DULUTH HOLDINGS INC. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm 40 Consolidated Balance Sheets as of January 31, 2021 and February 2, 2020 43 Consolidated Statements of Operations for Fiscal Years Ended January 31, 2021 and February 2, 2020 44 Consolidated Statements of Comprehensive Income for Fiscal Years Ended January 31, 2021 and February 2, 2020 45 Consolidated Statements of Shareholders’ Equity for Fiscal Years Ended January 31, 2021 and February 2, 2020 46 Consolidated Statements of Cash Flows for Fiscal Years Ended January 31, 2021 and February 2, 2020 47 Notes to Consolidated Financial Statements 48 Schedule II Valuation and Qualifying Accounts 66 ‎ 39 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Duluth Holdings Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Duluth Holdings Inc, a Wisconsin corporation, and affiliate (collectively, the “Company”) as of January 31, 2021 and February 2, 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended January 31, 2021, and the related notes and financial statement schedule included under Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2021 and February 2, 2020, and the results of its operations and its cash flows for each of the two years in the period ended January 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of January 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 26, 2021 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Segment reporting As described in Note 1 to the consolidated financial statements, the Company has historically disclosed two reportable segments, direct and retail. As a result of the Company’s continued growth of its omnichannel distribution network, resulting in a consistent online and in-store customer experience, and in conjunction with an assessment of the similarities of qualitative and quantitative characteristics between the two former reportable segments, the Company has determined that the historical structure of separate reportable segments for direct and retail is no longer representative. Therefore, as of February 3, 2020, the Company updated its segment reporting to one reportable segment. We identified the aggregation of reportable segments as a critical audit matter. The principal considerations for our determination that the aggregation of reportable segments is a critical audit matter are the qualitative and economic aggregation criteria and the appropriate period in which to reflect the change, which involved significant management judgment. As such, auditing this change required a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures. ‎ 40 Table of Contents Our audit procedures related to the aggregation of reportable segments included the following, among others:  We tested the Company’s internal control specific to management’s periodic assessment of the identification and disclosure of reportable segments. Following management’s conclusion that an updated assessment was necessary relative to reportable segments, we tested the Company’s accounting analysis control that included the factors specified below.  In consultation with our national office resources, we evaluated the time period in which management concluded it was appropriate to aggregate and disclose the two previously disclosed reportable segments. This included evaluating the continued maturation of the Company as an omni-store business, as well as the evolution of various omni-store initiatives that have been implemented by the Company including buy online and pick up in-store and ship from store. Our consultation included the following: o We considered our experience as the Company’s auditor of record in evaluating management’s identification of the Chief Executive Officer as the Chief Operating Decision Maker (“CODM”). o We corroborated management’s conclusion that the Company’s operating segments consist of direct and retail through the report that is periodically provided to the CODM to assist with business decisions. o We evaluated management’s assessments related to the qualitative and economic aggregation criteria that were considered to aggregate two previously disclosed reportable segments. The qualitative criteria we evaluated included (i) the nature of the Company’s products and services, (ii) the nature of the Company’s production process, (iii) the type of customer that the Company targets, and (iv) the methods used to distribute the Company’s products. The quantitative criteria we evaluated included (i) the mix of product sales between the aggregated components, and (ii) the similarity of long-term gross margins of the aggregated components. We corroborated management’s conclusions through our understanding of the Company’s products and customers and audited historical financial data. o We assessed management’s presentation and disclosure against the objectives and principles outlined in relevant accounting literature. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2002. Chicago, Illinois March 26, 2021 ‎ 41 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Duluth Holdings Inc. Opinion on internal control over financial reporting We have audited the internal control over financial reporting of Duluth Holdings Inc., a Wisconsin corporation, and affiliate (the “Company”) as of January 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended January 31, 2021, and our report dated March 26, 2021 expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP Chicago, Illinois March 26, 2021 ‎ 42 Table of Contents DULUTH HOLDINGS INC. Consolidated Balance Sheets (Amounts in thousands) January 31, 2021 February 2, 2020 ASSETS Current Assets: Cash and cash equivalents $ 47,221 $ 2,189 Receivables 2,820 1,470 Inventory, net 149,052 147,849 Prepaid expenses & other current assets 10,203 9,503 Prepaid catalog costs 1,014 1,181 Total current assets 210,310 162,192 Property and equipment, net 124,237 137,071 Operating lease right-of-use assets 117,490 120,431 Finance lease right-of-use assets, net 53,468 46,677 Restricted cash — 51 Available-for-sale security 6,111 6,432 Other assets, net 3,961 1,196 Total assets $ 515,577 $ 474,050 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 33,647 $ 33,053 Accrued expenses and other current liabilities 37,686 29,464 Income tax payable 7,579 3,427 Current portion of operating lease liabilities 11,050 10,674 Current portion of finance lease liabilities 2,629 1,600 Current maturities of Duluth long-term debt 2,500 1,000 Current maturities of TRI long-term debt 623 557 Total current liabilities 95,714 79,775 Operating lease liabilities, less current portion 104,287 106,120 Finance lease liabilities, less current portion 43,299 37,434 Duluth long-term debt, less current maturities 45,750 38,332 TRI long-term debt, less current maturities 27,229 27,778 Deferred tax liabilities 8,200 8,505 Total liabilities 324,479 297,944 Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 10,000 shares authorized; no shares ‎ issued or outstanding as of January 31, 2021 and February 2, 2020 — — Common stock (Class A), no par value; 10,000 shares authorized; ‎ 3,364 shares issued and outstanding as of January 31, 2021 and ‎ February 2, 2020 — — Common stock (Class B), no par value; 200,000 shares authorized; ‎ 29,530 shares issued and 29,477 shares outstanding as of January 31, 2021 and ‎ 29,191 shares issued and 29,172 outstanding as of February 2, 2020 — — Treasury stock, at cost; 53 and 19 shares as of January 31, 2021 and ‎ February 2, 2020, respectively ( 628 ) ( 407 ) Capital stock 92,875 90,902 Retained earnings 101,166 87,589 Accumulated other comprehensive income 48 188 Total shareholders' equity of Duluth Holdings Inc. 193,461 178,272 Noncontrolling interest ( 2,363 ) ( 2,166 ) Total shareholders' equity 191,098 176,106 Total liabilities and shareholders' equity $ 515,577 $ 474,050 The accompanying notes are an integral part of these consolidated financial statements. 43 Table of Contents DULUTH HOLDINGS INC. Consolidated Statements of Operations (Amounts in thousands, except per share figures) Fiscal Year Ended January 31, 2021 February 2, 2020 Net sales $ 638,783 $ 615,624 Cost of goods sold (excluding depreciation and amortization) 307,257 287,475 Gross profit 331,526 328,149 Selling, general and administrative expenses 307,311 300,041 Operating income 24,215 28,108 Interest expense 6,263 4,471 Other income, net 65 291 Income before income taxes 18,017 23,928 Income tax expense 4,637 5,429 Net income 13,380 18,499 Less: Net loss attributable to noncontrolling interest ( 197 ) ( 422 ) Net income attributable to controlling interest $ 13,577 $ 18,921 Basic earnings per share (Class A and Class B): Weighted average shares of ‎ common stock outstanding 32,447 32,309 Net income per share attributable ‎ to controlling interest $ 0.42 $ 0.59 Diluted earnings per share (Class A and Class B): Weighted average shares and ‎ equivalents outstanding 32,580 32,371 Net income per share attributable ‎ to controlling interest $ 0.42 $ 0.58 The accompanying notes are an integral part of these consolidated financial statements. ‎ 44 Table of Contents DULUTH HOLDINGS INC. Consolidated Statements of Comprehensive Income (Amounts in thousands) Fiscal Year Ended January 31, 2021 February 2, 2020 Net income $ 13,380 $ 18,499 Other comprehensive income Securities available-for-sale: Unrealized security (loss) income ( 190 ) 254 Income tax (benefit) expense ( 50 ) 66 Other comprehensive (loss) income ( 140 ) 188 Comprehensive income 13,240 18,687 Comprehensive loss attributable ‎ to noncontrolling interest ( 197 ) ( 422 ) Comprehensive income attributable ‎ to controlling interest $ 13,437 $ 19,109 The accompanying notes are an integral part of these consolidated financial statements. ‎ 45 Table of Contents DULUTH HOLDINGS INC. Consolidated Statements of Shareholders’ Equity (Amounts in thousands) Accumulated Noncontrolling Capital stock other interest in Total Treasury Retained comprehensive variable interest shareholders' Shares Amount stock earnings loss entities 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 211 554 — — — — 554 Consolidation of TRI Holdings, LLC — — — — — ( 1,505 ) ( 1,505 ) Restricted stock forfeitures ( 234 ) — — — — — — Stock-based compensation — 499 — — — — 499 Restricted stock surrendered for taxes ( 15 ) — ( 315 ) — — — ( 315 ) Other comprehensive income — — — — 188 188 Net income — — — 18,921 — ( 422 ) 18,499 Balance at February 2, 2020 32,536 $ 90,902 $ ( 407 ) $ 87,589 $ 188 $ ( 2,166 ) $ 176,106 Issuance of common stock 355 515 — — — — 515 Stock-based compensation — 1,458 — — — — 1,458 Restricted stock forfeitures ( 16 ) — — — — — — Restricted stock surrendered for taxes ( 34 ) — ( 221 ) — — — ( 221 ) Other comprehensive loss — — — — ( 140 ) — ( 140 ) Net income — — — 13,577 — ( 197 ) 13,380 Balance at January 31, 2021 32,841 $ 92,875 $ ( 628 ) $ 101,166 $ 48 $ ( 2,363 ) $ 191,098 The accompanying notes are an integral part of these consolidated financial statements. 