Item
1. Business.
Company
Overview
We
are a technology driven, omni-channel company that designs, manufactures and sells unique, high quality furniture comprised of
modular couches called Sactionals and 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, is unique to the furniture industry.
The
name “Lovesac” was derived from our original innovative product, a premium foam beanbag chair, the Sac. The Sac was
developed in 1995 and provided the foundation for the Company. We believe that the large size, comfortable foam filling and irreverent
branding of our Sacs products have been instrumental in growing a loyal customer base and our positive, fun image.
Our
Sactionals product line currently represents a majority of our sales. Sactionals are a couch system that consists of two components,
seats and sides, which can be arranged, rearranged and expanded into thousands of configurations easily and without tools. Our
Sactional products include a number of patented features relating to its geometry and modularity, coupling mechanisms and other
features. We believe that these high quality premium priced products enhance our brand image and customer loyalty and expect them
to continue to garner a significant share of our sales.
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. 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.
We
currently market and sell our products in over 75 showrooms at top tier malls, lifestyle centers and street locations in 30 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. Our retail showrooms are technology
driven and focused on educating prospective customers about the many benefits of our unique products, enabling us to require just
506 to 1,350 square feet for each showroom.
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 50 pounds upon shipping. Our showrooms and other direct marketing efforts work in
concert to drive customer conversion in ecommerce.
Company
History
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.
Our common stock began trading on Nasdaq under the symbol “LOVE” on June 27, 2018 and we consummated our initial public
offering of 4,025,000 shares of our common stock, or our IPO, on June 29, 2018, at a public offering price of $16.00 per share.
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. Traditional couches, chairs and sectionals are sold as static
products, purchased and used for a current and specific need in the home. As a result, we believe the industry is beholden to
the uncertainties of fashion, seasonality, and style, including the accompanying inventory risk.
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Sactionals.
We
believe our Sactionals platform is unlike competing products in its adaptability, yet is comparable aesthetically to similarly
priced premium couches and sectionals. Our Sactional products include a number of patented features relating to its geometry
and modularity, coupling mechanisms and other features Utilizing only two, standardized pieces, “seats” and “sides,”
and over 250 high quality, tight-fitting covers that are removable, washable, and changeable, making our Sactionals fully
customizable at initial purchase and throughout their product lifecycle providing consumers with thousands of style and layout
options 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.
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Sacs
. Our
original innovative product, the Sac, is one of the most comfortable premium beanbag chairs. 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 blend of shredded foam, Sacs provide serene comfort and durability, guaranteed never to go flat, no matter the
amount of use. Its removable cover is machine washable and may be easily replaced by purchasing one of our 300+ cover offerings.
Sacs are manufactured using patented methods that allow for compression of some components of the Sac product, which facilitates
shipping and handling of Sacs. This patented method allows us to shrink the Sac to an eighth of its original volume so that
it fits inside a duffle bag.
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Accessories.
Our
accessories complement our 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 and have recently launched the sale of the Power Hub charging accessory for Sactionals.
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Sales
Channels
We
offer our products through an omni-channel platform that provides a seamless and meaningful experience to our customers online
and in-store. Compared to traditional retailers, our showrooms require significantly less square footage because of our need to
have only a few in-store sample configurations for display and our ability to stack our inventory for immediate sale. Our retail
showrooms are technology driven and focused on educating prospective customers about the many benefits of our unique products,
enabling us to require just 506 to 1,350 square feet for each showroom. The small footprint requirement provides a cost advantage
and flexibility in locating our showrooms strategically in A-rated malls and street locations in our target markets. These logistical
advantages underlie our broader tech-driven, internet-based business model, where we leverage our showrooms 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.
Through
our fast growing mobile and ecommerce channel, we are able to significantly enhance the consumer shopping experience for home
furnishings, driving deeper brand engagement and loyalty, while simultaneously driving favorable margin expansion. Our technology
capabilities are robust, and we are well positioned to benefit from the growing consumer preference to transact via mobile devices.
We leverage our strong social media presence and showroom footprint to drive traffic toward our ecommerce platform, where product
testimonials and inspirational stories from our Lovesac community create a more engaging consumer experience for our customers.
Additionally, our products’ compact packaging facilitates consistent production scheduling, outsourcing of delivery and
lower shipping costs, demonstrating our logistical ability to quickly and cost-effectively deliver online orders.
