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 ( KPMG LLP , PCAOB ID No. 185 ) 38 Consolidated Balance Sheets as of January 29, 2023 and January 30, 202 2 41 Consolidated Statements of Operations for Fiscal Years Ended January 29, 2023 and January 30, 202 2 42 Consolidated Statements of Comprehensive Income for Fiscal Years Ended January 29, 2023 and January 30, 202 2 43 Consolidated Statements of Shareholders’ Equity for Fiscal Years Ended January 29, 2023 and January 30, 202 2 45 Consolidated Statements of Cash Flows for Fiscal Years Ended January 29, 2023 and January 30, 202 2 46 Notes to Consolidated Financial Statements 47 Schedule II Valuation and Qualifying Accounts 64 ‎ 37 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Duluth Holdings Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Duluth Holdings Inc. (the Company) as of January 29, 2023 and January 30, 2022, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the years then ended, and related notes and financial statement schedule II - Valuation and Qualifying Accounts (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 29, 2023 and January 30,2022, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. 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 29, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 17, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Product return reserve As discussed in Note 5 to the consolidated financial statements, as of January 29, 2023 the Company recorded $5,168 thousand in reserves for product returns within accrued expenses and other current liabilities. Management estimates the product return reserve using its own historical sales and product return information. We identified the assessment of the product return reserve as a critical audit matter. A high degree of auditor judgment was required to assess whether the historical return rate used to estimate the reserve for product returns is indicative of future returns. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the product return reserve. This included controls related to determining the historical return rate used to estimate product returns. We assessed the Company’s ability to 38 Table of Contents accurately estimate the product return rate by comparing prior period estimates to actual product return rates experienced. We analyzed the product return rate assumption by evaluating the consistency of the assumption with the trend of actual historical product return rates and by comparing the product return reserve to actual product returns received after the balance sheet date. /s/ KPMG LLP We have served as the Company’s auditor since 2021. Milwaukee, Wisconsin March 17, 2023 ‎ 39 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Duluth Holdings Inc. Opinion on Internal Control Over Financial Reporting We have audited Duluth Holdings Inc.’s (the Company) internal control over financial reporting as of January 29, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of January 29, 2023 and January 30, 2022, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the years then ended , and the related notes and financial statement schedule II – Valuation and Qualifying Accounts (collectively, the consolidated financial statements), and our report dated March 17, 2023 expressed an unqualified opinion on those consolidated 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 of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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/ KPMG LLP Milwaukee, Wisconsin March 17, 2023 ‎ 40 Table of Contents DULUTH HOLDINGS INC. Consolidated Balance Sheets (Amounts in thousands) January 29, 2023 January 30, 2022 ASSETS Current Assets: Cash and cash equivalents $ 45,548 $ 77,051 Receivables 6,041 5,455 Inventory, net 154,922 122,672 Prepaid expenses & other current assets 19,386 17,333 Prepaid catalog costs — 10 Total current assets 225,897 222,521 Property and equipment, net 108,332 110,078 Operating lease right-of-use assets 131,753 120,911 Finance lease right-of-use assets, net 47,206 50,133 Available-for-sale security 5,539 6,554 Other assets, net 8,727 5,353 Total assets $ 527,454 $ 515,550 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 56,547 $ 45,402 Accrued expenses and other current liabilities 40,815 47,504 Income tax payable 1,761 6,814 Current portion of operating lease liabilities 15,571 12,882 Current portion of finance lease liabilities 2,842 2,701 Current maturities of TRI long-term debt 768 693 Total current liabilities 118,304 115,996 Operating lease liabilities, less current portion 117,366 107,094 Finance lease liabilities, less current portion 37,425 40,267 TRI long-term debt, less current maturities 25,913 26,608 Deferred tax liabilities 1,249 2,867 Total liabilities 300,257 292,832 Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 