46 Table of Contents DULUTH HOLDINGS INC. Consolidated Statements of Cash Flows (Amounts in thousands) Fiscal Year Ended January 31, 2021 February 2, 2020 Cash flows from operating activities: Net income $ 13,380 $ 18,499 Adjustments to reconcile net income to net cash provided ‎ by operating activities: Depreciation and amortization 28,520 22,083 Stock-based compensation 1,629 647 Deferred income taxes ( 255 ) ( 1,151 ) Loss on disposal of property and equipment 324 — Changes in operating assets and liabilities: Receivables ( 1,350 ) 877 Income taxes receivable — 2,292 Inventory ( 1,203 ) ( 50,164 ) Prepaid expense & other assets 2,615 5,429 Software hosting implementation costs, net ( 4,089 ) — Deferred catalog costs 167 1,322 Trade accounts payable ( 1,464 ) 7,564 Income taxes payable 4,152 3,209 Accrued expenses and deferred rent obligations 7,719 ( 2,260 ) Noncash lease impacts 606 — Net cash provided by operating activities 50,751 8,347 Cash flows from investing activities: Purchases of property and equipment ( 11,743 ) ( 24,435 ) Capital contributions towards build-to-suit stores ( 520 ) ( 6,354 ) Principal receipts from available-for-sale security 131 117 Change in other assets — ( 15 ) Net cash used in investing activities ( 12,132 ) ( 30,687 ) Cash flows from financing activities: Proceeds from line of credit 95,388 271,754 Payments on line of credit ( 114,720 ) ( 268,965 ) Proceeds from delayed draw term loan 30,000 20,000 Payments on delayed draw term loan ( 1,750 ) — Payments on TRI long term debt ( 483 ) ( 495 ) Payments on finance lease obligations ( 1,958 ) ( 891 ) Shares withheld for tax payments on vested restricted stock ( 221 ) ( 315 ) Other 106 407 Net cash provided by financing activities 6,362 21,495 Increase (decrease) in cash, cash equivalents and restricted cash 44,981 ( 845 ) Cash, cash equivalents and restricted cash at beginning of period 2,240 3,085 Cash, cash equivalents and restricted cash at end of period $ 47,221 $ 2,240 Supplemental disclosure of cash flow information: Interest paid $ 6,435 $ 4,565 Income taxes paid $ 830 $ 562 Supplemental disclosure of non-cash information: Unpaid liability to acquire property and equipment $ 962 $ 1,414 The accompanying notes are an integral part of these consolidated financial statements. 47 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION 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 primarily through the Company’s own omnichannel platform. The Company’s products are marketed under the Duluth Trading Company 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 January 31, 2021, 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.” Basis of Presentation The consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). 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 and Fiscal 2019 ended on January 31, 2021 and February 2, 2020, respectively. Fiscal 2020 and Fiscal 2019 were a 52-week period. 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 year ended January 31, 2021 were impacted by COVID-19. These impacts are discussed within these notes to the consolidated financial statements. 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. Seasonality of Business The Company’s business is affected by the pattern of seasonality common to most retail 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. ‎ 48 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements consist of the accounts of Duluth Holdings Inc. and TRI Holdings, LLC (“TRI”) as a variable interest entity. See Note 6 “Variable Interest Entities” for further information. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition 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 following customer payment, which is when the customer obtains control of the product and has the ability to direct the use of the product, including, among other options, the ability to redirect the product to a different shipping destination. Store revenue is recognized at the point of sale. The Company provides the customer the right of return on the product and revenue is adjusted based on an estimate of the expected returns based on historical rates as well as events that may cause changes to historical rates. See Note 5 “Accrued Expense and Other Liabilities” for the Company’s product returns reserve. 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. A liability is recognized at the time a gift card is sold, and revenue is recognized at the time the gift card is redeemed for merchandise. See Note 8 “Revenue” for further information. Cost of Goods Sold and Selling, General and Administrative Expenses The following table illustrates the primary costs classified in cost of goods sold and selling, general and administrative expenses: Cost of Goods Sold Selling, General and Administrative Expenses · Direct cost of purchased merchandise · Payroll and payroll-related expenses · Inventory shrinkage and inventory adjustments due to obsolescence · Third party logistics ("3PL") · Inbound freight · Occupancy expenses related to stores and operations at the Company's headquarters, including utilities · Freight from the Company's distribution centers to its stores · Depreciation and amortization · Advertising expenses including: television, digital and social media advertising; catalog production and mailing; and print advertising costs · Freight associated with shipping product to customers · Consulting and professional fees Advertising and Catalog Expenses The Company’s non-direct response advertising primarily consists of billboards, web marketing programs, social media and radio and television advertisements, which are expensed as they are incurred. The Company’s direct-response advertising consists of producing, printing and mailing catalogs, which are expensed upon receipt by customers. Advertising and Catalog expenses were $ 72.4 million and $ 93.9 million for fiscal 2020 and fiscal 2019, respectively. ‎ 49 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements Shipping and Processing Shipping and processing revenue generated from customer orders has been classified as a component of net sales. Shipping and processing expense, including handling expense, has been classified as a component of selling, general and administrative expenses. Shipping and handling expenses