We
have also enhanced our sales through the use of shop in shops. We have an ongoing working relationship with Costco to operate
shop in shop showrooms that typically average ten days at a time. The shop in shop showrooms display select Sacs and Sactionals
and are staffed with associates trained to demonstrate and sell our products. We continue to explore other shop in shop partnerships
and opportunities to promote our products and facilitate customers interacting with our products in the real world.
Customers
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Robust
customer lifetime value.
The fiscal 2019 cohort had an average first year
value of $1,540 per new customer, and this is the highest first year value of all cohorts
we have tracked since fiscal 2015 and 21% higher than the 3 year benchmark fiscal 2015
cohort whose Customer Lifetime Value (CLV) is currently $1,277 which increased from $1,236 in fiscal 2018. We believe
this is an outcome of our decision to focus on driving penetration of Sactionals. We
calculated our fiscal 2019 cohort CLV by dividing the aggregate gross profits through
fiscal 2019 attributed to the fiscal 2019 cohort (approximately $99,613,884) by the total
number of new customers from fiscal 2019 (64,686).
In
addition, our Customer Acquisition Cost (CAC) was $309.46 for fiscal 2019. This is an increase from our fiscal 2018 CAC which
was $283.22. This increase is attributable to our increase in marketing spend targeted at Sactional customers. We expect our
CAC to continue to increase as we continue to target Sactional customers. We expect this increase in CAC to correspond with a
continued increase in CLV. Our CLV/CAC ratio for fiscal 2019 was 4.98 compared to 4.36 for fiscal 2018.
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Target
Demographics.
Based on our internal data, our typical customer is 25 to 45 years in age with an annual household
income of over $100,000. We consider this to be an attractive demographic because of its higher than average rates of household
formation and furniture purchasing. Members of the millennial demographic, our primary target market, are entering this age
group daily. Our customers have different tastes, styles, purchasing goals and budgets when shopping for couches, and our
Sactionals platform’s modularity addresses this wide array of needs.
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Competitive
Strengths
Our
consumers often cross-shop Lovesac with companies such as Crate and Barrel, Pottery Barn, Arhaus, Restoration Hardware, Ikea,
Joybird and Wayfair. We believe that the following strengths are central to the power of our brand and business model:
Innovative
Business Model
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Merchandising
Strategy.
Many 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 present lower risk. We also provide a broad assortment of made-to-order items, which 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.
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Product
Platform Approach.
We have two primary 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 that 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. To facilitate shipping, Sactionals seat
cushions and back pillows are compressed to fit inside an otherwise hollow hardwood upholstered seat frame.
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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 have 16 issued U.S. utility patents and 21 issued foreign utility patents,
6 pending U.S. utility patent applications, 36 pending foreign utility patent applications and 3 pending international patent
applications. We expect to file U.S. and international patent applications for future innovations. We believe that our patent
portfolio, combined with our innovative design approach may deter others from attempting to imitate or replicate our products.
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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 all of the most prolific social
media platforms. These are products that move, and change, and rearrange. They are soft, and comfortable, and fun to jump on.
We believe that all of this causes our customers to uniquely be 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.
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High
repeat purchasing rates.
We believe our focus on customer interaction and data driven analysis of their behavior
and projected needs, drives our high customer repeat rates. In fiscal 2019, our repeat customers accounted for 38% of all
transactions. This represents 1pt of the mix of transactions moving into new customer transactions. We expect new transactions
to continue to become a larger portion of our transaction mix as we spend on acquisition.
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Robust
Customer Lifetime Value
. Once customers invest in our products, they tend to stay with them, grow with them, and add to
them. We believe our customers’ loyalty is an important driver of our CLV. An example of this is that our fiscal 2015
cohort has increased its CLV by 19.3% since year end fiscal 2015.We calculated our fiscal 2015 CLV by dividing the aggregate
gross profits through fiscal 2018 attributable to the 2015 cohort (approximately $41,147,646,) by the total number of customers
in the 2015 cohort (38,423 customers).
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Omni-Channel
Approach
Our
distribution strategy allows us to reach customers through three distinct, brand-enhancing channels, which we refer to as our
omni-channel approach.
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Ecommerce
. Through
our mobile and ecommerce channel, we believe we are able to significantly enhance the consumer shopping experience, driving
deeper brand engagement and loyalty, while also realizing margins than our 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.
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Showrooms
. We
carefully select the best small-footprint retail locations in high-end malls and lifestyle centers for our showrooms. 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 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.
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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 an ongoing working relationship 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 the desire brand 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 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
through nationwide express couriers and efficiently utilize warehouse space and international shipping routes. We believe our
Sactionals are the only product in its category that enjoys this logistical advantage.
