DULUTH HOLDINGS INC. 10-Q

Item 1. Financial Statements DULUTH HOLDINGS INC. Condensed Consolidated Balance Sheets - Assets (Unaudited) (Amounts in thousands) November 1, 2020 February 2, 2020 ASSETS Current Assets: Cash and cash equivalents $ 12,800 $ 2,189 Receivables 1,534 1,470 Income taxes receivable 3,549 — Inventory, less reserves of $ 1,226 and $ 1,826 , respectively 213,403 147,849 Prepaid expenses & other current assets 10,515 9,503 Prepaid catalog costs 1,087 1,181 Total current assets 242,888 162,192 Property and equipment, net 129,938 137,071 Operating lease right-of-use assets 120,420 120,431 Finance lease right-of-use assets, net 54,208 46,677 Restricted cash — 51 Available-for-sale security 6,022 6,432 Other assets, net 1,271 1,196 Total assets $ 554,747 $ 474,050 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 3 Table of Contents DULUTH HOLDINGS INC. Condensed Consolidated Balance Sheets – Liabilities and Shareholders’ Equity (Unaudited) (Amounts in thousands) November 1, 2020 February 2, 2020 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 57,051 $ 33,053 Accrued expenses and other current liabilities 32,392 29,464 Income taxes payable — 3,427 Current portion of operating lease liabilities 11,132 10,674 Current portion of finance lease liabilities 2,594 1,600 Current portion of Duluth long-term debt 2,500 1,000 Current maturities of TRI long-term debt 606 557 Total current liabilities 106,275 79,775 Operating lease liabilities, less current maturities 107,082 106,120 Finance lease liabilities, less current maturities 43,968 37,434 Duluth long-term debt, less current maturities 89,400 38,332 TRI long-term debt, less current maturities 27,376 27,778 Deferred tax liabilities 11,886 8,505 Total liabilities 385,987 297,944 Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 10,000 shares authorized; no shares issued or outstanding as of November 1, 2020 and February 2, 2020 — — Common stock (Class A), no par value; 10,000 shares authorized; 3,364 shares issued and outstanding as of November 1, 2020 and February 2, 2020 — — Common stock (Class B), no par value; 200,000 shares authorized; 29,517 shares issued and 29,464 shares outstanding as of November 1, 2020 and 29,191 shares issued and 29,172 shares outstanding as of February 2, 2020 — — Treasury stock, at cost; 53 and 19 shares as of November 1, 2020 and February 2, 2020, respectively ( 622 ) ( 407 ) Capital stock 92,385 90,902 Retained earnings 79,335 87,589 Accumulated other comprehensive (loss) income ( 44 ) 188 Total shareholders' equity of Duluth Holdings Inc. 171,054 178,272 Noncontrolling interest ( 2,294 ) ( 2,166 ) Total shareholders' equity 168,760 176,106 Total liabilities and shareholders' equity $ 554,747 $ 474,050 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 4 Table of Contents DULUTH HOLDINGS INC. Condensed Consolidated Statements of Operations (Unaudited) (Amounts in thousands, except per share figures) Three Months Ended Nine Months Ended November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019 Net sales $ 135,531 $ 119,768 $ 382,823 $ 355,975 Cost of goods sold (excluding depreciation and amortization) 64,494 54,403 186,982 164,888 Gross profit 71,037 65,365 195,841 191,087 Selling, general and administrative expenses 68,189 64,037 202,175 196,128 Operating income (loss) 2,848 1,328 ( 6,334 ) ( 5,041 ) Interest expense 1,643 1,500 4,771 3,131 Other income (loss), net 87 58 ( 104 ) 254 Income (loss) before income taxes 1,292 ( 114 ) ( 11,209 ) ( 7,918 ) Income tax expense (benefit) 393 ( 203 ) ( 2,827 ) ( 2,209 ) Net income (loss) 899 89 ( 8,382 ) ( 5,709 ) Less: Net loss attributable to noncontrolling interest ( 41 ) ( 93 ) ( 128 ) ( 256 ) Net income (loss) attributable to controlling interest $ 940 $ 182 $ ( 8,254 ) $ ( 5,453 ) Basic earnings (loss) per share (Class A and Class B): Weighted average shares of common stock outstanding 32,476 32,322 32,431 32,299 Net income (loss) per share attributable to controlling interest $ 0.03 $ 0.01 $ ( 0.25 ) $ ( 0.17 ) Diluted earnings (loss) per share (Class A and Class B): Weighted average shares and equivalents outstanding 32,606 32,322 32,431 32,299 Net income (loss) per share attributable to controlling interest $ 0.03 $ 0.01 $ ( 0.25 ) $ ( 0.17 ) The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 5 Table of Contents DULUTH HOLDINGS INC. Condensed Consolidated Statements of Comprehensive Income (Unaudited) (Amounts in thousands) Three Months Ended Nine Months Ended November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019 Net income (loss) $ 899 $ 89 $ ( 8,382 ) $ ( 5,709 ) Other comprehensive income Securities available-for sale: Unrealized security income (loss) arising during the period 51 289 ( 314 ) 289 Income tax expense (benefit) 13 75 ( 82 ) 75 Other comprehensive income (loss) 38 214 ( 232 ) 214 Comprehensive income (loss) 937 303 ( 8,614 ) ( 5,495 ) Comprehensive loss attributable to noncontrolling interest ( 41 ) ( 93 ) ( 128 ) ( 256 ) Comprehensive income (loss) attributable ‎ to controlling interest $ 978 $ 396 $ ( 8,486 ) $ ( 5,239 ) The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 6 Table of Contents DULUTH HOLDINGS INC. Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) (Amounts in thousands) Nine Months Ended November 1, 2020 Accumulated Noncontrolling Capital stock other interest in Total Treasury Retained comprehensive variable interest shareholders' Shares Amount stock earnings income entity equity Balance at February 2, 2020 32,536 $ 90,902 $ ( 407 ) $ 87,589 $ 188 $ ( 2,166 ) $ 176,106 Issuance of common stock 227 115 — — — — 115 Stock-based compensation — 434 — — — — 434 Restricted stock forfeitures ( 1 ) — — — — — — Restricted stock surrendered for taxes ( 18 ) — ( 107 ) — — — ( 107 ) Other comprehensive loss — — — — ( 518 ) — ( 518 ) Net loss — — — ( 15,135 ) — ( 44 ) ( 15,179 ) Balance at May 3, 2020 32,744 $ 91,451 $ ( 514 ) $ 72,454 $ ( 330 ) $ ( 2,210 ) $ 160,851 Issuance of common stock 98 98 — — — — 98 Stock-based compensation — 372 — — — — 372 Restricted stock forfeitures ( 15 ) — — — — — — Restricted stock surrendered for taxes ( 13 ) — ( 67 ) — — — ( 67 ) Other comprehensive income — — — — 248 — 248 Net income (loss) — — — 5,941 — ( 43 ) 5,898 Balance at August 2, 2020 32,814 $ 91,921 $ ( 581 ) $ 78,395 $ ( 82 ) $ ( 2,253 ) $ 167,400 Issuance of common stock 17 133 — — — — 133 Stock-based compensation — 331 — — — — 331 Restricted stock surrendered for taxes ( 3 ) — ( 41 ) — — — ( 41 ) Other comprehensive income — — — — 38 — 38 Net income (loss) — — — 940 — ( 41 ) 899 Balance at November 1, 2020 32,828 $ 92,385 $ ( 622 ) $ 79,335 $ ( 44 ) $ ( 2,294 ) $ 168,760 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 7 Table of Contents DULUTH HOLDINGS INC. Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) (Amounts in thousands) Nine Months Ended November 3, 2019 Accumulated Noncontrolling Capital stock other interest in Total Treasury Retained comprehensive variable interest shareholders' Shares Amount stock earnings income entity equity Balance at February 3, 2019 32,574 $ 89,849 $ ( 92 ) $ 70,592 $ — $ ( 239 ) $ 160,110 Cumulative effect from ‎ adoption of ASC 842 — — — ( 1,924 ) — — ( 1,924 ) Issuance of common stock 149 134 — — — — 134 Stock-based compensation — 433 — — — — 433 Restricted stock forfeitures ( 6 ) — — — — — — Restricted stock surrendered for taxes ( 15 ) — ( 277 ) — — — ( 277 ) Net loss — — — ( 7,572 ) — ( 73 ) ( 7,645 ) Balance at May 5, 2019 32,703 $ 90,416 $ ( 369 ) $ 61,096 $ — $ ( 312 ) $ 150,831 Issuance of common stock 32 146 — — — — 146 Stock-based compensation — 513 — — — — 513 Restricted stock forfeitures ( 2 ) — — — — — — Restricted stock surrendered for taxes — — ( 36 ) — — — ( 36 ) Net income (loss) — — — 1,936 — ( 90 ) 1,846 Balance at August 4, 2019 32,733 $ 91,075 $ ( 405 ) $ 63,032 $ — $ ( 402 ) $ 153,300 Issuance of common stock 16 149 — — — — 149 Stock-based compensation — ( 773 ) — — — — ( 773 ) Restricted stock forfeitures ( 224 ) — — — — — — Restricted stock surrendered for taxes — — ( 1 ) — — — ( 1 ) Other comprehensive income — — — — 214 — 214 Net income (loss) — — — 182 — ( 93 ) 89 Balance at November 3, 2019 32,525 $ 90,451 $ ( 406 ) $ 63,214 $ 214 $ ( 495 ) $ 152,978 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 8 Table of Contents DULUTH HOLDINGS INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands) Nine Months Ended November 1, 2020 November 3, 2019 Cash flows from operating activities: Net loss $ ( 8,382 ) $ ( 5,709 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 21,209 15,934 Stock based compensation 1,263 282 Deferred income taxes 3,463 ( 914 ) Loss on disposal of property and equipment 304 — Changes in operating assets and liabilities: Receivables ( 64 ) ( 103 ) Income taxes receivable ( 3,549 ) ( 2,157 ) Inventory ( 65,554 ) ( 85,430 ) Prepaid expense & other current assets 1,154 2,568 Deferred catalog costs 94 1,611 Trade accounts payable 21,424 29,862 Income taxes payable ( 3,427 ) ( 218 ) Accrued expenses and deferred rent obligations 2,667 ( 3,350 ) Noncash lease impacts 784 — Net cash used in operating activities ( 28,614 ) ( 47,624 ) Cash flows from investing activities: Purchases of property and equipment ( 11,059 ) ( 20,899 ) Capital contributions towards build-to-suit stores ( 520 ) ( 3,712 ) Principal receipts from available-for-sale security 96 85 Change in other assets — ( 15 ) Net cash used in investing activities ( 11,483 ) ( 24,541 ) Cash flows from financing activities: Proceeds from line of credit 84,588 225,079 Payments on line of credit ( 60,894 ) ( 171,152 ) Proceeds from delayed draw term loan 32,500 20,000 Payments on delayed draw term loan ( 3,625 ) — Payments on TRI long term debt ( 354 ) ( 362 ) Payments on finance lease obligations ( 1,325 ) ( 528 ) Shares withheld for tax payments on vested restricted shares ( 215 ) ( 314 ) Other ( 18 ) 320 Net cash provided by financing activities 50,657 73,043 Increase in cash, cash equivalents and restricted cash 10,560 878 Cash, cash equivalents and restricted cash at beginning of period 2,240 3,085 Cash, cash equivalents and restricted cash at end of period $ 12,800 $ 3,963 Supplemental disclosure of cash flow information: Interest paid $ 4,730 $ 3,301 Income taxes paid $ 40 $ 555 Supplemental disclosure of non-cash information: Unpaid liability to acquire property and equipment $ 657 $ 378 The accompanying notes are an integral part of these condensed consolidated financial statements. 