increased in fiscal 2020 due to the shift to online shopping, as well as additional surcharges during our peak holiday season resulting from the strained distribution network. The Company incurred shipping and processing expenses of $ 46.9 million and $ 31.3 million for fiscal 2020 and fiscal 2019, respectively. Income Taxes The Company accounts for income taxes and related accounts using the liability method in accordance with ASC Topic 740, Income Taxes (“ASC 740”). Under ASC 740, the Company accrues income taxes payable or refundable and recognizes deferred tax assets and liabilities based on differences between U.S. GAAP and tax bases of assets and liabilities. The Company measures deferred tax assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse, and recognizes the effect of a change in enacted rates in the period of enactment. A valuation allowance is established if it is more likely than not that some portion or all of the deferred income tax asset will not be realized. The Company establishes assets and liabilities for uncertain tax positions taken or expected to be taken in income tax returns, using a more-likely-than-not recognition threshold. The Company recognizes penalties and interest related to uncertain tax positions as income tax expense. See Note 9 “Income Taxes,” of these Notes to Consolidated Financial Statements for further discussion. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. At various times during the year, the Company has certain cash balances deposited in financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk. Restricted Cash and Reconciliation of cash and cash equivalents and restricted cash to the 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 January 31, 2021. 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. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the Consolidated Balance Sheet that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows. January 31, 2021 February 2, 2020 (in thousands) Cash and cash equivalents $ 47,221 $ 2,189 Restricted Cash - 51 Total cash, cash equivalents and restricted cash shown in the ‎ consolidated statement of cash flows $ 47,221 $ 2,240 Significant Suppliers The Company’s principal supplier of inventory accounted for 60 % and 54 % of total inventory expenditures in fiscal 2020 and fiscal 2019, respectively. The Company also had a second supplier that accounted for 10 % and 12 % of total inventory expenditures in fiscal 2020 and fiscal 2019, respectively. 50 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements Inventories Inventory consists of finished goods stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out valuation method. The Company records an inventory reserve for the anticipated loss associated with selling inventories below cost. Inventory reserve for excess and obsolete items was $ 1.6 million and $ 1.8 million as of January 31, 2021 and February 2, 2020, respectively. Property and Equipment Property and equipment consist of the following: January 31, 2021 February 2, 2020 (in thousands) Land and land improvements $ 4,486 $ 4,486 Leasehold improvements 47,451 42,784 Buildings 35,344 35,905 Vehicles 161 161 Warehouse equipment 14,685 14,379 Office equipment and furniture 52,614 49,756 Computer equipment 9,861 8,135 Software 34,003 31,500 198,605 187,106 Accumulated depreciation and amortization ( 75,958 ) ( 53,255 ) 122,647 133,851 Construction in progress 1,590 3,220 Property and equipment, net $ 124,237 $ 137,071 The Company recorded depreciation expense of $ 24.2 million and $ 19.2 million for fiscal 2020 and fiscal 2019, respectively. The Company expenses as incurred all routine repair and maintenance costs that do not extend the estimated useful life of the asset. Property and equipment are carried at cost and are generally depreciated using the straight-line method over the estimated useful lives. Leasehold improvements are depreciated over the shorter of the lease term or estimated useful life. Depreciable lives by major classification are as follows: Years Land improvements 15 - 40 Leasehold improvements 3 - 15 Buildings 39 Vehicles 5 - 10 Warehouse equipment 5 - 10 Office equipment and furniture 5 - 10 Computer equipment 3 - 5 Software 3 - 5 ‎ 51 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements Prepaid Expenses and Other Assets Prepaid expenses and other assets consist of the following: January 31, 2021 February 2, 2020 (in thousands) Prepaid expenses & other current assets Pending returns inventory, net $ 2,490 $ 1,932 Current software hosting implementation costs, net 1,149 — Other prepaid expenses 6,564 7,571 Prepaid expenses & other current assets $ 10,203 $ 9,503 Other assets, net Goodwill $ 402 $ 402 Intangible assets, net 264 283 Non-current software hosting implementation costs 2,755 — Other assets, net 540 511 Other assets, net $ 3,961 $ 1,196 Software Hosting Implementation Costs Software hosting implementation costs includes costs of implementation activities of certain cloud computing arrangements in accordance with Accounting Standards Update No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) . Amortization expense and accumulated amortization was $ 0.2 million for fiscal 2020. See Note 13 “Recent Accounting Pronouncements” for more information. Goodwill Goodwill represents the excess of purchase price over the fair value of net assets acquired. ASC Topic 350, Intangibles-Goodwill and Other , requires that goodwill be tested for impairment annually, or more often if an event or circumstance indicates that an impairment loss may have been incurred. The Company’s management uses its judgment in assessing whether goodwill may have become impaired between annual impairment tests. Indicators such as unexpected adverse business