategy. Nearly all home furnishings retailers, online or offline, rely on an assortment of new offerings each season to drive their business and to refashion their offerings. We have avoided this “merchandising” approach in favor of a product platform-based approach that reduces the need for seasonal introductions, designer collections, or broad in-stock assortments. We optimize our in-stock assortment of covers and accessories by limiting them to those that sell in large quantity and therefore reduce our inventory. We also provide a broad assortment of made-to-order items, that we manufacture after the consumer has purchased and paid for them. This business model yields little to no surplus inventory, less margin erosion due to overstock write-downs, higher than average annual inventory turns, increased focus at the showroom management level, and simplicity at merchandising display execution.

 

  Product Platform Approach. We have essentially two platforms upon which we develop, manufacture and sell our fundamental Sacs and Sactionals products. We market our product platforms as a long term investment that our customers can continually update with new arrangements, coverings and accessories. In turn, these changes and updates provide a recurring revenue source for our business. In addition, our Sactionals platform is an environmentally conscious alternative to fixed couches which tend to be discarded when they go out of style or wear out, a by-product of our Designed for Life approach and an important feature to some consumers.

 

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  Ecommerce Focus. We build our business processes, systems, compensation structures, and logistical models with an ecommerce-first approach. We continually innovate to make shopping online easier for our customers, and we use social media to drive increased traffic to our web-based sales applications. From a product standpoint, the open-cell nature of the Durafoam filler in our Sacs allows them to be compressed for shipping to one-eighth of their normal size. Sactionals seat cushions and back pillows are compressed to fit inside an otherwise hollow hardwood upholstered Seat frame, allowing the shipping footprint of Sactionals to be at least twice as efficient as traditional couches, and deliverable by express couriers.

 

  A Culture of Innovation. From inception, we have focused on developing unique, innovative and proprietary product platforms. We are continuously expanding and introducing new extensions to these platforms to broaden the appeal and grow the addressable market of our product offerings. We continually evaluate new products to complement our Sactionals and Sac lines and are currently developing accessories for the tech-savvy consumer. We currently maintain 30 U.S. and international utility patents covering our products’ functionality with 12 more patent applications pending. We believe that our patent portfolio, proprietary materials and processes, and innovative design approach make our products difficult to imitate or replicate.

 

Strong Brand Loyalty

 

We believe our brand, products, and Designed for Life philosophy encourage people to share their stories and develop a personal relationship with Lovesac and its community. We foster these interactions through active direct engagement using several social media platforms. We believe that our customers are active ambassadors, providing organic public relations, word of mouth advertising, and customer testimonials and endorsements. In addition, our customers have a high repeat purchasing rate and high expected lifetime engagement.

 

  High repeat purchasing rates. We believe our focus on customer interaction and data driven analysis of their behavior and projected needs drives our high repeat customer rates. Repeat customers accounted for approximately 37% of all transactions for fiscal 2017. As we attract more customers to the Sactionals product platform, we believe sustained repeat purchasing rates will create opportunities for accelerated growth and will allow us to capitalize on the high lifetime value of our customers.

 

  Robust customer lifetime value. Once customers invest in a platform, they tend to stay with it, grow with it, and add to it. We believe this is an important driver of the high customer lifetime value (“CLV”) statistic for our Company. CLV is a prediction of the net profit attributed to the future relationship with a customer. Our CLV is based upon actual historical customer data. For fiscal 2017, we had an estimated CLV of $1,225 and customer acquisition cost of $189, all while only spending 2.2% of revenue on media, reflecting our loyal following and strong customer base.

 

Omni-Channel Approach

 

Our distribution strategy allows us to reach customers through three distinct, brand-enhancing channels.

 

  Ecommerce. Through our mobile and ecommerce channel, we believe that we are able to significantly enhance the consumer shopping experience, driving deeper brand engagement and loyalty, while also realizing higher margins that are more favorable than our retail showroom locations. We believe our robust technological capabilities position us well to benefit from the growing consumer preference to transact at home and via mobile devices.

 

  Showrooms. In our more than 60 showrooms in 29 states, we seek to carefully select the best small-footprint retail locations in high-end malls and lifestyle centers. The architecture and layout of these showrooms is designed to communicate our brand personality and key product features. Our goal is to educate first-time customers, creating an environment where people can touch, feel, read, and understand our the technology behind our products. We are updating and remodeling many of our showrooms to reflect our new showroom concept, which emphasizes our unique product platform, and will be the standard for future showrooms. Our new showroom concept, introduced in 2016, utilizes technology in more experiential ways to increase traffic and sales.

 

  Shop in shops. We are expanding the use of lower cost shop in shops to increase the number of locations where customers can experience and purchase our products. We have partnered with Costco to operate shop in shop programs, or “roadshows,” that usually run for 10 days at a time. These shop in shops are staffed similarly to our showrooms with associates trained to demonstrate and sell our products and promote our brand. We also believe our shop in shops provide a low cost alternative to drive brand awareness, in store sales, and ecommerce sales.

 

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Strong Millennial Appeal

 

We have targeted the millennial generation because we believe they desire branded products, coupled with transparent business practices, innovative solutions and the convenience of on-demand commerce. Additionally, members of the millennial generation, currently the most populous age group in the U.S., are completing their educations, getting married, and starting or expanding their households. The peak ages for home furnishings purchases are 35-54. We believe that home furnishings will thrive as millennials and their children need larger residences and the necessary furnishings for household and family formation. The modularity of our Sactionals and ease of cleaning and replacing covers on Sactionals and Sacs provide our customers who are moving and expanding their households with the ability to evolve their purchases to accommodate the changes in their family and housing situations, offering us a competitive advantage.

 

Unique Distribution Capability

 

Due to the unique modularity of our Sactionals products and the shrinkability of our Sacs, we are able to distribute our products efficiently through nationwide express carriers and utilize warehouse space and international shipping routes more economically than our competitors. We believe our Sactionals are the only product in its category that enjoys these logistical advantages.

 

Seasoned Management Team

 

Our management team is led by our CEO and founder, Shawn Nelson, who continues to focus on developing new products and intellectual property to drive future growth. Our President and Chief Marketing Officer, Jack Krause, has significant experience in and a deep understanding of the complexities in managing high-growth brands. Since joining Lovesac, he has been instrumental in guiding the company from a retail-led business model to an omni-channel direct-marketing driven business model. Our Chief Financial Officer, Donna Dellomo, is a Certified Public Accountant and possesses significant experience and knowledge regarding public company accounting and reporting. Prior to joining our Company, for 19 years, Ms. Dellomo served as Vice President and Chief Financial Officer of a publicly traded fragrance retailer with over 290 retail locations and a wholesale distribution network. In addition, we recently hired David Jensen as our Chief Technology/Chief Information Officer to lead our technology team as we evolve into a more marketing-driven digital-first retailer. Prior to joining our Company, Mr. Jensen served as the Senior Director of Information Services at the retailer J. Jill.

 

Our Growth Strategies

 

Key drivers of our growth strategy include:

 

Continue to Build on Our Brand Awareness

 

Despite our loyal following, we believe there is a significant opportunity to increase our brand awareness, which is less than 1% among all consumers nationally. Before 2017, we invested minimally in advertising. Since then, we have aggressively invested in brand building and direct marketing efforts, including direct mail, 30-second television commercials in select markets and social media. We plan to accelerate our ecommerce sales by building awareness via increased digital and social media, including digital videos and direct response television.

 

Update Showrooms and Add Other Locations

 

We intend to continue to renovate our current showroom locations, open new showrooms across the country in lifestyle centers, top tier shopping malls, and high street and urban locations, and expand product touch-feel points through the increased use of lower cost shop in shop locations. 

 

  Showrooms. We are evolving our model for new showrooms and renovating our existing showrooms to reflect the standards of this new model. Our new showroom concept utilizes technology in more experiential ways to increase traffic and sales, and communicate our brand personality and key product features. The architecture and layout of these showrooms is designed to educate first-time customers, creating a nearly self-service environment where people can touch, feel and understand the technology. To attract customer traffic, our new model features two giant LED screens embedded in the walls that play videos demonstrating the Sactionals differentiating technology in motion. In connection with these renovations, we have experienced enhanced productivity and negotiated more favorable lease terms.

 

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In addition, we recently refined our real estate selection strategy for showrooms in shopping centers to include alignment with the demographics of customers located near the prospective center and to seek locations within the center near other furniture retailers to take advantage of furniture-related customer traffic and to provide a comparison shopping experience that we believe favors our products.

 

  Shop in shops. Since 2016, we have partnered with Costco to operate shop in shop showrooms and have been expanding the use of these shop in shop showrooms. At these locations, customers can experience and purchase our products at a lower cost to us than our permanent showrooms.

 

Increase Sales and Operating Margins

 

We will seek to improve operating margins by maintaining our premium pricing and increasing sales through our omni-channel distribution approach.

 

  Premium Pricing. Reflecting their durability, functionality and configurability, Lovesac’s products are positioned in the premium segment of the market. In fiscal 2016, the average purchase price of first time Sactionals was $3,782 and our average transaction was $1,193. Although Sactionals are premium priced, the cost of adding to or changing them over time is lower than purchasing another couch, which we believe motivates our customers to make higher margin initial investments in our products. Further, we believe that as we grow sales, we will be able to spread them over relatively fixed overhead and increase our margins.

 

  Omni-Channel Platform. By leveraging our omni-channel platform, we cost-effectively drive traffic to our ecommerce channel, resulting in increased web-based sales and improved operating margins. We continually seek to improve our ecommerce capabilities to drive sales and take advantage of the lower cost of this channel. Our showrooms and other direct marketing efforts work in concert to drive customer conversion in ecommerce. In addition, our shop in shops provide a low cost alternative to drive brand awareness and both in-store and ecommerce sales.

 

Summary Risk Factors

 

Investing in our common stock involves substantial risk, and our business is subject to numerous risks and uncertainties, including those listed in the section entitled “Risk Factors” and elsewhere in this prospectus. These risks include, among other things:

 

  our ability to sustain recent growth rates, increase sales and achieve profitability;

 

  our ability to improve our products and develop new products;

 

  our ability to maintain and grow our brand image and reputation;

 

  our ability to maintain existing customers and acquire new customers in a cost-effective manner;

 

  our ability to manage the growth of our operations over time, including the growth of our omni-channel operations;

 

  our ability to successfully optimize our omni-channel operations and provide a seamless, relevant and reliable omni-channel experience;

 

  our ability to successfully open and operate new showrooms on a profitable basis;

 

  our ability to compete and succeed in a highly competitive and evolving industry;

 

  our ability to adapt to changes in consumer spending and general economic conditions;

 

  our dependence on a small number of suppliers and international suppliers in developing countries;

 

  our ability to manage supply chain-related expenses and disruptions in our supply chain;

 

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  our ability to maintain adequate protection of our intellectual property and to avoid violation of the intellectual property rights of others;

 

  our ability to manage our information technology systems to support our growing business;

 

  our ability to secure the personal information of our customers and employees and comply with applicable security standards; and

 

  our failure to maintain adequate internal controls over our financial and management systems.

 

Recent Reorganization and Securities Issuances

 

The Company was formed in the State of Delaware on January 3, 2017, in connection with a corporate reorganization with SAC Acquisition LLC, a Delaware limited liability company, the predecessor entity to the Company and current majority shareholder of the Company. Pursuant to the terms of the reorganization, on March 22, 2017, SAC Acquisition LLC assigned and the Company assumed all right, title and interest in and to all assets, including intellectual property, and liabilities of SAC Acquisition LLC in exchange for 15,000,000 shares of common stock.

 

We raised $23.4 million through the sale of preferred stock and warrants in multiple offerings in fiscal 2018. In March 2017, we issued an aggregate of 1,000,000 shares of our Series A-1 Preferred Stock at a purchase price of $10.00 per share for an aggregate purchase price of $10.0 million and warrants exercisable into our common stock with an aggregate exercise price of $7.0 million to affiliates of Satori Capital, LLC (“Satori”). The amount of common stock issuable upon exercise of the warrants included in this transaction will be calculated when the offering price is determined. This Series A-1 Preferred Stock is convertible to common stock at 70% of the offering price. Beginning in March 2017 and ending in October 2017, we completed an offering of our Series A Preferred Stock and issued an aggregate of 940,000 shares of our Series A preferred stock at a purchase price of $10.00 per share for an aggregate purchase price of $9.4 million and warrants exercisable into our common stock with an aggregate exercise price of $4.7 million to various entities and accredited investors, including investment vehicles affiliated with Mistral Capital Management, LLC (“Mistral”). The amount of common stock issuable upon exercise of the warrants included in this transaction will be calculated when the offering price is determined. This Series A Preferred Stock is convertible to common stock at 70% of the offering price. Lastly, between October 2017 and December 2017, we issued 400,000 shares of our Series A-2 Preferred Stock at a purchase price of $10.00 per share for an aggregate purchase price of $4.0 million and warrants exercisable into our common stock with an aggregate exercise price of $2.8 million to entities affiliated with Satori and we issued an aggregate of 11,500 shares of our Series A-2 Preferred Stock at a purchase price of $10 per share and warrants exercisable into our common stock with an aggregate exercise price of $80,500 to Shawn Nelson, our founder and Chief Executive Officer, Jack Krause, our President and Chief Marketing Officer, and Donna Dellomo, our Chief Financial Officer. The amount of common stock issuable upon exercise of the warrants included in this transaction will be calculated when the offering price is determined. This Series A-2 Preferred Stock is convertible to common stock at 70% of the offering price.

 

Immediately prior to this offering, we intend to (i) convert all of our outstanding shares of preferred stock into [●] shares of common stock, (ii) effect a 1-for-[●] reverse stock split of our common stock, (iii) file an amended and restated certificate of incorporation, and (iv) adopt amended and restated bylaws.

 

Corporate Information

 

The Company’s principal executive office is Two Landmark Square, Suite 300, Stamford, CT 06901. Our telephone number is 888-636-1223. Our Internet address is www.lovesac.com. We do not incorporate the information on or accessible through our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website a part of this prospectus.

 

Our Equity Sponsor

 

We have a valuable relationship with our equity sponsor, Mistral, who, through funds and investment vehicles, has made significant equity investments in us, including a controlling interest in our sole common shareholder SAC Acquisition LLC. We believe that we will continue to benefit from Mistral’s investment experience in the consumer products sector, its expertise in effecting transactions and its support for our near-term and long term strategic initiatives.