9 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION A. Nature of Operations Duluth Holdings Inc. (“Duluth Trading” or the “Company”), a Wisconsin corporation, is a lifestyle brand of men’s and women’s casual wear, workwear and accessories sold exclusively through the Company’s own direct and retail channels. The Company’s products are marketed under the Duluth Trading brand, with the majority of products being exclusively developed and sold as Duluth Trading branded merchandise. The Company has historically identified two operating segments, direct and retail. The direct segment, consisting of the Company’s website and catalogs, offers products nationwide. In 2010, the Company initiated its omnichannel platform with the opening of its first store. Since then, Duluth Trading has expanded its retail presence, and as of November 1, 2020, the Company operated 62 retail stores and three outlet stores. The Company identifies its operating segments according to how its business activities are managed and evaluated. The Company continues to grow its omnichannel distribution network which allows the consumer to interact with the Company through a consistent customer experience whether on the Company website or at Company stores. As the Company expands its distribution network, and in conjunction with assessing the similar nature of products sold, production process, distribution process, target customers and economic characteristics between the two segments, the Company determined that the historical structure of separate reporting segments for direct and retail was no longer representative. Therefore, as of February 3, 2020, the Company updated its segment reporting to one reportable external segment, consistent with the Company’s omnichannel business approach. The Company’s revenues generated outside the United States were insignificant. The Company has two classes of authorized common stock: Class A common stock and Class B common stock. The rights of holders of Class A common stock and Class B common stock are identical, except for voting and conversion rights. Each share of Class A common stock is entitled to ten votes per share and is convertible at any time into one share of Class B common stock. Each share of Class B common stock is entitled to one vote per share. The Company’s Class B common stock trades on the NASDAQ Global Select Market under the symbol “DLTH.” B. Basis of Presentation The condensed consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The Company consolidates TRI Holdings, LLC (“TRI”) as a variable interest entity (see Note 6 “Variable Interest Entity” for further information). All significant intercompany balances and transactions have been eliminated in consolidation. The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2020 is a 52-week period and ends on January 31, 2021 . Fiscal 2019 was a 52-week period and ended on February 2, 2020. The three and nine months of fiscal 2020 and fiscal 2019 represent the Company’s 13 and 39-week periods ended November 1, 2020 and November 3, 2019, respectively. The accompanying condensed consolidated financial statements as of and for the three and nine months ended November 1, 2020 and November 3, 2019 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations as of and for the three and nine months ended November 1, 2020 and November 3, 2019. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the fiscal year ended February 2, 2020. C. COVID-19 In March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, led to significant travel and transportation restrictions, including mandatory business closures and orders to shelter in place. The Company’s business operations and financial performance for the three and nine months ended November 1, 2020 were impacted by COVID-19. These impacts are discussed within these notes to the condensed consolidated financial statements. 10 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The ultimate impact of COVID-19 on our operational and financial performance still depends on future developments outside of our control. Given the uncertainty, we cannot reasonably estimate the continued impact on our business and whether that impact will be different than what we have already experienced. D. Impairment Analysis The Company determined that the effects of COVID-19 may represent indicators of asset impairment, and as a result, performed interim impairment assessments for the Company’s intangible assets, long-lived assets and goodwill at May 3, 2020. Due to the nature of the Company’s intangible assets balance, the Company concluded that no indicators of impairment were present. In the first fiscal quarter of 2020, t he Company performed undiscounted cash flow analyses on certain long-lived assets, including retail stores at the individual store level and determined that the estimated undiscounted future cash flows exceeded the net carrying values. The Company also performed an additional qualitative assessment of goodwill as of May 3, 2020 and determined that it was more likely than not that the fair value of these assets was greater than their carrying value. Based on these assessments, the Company concluded that no impairment losses had been incurred. However, the Company cannot predict the future impact or duration of the negative effect of COVID-19 and as a result, cannot reasonably predict the probability or amount of impairment losses that may be incurred in future periods. There were no triggering events subsequent to the quarter ended May 3, 2020 and no long-lived asset impairment charges recorded for the nine months ended November 1, 2020. E. Inventory Valuation Inventory, consisting of purchased product, is valued at the lower of cost or net realizable value, under the first-in, first-out method. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. Both estimates have calculations that require the Company to make assumptions and apply judgement regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. Inventory is adjusted periodically to reflect current market conditions, which requires management’s judgement that may significantly affect the ending inventory valuation, as well as gross margin. The reserve for inventory shrinkage is adjusted to reflect the trend of historical physical inventory count results. The Company performs its retail store physical inventory counts in July and the difference between actual and estimated shrinkage, recorded in Cost of goods sold, may cause fluctuations in second fiscal quarter results. F. Other Assets, net Other assets, net includes goodwill, loan origination fees, trade names, security deposits and prepaid expenses. Goodwill was $ 0.4 million as of November 1, 2020 and February 2, 2020. The Company’s other intangible asset, net of accumulated amortization was $ 0.3 million as of November 1, 2020 and February 2, 2020. Accumulated amortization was $ 0.3 million as of November 1, 2020 and February 2, 2020. G. Seasonality of Business The Company’s business is affected by the pattern of seasonality common to most apparel businesses. Historically, the Company has recognized a significant portion of its revenue and operating profit in the fourth fiscal quarter of each year as a result of increased sales during the holiday season. H. Restricted Cash and Reconciliation of cash and cash equivalents and restricted cash to the condensed statement of cash flows The Company’s restricted cash is held in escrow accounts and is used to pay a portion of the construction loans entered into by third party landlords (the “Landlords”) in connection with the Company’s retail store leases. The restricted cash is disbursed based on the escrow agreements entered into by and among the Landlords, the Company and the escrow agent. There was no restricted cash held in escrow accounts as of November 1, 2020. The Company considers short-term investments with original maturities of three months or less when purchased to be cash equivalents. Amounts receivable from credit card issuers are typically converted to cash within 2 to 4 days of the original sales transaction and are considered to be cash equivalents. 11 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheet that sum the total of the same such amounts shown in the condensed consolidated statement of cash flows. November 1, 2020 February 2, 2020 (in thousands) Cash and cash equivalents $ 12,800 $ 2,189 Restricted cash - 51 Total cash, cash equivalents and restricted cash shown in the ‎ condensed consolidated statement of cash flows $ 12,800 $ 2,240 I. Reclassifications Certain reclassifications have been made to the 2019 financial statements in order to conform to the 2020 presentation. There were no changes to previously reported shareholders' equity or net income (loss) as a result of the reclassifications. J. Significant Accounting Policies Except as disclosed below, there have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended February 2, 2020. Recently Adopted Accounting Pronouncements On February 3, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) (“ASU 2018-15”) which provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the new internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred. The new internal-use software guidance requires that certain costs incurred during the application development stage be capitalized and other costs incurred during the preliminary project and post-implementation stages be expensed as they are incurred. The Company adopted ASU 2018-15 using the prospective method. The adoption of ASU 2018-15 did not have a material impact on the Company’s condensed consolidated financial statements. 2. LEASES Based on the criteria set forth in ASC Topic 842, Leases (“ASC 842”), the Company recognizes ROU assets and lease liabilities related to leases on the Company’s consolidated balance sheets. The Company determines if an arrangement is, or contains, a lease at inception. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities reflect the obligation to make lease payments arising from the lease. At any given time during the lease term, the lease liability represents the present value of the remaining lease payments and the ROU asset is measured at the amount of the lease liability, adjusted for pre-paid rent, unamortized initial direct costs and the remaining balance of lease incentives received. Both the lease ROU asset and liability are reduced to zero at the end of the lease. The Company leases retail space under non-cancelable lease agreements, which expire on various dates through 2036. Substantially all of these arrangements are store leases. Store leases generally have initial lease terms ranging from five years to fifteen years with renewal options and rent escalation provisions. At the commencement of a lease, the Company includes only the initial lease term as the option to extend is not reasonably certain. The Company does not record leases with a lease term of 12 months or less on the Company’s consolidated balance sheets. When calculating the lease liability on a discounted basis, the Company applies its estimated discount. The Company bases this discount on a collateralized interest rate as well as publicly available data for instruments with similar characteristics. In addition to rent payments, leases