Growth
Strategies
In
order to position Lovesac for future growth, in the last several years we made significant investments in overhead, optimized
and integrated our business technologies and processes, and further developed our marketing tactics. In addition, we have refocused
our strategy regarding our showrooms, moving to higher end malls and lifestyle centers, to support digital sales, our primary
growth channel. We have also altered a number of our lease arrangements to fixed versus variable rent structures. Finally, we
have committed to a new showroom design creating a much more interactive, technology driven experience that has resulted in higher
traffic levels and conversion than previous showroom models.
These
long-term initiatives have required significant amount of management’s attention, which has shifted management’s focus
away from short-term sales growth. As a result of these efforts, along with the implementation of the strategies noted below,
we believe Lovesac is poised for meaningful sales growth. Our goal is to further improve our leadership in the home furnishings
market by pursuing the following key strategies:
Continue
to Build on Our Brand
Despite
our loyal following, we believe there is a significant opportunity to increase our brand awareness. Based on our own internal
study that was concluded in April 2017, we estimate that our brand awareness is less than 1% among all consumers nationally. Before
2017, we invested minimally in advertising. Since then, we have aggressively invested in brand building and direct marketing efforts,
including direct mail, 30-second television commercials in select markets and social media. Our focus on building the Lovesac
and Sactional brands has led to an increase in our new Sactional customer base, which grew by 55.8% in fiscal 2019. 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 shop
in shop locations. Because of their small size and above average productivity, we believe our approach to our showrooms creates
a compelling opportunity to open more showrooms in a wide variety of retail spaces across North America.
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Showrooms.
In
our showrooms, we focus on offering potential customers the opportunity to experience the considerable flexibility they have
in selecting fabrics and configurations. We are evolving our model for new showrooms and renovating our existing showrooms
to reflect the standards of our 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. To attract customer traffic, our new model
features two giant LED screens embedded in the walls that play videos demonstrating the Sactionals technology in motion. The
entire architecture and layout of these new showrooms have been redesigned to communicate the brand personality and key product
features, with the goal to educate first-time customers and create a self-service environment where people can touch, feel,
read, and understand the technology behind our products. LED screens on the walls and iPads in the hands of the staff enhance
what we believe is a “virtually merchandised” showroom in a very small footprint. In connection with these renovations,
we have experienced increased sales and negotiated more favorable lease terms.
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Shop
in shops.
We have an ongoing working relationship with Costco to operate shop in shop showrooms. We have been expanding
the use of these shop in shop showrooms, and plan to seek other partners to operate similar concept showrooms, to increase
the number of locations where customers can experience and purchase our products at a lower cost to us than our permanent
showrooms.
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Increase
Sales and Operating Margins
We
seek to increase sales and operating margins through our premium pricing strategy and omni-channel platform, which we believe
will require relatively small near term increases in fixed overhead.
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Premium
pricing
. Lovesac’s products are positioned in the premium couch segment of the furniture market. We market
as premium products because of our proprietary foam fillings, higher quality materials and unique modularity requiring a distinct
level of manufacturing capability. At our price point, we offer a unique value proposition that combines both beautiful aesthetics
and utility to our customers that we believe our competitors cannot offer. Additionally, our high end branding strategy, further
enhanced by our unsolicited celebrity endorsements and large social media following, commands premium pricing, as we feel
lowering prices may negatively affect perception of our products. The difference is explained by our platform approach, where
once a customer buys their first couch, the cost of expanding and adding to it over time is much less expensive than the traditional
method of purchasing another new couch to replace the old one.
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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.
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Supply
Chain and Sourcing
Our
products are manufactured in facilities located in Los Angeles, CA, Fort Worth, TX and Jackson County, NC, as well as in facilities
located abroad in Shanghai, Hangzhou, Jiaxing and Foshan, China and in Ho Chi Minh City, Vietnam. We engage with local third parties
for the manufacture of our products in each of those facilities. Lovesac does not own any of the manufacturing facilities where
our products are assembled. We believe that our suppliers’ facilities are sufficient to meet our current needs. We believe
that additional space will be available as needed to accommodate any needed expansion of our operations.
Seasonality
We
experience seasonal fluctuations in our sales. A larger percentage of our sales occur in the fourth quarter of our fiscal year,
which coincides with Cyber Monday (the first Monday after Thanksgiving, when online retailers typically offer holiday discounts),
the holiday season and our related promotional and marketing campaigns. Our fiscal 2019 quarters in sequential order equaled 16.1%,
20.0%, 25.1% and 38.7% of total sales respectively.