 

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Upon completion of this offering, assuming an offering size as set forth in “Summary of the Offering” and an initial public offering price of $[●] (the midpoint of the estimated price range set forth on the cover page of this prospectus), Mistral, through its controlling interest of SAC Acquisition LLC will control approximately [●]% of our common stock and will therefore be able to control all matters that require approval by our stockholders, including the election and removal of directors, changes to our organizational documents and approval of acquisition offers and other significant corporate transactions. Because Mistral will control more than 50% of the voting power of our outstanding common stock, we will be a “controlled company” under the corporate governance rules for Nasdaq listed companies. We will therefore be permitted to, and we intend to, elect not to comply with certain corporate governance requirements. See “Management-Controlled Company.”

 

Control by Mistral may give rise to actual or perceived conflicts of interest with holders of our common stock. Mistral’s significant ownership in us and its resulting ability to effectively control us may discourage a third party from making a significant equity investment in us or a transaction involving a change of control, including transactions in which holders of shares of our common stock might otherwise receive a premium for such holders’ shares over the then-current market price. See “Risk Factors- Risks Related to this Offering and Ownership of Our Common Stock” for a summary of the potential conflicts of interest that may arise as a result of our control by Mistral.

 

Implications of Being an Emerging Growth Company

 

The Jumpstart Our Business Startups Act (the “JOBS Act”), was enacted in April 2012 with the intention of encouraging capital formation in the United States and reducing the regulatory burden on newly public companies that qualify as “emerging growth companies”. We are an emerging growth company within the meaning of the JOBS Act. As an emerging growth company, we may take advantage of exemptions from various public reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”), requirements related to compliance with new or revised accounting standards, requirements related to the disclosure of executive compensation in this prospectus and in our periodic reports and proxy statements, and the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. 

 

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. As a result, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to take advantage of this extended transition period.

 

We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have $1.07 billion or more in annual revenue; (ii) the date we qualify as a “large accelerated filer” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or (iv) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

 

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Summary of the Offering

 

Common stock offered by us [●] shares
   
Offering price $[●] per share
   
Common stock outstanding before this offering [●] shares, as of [●], 2017
   
Common stock to be outstanding after this offering [●] shares.  If the underwriter’s over-allotment option is exercised in full, the total number of shares of common stock outstanding immediately after this offering would be [●].     
   
Over-allotment option We have granted a 30-day option to the underwriter to purchase up to [●] additional shares of common stock solely to cover over-allotments, if any.
   
Use of proceeds We intend to use the net proceeds of this offering for: (i) increased sales and marketing expenses; (ii) product development; (iii) repayment of debt; and (iv) working capital and other general corporate purposes.  See “Use of Proceeds” beginning on page 31 of this prospectus.
   
Risk factors Investing in our shares of common stock involves a high degree of risk.  See “Risk Factors” beginning on page 14 of this prospectus for a discussion of factors you should consider before making a decision to invest in our common stock.
   
Controlled Company After the completion of this offering, Mistral and its affiliates will continue to control a majority of our common stock. We will avail ourselves of the controlled company exemption under the corporate governance standards of Nasdaq.
   
Proposed listing In connection with this offering, we are applying to list our common stock on the Nasdaq Global Market (“Nasdaq”) under the symbol “LSAC.”

 

The number of shares of our common stock to be outstanding immediately after the closing of this offering is based on 15,000,000 shares of common stock outstanding as of [●], and, except as otherwise indicated, all information in this prospectus, reflects and assumes the following:

 

  initial public offering price of $[●] per share of common stock, the midpoint of the price range on the cover of this prospectus;

 

  conversion of the 940,000 outstanding shares of Series A Convertible Preferred Stock with a conversion price equal to 70% of the offering price;

 

  conversion of the 1,000,000 outstanding shares of Series A-1 Convertible Preferred Stock with a conversion price equal to 70% of the offering price;

 

  conversion of the 411,500 outstanding shares of Series A-2 Convertible Preferred Stock with a conversion price equal to 70% of the offering price;

 

  does not reflect the exercise of the outstanding warrants equaling, in the aggregate, $14.58 million of common stock, at an exercise price per share equal to the offering price;

 

  does not reflect an additional 1,050,000 shares of common stock reserved for issuance under the Equity Plan; and

 

  does not reflect the exercise of the underwriter’s warrant to purchase up to [●] additional shares of our common stock in this offering.

 

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Summary Consolidated Financial and Operating Data

 

The following tables present our summary consolidated financial and other data as of and for the periods indicated. The summary consolidated statements of operations data and the consolidated statement of cashflow data for the fiscal years ended January 31, 2016 and January 29, 2017, and the summary consolidated balance sheet data as of January 29, 2017 are derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical audited results are not necessarily indicative of the results that should be expected in any future period.

 

The summary consolidated statements of operations data and the consolidated statement of cashflow data for the twenty-six weeks ended July 31, 2016 and July 30, 2017 and the summary consolidated balance sheet data as of January 29, 2017 and July 30, 2017, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared our unaudited consolidated financial statements on the same basis as our audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to present fairly the financial information set forth in those statements. The results for any interim period are not necessarily indicative of the results that may be expected for the full year and our historical unaudited results are not necessarily indicative of the results that should be expected in any future period.

 

We have derived the summary consolidated statements of operations data for the fifty-two weeks ended July 30, 2017 by adding the summary consolidated statements of operations data for the twenty-six weeks ended July 30, 2017 to the summary consolidated statements of operations data for the twenty-six weeks ended January 29, 2017. We believe that presentation of the summary consolidated statements of operations data for the fifty-two weeks ended July 30, 2017 is useful to investors because it allows investors to review our current performance trends over a period consisting of our four most recent consecutive fiscal quarters.

 

The summarized financial information presented below is derived from and should be read in conjunction with our audited and unaudited consolidated financial statements, as applicable, including the notes to those financial statements which are included elsewhere in this prospectus along with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results, and results for any interim period below are not necessarily indicative of results for the full year.

 

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   Fiscal Year Ended   Twenty-Six
Weeks Ended
   Fifty-Two Weeks Ended 
   January 29,
2017
   January 31,
2016
   July 30,
2017
   July 31,
2016
   July 30,
2017
 
(dollars in thousands, except per share data)                    
                     
Consolidated Statements of Operations Data:                    
Net sales                    
Showrooms  $62,277   $59,095   $30,211   $25,584   $66,904 
Internet   12,270    10,601    6,312    4,058    14,524 
Other   1,796    4,449    1,854    881    2,769 
Total net sales   76,343    74,145    38,377    30,523    84,197 
Costs of merchandise sold   34,646    33,635    17,757    14,685    37,718 
Gross profit   41,697    40,510    20,620    15,838    46,479 
                          
Selling, general and administrative expenses   48,006    47,174    26,142    21,828    52,320 
Operating loss   (6,309)   (6,664)   (5,522)   (5,990)   (5,841)
                          
Other                         
Other expense   -    (86)   -    -    - 
Loss on extinguishment of debt   -    (557)   -    -    - 
Interest expense   (565)   (1,687)   (229)   (312)   (482)
Net Loss  $(6,874)  $(8,994)  $(5,751)  $(6,302)  $(6,323)
                          
Net Loss per Common Share:                         
Net loss per common share (basic and diluted)(1)  $(0.48)  $(0.83)  $(0.40)  $(0.46)  $(0.42)
Weighted-average shares used in computing net loss per common share(1)   14,368,216    10,852,433    15,000,000    13,675,681    15,000,000 
                          
Pro Forma Net Loss per Common Share (unaudited):                         
Pro forma net loss per common share (basic and diluted)  $[●]    -   $[●]    -   $[●] 
Pro forma weighted-average shares used in computing pro forma net loss per common share   [●]    -    [●]    -    [●] 
                          
Other Financial and Operating Data (unaudited):                         
Retail(2)                         
Comparable showroom sales change(3)   4%   17%   11%   6%   10%
Showrooms open at end of period   60    59    65    59    65 
Total showroom square footage at end of period (in thousands)   [●]    [●]    [●]    [●]    [●] 
Total showroom selling square footage at end of period (in thousands)(4)   [●]    [●]    [●]    [●]    [●] 
Sales per selling square foot(5)  $1,092   $1,065   $1,030   $927   $1,199 
Capital expenditures(6)  $3,757   $965   $2,986   $1,381   $5,362 
EBITDA(7)(8)  $(3,990)  $(4,846)  $(4,756)  $(4,773)  $(3,755)
Adjusted EBITDA(7)(8)   [●]    [●]    [●]    [●]    [●] 
Adjusted EBITDA Margin(7)(9)   [●]    [●]    [●]    [●]    [●] 
Four-Wall Adjusted EBITDA(7)(8)   [●]    [●]    [●]    [●]    [●] 
Four-Wall Adjusted EBITDA Margin(7)(9)   [●]    [●]    [●]    [●]    [●] 
Average Unit Volume(7)(10)   [●]    [●]    [●]    [●]    [●] 

 

  

As of

July 30,

2017

  

As of

January 29,

2017

 
(dollars in thousands)    
     
Balance Sheet data:        
Cash and cash equivalents  $773   $879 
Working capital(11)   5,105    3,350 
Total assets   28,322    20,720 
Total liabilities   14,201    13,670 
Total stockholders’ equity   14,121    7,050 

 

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   Fiscal Year Ended   Twenty-Six
Weeks Ended
 
   January 29, 2017   January 31,
2016
   July 30,
2017
   July 31,
2016
 
(dollars in thousands)    
     
Consolidated Statement of Cashflow Data:                
Net cash used in operating activities  $(6,400)  $(8,872)  $(8,782)  $(6,294)
Net cash used in investing activities   (4,062)   (1,155)   (3,090)   (1,439)
Net cash provided by financing activities   11,132    9,872    11,767    8,407 
Net change in cash and cash equivalents   670    (155)   (105)   674 

 

(1) For the calculation of basic and diluted net loss per share, see Note 1 to our audited consolidated financial statements and Note 5 to our unaudited condensed consolidated financial statements. The weighted average number of common shares used in computing the net loss per common share gives effect to (i) the 1-for-[●] reverse stock split of our common stock that occurred on [●]. The pro forma weighted average number of common shares used in computing pro forma net loss per common share gives effect to (i) the conversion of our outstanding preferred stock into [●] shares of our common stock, and (ii) the 1-for-[●] reverse stock split of our common stock that occurred on [●].
  (2) Retail data represents our showrooms exclusive of shop in shop showrooms.
  (3) Comparable showroom sales are calculated based on showrooms that were open at least fifty-two weeks as of the end of the reporting period. 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. The change in comparable showroom sales is calculated by comparing the period’s comparable showroom sales to the same period in the preceding fiscal year.
  (4) 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.
  (5) Retail sales per selling square foot is calculated by dividing total net sales for all showrooms, comparable and non-comparable, by the average selling square footage for the period.
  (6) Capital expenditures consist primarily of investments in new showrooms and remodeled showrooms.
  (7) EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Four-Wall Adjusted EBITDA, Four Wall Adjusted EBITDA Margin, and Average Unit Volume (collectively, our “Non-GAAP Measures”) are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We believe that EBITDA, Adjusted EBITDA, and Four-Wall Adjusted EBITDA are useful measures of operating performance, as they eliminate expenses that are not reflective of the underlying business performance, facilitate a comparison of our operating performance on a consistent basis from period-to-period and provide for a more complete understanding of factors and trends affecting our business. Additionally, EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use EBITDA and Adjusted EBITDA, alongside other GAAP measures such as gross profit, operating income (loss) and net income (loss), to measure evaluate our operating performance and we believe these measures are useful to investors in evaluating our operating performance.

 

Our Non-GAAP Measures are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income (loss) or net income (loss) per share as a measure of financial performance, cash flows from operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP. They should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, our Non-GAAP Measures are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as tax payments and debt service requirements and certain other cash costs that may recur in the future. Our Non-GAAP Measures contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In addition, our Non-GAAP Measures exclude certain non-recurring and other charges.

 

You should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in Our Non-GAAP Measures. Our presentation of Our Non-GAAP Measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying primarily on our GAAP results and by using Our Non-GAAP Measures as supplemental information. Our Non-GAAP Measures are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

 

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  (8) We define EBITDA as net income before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These items include sponsor fees, equity-based compensation expense, write-offs of property and equipment, showroom opening and closing costs and certain other charges and gains that we do not believe reflect our underlying business performance. Four-Wall Adjusted EBITDA means, for any period, a particular showroom’s Adjusted EBITDA, excluding any allocations of corporate selling, general and administrative expenses allocated to our showrooms. The following provides a reconciliation of net loss to EBITDA, Adjusted EBITDA, and Four-Wall Adjusted EBITDA for the periods presented:

 

     Fiscal Year Ended   Twenty-Six
Weeks Ended
   Fifty-Two Weeks Ended 
     January 29, 2017   January 31, 2016   July 30,
2017
   July 31,
2016
   July 30,
2017
 
                       
  (dollars in thousands)                    
                       
  Net loss  $(6,874)  $(8,994)  $(5,751)  $(6,302)  $(6,323)
  Interest expense   566    1,687    229    312    482 
  Taxes   138    32    8    36    110 
  Depreciation and amortization   2,180    2,429    758    1,181    1,976 
  EBITDA   (3,990)   (4,846)   (4,756)   (4,773)   (3,755)
  Sponsor fees(a)   400    300    383    258    525 
  Equity-based compensation expense(b)   26    37    -    -    26 
  Write-off of property and equipment(c)   77    -    -    -    77 
  Other non-recurring expenses(d)   [●]    [●]    [●]    [●]    [●] 
  Adjusted EBITDA   [●]    [●]    [●]    [●]    [●] 
  Other general and administrative expenses(e)   [●]    [●]    [●]    [●]    [●] 
  Four-Wall Adjusted EBITDA   [●]    [●]    [●]    [●]    [●] 

  

  (a) Represents management fees charged by our equity sponsors. Following this offering, we will terminate our management agreement and cease to incur these costs moving forward.

 

  (b) Represents expenses associated with equity incentive units granted to our management.

 

  (c) Represents the net loss on the disposal of fixed assets.

 

  (d) Represents items management believes are not indicative of ongoing operating performance. These expenses are primarily composed of legal and professional fees associated with non-recurring events, including showroom pre-opening and closing costs. The fiscal year 2016 costs included fees associated with modifications made to its line of credit. The fiscal year 2017 costs include legal and professional services incurred in connection with the Company’s fundraising initiatives.

 

  (e) Represents general and administrative expenses that are corporate and regional expenses and not incurred by our showrooms, and which are primarily comprised of expenses related to (i) wages and benefits of corporate and regional employees, (ii) non-showroom rent, utilities and maintenance, (iii) corporate and regional marketing and advertising and (iv) corporate professional fees.

 

  (9) Adjusted EBITDA margin means, for any period, the Adjusted EBITDA for that period divided by the net sales for that period. Four-Wall Adjusted EBITDA margin means, for any period, the Four-Wall Adjusted EBITDA for that period divided by the net sales for that period.
  (10) Average Unit Volume is calculated by dividing total showroom sales by the number of showrooms open during the period. For showrooms that are not open for the entire period, fractional adjustments are made to the number of showrooms used in the denominator such that it corresponds to the period of associated sales
  (11) Working capital is defined as current assets, less current liabilities.