10,000 shares authorized; no shares ‎ issued or outstanding as of January 29, 2023 and January 30, 2022 — — Common stock (Class A), no par value; 10,000 shares authorized; ‎ 3,364 shares issued and outstanding as of January 29, 2023 and ‎ January 30, 2022 — — Common stock (Class B), no par value; 200,000 shares authorized; ‎ 30,191 shares issued and 30,079 shares outstanding as of January 29, 2023 and ‎ 29,530 shares issued and 29,477 outstanding as of January 30, 2022 — — Treasury stock, at cost; 112 and 53 shares as of January 29, 2023 and ‎ January 30, 2022, respectively ( 1,459 ) ( 1,002 ) Capital stock 98,842 95,515 Retained earnings 133,172 130,868 Accumulated other comprehensive income ( 148 ) 489 Total shareholders' equity of Duluth Holdings Inc. 230,407 225,870 Noncontrolling interest ( 3,210 ) ( 3,152 ) Total shareholders' equity 227,197 222,718 Total liabilities and shareholders' equity $ 527,454 $ 515,550 The accompanying notes are an integral part of these consolidated financial statements. 41 Table of Contents DULUTH HOLDINGS INC. Consolidated Statements of Operations (Amounts in thousands, except per share figures) Fiscal Year Ended January 29, 2023 January 30, 2022 Net sales $ 653,307 $ 698,584 Cost of goods sold (excluding depreciation and amortization) 309,872 321,260 Gross profit 343,435 377,324 Selling, general and administrative expenses 337,204 333,225 Operating income 6,231 44,099 Interest expense 3,653 4,717 Other income, net 376 55 Income before income taxes 2,954 39,437 Income tax expense 708 9,887 Net income 2,246 29,550 Less: Net loss attributable to noncontrolling interest ( 58 ) ( 152 ) Net income attributable to controlling interest $ 2,304 $ 29,702 Basic earnings per share (Class A and Class B): Weighted average shares of ‎ common stock outstanding 32,772 32,618 Net income per share attributable ‎ to controlling interest $ 0.07 $ 0.91 Diluted earnings per share (Class A and Class B): Weighted average shares and ‎ equivalents outstanding 32,991 32,851 Net income per share attributable ‎ to controlling interest $ 0.07 $ 0.90 The accompanying notes are an integral part of these consolidated financial statements. ‎ 42 Table of Contents DULUTH HOLDINGS INC. Consolidated Statements of Comprehensive Income (Amounts in thousands) Fiscal Year Ended January 29, 2023 January 30, 2022 Net income $ 2,246 $ 29,550 Other comprehensive income Securities available-for-sale: Unrealized security (loss) income ( 852 ) 590 Income tax (benefit) expense ( 215 ) 149 Other comprehensive (loss) income ( 637 ) 441 Comprehensive income 1,609 29,991 Comprehensive loss attributable ‎ to noncontrolling interest ( 58 ) ( 152 ) Comprehensive income attributable ‎ to controlling interest $ 1,667 $ 30,143 The accompanying notes are an integral part of these consolidated financial statements. ‎ 43 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 January 31, 2021 32,841 $ 92,875 $ ( 628 ) $ 101,166 $ 48 $ ( 3,000 ) $ 190,461 Issuance of common stock 265 594 — — — — 594 Stock-based compensation — 2,046 — — — — 2,046 Restricted stock forfeitures ( 9 ) — — — — — — Restricted stock surrendered for taxes ( 26 ) — ( 374 ) — — — ( 374 ) Other comprehensive income — — — — 441 441 Net income — — — 29,702 — ( 152 ) 29,550 Balance at January 30, 2022 33,071 $ 95,515 $ ( 1,002 ) $ 130,868 $ 489 $ ( 3,152 ) $ 222,718 Issuance of common stock 457 616 — — — — 616 Stock-based compensation — 2,711 — — — — 2,711 Restricted stock forfeitures ( 54 ) — — — — — — Restricted stock surrendered for taxes ( 31 ) — ( 457 ) — — — ( 457 ) Other comprehensive loss — — — — ( 637 ) ( 637 ) Net income — — — 2,304 — ( 58 ) 2,246 Balance at January 29, 2023 33,443 $ 98,842 $ ( 1,459 ) $ 133,172 $ ( 148 ) $ ( 3,210 ) $ 227,197 The accompanying notes are an integral part of these consolidated financial statements. 44 Table of Contents DULUTH HOLDINGS INC. Consolidated Statements of Cash Flows (Amounts in thousands) Fiscal Year Ended January 29, 2023 January 30, 2022 Cash flows from operating activities: Net income $ 2,246 $ 29,550 Adjustments to reconcile net income to net cash provided ‎ by operating activities: Depreciation and amortization 30,810 29,225 Stock-based compensation 2,711 2,198 Deferred income taxes ( 1,403 ) ( 5,483 ) Loss on disposal of property and equipment 1,392 398 Changes in operating assets and liabilities: Receivables ( 586 ) ( 3,185 ) Inventory ( 32,250 ) 26,380 Prepaid expense & other assets 869 ( 2,438 ) Software hosting implementation costs, net ( 6,121 ) ( 4,701 ) Deferred catalog costs 10 1,004 Trade accounts payable 12,685 10,481 Income taxes payable ( 5,053 ) ( 765 ) Accrued expenses and deferred rent obligations ( 11,768 ) 9,865 Other ( 365 ) ( 845 ) Noncash lease impacts 1,195 297 Net cash (used in) provided by operating activities ( 5,628 ) 91,981 