Intellectual
Property
We
own 19 U.S. federal trademark registrations, 38 foreign trademark registrations, a number of U.S. and foreign trademark applications
and common law trademark rights. Our registered U.S. trademarks include registrations for the Lovesac
®
, Lovesoft
®
,
Sactionals
®
, Durafoam
®
, SAC
®
and Designed For Life
®
trademarks. Our
trademarks, if not renewed, are scheduled to expire between 2020 and 2028.
In
order to maintain our U.S. trademark registrations, we must continue to use the marks in commerce on the goods and services identified
in the registrations and must make required filings with the U.S. Patent and Trademark Office at intervals specified by applicable
statutes and regulations. Failure to comply with these requirements may result in abandonment or cancellation of the registrations.
We
have 16 issued U.S. utility patents and 21 issued foreign utility patents, that are scheduled to expire between 2022 and 2037.
We have 6 pending U.S. utility patent applications, 36 pending foreign utility patent applications and 3 pending international
patent applications. Our Sactional technology patents include our proprietary geometric modular system and segmented bi-coupling
technology. We also have multiple patents pending and expect to file patent applications for future innovations.
Competition
Our
business is rapidly evolving and intensely competitive. Our competition includes: furniture stores, big box retailers, department
stores, specialty retailers and online furniture retailers and marketplaces.
We
believe our combination of proprietary products, brand strength, loyal customer base, omni-channel approach, technological platform,
unique consumer experience, logistical advantages and seasoned management team allow us to compete effectively against and differentiate
ourselves from the competition.
Employees
As
of February 3, 2019, we employed a total of 257 full time and 333 part time employees, and we contracted with 6 independent contractors.
All employees and contractors are subject to contractual agreements that specify, among other things, requirements for confidentiality,
ownership of newly developed intellectual property and restrictions on working for competitors as well as other matters.
Item
1A. 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 Annual Report on Form 10-K, 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.
If
we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose
confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be adversely
affected.
As
a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses
in such internal control. Section 404 of SOX requires that we furnish a report by management on, among other things, the effectiveness
of our internal control over financial reporting 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 cash position or revolving credit facility may not be able to accommodate.
In such a situation, we also may not be able to accurately report our financial results, prevent fraud or file our periodic reports
in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline
in our stock price.
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.
If
we fail to acquire new customers, or fail to do so in a cost-effective manner, we may not be able to achieve revenue growth or
profitability.
To
acquire new customers, we must appeal to prospects who have historically used other means of commerce to purchase furniture, such
as traditional furniture retailers. To date, we have reached new customers primarily through our showroom presence in various
markets, and through social media, digital content, third-party advocates for our brand and products and by word of mouth, and
now through national television advertisements. Until now, these efforts have allowed us to acquire new customers at what we believe
is a reasonable cost and rate. However, there is no guarantee that these methods will continue to be successful or will drive
customer acquisition rates necessary for us to achieve revenue growth or profitability.
Our
business is highly competitive. Competition presents an ongoing threat to the success of our business.
Our
business is rapidly evolving and intensely competitive, and we have many competitors in different industries. We compete with
furniture stores, big box retailers, department stores, specialty retailers and online furniture retailers and marketplaces.
We
expect competition in both retail stores and ecommerce to continue to increase. Our ability to compete successfully depends on
many factors both within and beyond our control, including:
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the
size and composition of our customer base;
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our
selling and marketing efforts;
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the
quality, price, reliability and uniqueness of products we offer;
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the
convenience of the shopping experience that we provide;
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our
ability to distribute our products and manage our operations; and
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our
reputation and brand strength.
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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.
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 Operating
Officer, Donna Dellomo, our Executive Vice President and 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.
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 25% of our revenues in fiscal 2019 and 26% of our revenues in fiscal 2018, are currently manufactured by a single
manufacturer in Texas. Sactionals, which represented approximately 72% of our revenues in fiscal 2019 and 71% of our revenues
in fiscal 2018, are manufactured by suppliers in China and Vietnam 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:
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fires,
floods, earthquakes, hurricanes, or other catastrophes;
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unscheduled
maintenance outages;
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utility
and transportation infrastructure disruptions;
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other
operational problems;
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political,
social or economic instability; or
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financial
instability or bankruptcy of any such supplier.
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Our
reliance on international suppliers increases our risk of supply chain disruption, which could materially increase the cost and
reduce or delay the supply of our products, which could adversely affect our business, financial condition, operating results
and prospects.