  

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Risk Factors

 

An investment in the common stock of The Lovesac Company (the “Company,” “Lovesac,” “we,” “us” or “our”) involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our financial statements and the related notes thereto, before making a decision to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently believe are not material, also may become important factors that affect us and impair our business operations. The occurrence of any of the events or developments discussed in the risk factors below could have a material and adverse impact on our business, results of operations, financial condition and cash flows, and in such case, our future prospects would likely be materially and adversely affected. If any of such events or developments were to happen, the trading price of our common stock could decline. Further, our actual results could differ materially and adversely from those anticipated in our forward-looking statements as a result of certain factors.

 

Risks Relating to Our Business and Industry

 

We have historically operated at a loss, and we may never achieve or sustain profitability.

 

While we have typically experienced revenue growth from period-to-period, the level of growth has at times been inconsistent. We have had to rely on a combination of cash flow from operations and new capital in order to sustain our business. We have historically operated at a loss, which has resulted in an accumulated deficit, despite the fact that we have raised significant capital in recent periods. There can be no assurance that we will ever achieve profitability. Even if we do, there can be no assurance that we will be able to maintain or increase profitability on a quarterly or annual basis. Failure to do so would continue to have a material adverse effect on our accumulated deficit and could result in a decline in our common stock price.

 

Our recent growth rates may not be sustainable.

 

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 there can be no assurance the current retailer with whom we partner will continue to house them or that we will be able to enter into similar arrangements with other retailers, which could hinder our anticipated sales growth. Our business is highly competitive, and there can be no assurance that we will be able to sustain or improve our recent growth rates.

 

Our ability to raise capital in the future may be limited. Our inability to raise capital when needed could prevent us from growing and could have a material adverse effect on our business, financial condition, operating results and prospects.

 

If we continue to experience insufficient cash flow from operations to support our operating and capital needs we will be required to raise additional capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all. We may sell common stock, preferred stock, convertible securities and other equity securities in one or more transactions at prices and in such a manner as we may determine from time to time. If we sell any such equity securities in subsequent transactions, investors may be materially diluted. Debt financing, if available, may involve restrictive covenants and could reduce, among other things, our operational flexibility. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures. In addition, debt financings may be blocked by our senior lender that provides an asset-backed revolving credit facility to fund our inventory purchases in advance of customer sales. Our lender has, and any subsequent senior lender likely will have, the right to consent to any new debt financing. There can be no assurance that our lender will provide such consent. Our inability to raise capital when needed could prevent us from growing and have a material adverse effect on our business, financial condition, operating results and prospects.

 

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If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be adversely affected.

 

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of SOX requires that we furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with the fiscal year ending January 2019. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the later of the date we are deemed to be an “accelerated filer” or a “large accelerated filer,” each as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or the date we are no longer an “emerging growth company,” as defined in the JOBS Act. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are in the process of designing and implementing the internal control over financial reporting required to comply with this obligation, which process will be time-consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, are unable to comply with the requirements of Section 404 of SOX in a timely manner, are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our common stock could be adversely affected. In addition, we could become subject to investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which could require additional financial and management resources. 

 

If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

 

We rely on financial reporting and data analytics that must be accurate in order to make real-time management decisions, accurately manage our cash position, and maintain adequate inventory levels while conserving adequate cash to fund operations. In the event of a systems failure, a process breakdown, the departure of key management, or fraud, we would be unable to efficiently manage these items and may experience liquidity shortfalls that our revolving credit facility may not be able to accommodate. In such a situation, we also may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

 

We may be unable to accurately forecast our operating results and growth rate, which may adversely affect our reported results and stock price.

 

We may not be able to accurately forecast our operating results and growth rate. We use a variety of factors in our forecasting and planning processes, including historical results, recent history and assessments of economic and market conditions. Our growth rates may not be sustainable, and our growth depends on the continued growth of demand for the products we offer. Lower demand caused by changes in customer preferences, a weakening of the economy or other factors may result in decreased revenues or growth. Furthermore, many of our expenses and investments are fixed, and we may not be able to adjust our spending in a timely manner to compensate for any unexpected shortfall in our operating results. Failure to accurately forecast our operating results and growth rate could cause our actual results to be materially lower than anticipated. If our growth rate declines as a result, investors’ perceptions of our business may be adversely affected, and the market price of our common stock could decline.

 

If we fail to manage our growth effectively, our business, financial condition, operating results and prospects could be harmed.

 

To manage our anticipated growth effectively, we must continue to implement our operational plans and strategies, improve and expand our corporate infrastructure, information systems, and executive management and expand, train and manage our employee base. As we grow, we will need to find, train, and monitor additional employees and continue to invest in information systems that support key functions such as accounting, human resources, sales analytics, and marketing, all of which strain the time of our executive management team and our resources. If we fail to manage our growth effectively, our business, financial condition, operating results and prospects could be harmed.

 

Our inability to maintain our brand image, engage new and existing customers and gain market share could have a material adverse effect on our growth strategy and our business, financial condition, operating results and prospects.

 

Our ability to maintain our brand image and reputation is integral to our business and implementation of our growth strategy. Maintaining, promoting and growing our brand will depend largely on the success of our design, merchandising and marketing efforts and our ability to provide a consistent, high-quality product and customer experience. Our reputation could be jeopardized if we fail to maintain high standards for product quality and integrity and any negative publicity about these types of concerns may reduce demand for our products. While we believe our brand enjoys a loyal customer base, the success of our growth strategy depends, in part, on our ability to keep existing customers engaged and attract new customers to our brand. If we experience damage to our reputation or loss of consumer confidence, we may not be able to retain existing customers or acquire new customers, which could have a material adverse effect on our business, financial condition, operating results and prospects.

 

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If we fail to acquire new customers, or fail to do so in a cost-effective manner, we may not be able to achieve revenue growth or profitability.

 

To acquire new customers, we must appeal to prospects who have historically used other means of commerce to purchase furniture, such as traditional furniture retailers. To date, we have reached new customers primarily through our showroom presence in various markets, and through social media, digital content, third-party advocates for our brand and products and by word of mouth. 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, including the following:

 

  Ashley Furniture, IKEA, and other regional stores such as Bob’s Discount Furniture, Havertys, Raymour & Flanagan and Rooms To Go;

 

  Costco, JCPenney and Macy’s;

 

  Crate and Barrel, Ethan Allen, Pottery Barn and Restoration Hardware; and

 

  Amazon, Wayfair, eBay, Joybird, Burrow, Campaign and One Kings Lane.

 

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.

 

Our business depends on effective marketing and increased customer traffic.

 

We rely on a variety of marketing strategies to compete for customers and increase sales. If our competitors increase their spending on marketing, if our marketing is less effective than that of our competitors, or if we do not adequately leverage the technology and data analytics needed to generate concise competitive insight, our business, financial condition, operating results and prospects could be adversely affected.

 

Our increased use of social media poses reputational risks.

 

As use of social media becomes more prevalent, our susceptibility to risks related to social media increases. The immediacy of social media precludes us from having real-time control over postings made regarding us via social media, whether matters of fact or opinion. Information distributed via social media could result in immediate unfavorable publicity we may not be able to reverse. This unfavorable publicity could result in damage to our reputation and therefore have a material adverse effect on our business, financial condition, operating results and prospects.

 

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Our efforts to launch new products may not be successful.

 

We plan to expand our product line in the future. We may not be able to develop products which are attractive to our customers, and our costs to develop new products may be significant. It may take longer than we might expect for a product, even if ultimately successful, to achieve attractive sales results. Failure to successfully develop or market new products or delays in the development of new products could have a material adverse effect on our financial condition, results of operations and business.

 

We rely on the performance of members of management and highly skilled personnel. If we are unable to attract, develop, motivate and retain well-qualified employees, our business could be harmed.

 

We believe our success has depended, and continues to depend, on the efforts and talents of Shawn Nelson, our founder, member of the Board of Directors and Chief Executive Officer, Andrew Heyer, our Chairman, Jack Krause, our President and Chief Marketing Officer, Donna Dellomo, our Chief Financial Officer, and other members of our management team. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. The market for such employees in the cities in which we operate is competitive. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. The loss of any of our key employees, including members of our senior management team, could materially adversely affect our ability to execute our business plan, and we may not be able to find adequate replacements. Our inability to recruit and develop mid-level managers could have similar adverse effects on our ability to execute our business plan.

 

Some of our officers and other key employees are at-will employees, meaning that they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. While others have employment agreements with stated terms, they could still leave our employ. If we do not succeed in retaining and motivating existing employees or attracting well-qualified employees, our business, financial condition, operating results and prospects may be materially adversely affected.

 

System interruptions that impair customer access to our sites or other performance failures in our technology infrastructure could damage our business, reputation and brand, and substantially harm our business and results of operations.

 

The satisfactory performance, reliability and availability of our website, transaction processing systems and technology infrastructure are critical to our reputation, and our ability to acquire and retain customers and maintain adequate customer service levels. We currently rely on a variety of third party service providers to support mission critical systems and the efficient flow of merchandise from and between warehouses and showrooms to customers. For example, we rely on common carriers for the delivery of merchandise purchased by customers through our website and in our showrooms, and the systems we employ to communicate delivery schedules and update customers about order tracking interface with the information systems of these common carriers. Our own systems, which are customized versions of ecommerce, customer relationship management, payment processing, and inventory management software technologies deployed by numerous retailers and wholesalers in a variety of industries, must work seamlessly in order for information to flow correctly and update accurately across these systems. Any failure in this regard could result in negative customer experiences, putting our brand and growth at risk.

 

Through third parties that underwrite customer risk, we offer financing options in order to increase the market demand for our products among customers who may not be able to buy them using cash. The systems of these third parties must work efficiently in order to give customers real-time credit availability. Changes in the risk underwriting or technologies of these third parties may result in lower credit availability to our potential customers and therefore reduced sales. The occurrence of any of the foregoing could substantially harm our business and results of operations.

 

Unauthorized disclosure of sensitive or confidential information, whether through a breach of our computer system or otherwise, could severely hurt our business.

 

Certain aspects of our business involve the receipt, storage and transmission of customers’ personal information, consumer preferences and payment card information, as well as confidential information about our associates, our suppliers and our Company, some of which is entrusted to third-party service providers and vendors. Despite the security measures we have in place, our facilities and systems, and those of third parties with which we do business, may be vulnerable to security breaches, acts of vandalism and theft, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events.

 

An electronic security breach in our systems (or in the systems of third parties with which we do business) that results in the unauthorized release of individually identifiable information about customers or other sensitive data could occur and have a material adverse effect on our reputation, lead to substantial financial losses from remedial actions, and lead to a substantial loss of business and other liabilities, including possible punitive damages. In addition, as the regulatory environment relating to retailers and other companies’ obligation to protect such sensitive data becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could result in additional costs, and a material failure on our part to comply could subject us to fines, other regulatory sanctions and lawsuits.

 

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Our business is sensitive to economic conditions and consumer spending.

 

We face numerous business risks relating to macroeconomic factors. Consumer purchases of discretionary items, including our products, generally decline during recessionary periods and other times when disposable income is lower. Factors impacting discretionary consumer spending include general economic conditions, wages and employment, consumer debt, reductions in net worth based on severe market declines, residential real estate and mortgage markets, taxation, volatility of fuel and energy prices, interest rates, consumer confidence, political and economic uncertainty and other macroeconomic factors. Deterioration in economic conditions or increasing unemployment levels may reduce the level of consumer spending and inhibit consumers’ use of credit, which may adversely affect our sales. In recessionary periods and other periods where disposable income is adversely affected, we may have to increase the number of promotional sales or otherwise dispose of inventory for which we have previously paid to manufacture, which could further adversely affect our financial performance. It is difficult to predict when or for how long any of these conditions could affect our business and a prolonged economic downturn could have a material adverse effect on our business, financial condition, operating results and prospects.

 

A substantial portion of our business is dependent on a small number of suppliers. A material disruption at any of our suppliers’ manufacturing facilities could prevent us from meeting customer demand, reduce our sales, and/or negatively affect our financial results.

 

We do not own or operate any manufacturing facilities and therefore depend on third-party suppliers for the manufacturing of all of our products. Moreover, a substantial portion of our business is dependent on a small number of suppliers. Sacs, which represented approximately 26% of our revenues in fiscal 2017, are currently manufactured by a single manufacturer in Texas. Sactionals, which represented approximately 74% of our revenues in fiscal 2017, are manufactured by two suppliers in China and our outdoor Sactionals are manufactured in Vietnam.

 

Any of our suppliers’ manufacturing facilities, or any of the machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, which could materially and adversely impact our business, operations and financial condition. These events include but are not limited to:

 

  equipment failure;

 

  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.

 

Our reliance on international suppliers increases our risk of supply chain disruption, which could materially increase the cost and reduce or delay the supply of our products, which could adversely affect our business, financial condition, operating results and prospects.

 

Our current suppliers are located in China, Vietnam and the United States. Our reliance on international suppliers increases our risk of supply chain disruption. Events that could cause disruptions to our supply chain include but are not limited to:

 

  the imposition of additional trade laws or regulations;

 

  the imposition of additional duties, tariffs and other charges on imports and exports;

 

  foreign currency fluctuations;

 

  theft; and

 

  restrictions on the transfer of funds.

 

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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.

 

Our reliance on suppliers in developing countries increases our risk with respect to available manufacturing infrastructure, labor and employee relations, political and economic stability, corruption, and regulatory, environmental, health and safety compliance.

 

Our reliance on suppliers in developing countries increases our risk with respect to infrastructure available to support manufacturing, labor and employee relations, political and economic stability, corruption, and regulatory, environmental, health and safety compliance. Any failure of our suppliers to comply with ethical sourcing standards or labor or other local laws in the country of manufacture, or the divergence of a supplier’s labor practices from those generally accepted as ethical in the United States, could disrupt the shipment of products, force us to locate alternative manufacturing sources, reduce demand for our products, damage our reputation and/or expose us to potential liability for their wrongdoings. Any of these events could have a material adverse effect on our reputation, business, financial condition, operating results and prospects.

 

Most of our products are shipped from our suppliers by ocean vessel. If a disruption occurs in the operation of ports through which our products are imported, we may incur increased costs and suffer delays, which could have a material adverse effect on our business, financial condition, operating results and prospects.

 

Most of our products are shipped from our suppliers by ocean vessel. If a disruption occurs in the operation of ports through which our products are imported, we may incur increased costs related to air freight or use of alternative ports. Shipping by air is significantly more expensive than shipping by ocean and our margins could be reduced. Shipping to alternative ports could also lead to delays in receipt of our products. We rely on third-party shipping companies to deliver our products to us. Failures by these shipping companies to deliver our products to us or lack of capacity in the shipping industry could lead to delays in receipt of our products or increased expense in the delivery of our products. Any of these developments could have a material adverse effect on our business, financial condition, operating results and prospects.