for retail space contain payments for real estate taxes, insurance costs, common area maintenance, and utilities that are not fixed. The Company accounts for these costs as variable payments and does not include such costs as a lease component. ‎ 12 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Due to the adverse impacts of COVID-19, the Company has negotiated rent deferral and payback periods with a number of the Company’s store landlords for the months of April and May 2020. Based on the guidance set forth in the Financial Accounting Standards Board (“FASB”) issued Staff Q&A “Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic” the Company has accounted for these deferrals as if no changes to the lease contract were made and will not elect to apply the lease modification guidance under ASC 842. As of November 1, 2020 the Company has deferred rent of approximately $ 1.0 million which was recorded within accrued expenses and other current liabilities and will be paid in accordance with the concession arrangements. The expense components of the Company’s leases reflected on the Company’s consolidated statement of operations were as follows: Consolidated Statement Three Months Ended Nine Months Ended of Operations November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019 (in thousands) Finance lease expenses Amortization of right-of-use ‎ assets Selling, general and ‎ administrative expenses $ 778 $ 542 $ 2,092 $ 1,168 Interest on lease liabilities Interest expense 483 368 1,356 802 Total finance lease expense $ 1,261 $ 910 $ 3,448 $ 1,970 Operating lease expense Selling, general and ‎ administrative expenses $ 3,915 $ 3,935 $ 12,149 $ 11,094 Amortization of build-to-suit ‎ leases capital contribution Selling, general and ‎ administrative expenses 329 311 977 790 Variable lease expense Selling, general and ‎ administrative expenses 2,744 1,672 6,782 5,324 Total lease expense 1 $ 8,249 $ 6,828 $ 23,356 $ 19,178 1 Total lease expense in the above table was overstated by $ 3.9 million for the three and six months ended August 2, 2020. There was no impact to the Condensed Consolidated Financial Statement of Operations or any other disclosures for the three and six months ended August 2, 2020. Other information related to leases were as follows: Nine Months Ended November 1, 2020 November 3, 2019 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Financing cash flows from finance leases $ 1,325 $ 523 Operating cash flows from finance leases $ 1,356 $ 802 Operating cash flows from operating leases $ 11,537 $ 9,841 Right-of-use assets obtained in exchange for lease liabilities: Finance leases $ 8,966 $ 41,932 Operating leases $ 11,642 $ 12,688 Weighted-average remaining lease term (in years): Finance leases 13 15 Operating leases 10 10 Weighted-average discount rate: Finance leases 4.4 % 4.5 % Operating leases 4.3 % 4.3 % ‎ 13 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Future minimum lease payments under the non-cancellable leases are as follows as of November 1, 2020: Fiscal year Finance Operating (in thousands) 2020 (remainder of fiscal year) $ 1,136 $ 4,115 2021 4,575 15,722 2022 4,554 15,851 2023 4,582 16,033 2024 4,770 15,383 Thereafter 42,655 78,019 Total future minimum lease payments $ 62,272 $ 145,123 Less – Discount 15,710 26,909 Lease liability $ 46,562 $ 118,214 3. DEBT AND LINE OF CREDIT Debt consists of the following: November 1, 2020 February 2, 2020 (in thousands) TRI Senior Secured Note $ 24,482 $ 24,835 TRI Note 3,500 3,500 $ 27,982 $ 28,335 Less: current maturities 606 557 TRI long-term debt $ 27,376 $ 27,778 Duluth Line of credit $ 43,025 $ 19,332 Duluth Delayed draw term loan 48,875 20,000 $ 91,900 $ 39,332 Less: current maturities 2,500 1,000 Duluth long-term debt $ 89,400 $ 38,332 TRI Holdings, LLC TRI entered into a senior secured note (“TRI Senior Secured Note”) with an original balance of $ 26.7 million. The TRI Senior Secured Note is scheduled to mature on October 15, 2038 and requires installment payments with an interest rate of 4.95 %. See Note 6 “Variable Interest Entities” for further information. TRI entered into a promissory note (“TRI Note”) with an original balance of $ 3.5 million. The TRI Note is scheduled to mature in November 2038 and requires annual interest payments at a rate of 3.05 %, with a final balloon payment due in November 2038. While the above notes are consolidated in accordance with ASC Topic 810, Consolidation , the Company is not the guarantor nor obligor of these notes. Line of Credit On May 17, 2018, the Company entered into a credit agreement (the “Credit Agreement”) which provides for borrowing availability of up to $ 80.0 million in revolving credit (the “Revolver”), and borrowing availability of up to $ 50.0 million in a delayed draw term loan (“DDTL”), for a total credit facility of $ 130.0 million. The $ 80.0 million revolving credit matures on May 17, 2023 . The $50.0 million DDTL was available to draw upon in differing amounts through May 17, 2020 and matures on May 17, 2023 . Outstanding balances under the DDTL require quarterly principal payments with a final balloon payment at maturity. The Credit Agreement is secured by essentially all Company assets and requires the Company to maintain compliance with certain financial and non-financial covenants, including a maximum rent adjusted leverage ratio and a minimum fixed charge coverage ratio as defined in the Credit Agreement. 