Our
current suppliers are located in China, Vietnam 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:
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the
imposition of additional trade laws or regulations;
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the
imposition of additional duties, tariffs and other charges on imports and exports;
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foreign
currency fluctuations;
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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.
We
are subject to risks associated with our dependence on foreign manufacturing and imports for our products.
Our
business highly depends on global trade, as well as trade and or other factors that impact the specific countries where our vendors’
production facilities are located. Our future success will depend in large part upon our ability to maintain our existing foreign
vendor relationships and to develop new ones based on the requirements of our business and any changes in trade dynamics that
might dictate changes in the locations for sourcing of products. While we rely on long-term relationships with many of our vendors,
we have no long-term contracts with them and generally transact business with them on an order-by-order basis.
Many
of our imported products are subject to existing duties, tariffs, anti-dumping duties and quotas that may limit the quantity or
affect the price of some types of goods that we import into the United States. In addition, substantial regulatory uncertainty
exists regarding international trade and trade policy, both in the United States and abroad. For example, recently President Trump
has introduced a number of different tariffs on various goods imported from China. In September 2018, the Office of the U.S. Trade
Representative began imposing a 10 percent ad valorem duty on a subset of products imported from China, inclusive of various furniture
product categories. In addition, the Office of the U.S. Trade Representative announced that level of the additional tariffs will
increase to 25 percent starting January 1, 2019. The increase to 25% is temporarily on hold. We believe that nearly all of our
products sourced from China are, and will continue to be, affected by the tariffs. While we are continuing to assess these proposed
tariffs on Chinese imports and are evaluating strategies to mitigate the effects of the tariffs, there can be no assurance that
we will not experience disruption in our business.
Further,
these changes to tariffs or other rules related to cross border trade, could materially increase our cost of goods sold with respect
to products that we purchase from vendors who manufacture products in China, which could in turn require us to increase our prices
and, in the event consumer demand declines as a result, negatively impact our financial performance. Certain of our competitors
may be better positioned than us to withstand or react to these kinds of changes including border taxes, tariffs or other restrictions
on global trade and as a result we may lose market share to such competitors. Due to broad uncertainty regarding the timing, content
and extent of any regulatory changes in the U.S. or abroad, we cannot predict the impact, if any, that these changes could have
to our business, financial condition and results of operations.
Our
reliance on suppliers in developing countries increases our risk with respect to available manufacturing infrastructure, labor
and employee relations, political and economic stability, corruption, and regulatory, environmental, health and safety compliance.
Our
reliance on suppliers in developing countries increases our risk with respect to infrastructure available to support manufacturing,
labor and employee relations, political and economic stability, corruption, and regulatory, environmental, health and safety compliance.
Any failure of our suppliers to comply with ethical sourcing standards or labor or other local laws in the country of manufacture,
or the divergence of a supplier’s labor practices from those generally accepted as ethical in the United States, could disrupt
the shipment of products, force us to locate alternative manufacturing sources, reduce demand for our products, damage our reputation
and/or expose us to potential liability for their wrongdoings. Any of these events could have a material adverse effect on our
reputation, business, financial condition, operating results and prospects.
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.
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:
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economic
downturns in a particular area;
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competition
from nearby retailers selling similar products;
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changing
consumer demographics in a particular market;
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changing
preferences of consumers in a particular market;
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the
closing or decline in popularity of other businesses located near our store;
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reduced
customer foot traffic outside a showroom location; and
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store
impairments due to acts of God or terrorism.
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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 February 3, 2019, we had 75 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:
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identify
new markets where our products and brand image will be accepted or the performance of our showrooms will be successful;
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obtain
desired locations, including showroom size and adjacencies, in targeted high street and urban locations and top tier malls;
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negotiate
acceptable lease terms, including desired rent and tenant improvement allowances;
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achieve
brand awareness, affinity and purchaser intent in new markets;
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hire,
train and retain showroom associates and field management;
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assimilate
new showroom associates and field management into our corporate culture;
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source
and supply sufficient inventory levels;
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successfully
integrate new showrooms into our existing operations and information technology systems; and
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have
the capital necessary to fund new showrooms.
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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.
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:
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increasing
our vulnerability to general adverse economic and industry conditions;
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limiting
our ability to obtain additional financing;
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requiring
a substantial portion of our available cash to pay our rental obligations, reducing cash available for other purposes;
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limiting
our flexibility in planning for or reacting to changes in our business or in the industry in which we compete; and
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placing
us at a disadvantage with respect to some of our competitors who sell their products exclusively online.