 

Increases in the demand for, or the price of, raw materials used to manufacture our products or other fluctuations in sourcing or distribution costs could increase our costs and negatively impact our gross margin.

 

We believe that we have strong supplier relationships, and we work with our suppliers to manage cost increases. Our gross margin depends, in part, on our ability to mitigate rising costs or shortages of raw materials used to manufacture our products. Raw materials used to manufacture our products are subject to availability constraints and price volatility impacted by a number of factors, including supply and demand for fabrics, weather, government regulations, economic conditions and other unpredictable factors. In addition, our sourcing costs may fluctuate due to labor conditions, transportation or freight costs, energy prices, currency fluctuations or other unpredictable factors. The occurrence of any of the foregoing could increase our costs, delay or reduce the availability of our products and negatively impact our gross margin.

 

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.

 

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We may be subject to product liability claims if people or property are harmed by the products we sell.

 

We have not had any significant product liability claims to date. We place a high priority on designing our products to be safe for consumers and safety test our products in third-party laboratories. Still, the products we sell or have manufactured may expose us to product liability claims, litigation and regulatory action relating to personal injury, death and environmental or property damage. Some of our agreements with our suppliers and international manufacturers may not indemnify us from product liability for a particular supplier’s or international manufacturer’s products, or our suppliers or international manufacturers may not have sufficient resources or insurance to satisfy their indemnity and defense obligations. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. Any product liability claims asserted against us could, among other things, harm our reputation, damage our brand, cause us to incur significant costs, and have a material adverse effect on our business, results of operations and financial condition.

 

Our ability to attract customers to our showrooms depends heavily on successfully locating our showrooms in suitable locations. Any impairment of a showroom location, including any decrease in customer traffic, could cause our sales to be lower than expected.

 

We plan to open new showrooms in high street and urban locations and historically we have favored top tier mall locations near luxury and contemporary retailers that we believe are consistent with our key customers’ demographics and shopping preferences. Sales at these showrooms are derived, in part, from the volume of foot traffic in these locations. Showroom locations may become unsuitable due to, and our sales volume and customer traffic generally may be harmed by, among other things:

 

  economic downturns in a particular area;

 

  competition from nearby retailers selling similar products;

 

  changing consumer demographics in a particular market;

 

  changing preferences of consumers in a particular market;

 

  the closing or decline in popularity of other businesses located near our store;

 

  reduced customer foot traffic outside a showroom location; and

 

  store impairments due to acts of God or terrorism.

 

Even if a showroom location becomes unsuitable, we will generally be unable to cancel the long term lease associated with such showroom.

 

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 July 30, 2017, we had more than 60 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:

 

  identify new markets where our products and brand image will be accepted or the performance of our showrooms will be successful;

 

  obtain desired locations, including showroom size and adjacencies, in targeted high street and urban locations and top tier malls;

 

  negotiate acceptable lease terms, including desired rent and tenant improvement allowances;

 

  achieve brand awareness, affinity and purchaser intent in new markets;

 

  hire, train and retain showroom associates and field management;

 

  assimilate new showroom associates and field management into our corporate culture;

 

  source and supply sufficient inventory levels;

 

  successfully integrate new showrooms into our existing operations and information technology systems; and

 

  have the capital necessary to fund new showrooms.

 

In addition, our new showrooms may not be immediately profitable, and we may incur significant losses until these showrooms become profitable. Unavailability of desired showroom locations, delays in the acquisition or opening of new showrooms, delays or costs resulting from a decrease in commercial development due to capital restraints, difficulties in staffing and operating new showroom locations or a lack of customer acceptance of showrooms in new market areas may negatively impact our new showroom growth and the costs or the profitability associated with new showrooms. While we are seeking to mitigate some of the risks related to our mall based showrooms by opening high street and lifestyle center-based showrooms and continuing to build our online sales, there can be no assurance that this strategy will be successful or lead to greater sales.

 

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As we expand our showroom base, we may not be able to achieve the showroom sales growth rates that we have achieved in the past, which could cause our share price to decline.

 

As we expand our showroom base, we may not be able to achieve the showroom sales growth rates that we have achieved historically. If our showroom sales growth rates decline or fail to meet market expectations, the value of our common stock could decline.

 

In addition, the results of operations of our showroom locations have fluctuated in the past and can be expected to continue to fluctuate in the future. A variety of factors affect showroom sales, including, among others, consumer spending patterns, fashion trends, competition, current economic conditions, pricing, inflation, the timing of the release of new merchandise and promotional events, changes in our product assortment, the success of marketing programs and weather conditions. If we misjudge the market for our products, we may have excess inventory of some of our products and miss opportunities for other products. These factors may cause our showroom sales results in the future to be materially lower than recent periods or our expectations, which could harm our results of operations and result in a decline in the price of our common stock.

 

We have and will continue to expend significant 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 significant capital doing so. While preliminary results appear promising, there is no guarantee that the capital spent on these remodeled showrooms will result in increased showroom traffic or increased sales.

 

Our lease obligations are substantial and expose us to increased risks.

 

We do not own any of our showrooms. Instead, we rent all of our showroom spaces pursuant to leases. Nearly all of our leases require a fixed annual rent, and many of them require the payment of additional rent if showroom sales exceed a negotiated amount. Most of our leases are “net” leases that require us to pay all costs of insurance, maintenance and utilities, as well as applicable taxes.

 

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:

 

  increasing our vulnerability to general adverse economic and industry conditions;

 

  limiting our ability to obtain additional financing;

 

  requiring a substantial portion of our available cash to pay our rental obligations, reducing cash available for other purposes;

 

  limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we compete; and

 

  placing us at a disadvantage with respect to some of our competitors who sell their products exclusively online.

 

Many of our leases contain relocation clauses that allow the landlord to move the location of our showrooms. Moreover, as our leases expire, we may be unable to negotiate acceptable renewals. If either of these events occur, our business, sales and results of operations may be harmed.

 

Many of our leases include relocation clauses that allow the landlord to move the location of our showrooms. If any of our showrooms are relocated, there can be no assurance that the new location will experience the same levels of customer traffic or success that the prior location experienced. In addition, as our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close showrooms in desirable locations. We may also be unable to enter into new leases on terms acceptable to us or in desirable locations. If any of the foregoing occur, our business, sales and results of operations may be harmed.

 

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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 expect future showrooms to be subject to similar long term, non-cancelable leases. If an existing or future showroom is not profitable, and we decide to close it, we may nonetheless be required to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term if we cannot negotiate a mutually acceptable termination payment.

 

Changes in lease accounting standards may materially and adversely affect us.

 

The Financial Accounting Standards Board (“FASB”), recently adopted new accounting rules that will apply to annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period. The Company, as an “emerging growth company,” has elected to defer compliance with new or revised financial accounting standards and, as a result, the new accounting rule will apply to annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. When the rules are effective, we will be required to capitalize all leases on our balance sheet and account for our showroom leases as assets and liabilities, where we previously accounted for such leases on an “off balance sheet” basis. As a result, a significant amount of lease-related assets and liabilities will be recorded on our balance sheet, and we may be required to make other changes to the recording and classification of our lease-related expenses. These changes will not directly impact our overall financial condition. However, they could cause investors or others to believe that we are highly leveraged and could change the calculations of financial metrics and covenants under our debt facilities and third-party financial models regarding our financial condition. 

 

We depend on our ecommerce business and failure to successfully manage this business and deliver a seamless omni-channel shopping experience to our customers could have an adverse effect on our growth strategy, business, financial condition, operating results and prospects.

 

Sales through our ecommerce channel account for a significant portion of our revenues. Our business, financial condition, operating results and prospects are dependent on maintaining our ecommerce business. Dependence on our ecommerce business and the continued growth of our direct and retail channels subjects us to certain risks, including:

 

  the failure to successfully implement new systems, system enhancements and Internet platforms;

 

  the failure of our technology infrastructure or the computer systems that operate our website and their related support systems, causing, among other things, website downtimes, telecommunications issues or other technical failures;

 

  the reliance on third-party computer hardware/software providers;

 

  rapid technological change;

 

  liability for online content;

 

  violations of federal, state, foreign or other applicable laws, including those relating to data protection;

 

  credit card fraud;

 

  cyber security and vulnerability to electronic break-ins and other similar disruptions; and

 

  diversion of traffic and sales from our stores.

 

Our failure to successfully address and respond to these risks and uncertainties could negatively impact sales, increase costs, diminish our growth prospects and damage the reputation of our brand, each of which could have a material adverse effect on our business, financial condition, operating results and prospects.

 

Our inability to successfully optimize our omni-channel operations and maintain a relevant and reliable omni-channel experience for our customers could have a material adverse effect on our growth strategy and our business, financial condition, operating results and prospects.

 

Growing our business through our omni-channel operations is key to our growth strategy. Our goal is to offer our customers seamless access to our products across our channels, and our success depends on our ability to anticipate and implement innovations in sales and marketing strategies to appeal to existing and potential customers who increasingly rely on multiple channels, such as ecommerce, to meet their shopping needs. Failure to enhance our technology and marketing efforts to align with our customers’ developing shopping preferences could significantly impair our ability to meet our strategic business and financial goals. If we do not successfully optimize our omni-channel operations, or if they do not achieve their intended objectives, it could have a material adverse effect on our business, financial condition, operating results and prospects.

 

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If we are unable to successfully adapt to consumer shopping preferences or develop and maintain a relevant and reliable omni-channel experience for our customers, our financial performance and brand image could be adversely affected.

 

We are continuing to grow our omni-channel business model. While we interact with many of our customers through our showrooms, our customers are increasingly using computers, tablets and smartphones to make purchases online and to help them make purchasing decisions when in our showrooms. Our customers also engage with us online through our social media channels, including Facebook and Instagram, by providing feedback and public commentary about aspects of our business. Omni-channel retailing is rapidly evolving. Our success depends, in part, on our ability to anticipate and implement innovations in customer experience and logistics in order to appeal to customers who increasingly rely on multiple channels to meet their shopping needs. If for any reason we are unable to continue to implement our omni-channel initiatives or provide a convenient and consistent experience for our customers across all channels that delivers the products they want, when and where they want them, our financial performance and brand image could be adversely affected.

 

Purchasers of furniture may choose not to shop online, which could affect the growth of our business.

 

The online market for furniture is less developed than the online market for apparel, consumer electronics and other consumer products in the United States. While we believe this market is growing, it still accounts for a small percentage of the market as a whole. We are relying on online sales for our continued success and growth. If the online market for furniture does not gain wider acceptance, our growth and business may suffer.

 

In addition, our success in the online market will depend, in part, on our ability to attract consumers who have historically purchased furniture through traditional retailers. We may have to incur significantly higher and more sustained advertising and promotional expenditures in order to attract additional online consumers to our website and convert them into purchasing customers. Specific factors that could impact consumers’ willingness to purchase furniture from us online include:

 

  concerns about buying products, and in particular larger products, with a limited physical storefront, face-to-face interaction with sales personnel and the ability to physically examine products;

 

  actual or perceived lack of security of online transactions and concerns regarding the privacy of personal information;

 

  inconvenience associated with returning or exchanging items purchased online; and

 

  usability, functionality and features of our website.

 

If the online shopping experience we provide does not appeal to consumers or meet the expectations of existing customers, we may not acquire new customers at rates consistent with historical periods, and existing customers’ buying patterns may not be consistent with historical buying patterns. If either of these events occur, our business, sales and results of operations may be harmed.

 

Product warranty claims could have a material adverse effect on our business.

 

We provide a lifetime warranty on most components of our products, which, if deficient, could lead to warranty claims. Currently, we do not maintain a reserve for warranty claims. Material warranty claims could, among other things, harm our reputation and damage our brand, cause us to incur significant repair and/or replacement costs, and material adversely affect our business, financial condition, operating results and prospects.

 

Significant merchandise returns could harm our business.

 

We allow our customers to return products, subject to our return policy. While the Company has experienced relatively few product returns, this could change, and, if customer returns are significant, our business, financial condition, operating results and prospects could be harmed. Further, we modify our policies relating to returns from time to time, which may result in customer dissatisfaction or an increase in the number of product returns.

 

We are subject to risks related to online payment methods.

 

We accept payment using a variety of methods, including credit card, debit card, PayPal and gift cards. As we offer new payment options to consumers, we may become subject to additional regulations, compliance requirements and fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and increase our operating costs. We are also subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply.

 

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As our business changes, we may also be subject to different rules under existing standards, which may require new assessments that involve costs above what we currently pay for compliance. If we fail to comply with the rules or requirements of any provider of a payment method we accept, if the volume of fraud in our transactions limits or terminates our rights to use payment methods we currently accept, or if a data breach occurs relating to our payment systems, we may, among other things, be subject to fines or higher transaction fees and may lose, or have restrictions placed upon, our ability to accept credit card and debit card payments from consumers or our ability to facilitate other types of online payments. If any of these events were to occur, our business, financial condition and operating results could be materially adversely affected.

 

In addition, we occasionally receive orders placed with fraudulent credit card data. We may suffer losses as a result of orders placed with fraudulent credit card data even if the associated financial institution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent credit card transactions. If we are unable to detect or control credit card fraud, our liability for these transactions could harm our business, financial condition, operating results and prospects.

 

Government regulation of the Internet and ecommerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.

 

We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and ecommerce. Existing and future regulations and laws could impede the growth of the Internet, ecommerce or mobile commerce. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications, consumer protection, Internet neutrality and gift cards. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or ecommerce. It is possible that general business regulations and laws, or those specifically governing the Internet or ecommerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices.

 

Though we seek at all times to be in full compliance with all such laws, we cannot be sure that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by governmental entities or others. Any such proceeding or action could damage our reputation and brand, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, decrease the use of our website by consumers and result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations.

 

We may be unable to protect our trademarks or brand image, which could harm our business.

 

We rely on certain trademark registrations and common law trademark rights to protect the distinctiveness of our brand. However, there can be no assurance that the actions we have taken to establish and protect our trademarks will be adequate to prevent imitation of our trademarks by others or to prevent others from claiming that sales of our products infringe, dilute or otherwise violate third party trademarks or other proprietary rights that could block sales of our products. Moreover, certain of our trademark applications may never be granted.