conditions, economic factors, competitive activities, loss of key personnel and acts by governments may signal that an asset has become impaired. The Company determined that the effects of COVID-19 may represent indicators of asset impairment, and as a result performed an interim qualitative assessment for the Company’s goodwill at May 3, 2020. The Company determined that it was more likely than not that the fair value was greater than its carrying value and no impairment loss had been incurred. There were no triggering events subsequent to the quarter ended May 3, 2020 and through the year ended January 31, 2021. Management performed its annual qualitative assessment of goodwill as of December 31, 2020 and 2019 and determined that it was more likely than not that the fair value of the Company was greater than its carrying amount; as such, no further evaluation of goodwill was deemed necessary. No impairment was recognized for the years ended January 31, 2021 or February 2, 2020. Intangible Assets and Other Assets Intangible assets and other assets include loan origination fees and trade names which are amortized over their estimated useful lives ranging from three years to fifteen years . Other assets also include security deposits required by certain of the Company’s lease agreements and prepaid expenses. Amortization expense was $ 0.2 million for fiscal 2020 and $ 0.1 million for fiscal 2019. Accumulated amortization was $ 0.7 million and $ 0.5 million as of January 31, 2021 and February 2, 2020, respectively. 52 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements Scheduled future amortization of amortizable other assets are as follows as of January 31, 2021: Fiscal year (in thousands) 2021 $ 210 2022 193 2023 71 2024 18 2025 17 Thereafter 28 $ 537 Impairment of Long-Lived Assets The Company’s long-lived assets are reviewed for impairment during the fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and the carrying value of the asset or group of assets. Such analyses necessarily involve judgment. The Company determined that the effects of COVID-19 may represent indicators of asset impairment, and as a result, performed an interim impairment assessment at May 3, 2020. In the first fiscal quarter of 2020, the 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. There were no triggering events subsequent to the quarter ended May 3, 2020 and through the year ended January 31, 2021. Consequently, there were no long-lived asset impairment charges recorded for fiscal 2020. For fiscal 2019, management did not identify any events or changes in circumstances that indicated the potential impairment of long-lived assets. Store Pre-opening Costs Store pre-opening costs are expensed as incurred and are included in selling, general and administrative expenses. Stock-Based Compensation In connection with the IPO, the Company adopted the 2015 Equity Incentive Plan of Duluth Holdings Inc. (“2015 Plan”), which provides compensation alternatives such as stock options, shares, restricted stock, restricted stock units, deferred stock and performance share units, using or based on the Company’s Class B common stock. The Company accounts for its stock-based compensation plan in accordance with ASC Topic 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. Restricted stock issued to board members generally vests over a period of one year . Restricted stock issued to key employees and executives typically vests over a period of three years to five years based on the terms for each individual award. The fair value of the restricted stock is determined based on the market value of the Company’s Class B common stock on the grant date. Restricted stock forfeitures are recognized as incurred. Total stock compensation expense associated with restricted stock recognized by the Company was $ 1.5 million and $ 0.5 million for fiscal 2020 and fiscal 2019, respectively, and is included in selling, general and administrative expenses on the Consolidated Statements of Operations. 53 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements The following is a summary of the activity in the Company’s unvested restricted stock during the years ended January 31, 2021 and February 2, 2020: Weighted average grant date fair value Shares per share Outstanding at February 3, 2019 321,657 14.29 Granted 165,730 17.67 Vested ( 61,647 ) 18.90 Forfeited ( 233,646 ) 12.65 Outstanding at February 2, 2020 192,094 17.71 Granted 283,063 7.13 Vested ( 120,592 ) 16.21 Forfeited ( 16,326 ) 10.42 Outstanding at January 31, 2021 338,239 $ 9.74 At January 31, 2021, the Company had unrecognized compensation expense of $ 2.2 million related to the restricted stock awards, which is expected to be recognized over a weighted average period of 2.4 years. Treasury Stock Treasury stock consists of shares withheld in lieu of tax payments when restricted stock vests using the treasury cost method and is classified in the Consolidated Balance Sheets as a reduction to shareholders’ equity. Taxes Collected from Customers The Company presents all non-income government-assessed taxes (sales, use and value-added taxes) collected from its customers and remitted to governmental agencies on a net basis (excluded from revenue) in its consolidated financial statements. Other Comprehensive Income Other comprehensive income or loss represents the change in equity from non-shareholder or non-member transactions, which is not included in the statements of earnings but is reported as a separate component of shareholders’ equity. For fiscal 2020 and fiscal 2019, other comprehensive income consists of changes in unrealized gains and losses on available-for-sale securities, net of taxes. Fair Value Measurements 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. ‎ 54 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements 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 fiscal 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. 