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Many
of our leases contain relocation clauses that allow the landlord to move the location of our showrooms. Moreover, as our leases
expire, we may be unable to negotiate acceptable renewals. If either of these events occur, our business, sales and results of
operations may be harmed.
Many
of our leases include relocation clauses that allow the landlord to move the location of our showrooms. If any of our showrooms
are relocated, there can be no assurance that the new location will experience the same levels of customer traffic or success
that the prior location experienced. In addition, as our leases expire, we may fail to negotiate renewals, either on commercially
acceptable terms or at all, which could cause us to close showrooms in desirable locations. We may also be unable to enter into
new leases on terms acceptable to us or in desirable locations. If any of the foregoing occur, our business, sales and results
of operations may be harmed.
We
are required to make substantial lease payments under our leases, and any failure to make these lease payments when due would
likely harm our business.
We
depend on cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate
sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from other sources, we
may not be able to service our substantial lease expenses, which would harm our business.
Moreover,
our showroom leases are generally long term and non-cancelable, and we generally expect future showrooms to be subject to similar
long term, non-cancelable leases. If an existing or future showroom is not profitable, and we decide to close it, we may nonetheless
be required to perform our obligations under the applicable lease including, among other things, paying the base rent for the
balance of the lease term if we cannot negotiate a mutually acceptable termination payment.
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:
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the
failure to successfully implement new systems, system enhancements and Internet platforms;
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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;
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the
reliance on third-party computer hardware/software providers;
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rapid
technological change;
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liability
for online content;
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violations
of federal, state, foreign or other applicable laws, including those relating to data protection;
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cyber
security and vulnerability to electronic break-ins and other similar disruptions; and
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diversion
of traffic and sales from our stores.
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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.
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:
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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;
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actual
or perceived lack of security of online transactions and concerns regarding the privacy of personal information;
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inconvenience
associated with returning or exchanging items purchased online; and
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usability,
functionality and features of our website.
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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. In prior years,
the Company did not maintain a reserve for warranty claims. As a result of a projected increase in sales, the Company began recording
a reserve for warranty claims for fiscal 2019. However, there can be no assurance that our reserve for warranty claims will be
adequate and additional or reduced warranty reserves may be required. Material warranty claims could, among other things, harm
our reputation and damage our brand, cause us to incur significant repair and/or replacement costs, and 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.
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 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 counterfeiting
or infringement of our trademarks by others. We may not be able to claim or assert trademark or unfair competition claims against
third parties for any number of reasons, and our trademarks may be found invalid or unenforceable. A judge, jury or other adjudicative
body may find that the conduct of competitors does not infringe or violate our trademark rights. Third parties may claim that
the use of our trademarks and branding infringe, dilute or otherwise violate the common law or registered marks of that party,
or that our sales and marketing efforts constitute unfair competition. Such claims could result in injunctive relief prohibiting
the use of our marks, branding and marketing activities, and significant damages, treble damages and attorneys’ fees and
costs could be awarded as a result of such claims. Moreover, U.S. and foreign trademark offices may refuse to grant existing and
future trademark applications and may cancel or partially cancel trademark registrations.
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.
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 have 16 issued U.S. utility patents and 21 issued foreign utility
patents, that are scheduled to expire between 2022 and 2037. We have 6 pending U.S. utility patent applications, 36 pending foreign
utility patent applications and 3 pending international patent applications. We expect to file U.S. and international patent applications
for future innovations. We might not be able to obtain protection in the United States or internationally for our intellectual
property, and we might not be able to obtain effective intellectual property protection in countries in which we may in the future
sell products. If we are unable to obtain such protection, our business, financial condition, operating results and prospects
may be harmed. Additionally, employees, contractors or consultants may misappropriate or disclose our confidential information
or intellectual property and agreements with those persons may not exist, may not cover the information or intellectual property
in question, or may not be enforceable, all of which could have an adverse impact on our business, financial condition, operating
results and prospects for the future.
The
protection of our intellectual property rights may require the expenditure of significant financial, managerial and operational
resources. Notwithstanding such expenditures, the steps we take to protect our intellectual property may not adequately protect
our rights or prevent third parties from infringing, misappropriating or disclosing confidential information or intellectual property.