 

The laws of certain foreign countries may not protect the use of unregistered trademarks to the same extent as do the laws of the United States. As a result, international protection of our brand image may be limited, and our right to use our trademarks outside the United States could be impaired. Other persons or entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for furniture and/or accessories in foreign countries where our products are manufactured. There may also be other prior registrations of trademarks identical or similar to our trademarks in other foreign countries of which we are not aware. Accordingly, it may be possible for others to prevent the manufacture of our branded merchandise in certain foreign countries or the sale or exportation of our branded merchandise from certain foreign countries to the United States. If we were unable to reach a licensing arrangement with these parties, we might be unable to manufacture our products in those countries. Our inability to register our trademarks or purchase or license the right to use the relevant trademarks or logos in these jurisdictions could limit our ability to manufacture our products in less costly markets or penetrate new markets in jurisdictions outside the United States. The occurrence of any of the foregoing could harm our business.

 

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We may not be able to adequately protect our intellectual property rights.

 

We regard our customer and prospect lists, trademarks, domain names, copyrights, patents and similar intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection, agreements and other methods with our employees and others to protect our proprietary rights. We currently have 30 U.S. and foreign patents which are used in the products that we sell to the public, with another 12 U.S. and foreign patent applications filed and pending. We might not be able to obtain broad protection in the United States or internationally for all of our intellectual property, and we might not be able to obtain effective intellectual property protection in every country in which we may in the future sell products. If we are unable to obtain such broad protection, our business, financial condition, operating results and prospects may be harmed.

 

The protection of our intellectual property rights may require the expenditure of significant financial, managerial and operational resources. Still, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. Any of our patents, marks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Additionally, because the process of obtaining patent protection is expensive and time-consuming, we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner, and our patent applications may never be granted. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain. If we are unable to adequately protect our intellectual property rights, our business, financial condition, operating results and prospects may be harmed.

 

We also might be required to spend significant resources to monitor and protect our intellectual property rights. We may not be able to discover or determine the extent of any infringement, misappropriation or other violation of our intellectual property rights and other proprietary rights. We may initiate claims or litigation against others for infringement, misappropriation or violation of our intellectual property rights or proprietary rights or to establish the validity of such rights. Despite our efforts, we may be unable to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights and other proprietary rights. In addition, initiating claims or litigations against others for infringement, misappropriation or violation of our intellectual property rights or proprietary rights may be prohibitively expensive. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may materially adversely affect our business, financial condition, operating results and prospects.

 

Our products may be found to infringe the intellectual property rights of others.

 

Third parties may assert claims or initiate litigation asserting that our products infringe such third parties’ patent, copyright, trademark or other intellectual property rights. The asserted claims and/or litigation could include claims against us or our suppliers alleging infringement of intellectual property rights with respect to our products or components of such products.

 

Regardless of the merit of the claims, if our products are alleged to infringe the intellectual property rights of other parties, we could incur substantial costs and we may have to, among other things:

 

  obtain licenses to use such intellectual rights, which may not be available on commercially reasonable terms, or at all;

 

  redesign our products to avoid infringement;

 

  stop using the subject matter claimed in the intellectual property held by others;

 

  pay significant damages; and/or

 

  defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of our time, financial and management resources.

 

If any of the foregoing occur, our business, financial condition, operating results and prospects could be materially adversely affected.

 

Risks Relating to this Offering and Ownership Of Our Common Stock

 

Our principal stockholder, SAC Acquisition LLC, will continue to have significant influence over us following the completion of this offering, and its interests could conflict with those of our other stockholders.

 

Prior to this offering, our principal stockholder, SAC Acquisition LLC, owned over [●]% of the outstanding shares of our common stock on a fully-diluted basis. As a result, SAC Acquisition LLC is able to influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. SAC Acquisition LLC may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may also have the effect of delaying, preventing or deterring a change of control of the Company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our Company and might ultimately affect the market price of our common stock.

 

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Holders of our outstanding warrants to purchase common stock will own a significant portion of our common stock following the exercise of such warrants. The exercise of such warrants will significantly dilute the investors participating in this offering.

 

Holders of our outstanding warrants to purchase common stock will own a significant portion of our common stock following the exercise of such warrants. During the three-year period following the completion of this offering, holders of our outstanding warrants will have the right to exercise such warrants and purchase shares of our common stock at the price per share paid by investors in this offering. The exercise will dilute investors participating in this offering.

 

We will be a “controlled company” within the meaning of the Nasdaq rules. As a result, we will qualify for, and may rely on, certain exemptions from corporate governance requirements that provide protection to stockholders of other companies.

 

After completion of this offering, we will be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with some corporate governance requirements, including:

 

  the requirement that a majority of our board of directors consist of “independent directors”;

 

  the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

  the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

  the requirement for an annual performance evaluation of the compensation and nominating and corporate governance committees.

 

Following this offering, we intend to rely on some or all of these exemptions. If we so rely, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

 

In addition, Nasdaq has developed listing standards regarding compensation committee independence requirements and the role and disclosure of compensation consultants and other advisers to the compensation committee that, among other things, require:

 

  compensation committees to be composed of independent directors, as determined pursuant to new independence requirements;

 

  compensation committees to be explicitly charged with hiring and overseeing compensation consultants, legal counsel and other committee advisors; and

 

  compensation committees to consider, when engaging compensation consultants, legal counsel or other advisors, independence factors, including factors that examine the relationship between the consultant or advisor’s employer and us.

 

As a controlled company, we will not be subject to these compensation committee independence requirements.

 

There has been no prior market for our common stock. An active market may not develop or be sustained, and investors may not be able to resell their shares of common stock at or above the initial public offering price.

 

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriter and us and may vary from the market price of our common stock following the completion of this offering. An active or liquid market in our common stock may not develop upon completion of this offering or, if it does develop, may not be sustained. As a result, you may not be able to sell the shares of common stock you purchase in this offering at or above the initial public offering price, or if at all.

 

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The market price of our common stock may be volatile or may decline steeply or suddenly regardless of our operating performance, resulting in substantial losses for investors purchasing shares of common stock in this offering.

 

The initial public offering price for our common stock will be determined through negotiations between the underwriter and the Company. This price may not reflect the market price of our common stock following the completion of this offering. Moreover, the market price of our common stock may be volatile or decline steeply or suddenly, regardless of our operating performance. This could occur for any number of reasons, many of which are beyond our control, including:

 

  actual or anticipated fluctuations in our customer growth, sales, or other operating results;

 

  variations between our actual operating results and the expectations of securities analysts, investors, and the financial community;

 

  any forward-looking financial or operating information we may provide to the public or securities analysts, any changes in this information, or our failure to meet expectations based on this information;

 

  actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our Company, or our failure to meet these estimates or the expectations of investors;

 

  additional shares of our common stock being sold into the market by us or our existing stockholders, or the anticipation of such sales, including if existing stockholders sell shares into the market when applicable “lock-up” periods end;

 

  price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

  announcements by us or our competitors of significant products, acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

  lawsuits threatened or filed against us;

 

  developments in new legislation or rulings by judicial or regulatory bodies; and

 

  other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

We may be subject to securities litigation, which is expensive and could divert management attention.

 

The market price of our common stock may be volatile, and in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, and results of operations.

 

An active trading market for our common stock may never develop or be sustained and we may be unable to comply with the applicable continued listing requirements or standards of the Nasdaq Global Market and could be delisted.

 

We have applied to list our common stock on the Nasdaq Global Market under the symbol “LSAC.” In order to maintain that listing, we will be required to satisfy minimum financial and other continued listing requirements and standards, including those regarding minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can be no assurance that we will be able to comply with the applicable listing standards. If we cannot comply with the applicable listing standards our common stock may be delisted which could materially adversely affect our trading volume and stock price.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our Company, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who cover us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.

 

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The requirements of being a public company may strain our resources, result in more litigation, and divert the attention of Company management.

 

As a public company, we will be subject to the reporting requirements of the Exchange Act, SOX, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Global Market, and other applicable securities rules and regulations. Complying with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming and costly, and increase demand on our systems and resources. For example, in anticipation of becoming a public company, we will need to adopt additional internal controls and disclosure controls and procedures, retain a transfer agent, adopt an insider trading policy and bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws. 

 

The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. By disclosing information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If those claims are successful, our business could be seriously harmed. Even if the claims do not result in litigation or are resolved in our favor, the time and resources needed to resolve them could divert our management’s resources and seriously harm our business.

 

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

 

While we intend to use the net proceeds of this offering in the manner set forth in “Use of Proceeds” below, we have broad discretion over the ultimate use of those proceeds. You will be relying on the judgment of Company management regarding the application of those proceeds. You will not have the opportunity to influence our decisions regarding how we use our proceeds from this offering, and we may spend or invest these proceeds in a way with which our stockholders disagree.

 

If our management fails to use these funds effectively, our business could be seriously harmed. Moreover, Company management may apply our proceeds from this offering in ways that fail to increase, or even decrease, the value of your investment.

 

Investors in this offering will experience immediate and substantial dilution.

 

The initial public offering price is expected to be substantially higher than the net tangible book value per share of our common stock immediately following this offering. Therefore, if you purchase common stock in the offering, you will experience immediate and substantial dilution in net tangible book value per share in relation to the price that you paid for your shares. We expect the dilution as a result of the offering to be $[●] per share, based on an assumed initial offering price of $[●] per share and our pro forma net tangible book value of $[●] per share as of [●], 2018. Accordingly, if we were liquidated at our pro forma net tangible book value, you would not receive the full amount of your investment.

 

We are an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

We are an “emerging growth company” as defined in the JOBS Act, and we could be an emerging growth company for up to five years following the completion of this offering. For as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including:

 

  not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of SOX;

 

  reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and

 

  exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. Investors may find our common stock less attractive if we choose to rely on any of the exemptions or accommodations afforded to emerging growth companies. If investors find our common stock less attractive because we rely on any of these exemptions or accommodations, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile.

 

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our Company more difficult, and limit attempts by our stockholders to replace or remove our current management.

 

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our certificate of incorporation and bylaws include provisions that:

 

  permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships by the affirmative vote of a majority of the directors or stockholders holding at least 66 2/3% of the issued and outstanding shares of common stock;

 

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  provide that directors may only be removed by the majority of the shares of voting stock then outstanding entitled to vote generally in election of directors;

 

  require a two-thirds majority of all directors who constitute the Board of Directors or holders at least 75% of the issued and outstanding shares our common stock to adopt, amend or repeal provisions of our bylaws;

 

  require 66 2/3% of the voting power of all then outstanding shares of capital stock of the Company entitled to vote generally in election of directors to amend, alter or repeal, or adopt any provision inconsistent with certain sections of our certificate of incorporation;

 

  eliminate the ability of our stockholders to call special meetings of stockholders, except as otherwise provided by the terms of any series of preferred stock;

 

  restrict the forum for certain litigation against us to Delaware; and

 

  establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

 

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any holder of at least 15% of our capital stock for a period of three years following the date on which the stockholder became a 15% stockholder.

 

We do not expect to declare any dividends in the foreseeable future.

 

The continued operation and growth of our business will require substantial cash. Accordingly, we do not anticipate paying any cash dividends to holders of our common stock at any time in the foreseeable future. Any determination to pay future dividends will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, indebtedness, restrictions imposed by applicable law and other factors our board of directors deems relevant. Consequently, the only way investors may be able to realize future gain on their investment is to sell their shares of common stock after the price of such shares has appreciated. However, there is no guarantee that investors’ shares of common stock will appreciate in value or even maintain the price at which our investors purchased their shares of common stock.

 

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Cautionary Note Regarding Forward-Looking Statements

 

This prospectus contains forward-looking statements. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “potential,” “should,” “will” and “would” or the negatives of these terms or other comparable terminology.

 

You should not place undue reliance on forward looking statements. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. The cautionary statements set forth in this prospectus, including in “Risk Factors” and elsewhere, identify important factors which you should consider in evaluating our forward-looking statements. These factors include, among other things:

 

  our ability to sustain recent growth rates;

 

  our ability to manage the growth of our operations over time;

 

  our ability to maintain and grow our brand;

 

  our ability to improve our products and develop new products;

 

  our ability to maintain adequate protection of our intellectual property and avoid violation of the intellectual property rights of others;

 

  our ability to successfully open and operate new showrooms;

 

  our ability to increase our Internet sales; and

 

  our ability to compete and succeed in a highly competitive and evolving industry.

 

These risks are not exhaustive. Other sections of this prospectus include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.

 

Although the forward-looking statements in this prospectus are based on our beliefs, assumptions and expectations, taking into account all information currently available to us, we cannot guarantee future transactions, results, performance, achievements or outcomes. No assurance can be made to any investor by anyone that the expectations reflected in our forward-looking statements will be attained, or that deviations from them will not be material and adverse. We undertake no obligation, other than as may be required by law, to re-issue this prospectus or otherwise make public statements updating our forward-looking statements.

 

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Use of Proceeds

 

We estimate that the net proceeds to us from the sale of common stock by this prospectus will be approximately $[●] million, assuming the sale by us of [●] shares of our common stock at an assumed public offering price of $[●] per share and after deducting the underwriting discounts and commissions, and estimated offering expenses payable by us of approximately $[●].

 

A $[●] increase (decrease) in the assumed public offering price of $[●] per share would increase (decrease) the expected net cash proceeds of the offering to us by approximately $[●] million, or $[●] per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us. Similarly, a $[●] increase (decrease) in the number of shares of common stock sold in this offering would increase (decrease) the expected net cash proceeds of the offering to use by approximately $[●] million, or $[●] per share, assuming that the per share offering price, at the midpoint of the range, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.

 

The principal purposes of this offering are to increase our capitalization and financial flexibility, and create a public market for our common stock and thereby enable access to the public equity markets for us and our stockholders. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds from this offering primarily (i) to increase sales and marketing, (ii) for product development, (iii) to repay debt, and (iv) for working capital and other general corporate purposes.

 

On March 22, 2017, in connection with our reorganization, we issued to Siena Funding Group LLC, a promissory note in the aggregate principal amount of $7 million, with an annual interest rate of 3% and with a maturity date of May 14, 2018 and assumed all liabilities and obligations under the Loan and Security Agreement, as amended, by and between SAC Acquisition LLC and Siena Funding Group LLC. See “Summary – Corporate Information.” We intend to use a portion of the net proceeds to repay the outstanding amounts under the promissory note ($[●] at [●], 2018).

 

The amount and timing of expenditures or for any particular use may vary based on a number of factors, including the amount of cash used in or provided by our operations. Our management will have broad discretion in the application of these proceeds, and investors will be relying on the judgment of our management regarding the application of the proceeds of this offering.

 

Dividend Policy

 

We have never declared nor paid any dividends on our common stock since incorporation and do not anticipate that we will do so in the foreseeable future. All shares of our common stock are entitled to an equal share of any dividends declared and paid. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments, provisions of applicable law and other factors the board of directors deems relevant.