14 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) On April 30, 2020, the Credit Agreement was amended to include an incremental DDTL of $ 20.5 million (the “Incremental DDTL”) that is available to draw upon before March 31, 2021, and matures on April 29, 2021 , for a total credit facility of $ 150.5 million. As of and for the nine months ended November 1, 2020, no amount of the Incremental DDTL was funded. The loan covenants were also amended to allow for greater flexibility during the Company’s peak borrowing periods in fiscal 2020. The interest rate applicable to the Revolver or DDTL will be a fixed rate for a one-, two-, three- or six-month interest period equal to LIBOR (with a 1 % floor) for such interest period plus a margin of 225 to 300 basis points, based upon the Company’s rent adjusted leverage ratio (effective rate of 3.5 % for the Revolver and the DDTL at November 1, 2020). The interest rate applicable to the Incremental DDTL will also be a fixed rate over the aforementioned interest periods equal to LIBOR (with a 1 % floor) for such interest period plus a margin of 275 to 350 basis points. As of November 1, 2020 and for the nine months then ended, the Company was in compliance with all financial and non-financial covenants for all debts discussed above. 4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: November 1, 2020 February 2, 2020 (in thousands) Salaries and benefits $ 6,798 $ 2,775 Deferred revenue 7,186 9,946 Freight 4,534 5,404 Product returns 4,451 3,508 Catalog costs 99 542 Unpaid purchases of property & equipment 261 971 Accrued advertising 2,927 633 Other 6,136 5,685 Total accrued expenses and other current liabilities $ 32,392 $ 29,464 5. FAIR VALUE ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) , defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., an exit price). The exit price is based on the amount that the holder of the asset or liability would receive or need to pay in an actual transaction (or in a hypothetical transaction if an actual transaction does not exist) at the measurement date. ASC 820 describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable, as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The fair value of the Company’s available-for-sale security was valued based on a discounted cash flow method (Level 3), which incorporates the U.S. Treasury yield curve, credit information and an estimate of future cash flows. During the nine months ended November 1, 2020, certain changes in the inputs did impact the fair value of the available-for-sale security. The calculated fair value is based on estimates that are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. ‎ 15 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The amortized cost and fair value of the Company’s available-for-sale security and the corresponding amount of gross unrealized gains and losses recognized in accumulated other comprehensive income are as follows: November 1, 2020 Cost or Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value (in thousands) Level 3 security: Corporate trust $ 6,082 $ — $ 60 $ 6,022 The Company does not intend to sell the available-for-sale-security in the near term and does not believe that it will be required to sell the security. The Company reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment. The Company assessed the unrealized loss position as of November 1, 2020 and determined that the Company is expected to recover the entire amortized cost basis of the available-for-sale security. Accordingly, no other-than-temporary impairment was recorded in the unaudited condensed consolidated statements of operations for the nine months ended November 1, 2020. February 2, 2020 Cost or Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value (in thousands) Level 3 security: Corporate trust $ 6,178 $ 254 $ — $ 6,432 The following table presents future principal receipts related to the Company’s available-for-sale security by contractual maturity as of November 1, 2020. Amortized Estimated Cost Fair Value (in thousands) Within one year $ 143 $ 140 After one year through five years 980 963 After five years through ten years 1,531 1,514 After ten years 3,428 3,405 Total $ 6,082 $ 6,022 The carrying values and fair values of other financial instruments in the Consolidated Balance Sheets are as follows: November 1, 2020 February 2, 2020 Carrying Amount Fair Value Carrying Amount Fair Value (in thousands) TRI Long-term debt, including short-term portion $ 27,982 $ 28,281 $ 28,335 $ 30,238 The above long-term debt, including short-term portion is attributable to the consolidation of TRI in accordance with ASC Topic 810, Consolidation . The fair value was also based on a discounted cash flow method (Level 3) based on credit information and an estimate of future cash flows. As of November 1, 2020 and February 2, 2020, the carrying values of the long-term delayed draw term loan and long-term line of credit both approximated their fair value. 