DULUTH HOLDINGS INC. 10-Q

Item 1. Financial Statements DULUTH HOLDINGS INC. Condensed Consolidated Balance Sheets - Assets (Unaudited) (Amounts in thousands) October 31, 2021 January 31, 2021 ASSETS Current Assets: Cash and cash equivalents $ 20,390 $ 47,221 Receivables 5,133 2,270 Income tax receivable 605 — Inventory, less reserves of $ 1,439 and $ 1,600 , respectively 165,078 149,052 Prepaid expenses & other current assets 14,787 10,203 Prepaid catalog costs 635 1,014 Total current assets 206,628 209,760 Property and equipment, net 114,579 124,237 Operating lease right-of-use assets 124,164 117,490 Finance lease right-of-use assets, net 50,866 53,468 Available-for-sale security 6,598 6,111 Other assets, net 5,382 4,511 Total assets $ 508,217 $ 515,577 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) October 31, 2021 January 31, 2021 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 59,157 $ 33,647 Accrued expenses and other current liabilities 41,832 37,686 Income taxes payable — 7,579 Current portion of operating lease liabilities 12,362 11,050 Current portion of finance lease liabilities 2,679 2,629 Current portion of Duluth long-term debt — 2,500 Current maturities of TRI long-term debt 675 623 Total current liabilities 116,705 95,714 Operating lease liabilities, less current maturities 110,370 104,287 Finance lease liabilities, less current maturities 40,954 43,299 Duluth long-term debt, less current maturities — 45,750 TRI long-term debt, less current maturities 26,773 27,229 Deferred tax liabilities 8,092 8,200 Total liabilities 302,894 324,479 Shareholders' equity: Preferred stock, no par value; 10,000 shares authorized; no shares issued or outstanding as of October 31, 2021 and January 31, 2021 — — Common stock (Class A), no par value; 10,000 shares authorized; 3,364 shares issued and outstanding as of October 31, 2021 and January 31, 2021 — — Common stock (Class B), no par value; 200,000 shares authorized; 29,782 shares issued and 29,703 shares outstanding as of October 31, 2021 and 29,530 shares issued and 29,477 shares outstanding as of January 31, 2021 — — Treasury stock, at cost; 79 and 53 shares as of October 31, 2021 and January 31, 2021, respectively ( 998 ) ( 628 ) Capital stock 94,815 92,875 Retained earnings 113,509 101,166 Accumulated other comprehensive income 494 48 Total shareholders' equity of Duluth Holdings Inc. 207,820 193,461 Noncontrolling interest ( 2,497 ) ( 2,363 ) Total shareholders' equity 205,323 191,098 Total liabilities and shareholders' equity $ 508,217 $ 515,577 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 October 31, 2021 November 1, 2020 October 31, 2021 November 1, 2020 Net sales $ 145,277 $ 135,531 $ 427,823 $ 382,823 Cost of goods sold (excluding depreciation and amortization) 61,627 64,494 196,204 186,982 Gross profit 83,650 71,037 231,619 195,841 Selling, general and administrative expenses 78,792 68,189 211,779 202,175 Operating income (loss) 4,858 2,848 19,840 ( 6,334 ) Interest expense 900 1,643 3,390 4,771 Other (loss) income, net ( 265 ) 87 ( 193 ) ( 104 ) Income (loss) before income taxes 3,693 1,292 16,257 ( 11,209 ) Income tax expense (benefit) 930 393 4,048 ( 2,827 ) Net income (loss) 2,763 899 12,209 ( 8,382 ) Less: Net loss attributable to noncontrolling interest ( 43 ) ( 41 ) ( 134 ) ( 128 ) Net income (loss) attributable to controlling interest $ 2,806 $ 940 $ 12,343 $ ( 8,254 ) Basic earnings (loss) per share (Class A and Class B): Weighted average shares of common stock outstanding 32,649 32,476 32,605 32,431 Net income (loss) per share attributable to controlling interest $ 0.09 $ 0.03 $ 0.38 $ ( 0.25 ) Diluted earnings (loss) per share (Class A and Class B): Weighted average shares and equivalents outstanding 32,761 32,606 32,825 32,431 Net income (loss) per share attributable to controlling interest $ 0.09 $ 0.03 $ 0.38 $ ( 0.25 ) 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 October 31, 2021 November 1, 2020 October 31, 2021 November 1, 2020 Net income (loss) $ 2,763 $ 899 $ 12,209 $ ( 8,382 ) Other comprehensive income Securities available-for sale: Unrealized security (loss) income arising during the period ( 94 ) 51 595 ( 314 ) Income tax (benefit) expense ( 24 ) 13 149 ( 82 ) Other comprehensive (loss) income ( 70 ) 38 446 ( 232 ) Comprehensive income (loss) 2,693 937 12,655 ( 8,614 ) Comprehensive loss attributable to noncontrolling interest ( 43 ) ( 41 ) ( 134 ) ( 128 ) Comprehensive income (loss) attributable ‎ to controlling interest $ 2,736 $ 978 $ 12,789 $ ( 8,486 ) 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 October 31, 2021 Accumulated Noncontrolling Capital stock other interest in Total Treasury Retained comprehensive variable interest shareholders' Shares Amount stock earnings income entity equity Balance at January 31, 2021 32,841 $ 92,875 $ ( 628 ) $ 101,166 $ 48 $ ( 2,363 ) $ 191,098 Issuance of common stock 101 132 — — — — 132 Stock-based compensation — 371 — — — — 371 Restricted stock forfeitures ( 1 ) — — — — — — Restricted stock surrendered for taxes ( 24 ) — ( 358 ) — — — ( 358 ) Other comprehensive loss — — — — 202 — 202 Net income (loss) — — — 544 — ( 46 ) 498 Balance at May 2, 2021 32,917 $ 93,378 $ ( 986 ) $ 101,711 $ 250 $ ( 2,409 ) $ 191,944 Issuance of common stock 142 139 — — — — 139 Stock-based compensation — 563 — — — — 563 Restricted stock forfeitures ( 2 ) — — — — — — Restricted stock surrendered for taxes — — ( 5 ) — — — ( 5 ) Other comprehensive income — — — — 314 — 314 Net income (loss) — — — 8,992 — ( 45 ) 8,947 Balance at August 1, 2021 33,057 $ 94,080 $ ( 991 ) $ 110,703 $ 564 $ ( 2,454 ) $ 201,902 Issuance of common stock 13 171 — — — — 171 Stock-based compensation — 564 — — — — 564 Restricted stock forfeitures ( 2 ) — — — — — — Restricted stock surrendered for taxes ( 1 ) — ( 7 ) — — — ( 7 ) Other comprehensive income — — — — ( 70 ) — ( 70 ) Net income (loss) — — — 2,806 — ( 43 ) 2,763 Balance at October 31, 2021 33,067 $ 94,815 $ ( 998 ) $ 113,509 $ 494 $ ( 2,497 ) $ 205,323 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 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 forfeitures ( 3 ) — — — — — — Restricted stock surrendered for taxes — — ( 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. ‎ 8 Table of Contents DULUTH HOLDINGS INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands) Nine Months Ended October 31, 2021 November 1, 2020 Cash flows from operating activities: Net income (loss) $ 12,209 $ ( 8,382 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 21,822 21,209 Stock based compensation 1,612 1,263 Deferred income taxes ( 257 ) 3,463 Loss on disposal of property and equipment 404 304 Changes in operating assets and liabilities: Receivables ( 2,863 ) ( 64 ) Income taxes receivable ( 605 ) ( 3,549 ) Inventory ( 16,026 ) ( 65,554 ) Prepaid expense & other current assets ( 1,571 ) 1,154 Software hosting implementation costs, net ( 2,939 ) — Deferred catalog costs 379 94 Trade accounts payable 24,944 21,424 Income taxes payable ( 7,579 ) ( 3,427 ) Accrued expenses and deferred rent obligations 4,117 2,667 Other assets ( 918 ) — Noncash lease impacts 29 784 Net cash provided by (used in) operating activities 32,758 ( 28,614 ) Cash flows from investing activities: Purchases of property and equipment ( 9,108 ) ( 11,059 ) Capital contributions towards build-to-suit stores — ( 520 ) Principal receipts from available-for-sale security 108 96 Proceeds from disposals 55 — Net cash used in investing activities ( 8,945 ) ( 11,483 ) Cash flows from financing activities: Proceeds from line of credit 5,000 84,588 Payments on line of credit ( 5,000 ) ( 60,894 ) Proceeds from delayed draw term loan — 32,500 Payments on delayed draw term loan ( 48,250 ) ( 3,625 ) Payments on TRI long term debt ( 457 ) ( 354 ) Payments on finance lease obligations ( 1,894 ) ( 1,325 ) Payments of tax withholding on vested restricted shares ( 370 ) ( 215 ) Other 327 ( 18 ) Net cash (used in) provided by financing activities ( 50,644 ) 50,657 (Decrease) increase in cash, cash equivalents ( 26,831 ) 10,560 Cash, cash equivalents and restricted cash at beginning of period 47,221 2,240 Cash, cash equivalents and restricted cash at end of period $ 20,390 $ 12,800 Supplemental disclosure of cash flow information: Interest paid $ 3,328 $ 4,730 Income taxes paid $ 12,585 $ 40 Supplemental disclosure of non-cash information: Unpaid liability to acquire property and equipment $ 2,518 $ 657 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 primarily through the Company’s own omnichannel platform. 