Cash flows from investing activities: Purchases of property and equipment ( 22,833 ) ( 10,352 ) Principal receipts from available-for-sale security 164 147 Proceeds from disposal of PP&E 28 55 Net cash used in investing activities ( 22,641 ) ( 10,150 ) Cash flows from financing activities: Proceeds from line of credit — 5,000 Payments on line of credit — ( 5,000 ) Proceeds from long term debt 25,000 — Payments on long term debt ( 25,000 ) ( 48,250 ) Payments on TRI long term debt ( 692 ) ( 623 ) Payments on finance lease obligations ( 2,701 ) ( 2,559 ) Shares withheld for tax payments on vested restricted stock ( 457 ) ( 374 ) Other 616 442 Net cash used in financing activities ( 3,234 ) ( 51,364 ) (Decrease) Increase in cash and cash equivalents ( 31,503 ) 30,467 Cash and cash equivalents at beginning of period 77,051 46,584 Cash and cash equivalents at end of period $ 45,548 $ 77,051 Supplemental disclosure of cash flow information: Interest paid $ 3,653 $ 3,747 Income taxes paid $ 7,223 $ 16,161 Supplemental disclosure of non-cash information: Unpaid liability to acquire property and equipment $ 8,783 $ 3,151 The accompanying notes are an integral part of these consolidated financial statements. 45 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. 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 29, 2023, 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. The Company has 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 2022 and Fiscal 2021 ended on January 29 , 2023 and January 30, 2022, respectively. Fiscal 2022 and Fiscal 2021 were a 52-week period. 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. ‎ 46 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 fulfillment 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 · Occupancy expenses related to stores and operations at the Company's headquarters, including utilities · Inbound freight · Depreciation and amortization · Freight from the Company's fulfillment centers to its stores · 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 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 $ 76.3 million and $ 75.2 million for fiscal 2022 and fiscal 2021, respectively. ‎ 47 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. The Company incurred shipping and processing expenses of $ 44.0 million and $ 44.3 million for fiscal 2022 and fiscal 2021, respectively. Income Taxes The Company accounts for income taxes and related accounts using the asset/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. Cash and Cash Equivalents The Company considers short-term investments with original maturities of three months or less when purchased to be cash equivalents. As of January 29, 2023, Cash and cash equivalents consisted of cash, amounts receivable from credit card issuers and money market funds. 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. Significant Suppliers The Company’s principal supplier of inventory accounted for 56 % and 53 % of total inventory expenditures in fiscal 2022 and fiscal 2021, respectively. The Company also had a second supplier that accounted for 11 % and 8 % of total inventory expenditures in fiscal 2022 and fiscal 2021, respectively. 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, obsolete items and shrinkage was $ 1.8 million and $ 2.4 million as of January 29, 2023 and January 30, 2022, respectively with the majority of the decrease coming from the retail inventory shrinkage reserve. 48 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements Property and Equipment Property and equipment consist of the following: January 29, 2023 January 30, 2022 (in thousands) Land and land improvements $ 4,486 $ 4,486 Leasehold improvements 49,450 48,093 Buildings 36,183 35,359 Vehicles 161 161 Warehouse equipment 25,951 17,735 Office equipment and furniture 53,713 53,607 Computer equipment 9,185 8,325 Software 36,260 34,207 215,389 201,973 Accumulated depreciation and amortization ( 118,989 ) ( 97,473 ) 96,400 104,500 Construction in progress 11,932 5,578 Property and equipment, net $ 108,332 $ 110,078 The Company recorded depreciation expense of $ 26.7 million and $ 25.1 million for fiscal 2022 and fiscal 2021, 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 generally are as follows: Years Land improvements 15 Leasehold improvements 3 - 15 Buildings 39 Vehicles 5 Warehouse equipment 7 - 10 Office equipment and furniture 7 - 10 Computer equipment 3 - 5 Software 3 - 5 ‎ 49 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 29, 2023 January 30, 2022 (in thousands) Prepaid expenses & other current assets Pending returns inventory, net $ 2,373 $ 2,235 Current software hosting implementation costs, net 3,074 1,475 Other prepaid expenses 13,939 13,623 Prepaid expenses & other current assets $ 19,386 $ 17,333 Other assets, net Goodwill $ 402 $ 402 Intangible assets, net 450 246 Non-current software hosting implementation costs 6,148 2,949 Other assets, net 1,727 1,756 Other assets, net $ 8,727 $ 5,353 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 was $ 3.6 million and $ 1.8 million for fiscal 2022 and fiscal 2021, respectively. Accumulated amortization was $ 5.4 million and $ 2.0 million for fiscal 2022 and fiscal 2021, respectively. 