 

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CAPITALIZATION

 

The following table describes our capitalization as of July 30, 2017:

 

  on an actual basis; and

 

  on a pro forma, as adjusted basis to give effect to the sale of the shares in this offering at the assumed public offering price of $[●] per share, after deducting underwriting discounts and other estimated offering expenses payable by us.

 

The pro forma as adjusted information below is illustrative only, and our capitalization following the closing of this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

You should read the following table in connection with the sections entitled “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” “Description of Securities” and our financial statements and related notes included elsewhere in this prospectus.

 

    As of July 30, 2017 (unaudited) 
    Actual      Pro Forma As Adjusted(1) 
Cash and cash equivalents  $773,845   $        
Indebtedness   2,263,424      
Total liabilities   14,201,138      
Stockholders’ equity:          
Common Stock, par value $0.00001 per share; 100,000,0000 shares authorized, 15,000,000 shares issued and outstanding   150      
Preferred Stock, par value $0.00001 per share; 25,000,000 shares authorized and 1,688,500 shares issued and outstanding, no shares issued and outstanding, pro forma   17      
Accumulated paid-in capital   70,623,636      
Accumulated deficit   (56,503,270)     
Total stockholders’ equity (deficit)   14,120,533      
Total capitalization  $28,321,671   $   

 

  (1) A $[●] increase (decrease) in the assumed public offering price of $[●] per share would increase (decrease) the pro forma as adjusted capitalization by $[●], or $[●] per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us. Similarly, a $[●] increase (decrease) in the number of shares of common stock sold in this offering would increase (decrease) the pro forma as adjusted capitalization by approximately $[●], or $[●] per share, assuming that the per share offering price, at the midpoint of the price range on the cover of this prospectus, remains the same.

 

The pro forma information discussed above is to illustrate only and will change based on the actual public offering price, number of shares and other terms of this offering determined in pricing.

 

The number of shares of our common stock outstanding shown in the foregoing table and calculations reflects:

 

  the conversion to common stock of the 940,000 outstanding shares of Series A Convertible Preferred Stock with a conversion price equal to 70% of the offering price;

 

  the conversion to common stock of the 1,000,000 outstanding shares of Series A-1 Convertible Preferred Stock with a conversion price equal to 70% of the offering price;

 

  the conversion to common stock of the 411,500 outstanding shares of Series A-2 Convertible Preferred Stock with a conversion price equal to 70% of the offering price;

 

  the exclusion of outstanding warrants equaling, in the aggregate, $14.58 million of common stock, at an exercise price per share equal to the offering price;

 

  the exclusion of 1,050,000 shares of common stock reserved for issuance under the Equity Plan; and

 

  the exclusion of [●] shares of common stock issuable upon exercise of the underwriter’s warrant.

 

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Dilution

 

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock upon completion of this offering. Net tangible book value per share represents the amount of our total tangible assets (total assets less intangible assets) less total liabilities, divided by the number of shares of our common stock outstanding.

 

Our net tangible book value (deficit) as of [●], 2017 was $[●] or approximately $[●] per share of common stock, based upon [●] shares outstanding as of [●], 2017. After giving effect to the sale of the shares in this offering at the assumed public offering price of $[●] per share, the midpoint of the price range on the cover of this prospectus, and after deducting the estimated underwriting discount and offering expenses payable by us, our pro forma as adjusted net tangible book value (deficit) at [●], 2017 would have been approximately $[●] million or $[●] per share. This represents an immediate increase in pro forma net tangible book value of approximately $[●] per share to our existing stockholders, and immediate dilution of $[●] per share to investors purchasing shares in this offering.

 

Dilution in pro forma net tangible book value (deficit) per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering.

 

The following table illustrates the per share dilution to investors purchasing shares in the offering:

 

Assumed initial public offering price per share      $ 
Pro forma net tangible book value per share as of July 30, 2017  $      
Increase in pro forma net tangible book value per share attributable to new investors in this offering          
Pro forma as adjusted net tangible book value per share after this offering          
Dilution in net tangible book value per share to new investors in this offering      $  

 

A $[●] increase (decrease) in the assumed public offering price of $[●] per share would increase (decrease) the pro forma net tangible book value by $[●], or $[●] per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us. Similarly, a $[●] increase (decrease) in the number of shares of common stock sold in this offering would increase (decrease) the pro forma net tangible book value by approximately $[●], or $[●] per share, assuming that the assumed per share offering price of $[●], the midpoint of the price range on the cover of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.

 

If the underwriter exercises its over-allotment option in full to purchase an additional [●] shares of our common stock in this offering, the pro forma as adjusted net tangible book value will increase to $[●] per share, representing an immediate increase to existing stockholders of $[●] per share and an immediate dilution of $[●] per share to new investors participating in this offering.

 

The following table summarizes, on a pro forma as adjusted basis as of July 30, 2017, after giving effect to the conversion of all of our outstanding preferred stock, including the [●] shares of Series A and Series A-2 Preferred Stock issued after July 30, 2017, into shares of our common stock upon the closing of this offering, the differences between the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering. The calculation below is based on an assumed initial public offering price of $[●] per share, the midpoint of the price range on the cover of this prospectus, after deducting estimated underwriting discounts and estimated offering expenses payable by us.

 

   Shares Purchased   Total Consideration   Weighted-
Average
Price
Per Share
 
   #   %   $   %     
Existing stockholders               %  $    %  $ 
New investors purchasing common stock                      $        
Total          %  $         %     

 

Furthermore, we may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. We may also choose to engage in strategic acquisitions through the issuance of shares of our stock. New investors will experience further dilution if any of our outstanding options or warrants are exercised, new options are issued and exercised under our equity incentive plans or we issue additional shares of common stock, other equity securities or convertible debt securities in the future.

 

The pro forma information discussed above is illustrative only and will change based on the actual public offering price, number of shares and other terms of this offering determined at pricing.

 

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

 

The following tables present our summary consolidated financial and other data as of and for the periods indicated. The summary consolidated statements of operations data and the consolidated statement of cashflow data for the fiscal years ended January 31, 2016 and January 29, 2017, and the summary consolidated balance sheet data as of January 29, 2017 are derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical audited results are not necessarily indicative of the results that should be expected in any future period.

 

The summary consolidated statements of operations data and the consolidated statement of cashflow data for the twenty-six weeks ended July 31, 2016 and July 30, 2017 and the summary consolidated balance sheet data as of January 29, 2017 and July 30, 2017, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared our unaudited consolidated financial statements on the same basis as our audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to present fairly the financial information set forth in those statements. The results for any interim period are not necessarily indicative of the results that may be expected for the full year and our historical unaudited results are not necessarily indicative of the results that should be expected in any future period.

 

We have derived the summary consolidated statements of operations data for the fifty-two weeks ended July 30, 2017 by adding the summary consolidated statements of operations data for the twenty-six weeks ended July 30, 2017 to the summary consolidated statements of operations data for the twenty-six weeks ended January 29, 2017. We believe that presentation of the summary consolidated statements of operations data for the fifty-two weeks ended July 30, 2017 is useful to investors because it allows investors to review our current performance trends over a period consisting of our four most recent consecutive fiscal quarters.

 

The summarized financial information presented below is derived from and should be read in conjunction with our audited and unaudited consolidated financial statements, as applicable, including the notes to those financial statements which are included elsewhere in this prospectus along with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results, and results for any interim period below are not necessarily indicative of results for the full year.

 

   Fiscal Year Ended   Twenty-Six
Weeks Ended
   Fifty-Two Weeks Ended 
   January 29,
2017
   January 31,
2016
   July 30,
2017
   July 31,
2016
   July 30,
2017
 
(dollars in thousands, except per share data)                    
Consolidated Statements of Operations Data:                    
Net sales                    
Showrooms  $62,277   $59,095   $30,211   $25,584   $66,904 
Internet   12,270    10,601    6,312    4,058    14,524 
Other   1,796    4,449    1,854    881    2,769 
Total net sales   76,343    74,145    38,377    30,523    84,197 
Costs of merchandise sold   34,646    33,635    17,757    14,685    37,718 
Gross profit   41,697    40,510    20,620    15,838    46,479 
                          
Selling, general and administrative expenses   48,006    47,174    26,142    21,828    52,320 
Operating loss   (6,309)   (6,664)   (5,522)   (5,990)   (5,841)
                          
Other                         
Other expense   -    (86)   -    -    - 
Loss on extinguishment of debt   -    (557)   -    -    - 
Interest expense   (565)   (1,687)   (229)   (312)   (482)
Net Loss  $(6,874)  $(8,994)  $(5,751)  $(6,302)  $(6,323)
                          
Net Loss per Common Share:                         
Net loss per common share (basic and diluted) (1)  $(0.48)  $(0.83)  $(0.40)  $(0.46)  $(0.42)
Weighted-average shares used in computing net loss per common share(1)   14,368,216    10,852,433    15,000,000    13,675,681    15,000,000 
                          
Pro Forma Net Loss per Common Share (unaudited):                         
Pro forma net loss per common share (basic and diluted)  $[●]    -   $[●]    -   $[●] 
Pro forma weighted-average shares used in computing pro forma net loss per common share   [●]    -    [●]    -    [●] 
                          
Other Financial and Operating Data (unaudited):                         
Retail(2)                         
Comparable showroom sales change(3)   4%   17%   11%   6%   10%
Showrooms open at end of period   60    59    65    59    65 
Total showroom square footage at end of period (in thousands)   [●]    [●]    [●]    [●]    [●] 
Total showroom selling square footage at end of period (in thousands)(4)   [●]    [●]    [●]    [●]    [●] 
Sales per selling square foot(5)  $1,092   $1,065   $1,030   $927   $1,199 
Capital expenditures(6)  $3,757   $965   $2,986   $1,381   $5,362 
EBITDA(7)(8)  $(3,990)  $(4,846)  $(4,756)  $(4,773)  $(3,755)
Adjusted EBITDA(7)(8)   [●]    [●]    [●]    [●]    [●] 
Adjusted EBITDA Margin(7)(9)   [●]    [●]    [●]    [●]    [●] 
Four-Wall Adjusted EBITDA(7)(8)   [●]    [●]    [●]    [●]    [●] 
Four-Wall Adjusted EBITDA Margin(7)(9)   [●]    [●]    [●]    [●]    [●] 
Average Unit Volume(7)(10)   [●]    [●]    [●]    [●]    [●] 

 

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As of

July 30,

2017

  

As of

January 29,

2017

 
(dollars in thousands)    
Balance Sheet data:        
Cash and cash equivalents  $773   $879 
Working capital(11)   5,105    3,350 
Total assets   28,322    20,720 
Total liabilities   14,201    13,670 
Total stockholders’ equity   14,121    7,050 

  

   Fiscal Year Ended   Twenty-Six
Weeks Ended
 
   January 29, 2017   January 31,
2016
   July 30,
2017
   July 31,
2016
 
(dollars in thousands)    
Consolidated Statement of Cashflow Data:                
Net cash used in operating activities  $(6,400)  $(8,872)  $(8,782)  $(6,294)
Net cash used in investing activities   (4,062)   (1,155)   (3,090)   (1,439)
Net cash provided by financing activities   11,132    9,872    11,767    8,407 
Net change in cash and cash equivalents   670    (155)   (105)   674 

 

(1) For the calculation of basic and diluted net loss per share, see Note 1 to our audited consolidated financial statements and Note 5 to our unaudited condensed consolidated financial statements. The weighted average number of common shares used in computing the net loss per common share gives effect to (i) the 1-for-[●] reverse stock split of our common stock that occurred on [●]. The pro forma weighted average number of common shares used in computing pro forma net loss per common share gives effect to (i) the conversion of our outstanding preferred stock into [●] shares of our common stock, and (ii) the 1-for-[●] reverse stock split of our common stock that occurred on [●].
(2) Retail data represents our showrooms exclusive of shop in shop showrooms.
(3) Comparable showroom sales are calculated based on showrooms that were open at least fifty-two weeks as of the end of the reporting period. 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. The change in comparable showroom sales is calculated by comparing the period’s comparable showroom sales to the same period in the preceding fiscal year.
(4) 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.
(5) Retail sales per selling square foot is calculated by dividing total net sales for all showrooms, comparable and non-comparable, by the average selling square footage for the period.
(6) Capital expenditures consist primarily of investments in new showrooms and remodeled showrooms.
(7) EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Four-Wall Adjusted EBITDA, Four Wall Adjusted EBITDA Margin, and Average Unit Volume (collectively, our “Non-GAAP Measures”) are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We believe that our Non-GAAP Measures are useful measures of operating performance, as they eliminate expenses that are not reflective of the underlying business performance, facilitate a comparison of our operating performance on a consistent basis from period-to-period and provide for a more complete understanding of factors and trends affecting our business. Additionally, EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use EBITDA and Adjusted EBITDA, alongside other GAAP measures such as gross profit, operating income (loss) and net income (loss), to measure evaluate our operating performance and we believe these measures are useful to investors in evaluating our operating performance.

 

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Our Non-GAAP Measures are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income (loss) or net income (loss) per share as a measure of financial performance, cash flows from operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP. They should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, our Non-GAAP Measures are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as tax payments and debt service requirements and certain other cash costs that may recur in the future. Our Non-GAAP Measures contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In addition, our Non-GAAP Measures exclude certain non-recurring and other charges.

 

You should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our Non-GAAP Measures. Our presentation of our Non-GAAP Measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying primarily on our GAAP results and by using our Non-GAAP Measures as supplemental information. Our Non-GAAP Measures are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

 

(8) We define EBITDA as net income before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These items include sponsor fees, equity-based compensation expense, write-offs of property and equipment, showroom opening and closing costs and certain other charges and gains that we do not believe reflect our underlying business performance. Four-Wall Adjusted EBITDA means, for any period, a particular showroom’s Adjusted EBITDA, excluding any allocations of corporate selling, general and administrative expenses allocated to our showrooms. The following provides a reconciliation of net loss to EBITDA, Adjusted EBITDA, and Four-Wall Adjusted EBITDA for the periods presented:

 

     Fiscal Year Ended   Twenty-Six
Weeks Ended
   Fifty-Two Weeks Ended 
     January 29, 2017   January 31, 2016   July 30,
2017
   July 31,
2016
   July 30,
2017
 
  (dollars in thousands)                    
  Net loss  $(6,874)  $(8,994)  $(5,751)  $(6,302)  $(6,323)
  Interest expense   566    1,687    229    312    482 
  Taxes   138    32    8    36    110 
  Depreciation and amortization   2,180    2,429    758    1,181    1,976 
  EBITDA   (3,990)   (4,846)   (4,756)   (4,773)   (3,755)
  Sponsor fees(a)   400    300    383    258    525 
  Equity-based compensation expense(b)   26    37    -    -    26 
  Write-off of property and equipment(c)   77    -    -    -    77 
  Other non-recurring expenses(d)   [●]    [●]    [●]    [●]    [●] 
  Adjusted EBITDA   [●]    [●]    [●]    [●]    [●] 
  Other general and administrative expenses(e)   [●]    [●]    [●]    [●]    [●] 
  Four-Wall Adjusted EBITDA   [●]    [●]    [●]    [●]    [●] 

 

  (a) Represents management fees charged by our equity sponsors. Following this offering, we will terminate our management agreement and cease to incur these costs moving forward.
  (b) Represents expenses associated with equity incentive units granted to our management.
  (c) Represents the net loss on the disposal of fixed assets.
  (d) Represents items management believes are not indicative of ongoing operating performance. These expenses are primarily composed of legal and professional fees associated with non-recurring events, including showroom pre-opening and closing costs. The fiscal year 2016 costs included fees associated with modifications made to its line of credit. The fiscal year 2017 costs include legal and professional services incurred in connection with the Company’s fundraising initiatives.
  (e) Represents general and administrative expenses that are corporate and regional expenses and not incurred by our showrooms, and which are primarily comprised of expenses related to (i) wages and benefits of corporate and regional employees, (ii) non-showroom rent, utilities and maintenance, (iii) corporate and regional marketing and advertising and (iv) corporate professional fees.