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 identifies its operating segments according to how its business activities are managed and evaluated. The Company continues to report 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 2021 is a 52-week period and ends on January 30, 2022 . Fiscal 2020 was a 52-week period and ended on January 31, 2021. The three months of fiscal 2021 and fiscal 2020 represent the Company’s 13 week periods ended October 31, 2021 and November 1, 2020, respectively. The accompanying condensed consolidated financial statements as of and for the three and nine months ended October 31, 2021 and November 1, 2020 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 October 31, 2021 and November 1, 2020. 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 January 31, 2021. 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. These impacts are discussed within these notes to the condensed 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. D. Impairment Analysis As of October 31, 2021 and for the three and nine months then ended, no triggering events or indicators of asset impairment were noted. 10 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) E. Inventory 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 judgment 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 judgment 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. Prepaid Expenses and Other Assets Prepaid expenses and other assets consist of the following: October 31, 2021 January 31, 2021 (in thousands) Prepaid expenses & other current assets Pending returns inventory, net $ 1,993 $ 2,490 Current software hosting implementation costs, net 1,432 1,149 Other prepaid expenses 11,362 6,564 Prepaid expenses & other current assets $ 14,787 $ 10,203 Other assets, net Goodwill $ 402 $ 402 Intangible assets, net 251 264 Non-current software hosting implementation costs 2,866 2,755 Other assets, net 1,863 1,090 Other assets, net $ 5,382 $ 4,511 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. Cash and cash equivalents 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. I. Reclassifications Certain reclassifications have been made to the 2020 financial statements in order to conform to the 2021 presentation. There were no changes to previously reported shareholders’ equity or net income (loss) as a result of the reclassifications. J. Significant Accounting Policies 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 January 31, 2021. ‎ 11 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 2041. 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. 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 October 31, 2021 November 1, 2020 October 31, 2021 November 1, 2020 (in thousands) Finance lease expenses Amortization of right-of-use ‎ assets Selling, general and ‎ administrative expenses $ 840 $ 778 $ 2,518 $ 2,092 Interest on lease liabilities Interest expense 479 483 1,460 1,356 Total finance lease expense $ 1,319 $ 1,261 $ 3,978 $ 3,448 Operating lease expense Selling, general and ‎ administrative expenses $ 4,806 $ 3,915 $ 12,606 $ 12,149 Amortization of build-to-suit ‎ leases capital contribution Selling, general and ‎ administrative expenses 321 329 970 977 Variable lease expense Selling, general and ‎ administrative expenses 2,141 2,744 6,367 6,782 Total lease expense $ 8,587 $ 8,249 $ 23,921 $ 23,356 ‎ 12 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Other information related to leases were as follows: Nine Months Ended October 31, 2021 November 1, 2020 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Financing cash flows from finance leases $ 1,894 $ 1,325 Operating cash flows from finance leases $ 1,460 $ 1,356 Operating cash flows from operating leases $ 11,774 $ 11,537 Weighted-average remaining lease term (in years): Finance leases 12 13 Operating leases 9 10 Weighted-average discount rate: Finance leases 4.4 % 4.4 % Operating leases 4.1 % 4.3 % Future minimum lease payments under the non-cancellable leases are as follows as of October 31, 2021: Fiscal year Finance Operating (in thousands) 2021 (remainder of fiscal year) $ 1,137 $ 4,017 2022 4,523 17,520 2023 4,551 17,741 2024 4,736 17,130 2025 5,099 16,380 Thereafter 37,218 74,550 Total future minimum lease payments $ 57,264 $ 147,338 Less – Discount ( 13,631 ) ( 24,606 ) Lease liability $ 43,633 $ 122,732 13 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 3. DEBT AND CREDIT AGREEMENT Debt consists of the following: October 31, 2021 January 31, 2021 (in thousands) TRI Senior Secured Note $ 23,948 $ 24,352 TRI Note 3,500 3,500 $ 27,448 $ 27,852 Less: current maturities 675 623 TRI long-term debt $ 26,773 $ 27,229 Duluth Delayed draw term loan — 48,250 $ — $ 48,250 Less: current maturities — 2,500 Duluth long-term debt $ — $ 45,750 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. Credit Agreement On May 17, 2018, the Company entered into a credit agreement (the “Credit Agreement”) which provided 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 facility was scheduled to mature on May 17, 2023 . The $ 50.0 million DDTL was available to draw upon in differing amounts through May 17, 2020 and was scheduled to mature on May 17, 2023 . Outstanding balances under the DDTL required quarterly principal payments with a final balloon payment at maturity. The Credit Agreement was secured by essentially all Company assets and required 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 was available to draw upon before March 31, 2021, and matured on April 29, 2021 , for a total credit facility of $ 150.5 million. 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 was 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. The interest rate applicable to the Incremental DDTL was also 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. On May 14, 2021, the Company terminated the Credit Agreement, and entered into a new credit agreement (the “New Credit Agreement”), which was treated as a modification for accounting purposes. The New Credit Agreement matures on May 14, 2026 and provides for borrowings of up to $ 150.0 million that are available under a revolving senior credit facility, with a $ 5.0 million sublimit for issuance of standby letters of credit, as well as a $ 10.0 million sublimit for swing line loans. At the Company’s option, the interest rate applicable to the revolving senior credit facility will be a floating rate equal to: (i) the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) plus the applicable rate of 1.25 % to 2.00 % determined based on the Company’s rent adjusted leverage ratio, or (ii) the base rate plus the applicable rate of 0.25 % to 1.00 % based on the Company’s rent adjusted leverage ratio. The New Credit Agreement is secured by essentially all Company assets and requires the Company 14 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 New Credit Agreement As of October 31, 2021 and for the nine months then ended, the Company was in compliance with all financial and non-financial covenants contained within the New Credit Agreement. 4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: October 31, 2021 January 31, 2021 (in thousands) Salaries and benefits $ 11,181 $ 8,826 Deferred revenue 7,400 9,944 Freight 4,939 6,769 Product returns 5,037 5,304 Catalog costs 64 — Unpaid purchases of property & equipment 1,126 503 Accrued advertising 3,621 1,377 Other 8,464 4,963 Total accrued expenses and other current liabilities $ 41,832 $ 37,686 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 October 31, 2021, 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 judgment 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: October 31, 2021 Cost or Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value (in thousands) Level 3 security: Corporate trust $ 5,939 $ 659 $ — $ 6,598 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 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. No other-than-temporary impairment was recorded in the unaudited condensed consolidated statements of operations for the nine months ended October 31, 2021 or November 1, 2020. The following table presents future principal receipts related to the Company’s available-for-sale security by contractual maturity as of October 31, 2021. Amortized Estimated Cost Fair Value (in thousands) Within one year $ 159 $ 197 After one year through five years 1,077 1,271 After five years through ten years 1,662 1,856 After ten years 3,041 3,274 Total $ 5,939 $ 6,598 The carrying values and fair values of other financial instruments in the Consolidated Balance Sheets are as follows: October 31, 2021 January 31, 2021 Carrying Amount Fair Value Carrying Amount Fair Value (in thousands) TRI Long-term debt, including short-term portion $ 27,448 $ 27,944 $ 27,852 $ 28,697 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, the carrying value of the delayed draw term loan approximated its 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 October 31, 2021 and January 31, 2021. 