The validity, enforceability and infringement of our patents, trademarks, trade secrets and other intellectual property rights
may be challenged by others in litigation or through administrative process, and we may not prevail in such disputes. Additionally,
because the process of obtaining patent and trademark protection is expensive and time-consuming, we may not be able to prosecute
all necessary or desirable patent and trademark applications at a reasonable cost or in a timely manner, and such applications
may never be granted. Even if such applications issue as patents and trademarks, there can be no assurance that these patents
and trademarks will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability
and scope of protection of patents, trademarks 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, disclosure or other violation of our intellectual property
rights, confidential information or other proprietary rights. We may initiate claims or litigation against others for infringement,
misappropriation or violation of our intellectual property rights, confidential information or other proprietary rights or to
establish the validity of such rights. Despite our efforts, we may be unable to prevent third parties, former employees, consultants
or independent contractors from infringing upon, misappropriating, disclosing or otherwise violating our intellectual property
rights, confidential information and other proprietary rights. In addition, initiating claims or litigations against others for
infringement, misappropriation, disclosure or violation of our intellectual property rights, confidential information or proprietary
rights will be expensive, and may be prohibitively expensive. Any litigation or other dispute resolution mechanism, 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 or marketing activities may be found to infringe or violate the intellectual property rights of others.
Third
parties may assert claims or initiate litigation asserting that our products or our marketing activities infringe or violate such
third parties’ patent, copyright, trademark, trade secret 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 or violate the intellectual property rights of other parties,
we could incur substantial costs and we may have to, among other things:
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obtain
licenses to use such intellectual property rights, which may not be available on commercially reasonable terms, or at all;
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redesign
our products or change our marketing activities to avoid infringement or other violations of the intellectual property rights
of others;
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stop
using the subject matter protected by the intellectual property held by others;
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pay
significant compensatory and/or enhanced damages, attorneys’ fees and costs; and/or
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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.
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If
any of the foregoing occur, our business, financial condition, operating results and prospects could be materially adversely affected.
Risks
Relating to Ownership of Our Common Stock
Our
equity sponsor, Mistral, has significant influence over us and its interests could conflict with those of our other stockholders.
Our
equity sponsor, Mistral, currently controls approximately 43% of our common stock. SAC Acquisition LLC, our principal
shareholder, is controlled by Mistral through ownership interests held by various investment vehicles affiliated with
Mistral. Currently, Messrs. Bradley, Heyer and Phoenix are directors of the Company and are also principals of Mistral. As a
result, SAC Acquisition LLC and Mistral are 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 and Mistral 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.
Holders
of our outstanding warrants to purchase common stock will own a significant portion of our common stock following the exercise
of such warrants.
Holders
of our outstanding warrants to purchase common stock would own a significant portion of our common stock following the exercise
of such warrants 7% after giving effect to exercise of the warrants). During the three-year period following our IPO,
holders of our outstanding warrants have the right to exercise such warrants and purchase shares of our common stock at the price
per share of $16.00 (except for the warrant granted to Roth Capital Partners, LLC in connection with our IPO which as a five-year
term).
An
active trading market for our common stock may not be sustained and investors may not be able to resell their shares
at or above the price at which they purchased them.
We
have a limited history as a public company. In the absence of an active trading market for our common stock, investors may not
be able to sell their common stock at or above the price they paid or at the time that they would like to sell. In addition, an
inactive market may impair our ability to raise capital by selling shares and may impair our ability to acquire other companies
or technologies by using our shares as consideration, which, in turn, could harm our business.
The
trading price of the shares of our common stock has been and is likely to continue to be highly volatile, and purchasers of our
common stock could incur substantial losses.
The
stock market in general has experienced volatility that has often been unrelated to the operating performance of particular companies.
As a result of this volatility, investors may not be able to sell their common stock at or above the price they paid. The market
price for our common stock may be influenced by many factors, including:
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actual
or anticipated fluctuations in our customer growth, sales, or other operating results;
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variations
between our actual operating results and the expectations of securities analysts, investors, and the financial community;
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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;
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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;
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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;
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price
and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
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announcements
by us or our competitors of significant products, acquisitions, strategic partnerships, joint ventures, or capital commitments;
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lawsuits
threatened or filed against us;
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developments
in new legislation or rulings by judicial or regulatory bodies; and
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other
events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
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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.
Our
failure to meet the continued listing requirements of Nasdaq Global Market could result in a delisting of our common stock.
If
we fail to satisfy the continued listing requirements of Nasdaq Global Market (Nasdaq), such as minimum financial and other continued
listing requirements and standards, including those regarding minimum stockholders’ equity, minimum share price, and certain
corporate governance requirements, Nasdaq may take steps to delist our common stock. Such a delisting would likely have
a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you
wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with Nasdaq’s listing requirements,
but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize
the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum
bid price requirement, or prevent future non-compliance with Nasdaq’s listing requirements.