 

(9) Adjusted EBITDA margin means, for any period, the Adjusted EBITDA for that period divided by the net sales for that period. Four-Wall Adjusted EBITDA margin means, for any period, the Four-Wall Adjusted EBITDA for that period divided by the net sales for that period.
(10) Average Unit Volume is calculated by dividing total showroom sales by the number of showrooms open during the period. For showrooms that are not open for the entire period, fractional adjustments are made to the number of showrooms used in the denominator such that it corresponds to the period of associated sales.
(11) Working capital is defined as current assets, less current liabilities.

  

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Management’s Discussion and Analysis of Financial Condition
and Results of Operations

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this prospectus, as well as the information presented under “Selected Historical Consolidated Financial and Other Data.” The following discussion contains forward-looking statements that reflect our plans, estimates and assumptions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the sections of this prospectus titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

 

We operate on a 52- or 53-week fiscal year that ends on the Sunday closest to January 31st. 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. Fiscal year 2016 and fiscal year 2017 ended on January 31, 2016 and January 29, 2017, respectively, and were each comprised of 52 weeks.

 

Overview

 

We are a technology driven omni-channel company that designs, manufactures and sells unique, high quality furniture comprised of patented modular couches called Sactionals and proprietary, premium foam beanbag chairs called Sacs.  We market and sell our products through modern and efficient showrooms and, increasingly, through online sales. We position our retail locations as showrooms for our brand, while our website acts as a virtual extension of our showrooms. We believe that our ecommerce centric approach, coupled with our ability to deliver our large upholstered products through nationwide express couriers, are unique to the furniture industry. Our technology driven business is fully integrated across our multiple channels of distribution, consisting of our showrooms, including shop in shops, and our website.

 

We market and sell our products through more than 60 showrooms at top tier malls and lifestyle centers. Our modern, efficient showrooms are designed to appeal to millennials and other purchasers looking for comfortable, enduring, premium furniture. They showcase the different sizes of our Sacs, the myriad forms into which our Sactionals can be configured, and the large variety of fabrics that can be used to cover our products.

 

We have begun to reposition Lovesac from being a “word of mouth” discovery business to a leading home furnishings brand proactively marketed by us. Starting in 2016, we significantly accelerated the transformation of our brand through the following initiatives:

 

Omni-Channel Approach

 

Our omni-channel approach leverages multiple channels to engage with and reach our customer base. We cost-effectively drive traffic to our ecommerce channel, in an effort to increase web-based sales and improved operating margins. Our showrooms and other direct marketing efforts work in concert to drive customer conversion in ecommerce. Our shop in shops also provide a low cost alternative to drive brand awareness and in-store and ecommerce sales. We believe this omni-channel approach enables us to strategically deploy our resources to maximize return on invested capital. We have embarked upon a program to update and remodel many of our showrooms which will be the standard for future showrooms. The new concept, introduced in 2016, utilizes technology in more experiential ways to increase traffic and sales.

 

Unique Distribution Capability

 

Due to the unique modularity of our Sactionals products and the shrinkability of our Sacs, we are able to distribute our products efficiently through nationwide express couriers. We believe these factors allow us to efficiently utilize warehouse space and international shipping routes. We believe our Sactionals are the only product in its category that enjoys these logistical advantages.

 

Increase Marketing and Advertising

 

Prior to 2017, we invested minimally in marketing and advertising. Since then we have begun to invest more heavily in brand building and direct marketing efforts, including direct mail, 30-second television commercials in select markets, and social media. We plan to continue to build awareness via increased digital and social media, including digital videos and direct response television.

 

Seasoned and Committed Management Team

 

As a complement to our founder and Chief Executive Officer, Shawn Nelson, we recently strengthened our management team by adding a new President and Chief Marketing Officer, Jack Krause, a new Chief Financial Officer, Donna Dellomo, and a new Chief Technology Officer, David Jensen, as well other senior leaders in digital marketing, merchandising, finance, and merchandise inventory planning, all of whom bring extensive experience in their respective fields.

 

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Growth Strategy

 

We intend to increase the number of showrooms we operate, renovate existing showrooms, and increase our investments in brand building and direct marketing efforts. We will seek to increase sales and improve operating margins through our omni-channel distribution approach and premium prices.

 

Factors Affecting Our Operating Results

 

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

 

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

 

Overall Economic Trends.

 

The industry in which we operate is cyclical. In addition, our revenues are affected by general economic conditions. Purchases of our products are sensitive to a number of factors that influence the levels of consumer spending, including economic conditions, consumer disposable income, housing market conditions, consumer debt, interest rates and consumer confidence.

 

Seasonality.

 

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

 

Competition.

 

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

 

How We Assess the Performance of Our Business

 

In assessing the performance of our business, we consider a variety of financial and operating measures, including the following:

 

Net sales. 

 

Net sales reflect our sale of merchandise plus shipping and handling revenue collected from our customers, less returns and discounts. Sales made at Company operated showrooms, including shop in shops, are recognized at the point of sale when payment is tendered and ownership is transferred to the customer, which may occur subsequent to the sale. Sales of merchandise via the internet are recognized upon receipt and verification of payment and shipment of the merchandise to the customer. We expect web-based sales to increase as a percentage of total sales.

 

Comparable Showroom Sales. 

 

Comparable showroom sales are calculated based on showrooms that were open at least fifty-two weeks as of the end of the reporting period. 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. 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.

 

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Retail Sales Per Selling Square Foot.

 

Retail sales per selling square foot is calculated by dividing total net sales for all showrooms, comparable and non-comparable, 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 market reserves; inbound freight; all freight costs to ship merchandise to our showrooms; design, buying and allocation costs; 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.

 

In addition, we offer financing for our products through a leading third party consumer financing company. Although we do not assume credit risk on these purchases, we do pay fees to these third party lenders, resulting in lower margins on these sales than non-financed sales.

 

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 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; and marketing expense, which primarily include digital, social, and traditional marketing initiatives. 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 marketing and payroll costs. We expect these expenses, as well as rent expense associated with the opening of new showrooms, to increase as we grow our business.

 

In connection with our initial public offering, we will incur additional legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with SOX, the Dodd-Frank Wall Street Reform and Consumer Protection Act, other rules implemented by the SEC and applicable stock exchange rules. We expect these rules and regulations to substantially increase our legal and financial compliance costs, make certain financial reporting and other activities more time-consuming and costly, and require our management and other personnel to devote substantial time to these requirements. In this regard, we may hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.

 

Basis of Presentation and Results of Operations

 

The following discussion contains references to fiscal years 2017 and 2016, which represent our fiscal years ended January 29, 2017 and January 31, 2016, respectively. Our fiscal year ends on the Sunday closest to January 31. Fiscal years 2016 and 2017 were 52-week periods. The first twenty-six weeks of fiscal 2017 and fiscal 2018 were 26-week periods. 

 

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The following table sets forth, for the periods presented, our consolidated statement of operations data as a percentage of total revenues:

 

   Fiscal Year Ended   Twenty-six Weeks Ended 
   January 29,   January 31,   July 30,   July 31, 
   2017   2016   2017   2016 
                 
Statement of Operations Data:                
Net sales   100%   100%   100%   100%
Cost of merchandise sold   45%   45%   46%   48%
Gross margin   55%   55%   54%   52%
Selling, general and administrative expenses   63%   64%   68%   72%
                     
Loss from operations   (8%)   (9%)   (14%)   (20%)
Interest expense   1%   2%   1%   1%
Other expense   -    1%   -    - 
                     
Loss before income taxes   (9%)   (12%)   (15%)   (21%)
Income tax expense (benefit)   0%   0%   0%   0%
                     
Net loss   (9%)   (12%)   (15%)   (21%)

 

First Twenty-Six Weeks of Fiscal 2018 Compared to First Twenty-Six Weeks of Fiscal 2017

 

Net sales

 

Net sales increased $7.9 million, or 25.7%, to $38.4 million in the first twenty-six weeks of fiscal 2018 compared to $30.5 million in the first twenty-six weeks of fiscal 2017. We had 65 and 59 showrooms open as of July 30, 2017, and July 31, 2016, respectively. Of the six additional showrooms one was opened in the second half of fiscal 2017 and the remaining five were opened in the first twenty-six weeks of 2018. Showrooms sales increased $4.6 million, or 18.1%, to $30.2 million in the first twenty-six weeks of fiscal 2018 compared to $25.6 million in the first twenty-six weeks of fiscal 2017. This increase was due in large part to our comparable showroom sales increase of 11% in the first twenty-six weeks of fiscal 2018 compared to the first twenty-six weeks of fiscal 2017. Retail sales per selling square foot increased $103, or 11.2%, to $1,030 in the first twenty-six weeks of fiscal 2018 compared to $927 in the first twenty-six weeks fiscal 2017. Internet sales (sales made directly to customers through our ecommerce channel) increased $2.3 million, or 55.5%, to $6.3 million in the first twenty-six weeks of fiscal 2018 compared to $4.1 million in the first twenty-six weeks of fiscal 2017. We believe that the increase in both showroom and Internet sales was due primarily to our customers’ favorable reaction to our Sactionals products, the redesign of our showrooms and our increased marketing initiatives. Other sales, which include shop in shop sales, increased $1 million, or 110.4%, to $1.9 million in the first twenty-six weeks of fiscal 2018 compared to $0.9 million for the first twenty-six weeks of 2017. This increase was due in large part to our expansion of the use of shop in shops.

 

Gross profit

 

Gross profit increased $4.8 million, or 30.2%, to $20.6 million in the first twenty-six weeks of fiscal 2018 from $15.8 million in the first twenty-six weeks of fiscal 2017. Gross margin increased to 53.7% of net sales in the first twenty-six weeks of fiscal 2018 from 51.9% of net sales in the first twenty-six weeks of fiscal 2017. The improvement in gross margin percentage of 1.8% was driven primarily by reduced costs of our Sactionals and Sacs products. This margin improvement was partially offset by higher freight costs as a percentage of net sales due to increased selling activities through our ecommerce channel.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses increased $4.3 million, or 20.0%, to $26.1 million for the first twenty-six weeks of fiscal 2018 compared to $21.8 million for the first twenty-six weeks of fiscal 2017. The increase in selling, general and administrative expenses was primarily related to an increase in employment costs of $0.9 million, $1.5 million of increased marketing costs, $0.4 million of increased rent associated with our expansion of 6 showrooms, and $1.5 million of expenses related to costs of preparing for our potential initial public offering.

 

Selling, general and administrative expenses were 68% of net sales in the first twenty-six weeks of fiscal 2018 compared to 71.0% of net sales in the first twenty-six weeks of fiscal 2017. The improvement in selling, general and administrative expenses of 3.0% of net sales was driven largely by increased net sales during the first twenty-six weeks of fiscal 2018 compared to the prior period.

 

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Interest expense

 

Interest expense decreased $0.1 million to $0.2 million in the first twenty-six weeks of fiscal 2018 compared to $0.3 million in the first twenty-six weeks of fiscal 2017. This decrease resulted primarily from our fiscal 2018 financings, which was to pay down borrowings under our revolving credit facility. Through July 30, 2017, we raised $13.9 million in the form of Series A ($3.9 million), and Series A-1 ($10.0 million), which are convertible into our common stock on or after the successful completion of this offering at 70% of the price per share offered to investors in this offering. The Series A securities are also accompanied by $3.5 million worth of warrants with an exercise price equal to the price per share of this offering; the Series A-1 securities are accompanied by $7.0 million worth of warrants with an exercise price equal to the price per share of this offering.

 

Income tax expense

 

Income tax expense was not material for the first twenty-six weeks of fiscal 2018 nor for the first twenty-six weeks of fiscal 2017, as a result of our net loss position.

 

Fiscal 2017 Compared to Fiscal 2016

 

Net sales

 

Net sales increased $2.2 million, or 3.0%, to $76.3 million in fiscal 2017 compared to $74.1 million in fiscal 2016. We had 60 and 59 showrooms open at January 29, 2017 and January 31, 2016, respectively. Showrooms sales increased $3.2 million, or 5.0%, to $62.3 million in fiscal 2017 compared to $59.1 million in fiscal 2016. This increase was due in large part to our comparable showroom sales increase of 4.0% in fiscal 2017 compared to fiscal 2016. Retail sales per selling square foot increased $27, or 2.54%, to $1,092 in fiscal 2017 compared to $1,065 in fiscal 2016. Internet sales increased $1.7 million, or 15.7%, to $12.3 million in fiscal 2017 compared to $10.6 million in fiscal 2016. We believe that this increase was due primarily to our customers’ favorable reaction to our Sactionals products platform, as well as increased marketing efforts and the greater sophistication of those efforts. Other sales, which include shop in shop sales, decreased $2.7 million, or 60.0%, to $1.8 million in fiscal 2017 compared to $4.5 million for fiscal 2016. This decrease was due in large part to the discontinuation of a sales channel that the Company viewed as cannibalizing Internet sales.

 

Gross profit

 

Gross profit increased $1.2 million, or 3.0%, to $41.7 million in fiscal 2017 from $40.5 million in fiscal 2016. The increase in gross profit was primarily the result of increased net sales and improved freight costs.

 

Gross margin stayed the same at 54.6% of net sales in fiscal 2017 and fiscal 2016. The lack of change was driven primarily by increased product costs for our Sactionals products, partially offset by lower freight costs and improved Sacs costs.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses increased $0.8 million, or 2.0%, to $48.0 million for fiscal 2017 compared to $47.2 million for fiscal 2016. The increase in selling, general and administrative expenses was primarily related to decreased labor costs offset by higher computer expenses and higher rent due to a larger number of showrooms open. Labor costs excluding the increase in severance fees of $1.1 million, decreased $2.1 million for fiscal 2017 compared to fiscal 2016 due to our improved in-showroom labor model.