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. January 31, 2021 Cost or Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value (in thousands) Level 3 security: Corporate trust $ 6,047 $ 64 $ $ 6,111 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 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 security on a quarterly basis to monitor its exposure to other-than-temporary impairment. No other-than-temporary impairment was recorded in the Consolidated Statements of Operations in fiscal 2020 or fiscal 2019. The following table presents the future receipts related to the Company’s available-for-sale security by contractual maturity as of January 31, 2021. Amortized Estimated Cost Fair Value (in thousands) Within one year $ 147 $ 150 After one year through five years 1,004 1,022 After five years through ten years 1,563 1,581 After ten years 3,333 3,358 Total $ 6,047 $ 6,111 The carrying values and fair values of other financial instruments in the Consolidated Balance Sheets are as follows: January 31, 2021 February 2, 2020 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value TRI Long-term debt, including short-term portion $ 27,852 $ 28,697 $ 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 January 31, 2021, and February 2, 2020, the carrying values of the long-term delayed draw term loan and long-term line of credit both approximated its fair value. 55 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements 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 as a result of the reclassifications. 3. 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 rate. The Company bases this discount rate 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. 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 January 31, 2021 the Company has deferred rent of approximately $ 0.8 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 of Operations January 31, 2021 February 2, 2020 (in thousands) Finance lease Amortization of right-of-use ‎ assets Selling, general and administrative expenses $ 2,929 $ 1,362 Interest on lease liabilities Interest expense 1,858 1,230 Total finance lease expense $ 4,787 $ 2,592 Operating lease expense Selling, general and administrative expenses $ 16,141 $ 15,636 Amortization of build-to-suit leases capital contribution Selling, general and administrative expenses 1,309 1,129 Variable lease expense Selling, general and administrative expenses 9,453 7,347 Total lease expense $ 31,690 $ 26,704 ‎ 56 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements Other information related to leases were as follows: January 31, 2021 February 2, 2020 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Financing cash flows from finance leases $ 1,958 $ 891 Operating cash flows from finance leases $ 1,858 $ 1,230 Operating cash flows from operating leases $ 15,652 $ 13,621 Right-of-use assets obtained in exchange for lease liabilities: Finance leases $ 8,966 $ 41,566 Operating leases $ 11,642 $ 17,629 Weighted-average remaining lease term (in years): Finance leases 13 15 Operating leases 9 10 Weighted-average discount rate: Finance leases 4.4 % 4.5 % Operating leases 4.3 % 4.3 % Future minimum lease payments under the non-cancellable leases are as follows as of January 31, 2021 : Finance Operating Fiscal year Leases Leases (in thousands) 2021 $ 4,575 $ 15,721 2022 4,554 15,851 2023 4,582 16,033 2024 4,769 15,383 2025 5,133 14,593 Thereafter 37,522 63,427 Total future minimum lease payments $ 61,135 $ 141,008 Less - Discount 15,207 25,671 Lease liability $ 45,928 $ 115,337 Total rent expense under non-cancellable leases was $ 17.1 million and $ 16.2 million for fiscal 2020 and fiscal 2019, respectively. 57 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements 4. DEBT AND CREDIT AGREEMENT Debt consists of the following: January 31, 2021 February 2, 2020 (in thousands) TRI Senior Secured Note $ 24,352 $ 24,835 TRI Note 3,500 3,500 $ 27,852 $ 28,335 Less: current maturities 623 557 TRI Long-term debt $ 27,229 $ 27,778 Duluth Line of credit $ — $ 19,332 Duluth Delayed draw term loan 48,250 20,000 $ 48,250 $ 39,332 Less: current maturities 2,500 1,000 Duluth long-term debt $ 45,750 $ 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 the obligor of these notes. Credit Agreement 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 and associated swing line (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 16, 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. 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 fiscal year ended January 31, 2021, 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 January 31, 2021). 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 January 31, 2021, and for the fiscal year then ended, the Company was in compliance with all financial and non-financial covenants for all debts discussed above. ‎ 58 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements Future principal maturities of all TRI debt, excluding financing fees of $ 1.3 million associated with the TRI debt, and the Company’s Credit Agreement, are as follows as of January 31, 2021: Fiscal year (in thousands) 2021 $ 3,123 2022 3,193 2023 44,018 2024 847 2025 931 Thereafter 25,292 $ 77,404 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: January 31, 2021 February 2, 2020 (in thousands) Salaries and benefits $ 8,826 $ 2,775 Deferred revenue 9,944 9,946 Freight 6,769 5,404 Product returns 5,304 3,508 Catalog costs 396 542 Unpaid purchases of property & equipment 503 971 Accrued advertising 981 633 Other 4,963 5,685 Total accrued expenses