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 depends 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.
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 are subject to the reporting requirements of the Exchange Act, SOX, the Dodd-Frank Wall Street Reform and
Consumer Protection Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations. Complying
with these rules and regulations increases our legal and financial compliance costs, makes some activities more difficult, time-consuming
and costly, and increases demand on our systems and resources.
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.
You
may experience future dilution as a result of future equity offerings.
In
order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible
into or exchangeable for our common stock. We may sell shares or other securities in the future that could have rights superior
to existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible
or exchangeable into common stock, in future transactions may be higher or lower than the price per share paid by current stockholders.
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 our IPO. 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:
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not
being required to have our independent registered public accounting firm audit our internal control over financial reporting
under Section 404 of SOX;
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reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
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exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved.
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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. The Company has irrevocably elected to take advantage of the extended transition period
for new or revised accounting standards.
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 amended and restated certificate of incorporation and our amended and restated 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:
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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 25% 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;
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require
a majority of all directors who constitute the Board of Directors or holders at least 25% of the issued and outstanding shares
our common stock to adopt, amend or repeal provisions of our bylaws;
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require
50% 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;
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except
as otherwise provided by the terms of any series of preferred stock, special meetings of stockholders of the Company may be
called only by the board of directors, the chairperson of the board of directors, the chief executive officer, the president
(in the absence of a chief executive officer) or at least twenty-five percent (25%) of all then outstanding shares of capital
stock of the Company entitled to vote generally in the election of directors, voting together as a single class; and
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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.
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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.
Sales
of a substantial number of shares of our common stock into the public market by certain of our stockholders could depress our
stock price.
Sales
of substantial amounts of our common stock in the public market could reduce the prevailing market prices for our common stock.
Substantially all of our outstanding common stock is eligible for sale as are shares of common stock issuable under vested and
exercisable stock options. If our existing stockholders sell a large number of shares of our common stock, or the public market
perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly.
Existing stockholder sales might also make it more difficult for us to sell additional equity securities at a time and price that
we deem appropriate.
Holders
of approximately 13% of our outstanding common stock have rights, subject to certain conditions such as the lock-up
arrangements described above, to require us to file registration statements for the public sale of their shares or to include
their shares in registration statements that we may file for ourselves or other stockholders. Registration of these shares under
the Securities Act of 1933, as amended, or the Securities Act, would result in the shares becoming freely tradable without restriction
under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales
of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See “Certain
Relationships and Related Party Transactions—Amended and Restated Stockholders Agreement.”
A significant disruption in, or breach
in security of, our information technology systems or violations of data protection laws could materially adversely affect our
business and reputation.
In the ordinary course of business, we
collect and store confidential information, including proprietary business information belonging to us, our customers, suppliers,
business partners and other third parties and personally identifiable information of our employees. We rely on information technology
systems to protect this information and to keep financial records, process orders, manage inventory, coordinate shipments to customers,
and operate other critical functions. Our information technology systems may be susceptible to damage, disruptions or shutdowns
due to power outages, hardware failures, telecommunication failures and user errors. If we experience a disruption in our information
technology systems, it could result in the loss of sales and customers and significant incremental costs, which could materially
adversely affect our business. We may also be subject to security breaches caused by computer viruses, illegal break-ins or hacking,
sabotage, or acts of vandalism by disgruntled employees or third parties. The risk of a security breach or disruption, particularly
through cyberattack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased
as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our information
technology network and systems have been and, we believe, continue to be under constant attack. Accordingly, despite our security
measures or those of our third-party service providers, a security breach may occur, including breaches that we may not be able
to detect. Security breaches of our information technology systems could result in the misappropriation or unauthorized disclosure
of confidential.
Uncertainties in the interpretation
and application of the 2017 Tax Cuts and Jobs Act could materially affect our tax obligations and effective tax rate.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017, or the “2017 Tax Act,” was signed
into law and includes several key tax provisions that affected us, including a reduction of the statutory corporate tax rate from
35% to 21% effective for tax years beginning after December 31, 2017, elimination of certain deductions, and changes to how the
United States imposes income tax on multinational corporations, among others. The 2017 Tax Act requires complex computations to
be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions
of the 2017 Tax Act, significant estimates in calculations, and the preparation and analysis of information not previously relevant
or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies will continue to interpret or issue
guidance on how provisions of the U.S. Tax Act will be applied or otherwise administered. As future guidance is issued, we may
adjust amounts that we have previously recorded that may materially impact our financial statements in the period in which the
adjustments are made.