16 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 6. VARIABLE INTEREST ENTITY Based upon the criteria set forth in ASC 810, Consolidation , the Company consolidates variable interest entities (“VIEs”) in which it has a controlling financial interest and is therefore deemed the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance; and (b) the obligation to absorb the VIE losses and the right to receive benefits that are significant to the VIE. The Company has determined that it was the primary beneficiary of one variable interest entity (“VIE”) as of November 1, 2020 and February 2, 2020. The Company leases the Company’s headquarters in Mt. Horeb, Wisconsin from TRI. In conjunction with the lease, the Company invested $ 6.3 million in a trust that loaned funds to TRI for the construction of the Company’s headquarters. TRI is a Wisconsin limited liability company whose primary purpose and activity is to own this real property. The Company considers itself the primary beneficiary for TRI as the Company has both the power to direct the activities that most significantly impact the entity’s economic performance and is expected to receive benefits that are significant to TRI. As the Company is the primary beneficiary, it consolidates TRI and the lease is eliminated in consolidation. The Company does not consolidate the trust as the Company is not the primary beneficiary. The condensed consolidated balance sheets include the following amounts as a result of the consolidation of TRI as of November 1, 2020 and February 2, 2020: November 1, 2020 February 2, 2020 (in thousands) Cash $ 342 $ 279 Property and equipment, net 25,517 25,981 Total assets $ 25,859 $ 26,260 Other current liabilities $ 171 $ 91 Current maturities of long-term debt 606 557 TRI Long-term debt 27,376 27,778 Noncontrolling interest in VIE ( 2,294 ) ( 2,166 ) Total liabilities and shareholders' equity $ 25,859 $ 26,260 7. EARNINGS (LOSS) PER SHARE Earnings (loss) per share is computed under the provisions of ASC 260 , Earnings Per Share . Basic earnings (loss) per share is based on the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is based on the weighted average number of common shares plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding restricted stock and are considered only for dilutive earnings (loss) per share unless considered anti-dilutive. The reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share calculation is as follows: Three Months Ended Nine Months Ended November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019 (in thousands, except per share data) Numerator - net income (loss) attributable to ‎ controlling interest $ 940 $ 182 $ ( 8,254 ) $ ( 5,453 ) Denominator - weighted average shares ‎ (Class A and Class B) Basic 32,476 32,322 32,431 32,299 Dilutive shares 130 — — — Diluted 32,606 32,322 32,431 32,299 Earnings (loss) per share (Class A and Class B) Basic $ 0.03 $ 0.01 $ ( 0.25 ) $ ( 0.17 ) Diluted $ 0.03 $ 0.01 $ ( 0.25 ) $ ( 0.17 ) 17 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The computation of diluted earnings (loss) per share excluded ( 0.1 ) million shares of unvested restricted stock for the three months ended November 3, 2019, because their inclusion would be anti-dilutive due to the amount of forfeitures. The computation of diluted earnings (loss) per share excluded 0.1 million shares of unvested restricted stock for both the nine months ended November 1, 2020 and November 3, 2019 because their inclusion would be anti-dilutive due to a net loss. 8. STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plan in accordance with ASC 718, Stock Compensation , which requires the Company to measure all share-based payments at grant date fair value and recognize the cost over the requisite service period of the award. Total stock compensation expense (benefit) associated with restricted stock recognized by the Company was $ 0.3 million and $ 1.1 million for the three and nine months ended November 1, 2020, respectively and $( 0.8 ) million and $ 0.2 million for the three and nine months ended November 3, 2019, respectively. The Company’s total stock compensation expense (benefit) is included in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations. A summary of the activity in the Company’s unvested restricted stock during the nine months ended November 1, 2020 is as follows: Weighted average fair value Shares per share Outstanding at February 2, 2020 192,094 $ 17.71 Granted 283,063 7.13 Vested ( 119,449 ) 16.20 Forfeited ( 16,326 ) 10.42 Outstanding at November 1, 2020 339,382 $ 9.77 At November 1, 2020, the Company had unrecognized compensation expense of $ 2.5 million related to the restricted stock awards, which is expected to be recognized over a weighted average period of 2.5 years. 9. PROPERTY AND EQUIPMENT Property and equipment consist of the following: November 1, 2020 February 2, 2020 (in thousands) Land and land improvements $ 4,486 $ 4,486 Leasehold improvements 46,989 42,784 Buildings 35,905 35,905 Vehicles 161 161 Warehouse equipment 15,220 14,379 Office equipment and furniture 52,579 49,756 Computer equipment 8,525 8,135 Software 33,900 31,500 197,765 187,106 Accumulated depreciation and amortization ( 70,746 ) ( 53,255 ) 127,019 133,851 Construction in progress 2,919 3,220 Property and equipment, net $ 129,938 $ 137,071 ‎ 18 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 10. REVENUE The Company’s revenue primarily consists of the sale of apparel, footwear and hard goods. Revenue for merchandise that is shipped to our customers from our distribution centers and stores is recognized upon shipment. Store revenue is recognized at the point of sale, net of returns, and excludes taxes. Shipping and processing revenue generated from customer orders are included as a component of net sales and shipping and processing expense, including handling expense, is included as a component of selling, general