and other current liabilities $ 37,686 $ 29,464 6. VARIABLE INTEREST ENTITIES 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 VIE as of January 31, 2021 and February 2, 2020. The Company leases the Company’s headquarters in Mt. Horeb, Wisconsin from TRI. In conjunction with the lease, the Company originally 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. ‎ 59 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements The Consolidated Balance Sheets include the following amounts as a result of the consolidation of TRI as of January 31, 2021 and February 2, 2020. January 31, 2021 February 2, 2020 (in thousands) Cash $ 747 $ 279 Property and equipment, net 24,800 25,981 Total assets $ 25,547 $ 26,260 Other current liabilities $ 58 $ 91 Current maturities of TRI long-term debt 623 557 TRI long-term debt 27,229 27,778 Noncontrolling interest in VIE ( 2,363 ) ( 2,166 ) Total liabilities and shareholders' equity $ 25,547 $ 26,260 7. EARNINGS PER SHARE Earnings per share is computed under the provisions of ASC 260 , Earnings Per Share . Basic earnings per share is based on the weighted average number of common shares outstanding for the period. Diluted earnings 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 per share unless considered anti-dilutive. The reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation is as follows: Fiscal Year Ended January 31, 2021 February 2, 2020 (in thousands, except per share data) Numerator - net income attributable to controlling interest $ 13,577 $ 18,921 Denominator - weighted average shares (Class A and Class B) Basic 32,447 32,309 Dilutive shares 133 62 Diluted 32,580 32,371 Earnings per share (Class A and Class B) Basic $ 0.42 $ 0.59 Diluted $ 0.42 $ 0.58 8. 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. January 31, 2021 February 2, 2020 (in thousands) Direct-to-consumer $ 460,839 $ 350,371 Stores 177,944 265,253 $ 638,783 $ 615,624 60 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements 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 upon issuance in Accrued expenses and other current liabilities under deferred revenue (see Note 5 “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: January 31, 2021 February 2, 2020 (in thousands) Contract assets $ 2,490 $ 1,932 Contract liabilities $ 9,788 $ 9,790 Revenue from gift cards is recognized when the gift card is redeemed by the customer for merchandise, or as 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: January 31, 2021 February 2, 2020 (in thousands) Balance as of Beginning of Period $ 9,790 $ 8,508 Gift cards sold 17,098 17,523 Gift cards redeemed ( 14,766 ) ( 15,137 ) Gift card breakage ( 2,334 ) ( 1,047 ) Gift card escheat - ( 57 ) Balance as of End of Period $ 9,788 $ 9,790 61 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements 9. INCOME TAXES The components of income tax expense were as follows: Fiscal Year Ended January 31, 2021 February 2, 2020 (in thousands) Current: Federal $ 3,350 $ 4,727 State 1,283 1,308 4,633 6,035 Noncurrent: Federal $ 168 $ — State 91 — 259 — Deferred: Federal 353 ( 568 ) State ( 608 ) ( 38 ) ( 255 ) ( 606 ) Total income tax expense $ 4,637 $ 5,429 The tax effects of unrealized gains and losses on securities are components of other comprehensive income and therefore excluded from deferred tax expense. The reconciliation of income tax expense to the amount computed at the federal statutory rate was as follows: Fiscal Year Ended January 31, 2021 February 2, 2020 (in thousands) Federal taxes at statutory rate $ 3,824 21.0 % $ 5,114 21.0 % State and local income taxes, net of federal benefit 786 4.3 % 965 4.0 % Research and development tax credits ( 151 ) ( 0.8 ) % ( 487 ) ( 2.0 ) % Other 178 1.0 % ( 163 ) ( 0.7 ) % Total income tax expense $ 4,637 25.5 % $ 5,429 22.3 % ‎ 62 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements Deferred income taxes reflect the net tax effects of temporary differences between U.S. GAAP and tax bases of assets and liabilities. Significant components of deferred tax assets and liabilities were as follows: January 31, 2021 February 2, 2020 (in thousands) Deferred tax assets: Returns allowance $ 1,330 $ 912 Uniform capitalization 3,425 2,930 Deferred rent 205 — Accruals 1,841 388 Stock-based compensation 231 352 Advance payments 685 820 Unrecognized tax benefits 2 — Total deferred tax assets 7,719 5,402 Deferred tax liabilities: Property and equipment 13,202 10,346 Unrealized gain on investment 16 66 Inventory 223 27 Prepaid expenses 868 857 Goodwill and intangibles 66 66 Capital lease 1,454 2,358 Revenue recognition method adjustment 90 187 Total deferred tax liabilities 15,919 13,907 Net deferred tax liabilities $ 8,200 $ 8,505 Uncertain Tax Positions A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: January 31, 2021 February 2, 2020 (in thousands) Balance beginning of year $ — $ — Additions for tax positions in prior year 214 — Additions for tax positions in current year 45 — Balance at end of year $ 259 $ — If recognized, $ 0.3 million of the Company’s unrecognized tax benefits as of January 31, 2021, would affect the Company’s effective tax rate. The Company does not anticipate that there will be a material change in the balance of the unrecognized tax benefits in the next 12 months. Any interest and penalties related to uncertain tax positions are recorded in income tax expense. There were no amounts recorded as tax expense for interest or penalties for the years ended February 2, 2020. The Company files income tax returns in the United States federal jurisdiction and in various state jurisdictions. Federal tax returns for tax years beginning January 1, 2017 , and state tax returns for tax years beginning January 1, 2016 , are open for examination. CARES Act On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed. The CARES Act, among other things, included provisions relating to refundable payroll tax credits, deferment of employer social security payments, alternative minimum tax credit refunds and modifications to net interest deduction limitations. The Company has concluded the analysis of these provisions as of year-end and the CARES Act did not have a material impact on the Company’s income taxes for the year ended January 31, 2021. 