 

Selling, general and administrative expenses were 62.8% of net sales in fiscal 2017 compared to 63.6% of net sales in fiscal 2016. The improvement in selling, general and administrative expenses was driven largely by increased net sales.

 

Interest expense

 

Interest expense decreased $1.1 million to $0.6 million in fiscal 2017 compared to $1.7 million in fiscal 2016. This decrease resulted primarily from our fiscal 2017 financing which resulted in lower borrowings under our revolving line of credit.

 

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Other expense

 

Other expense decreased $0.6 million to zero in fiscal 2017 compared to $0.6 million in fiscal 2016. This decrease resulted primarily from a one-time loss on debt extinguishment that occurred in fiscal 2016.

 

Income tax expense

 

Income tax expense was not material for fiscal 2017 or fiscal 2016. 

 

Quarterly Results and Seasonality

 

The following table sets forth our historical quarterly consolidated statements of income for each of the last eight fiscal quarters through the fiscal quarter ended July 30, 2017. This unaudited quarterly information has been prepared on the same basis as our annual audited financial statements appearing elsewhere in this prospectus and includes all adjustments, consisting of only normal recurring adjustments, that we consider necessary to present fairly the financial information for the fiscal quarters presented. The unaudited quarterly data should be read in conjunction with our audited and unaudited consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

Our business is seasonal and we have historically realized a higher portion of our net sales and net income in the fourth fiscal quarter due primarily to the holiday selling season. Working capital requirements are typically higher in the third fiscal quarter due to inventory built-up in advance of the holiday selling season. During these peak periods we have historically increased our borrowings under our line of credit. As such, results of a period shorter than a full year may not be indicative of results expected for the entire year, and the seasonal nature of our business may affect comparisons between periods.

 

Liquidity and Capital Resources

 

General

 

Our business relies on cash flows from operations, our revolving line of credit and securities issuances as our primary sources of liquidity. Our primary cash needs are for 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. Our borrowings generally increase in our third fiscal quarter as we prepare for the holiday selling season which is in our fourth fiscal quarter. We believe that cash expected to be generated from operations, and the availability of borrowings under our revolving line of credit or other financing arrangements, together with the amounts raised through the sale of equity subsequent to July 30, 2017 of $6.2 million, will be sufficient to meet working capital requirements, anticipated capital expenditures and payments due under our existing revolving line of credit for at least the next 12 months.

 

Cash Flow Analysis

 

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

 

       (unaudited) 
   Fiscal Year Ended   Twenty-six Weeks Ended 
   January 29,   January 31,   July 30,   July 31, 
   2017   2016   2017   2016 
                 
Used in operating activities  $(6,400)  $(8,872)  $(8,782)  $(6,294)
Used in investing activities   (4,062)   (1,155)   (3,090)   (1,439)
Provided by financing activities   11,132    9,872    11,767    8,407 
(Decrease) increase in cash and cash equivalents   670    (155)   (105)   674 
Cash and cash equivalents at end of period   879    209    774    883 

 

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Net Cash (Used in) Provided By Operating Activities

 

Cash from operating activities consists primarily of net income adjusted for certain non-cash items, including depreciation, impairment of property and equipment, stock-based compensation, non-cash interest expense and the effect of changes in working capital and other activities.

 

For the first twenty-six weeks of fiscal 2018, net cash used by operating activities was $8.8 million and consisted of a decrease in working capital and other activities of $3.9 million, a net loss of $5.8 million, and non-cash items of $0.9 million. Working capital and other activities consisted primarily of increases in inventory of $3.5 million, prepaid expenses of $1.1 million and accounts receivable of $0.8 million, partially offset by increases in accrued liabilities and accounts payable of $1.3 million, and other current liabilities of $0.1 million.

 

For the first twenty-six weeks of fiscal 2017, net cash used by operating activities was $6.3 million and consisted of a decrease in working capital and other activities of $1.3 million, a net loss of $6.3 million, and non-cash items of $1.3 million. Working capital and other activities consisted primarily of increases in inventory of $0.7 million, prepaid expenses of $0.8 million and a decrease in accounts receivable of $0.5 million, partially offset by increases in accrued liabilities and accounts payable of $0.2 million, and other current liabilities of $0.1 million.

 

In fiscal 2017, net cash used by operating activities was $6.4 million and consisted of a decrease in working capital and other activities of $2.0 million, a net loss of $6.9 million, and non-cash items of $2.5 million. Working capital and other activities consisted primarily of increases in inventory of $1.0 million, and decreased prepaid expenses of $0.7 million and accounts receivable of $0.2 million, partially offset by decreases in accrued liabilities and accounts payable of $1.5 million, and other current liabilities of $0.3 million.

 

For fiscal 2016, net cash used by operating activities was $8.9 million and consisted of a decrease in working capital and other activities of $3.7 million, a net loss of $9.0 million, and non-cash items of $3.8 million. Working capital and other activities consisted primarily of increases in inventory of $1.9 million, prepaid expenses of $1.9 million and accounts receivable of $0.4 million, partially offset by an increase in accrued liabilities and accounts payable of $0.3 million, and other current liabilities of $0.3 million.

 

Net Cash Used In Investing Activities

 

Investing activities consist primarily of investment in supply chain and systems infrastructure and capital expenditures related to new showroom openings and the remodeling of existing showrooms.

 

For the first twenty-six weeks of fiscal 2018, capital expenditures were $3.0 million as a result of investments in new and remolded showrooms.

 

For the first twenty-six weeks of fiscal 2017, capital expenditures were $1.4 million as a result of investments in new and remodeled showrooms of approximately $1.2 million and investment in supply chain and systems infrastructure of approximately $200,000.

 

For fiscal 2017, capital expenditures were $3.8 million as a result of investments in new showrooms and remodeled showrooms of approximately $3.0 million, and investment in supply chain and systems infrastructure of approximately $800,000.

 

For fiscal 2016, capital expenditures were $1.0 million as a result of investments in new showrooms and remodeled showrooms of approximately $700,000, and investment in supply chain and systems infrastructure of approximately $300,000.

 

Net Cash Provided By (Used In) Financing Activities

 

Financing activities consist primarily of borrowings and repayments related to the existing revolving line of credit, capital contributions from securities issuances.

 

For the first twenty-six weeks of fiscal 2018, net cash provided by financing activities was $11.8 million, primarily due to an investment in our Series A, Series A-1 and Series A-2 preferred stock, which, upon an initial public offering, will convert into shares of our common stock at 70% of the price per share at which we sell common stock in the initial public offering. To the extent not previously converted, the preferred shares will automatically convert into shares of common stock of the Company on the first anniversary date of the closing of the initial public offering at the conversion price described above. The above change is net of principal payments on debt of $1.0 million.

 

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For the first twenty-six weeks of fiscal 2017, net cash provided by financing activities was $8.4 million primarily due to investments in preferred stock of $8.3 million, as well as borrowings from our facility note payable net of principal payments on debt on our revolving line of credit and other debt.

 

For fiscal 2017, net cash provided by financing activities was $11.1 million primarily due to sale of equity for cash in the amount of $11.3 million, as well as borrowings from our revolving line of credit, net of amounts paid on our revolving line of credit and for deferred financing fees.

 

For fiscal 2016, net cash provided by financing activities was $9.9 million primarily due to sale of equity for cash in the amount of $15.8 million, net of payments to a previous stockholder for equity of $2.0 million, and payments on both our on long term borrowings and the line of credit of approximately $3.9 million.

 

Revolving Line of Credit

 

On May 14, 2013, the Company entered into a loan and security agreement with Siena Funding LLC, subsequently amended, which provides for a revolving line of credit for up to $7.0 million. The maturity date of the line of credit is May 14, 2018. Under the terms of the credit agreement, we may increase the amount of the line of credit by up to an additional $2.0 million provided that, among other things, no default under the line of credit then exists or would result from such increase and sufficient borrowing base collateral is available to support increased loan amounts.

 

The availability of credit at any given time under the line of credit is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory, accounts receivable, and reserves established by the administrative agent. As a result of the borrowing base formula, the actual borrowing availability under the line of credit could be less than the stated amount of the line of credit (as reduced by the actual borrowings and outstanding letters of credit under the line of credit). The line of credit is secured by substantially all of the Company’s assets, including accounts receivable, inventory, intangible assets, property, equipment, goods and fixtures.

 

Borrowings under the line of credit accrue interest at the base rate, which is defined as the greatest of (i) Prime Rate published by The Wall Street Journal, (ii) Federal Funds Rate plus 0.5% or (iii) 3.25%, plus 3% (7.25% at July 30, 2017 and 6.75% January 29, 2017). As of July 30, 2017, $2.26 million was outstanding under the line of credit. As of July 30, 2017, the Company’s excess borrowing availability under the line of credit was $2.32 million.

 

The loan and security agreement contains various restrictive covenants, including, among others, limitations on the ability to incur liens, make loans or other investments, incur additional debt, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions, or enter into transactions with affiliates. The loan and security agreement does not contain any significant financial maintenance covenants. The Company is currently in compliance with all covenants contained in the loan and security agreement.

 

Contractual Obligations

 

We 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 29, 2017, our contractual cash obligations over the next several periods were as follows:

 

   Payments due by period 
(in thousands)  Total   Less than
1 year
   1-3 years   3-5 Years   More than
5 Years
 
Revolving line of credit  $3,098,777   $3,098,777   $-   $-   $- 
Employment agreements   1,886,500    1,886,500    -    -    - 
Operating leases   34,130,329    5,752,642    9,675,034    7,643,306    11,059,347 
Letters of credit   -    -    -    -    - 
Purchase obligations   -    -    -    -    - 
                          
Total  $39,115,606   $10,737,919   $9,675,034   $7,643,306   $11,059,347 

 

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Off Balance Sheet Arrangements

 

We have no material off balance sheet arrangements as of July 30, 2017, except for operating leases entered into in the ordinary course of business.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates, and judgments on an ongoing basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.

 

Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. However, our historical results for the periods presented in the consolidated financial statements have not been materially impacted by such variances. More information on all of our significant accounting policies can be found in Note 1 – Operations and Significant Accounting Policies to the Company’s audited consolidated financial statements.

 

Revenue Recognition

 

Company revenues consist of sales made to consumers at Company operated showrooms, and via the internet and also sales made businesses to business. Sales made at Company operated showrooms are recognized at the point of sale when payment is tendered and ownership is transferred to the customer. Sales of merchandise via the internet are recognized upon receipt and verification of payment and shipment of the merchandise to the customer. Ownership and risk of loss transfer to the customer upon shipment. Sales made to businesses are recognized at the point of shipment when ownership and the risk of loss transfer to the customer. Customer deposits are recorded for sales made for which ownership has not transferred as a result of payment received for goods upon order but not yet shipped at the end of any fiscal accounting period. These deposits are carried on our balance sheet until delivery is fulfilled which is typically within 4-5 days of order being processed.

 

Reductions for estimated returns, allowances and discounts are not material for either period presented therefore no reserves are currently being recorded.

 

Revenue is recognized net of sales tax collected.

 

Impairment of Long-Lived Assets

 

The Company’s long-lived assets consist of property and equipment, which includes leasehold improvements. Long-lived assets are reviewed for potential impairment at such time that events or changes in circumstances indicate that the carrying amount of an asset might not be recovered. The Company evaluates long-lived assets for impairment at the individual showroom level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual showroom’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amounts of the assets, an impairment loss calculation is prepared. An impairment loss is measured based upon the excess of the carrying value of the asset over its estimated fair value which is generally based on an estimated future discounted cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value. There were no impairments of long-lived assets during fiscal 2017 or 2016.

 

Advertising and Catalog Costs

 

The Company capitalizes direct response advertising costs, which consist primarily of catalog production and mailing costs, and recognizes expense over the related revenue stream if the following conditions are met (1) the primary purpose of the advertising is to elicit sales to customers who could be shown to have responded specifically to the advertising, and (2) the direct-response advertising results in probable and estimable future benefits.

 

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For the year ended January 29, 2017 the Company capitalized deferred catalog costs of approximately $62,500. The net balance remaining at January 29, 2017, after amortization was $23,417. Direct response advertising costs, which are included in prepaid expenses and other current assets, are amortized commencing with the date the catalogs are mailed to existing customers. The entire outstanding balance is expected to be amortized in fiscal 2018.

 

For the year ended January 31, 2016 the Company capitalized deferred catalog costs of approximately $250,000. There was no amortization related to these costs in 2016. Direct response advertising costs, which are included in prepaid expenses and other current assets, are amortized commencing with the date the catalogs are mailed to existing customers. The entire outstanding balance was amortized in fiscal 2017.

 

Advertising costs not associated with direct response advertising are expensed as incurred. Advertising expenses which are included in selling, general and administrative expenses were $2,239,966 in fiscal 2017 and $2,933,678 in fiscal 2016.

 

Merchandise Inventories

 

Merchandise inventories are comprised of finished goods and are carried at the lower of cost (or market, with cost determined on a weighted-average cost method (first-in, first-out method) and market determined based on the estimated net realizable value. Merchandise inventories consist primarily of foam filled furniture, sectional couches and related accessories. The Company adjusts its inventory for obsolescence based on historical trends, aging reports, specific identification and its estimates of future retail sales prices.

 

New Accounting Pronouncements

 

Except as described below, the Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its financial statements. The Company, as an emerging growth company, has elected to use the extended transition period for complying with new or revised financial accounting standards.

 

In August 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2015-14, which defers the effective date of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) by one year. ASU 2015-14 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. As a result, ASU 2015-14 is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, which for us is fiscal 2020. Earlier application is permitted. The Company is in the process of determining how this update will impact the Company’s consolidated financial statements and the notes thereto going forward.

 

In May 2014, FASB issued ASU No. 2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” ASU No. 2016-08 amends the principal versus agent guidance in the new revenue standard. ASU No. 2016-08 retains the guidance that the principal in an arrangement controls a good or service before it is transferred to a customer. ASU No. 2016-08 clarifies how an entity should identify the unit of accounting for principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. ASU No. 2016-08 also reframes the indicators to focus on evidence that an entity is acting as a principal rather than an agent, revise examples in the new standard and add new examples. The Company has not yet determined the effect of the adoption of ASU No. 2016-08 on the Company’s consolidated financial position and results of operations.

 

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. 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, with early adoption permitted. Management is currently evaluating the impact ASU No. 2016-02 will have on these consolidated financial statements.

 

In March 2016, FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the simplified areas apply only to nonpublic entities. ASU 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted in any interim or annual period. If an entity early adopts ASU 2016-09 in an interim period, any adjustments should be reflected as of the beginning of the fis