and administrative expenses. Sales tax collected from customers and remitted to taxing authorities is excluded from revenue and is included in accrued expenses. Sales disaggregated based upon sales channel is presented below. Three Months Ended Nine Months Ended November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019 (in thousands) Direct-to-consumer $ 86,392 $ 61,581 $ 273,503 $ 187,549 Stores 49,139 58,187 109,320 168,426 $ 135,531 $ 119,768 $ 382,823 $ 355,975 Contract Assets and Liabilities The Company’s contract assets primarily consist of the right of return for amounts of inventory to be returned that is expected to be resold and is recorded in Prepaid expenses and other current assets on the Company’s consolidated balance sheets. The Company’s contract liabilities primarily consist of gift card liabilities and are recorded in Accrued expenses and other current liabilities under deferred revenue (see Note 4 “Accrued Expenses and Other Current Liabilities”) on the Company’s consolidated balance sheets. Upon issuance of a gift card, a liability is established for its cash value. The gift card liability is relieved and revenues on gift cards are recorded at the time of redemption by the customer. Contract assets and liabilities on the Company’s consolidated balance sheets are presented in the following table: November 1, 2020 February 2, 2020 (in thousands) Contract assets $ 1,900 $ 1,932 Contract liabilities $ 7,030 $ 9,790 Revenue from gift cards is recognized when the gift card is redeemed by the customer for merchandise, or as a gift card breakage, an estimate of gift cards which will not be redeemed. The Company does not record breakage revenue when escheat liability to the relevant jurisdictions exists. Gift card breakage is recorded within Net sales on the Company’s consolidated statement of operations. The following table provides the reconciliation of the contract liability related to gift cards for the nine months ended: November 1, 2020 November 3, 2019 (in thousands) Balance as of beginning of period $ 9,790 $ 8,508 Gift cards sold 5,740 5,952 Gift cards redeemed ( 7,381 ) ( 7,497 ) Gift card breakage ( 1,119 ) - Balance as of end of period $ 7,030 $ 6,963 ‎ 19 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 11. INCOME TAXES The provision for income taxes for the interim period is based on an estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. Management judgment is required in projecting ordinary income to estimate the Company’s annual effective tax rate. The effective tax rate related to controlling interest was 29 % for the three months ended November 1, 2020, which was impacted by changes to certain discrete items during the quarter, and 26 % for the nine months ended November 1, 2020. The effective tax rate related to controlling interest, which was not meaningful for the three months ended November 3, 2019 was impacted by discrete items related to stock compensation activity. The effective tax rate was 29 % for the nine months ended November 3, 2019. The income from TRI was excluded from the calculation of the Company’s effective tax rate, as TRI is a limited liability company and not subject to income taxes. On March 27, 2020 the United States enacted the CARES Act (the “Act”) to combat the negative economic impact of COVID-19. The CARES Act includes several provisions aimed at assisting corporate taxpayers, including correcting the drafting error from the Tax Cuts and Jobs Act related to the tax life for qualified improvement property, loosening of the interest deduction limitation in the 2019 and 2020 tax years and including the allowance of a five year carryback for net operating losses originating in the 2018, 2019 and 2020 tax years. The effective tax rate for the three and nine months ended November 1, 2020 was not materially impacted by the Act, but the Company continues to evaluate the Act’s provisions and how certain decisions may impact the Company’s financial position, results of operations and disclosures in future periods. 12. RECENT ACCOUNTING PRONOUNCEMENTS In June 2016, the FASB issued Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses, otherwise known as “CECL”. In addition, this guidance changes the recognition for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk and requires additional disclosures. On November 15, 2019, the FASB issued ASU No. 2019-10 “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815, and Leases (Topic 842),” (ASU 2019-10”), which provides framework to stagger effective dates for future major accounting standards and amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. ASU 2019-10 amends the effective dates for ASU 2016-13 for smaller reporting companies with fiscal years beginning after December 15, 2022, and interim periods within those years. The Company expects to adopt ASU 2016-13 on January 30, 2023, the first day of the Company’s first quarter for the fiscal year ending January 28, 2024, the Company’s fiscal year 2023. The Company is evaluating the level of impact adopting ASU 2016-13 will have on the Company’s consolidated financial statements. 13. SUBSEQUENT EVENTS The Company has evaluated subsequent events through the date which these condensed consolidated financial statements were available to be issued and has determined that it does not have any material subsequent events to disclose in these condensed consolidated financial statements. 20 Table of Contents