63 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements 10. RETIREMENT PLAN The Company has a contributory 401(k) profit sharing plan (the “Plan”) which covers all employees who have attained age 21 and who have met minimum service requirements. The Company makes quarterly non-discretionary “safe harbor” matching contributions to the Plan equal to 100 % of the basic contribution made by each participant on the first 3 % of his or her compensation plus 50 % of the basic contribution made by each participant on the next 2 % of his or her compensation. The Company is also permitted to make discretionary profit sharing contributions to the Plan. There were no profit sharing contributions for the plan year ended December 31, 2020. The Company’s total expenses under the Plan were $ 1.6 million and $ 1.5 million for fiscal 2020 and fiscal 2019, respectively. 11. COMMITMENTS AND CONTINGENCIES From time to time, the Company becomes involved in lawsuits and other claims arising from its ordinary course of business. Because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation or claim, management is currently unable to predict the ultimate outcome of any litigation or claim, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome. Management believes, after considering a number of factors and the nature of any outstanding litigation or claims, that the outcome will not have a material effect upon the Company’s results of operations, financial condition or cash flows. However, because of the unpredictable nature of these matters, the Company cannot provide any assurances regarding the outcome of any litigation or claim to which it is a party or the impact on it of an adverse ruling in such matters. 12. QUARTERLY FINANCIAL DATA (UNAUDITED) Fiscal 2020 First ‎ Quarter % of Net ‎ Sales Second ‎ Quarter % of Net ‎ Sales Third ‎ Quarter % of Net ‎ Sales Fourth ‎ Quarter % of Net ‎ Sales (in thousands, except earnings per share) Net sales $ 109,917 100.0 % $ 137,375 100.0 % $ 135,531 100.0 % $ 255,960 100.0 % Gross profit 52,332 47.6 % 72,472 52.8 % 71,037 52.4 % 135,685 53.0 % Operating (loss) income ( 18,974 ) ( 17.3 )% 9,792 7.1 % 2,848 2.1 % 30,549 11.9 % Net (loss) income attributable to ‎ controlling interest ( 15,135 ) ( 13.8 )% 5,941 4.3 % 940 0.7 % 21,831 8.5 % Basic (loss) earnings per share ‎ attributable to controlling interest ‎ (Class A and Class B) ( 0.47 ) 0.18 0.03 0.67 Diluted (loss) earnings per share ‎ attributable to controlling interest ‎ (Class A and Class B) ( 0.47 ) 0.18 0.03 0.67 64 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements Fiscal 2019 First ‎ Quarter % of Net ‎ Sales Second ‎ Quarter % of Net ‎ Sales Third ‎ Quarter % of Net ‎ Sales Fourth ‎ Quarter % of Net ‎ Sales (in thousands, except earnings per share) Net sales $ 114,244 100.0 % $ 121,963 100.0 % $ 119,768 100.0 % $ 259,649 100.0 % Gross profit 60,918 53.3 % 64,804 53.1 % 65,365 54.6 % 137,062 52.8 % Operating (loss) income ( 10,104 ) ( 8.8 )% 3,735 3.1 % 1,328 1.1 % 33,149 12.8 % Net (loss) income attributable to ‎ controlling interest ( 7,572 ) ( 6.6 )% 1,936 1.6 % 182 0.2 % 24,375 9.4 % Basic (loss) earnings per share ‎ attributable to controlling interest ‎ (Class A and Class B) ( 0.23 ) 0.06 0.01 0.75 Diluted (loss) earnings per share ‎ attributable to controlling interest ‎ (Class A and Class B) ( 0.23 ) 0.06 0.01 0.75 Subsequent to the issuance of the May 5, 2019 interim financial statements, the Company identified a reclass error for disclosure purposes between selling, general and administration and interest expense, which had no impact on net income for the May 5, 2019 unaudited Consolidated Statement of Operations. The reclass error has been corrected in the above table. The Company assessed the reclass error and determined it is immaterial to the interim financial statements. 13. RECENT ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements Intangibles – Goodwill and Other – Internal-use Software 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. In fiscal 2020, $ 3.9 million of capitalized costs associated with implementation activities, net of amortization are classified within Prepaid expenses & other current assets on the Company’s Consolidated Balance Sheets and $ 0.2 million of related amortization costs are included in Selling, general and administrative expenses on the Company’s Consolidated Statement of Operations. Recently Issued Accounting Pronouncements Not Yet Adopted Financial Instruments – Credit Losses – Measurement of Credit Losses on Financial Instruments 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. 65 Table of Contents DULUTH HOLDINGS INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS For the Years Ended January 31, 2021 and February 2, 2020 (Amounts in thousands) Charged to Charged to Beginning Cost and Other Ending Balance Expenses Accounts Deductions Balance Inventory reserve Year ended January 31, 2021 $ 1,826 $ — $ — $ ( 226 ) $ 1,600 Year ended February 2, 2020 2,420 — — ( 594 ) 1,826 Product returns reserve Year ended January 31, 2021 $ 3,508 $ 1,796 $ — $ — $ 5,304 Year ended February 2, 2020 2,088 1,420 — — 3,508 See accompanying Report of Independent Registered Public Accounting Firm. ‎ 66 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None .