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 October 31, 2021 and January 31, 2021: October 31, 2021 January 31, 2021 (in thousands) Cash $ 751 $ 747 Property and equipment, net 24,334 24,800 Total assets $ 25,085 $ 25,547 Other current liabilities $ 134 $ 58 Current maturities of long-term debt 675 623 TRI Long-term debt 26,773 27,229 Noncontrolling interest in VIE ( 2,497 ) ( 2,363 ) Total liabilities and shareholders' equity $ 25,085 $ 25,547 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 October 31, 2021 November 1, 2020 October 31, 2021 November 1, 2020 (in thousands, except per share data) Numerator - net income (loss) attributable to ‎ controlling interest $ 2,806 $ 940 $ 12,343 $ ( 8,254 ) Denominator - weighted average shares ‎ (Class A and Class B) Basic 32,649 32,476 32,605 32,431 Dilutive shares 112 130 220 — Diluted 32,761 32,606 32,825 32,431 Earnings (loss) per share (Class A and Class B) Basic $ 0.09 $ 0.03 $ 0.38 $ ( 0.25 ) Diluted $ 0.09 $ 0.03 $ 0.38 $ ( 0.25 ) 17 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The computation of diluted loss per share for the nine months ended November 1, 2020 excluded ( 0.1 ) million shares of unvested restricted stock, respectively, because their inclusion would be anti-dilutive. 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 associated with restricted stock recognized by the Company was $ 0.6 million and $ 1.6 million for the three and nine months ended October 31, 2021, respectively and $ 0.3 million and $ 1.1 million for the three and nine months ended November 1, 2020, respectively. The Company’s total stock compensation expense 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 October 31, 2021 is as follows: Weighted average fair value Shares per share Outstanding at January 31, 2021 338,239 $ 9.74 Granted 227,740 15.13 Vested ( 150,688 ) 8.13 Forfeited ( 4,165 ) 14.12 Outstanding at October 31, 2021 411,126 $ 13.43 At October 31, 2021, the Company had unrecognized compensation expense of $ 4.2 million related to the restricted stock awards, which is expected to be recognized over a weighted average period of 2.4 years. 9. PROPERTY AND EQUIPMENT Property and equipment consist of the following: October 31, 2021 January 31, 2021 (in thousands) Land and land improvements $ 4,486 $ 4,486 Leasehold improvements 46,988 47,451 Buildings 35,344 35,344 Vehicles 161 161 Warehouse equipment 17,469 14,685 Office equipment and furniture 52,898 52,614 Computer equipment 7,919 9,861 Software 34,180 34,003 199,445 198,605 Accumulated depreciation and amortization ( 91,092 ) ( 75,958 ) 108,353 122,647 Construction in progress 6,226 1,590 Property and equipment, net $ 114,579 $ 124,237 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 18 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 October 31, 2021 November 1, 2020 October 31, 2021 November 1, 2020 (in thousands) Direct-to-consumer $ 85,200 $ 86,392 $ 258,830 $ 273,503 Stores 60,077 49,139 168,993 109,320 $ 145,277 $ 135,531 $ 427,823 $ 382,823 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: October 31, 2021 January 31, 2021 (in thousands) Contract assets $ 1,993 $ 2,490 Contract liabilities $ 7,400 $ 9,788 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: October 31, 2021 November 1, 2020 (in thousands) Balance as of beginning of period $ 9,788 $ 9,790 Gift cards sold 6,097 5,740 Gift cards redeemed ( 8,112 ) ( 7,381 ) Gift card breakage ( 373 ) ( 1,119 ) Balance as of end of period $ 7,400 $ 7,030 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 25 % for the three months ended October 31, 2021 and 25 % for the nine months ended October 31, 2021. 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. 19 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 impact adopting ASU 2016-13 will have on the Company’s consolidated financial statements. 20 Table of Contents