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. Management performed its annual qualitative assessment of goodwill as of December 31, 2022 and 2021 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 29, 2023 or January 30, 2022. 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 2022 and fiscal 2021. Accumulated amortization was $ 0.8 million and $ 0.6 million as of January 29, 2023 and January 30, 2022, respectively. 50 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements Scheduled future amortization of amortizable other assets is as follows as of January 29, 2023: Fiscal year (in thousands) 2023 $ 207 2024 191 2025 157 2026 92 2027 22 Thereafter 9 $ 678 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. For fiscal 2022, 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 $ 2.7 million and $ 2.0 million for fiscal 2022 and fiscal 2021, respectively, and is included in selling, general and administrative expenses on the Consolidated Statements of Operations. 51 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 29, 2023 and January 30, 2022: Weighted average grant date fair value Shares per share Outstanding at January 31, 2021 338,239 9.74 Granted 227,740 15.35 Vested ( 151,408 ) 8.21 Forfeited ( 9,237 ) 13.06 Outstanding at January 30, 2022 405,334 13.54 Granted 392,497 10.99 Vested ( 124,773 ) 13.44 Forfeited ( 54,286 ) 12.20 Outstanding at January 29, 2023 618,772 $ 12.05 At January 29, 2023, the Company had unrecognized compensation expense of $ 4.9 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 2022 and fiscal 2021, other comprehensive income consists of changes in unrealized gains and losses on the Company’s 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. ‎ 52 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements The Company’s assets and liabilities measured at fair value are categorized as Level 1 or Level 3 instruments. The fair value of the Company’s money market account is obtained from real-time quotes for transactions in active exchange markets involving identical assets (Level 1). 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 2022, 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 money market account and available-for-sale security along with the corresponding amount of gross unrealized gains and losses recognized in accumulated other comprehensive income are as follows. January 29, 2023 Cost or Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value (in thousands) Level 1 security: Money market funds $ 25,031 $ — $ — $ 25,031 Level 3 security: Corporate trust $ 5,737 $ — $ ( 198 ) $ 5,539 January 30, 2022 Cost or Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value (in thousands) Level 3 security: Corporate trust $ 5,900 $ 654 $ — $ 6,554 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 2022 or fiscal 2021 . The following table presents the future receipts related to the Company’s available-for-sale security by contractual maturity as of January 29, 2023. Amortized Estimated Cost Fair Value (in thousands) Within one year $ 181 $ 168 After one year through five years 1,208 1,146 After five years through ten years 1,836 1,773 After ten years 2,512 2,452 Total $ 5,737 $ 5,539 The carrying values and fair values of other financial instruments in the Consolidated Balance Sheets are as follows: January 29, 2023 January 30, 2022 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value TRI Long-term debt, including short-term portion $ 26,681 $ 26,172 $ 27,301 $ 27,804 53 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements The above long-term debt, including the 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. 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 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 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. 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 29, 2023 January 30, 2022 (in thousands) Finance lease Amortization of right-of-use ‎ assets Selling, general and administrative expenses $ 3,361 $ 3,358 Interest on lease liabilities Interest expense 1,822 1,933 Total finance lease expense $ 5,183 $ 5,291 Operating lease expense Selling, general and administrative expenses $ 18,725 $ 16,326 Amortization of build-to-suit leases capital contribution Selling, general and administrative expenses 1,284 1,291 Variable lease expense Selling, general and administrative expenses 10,380 8,505 Total lease expense $ 35,572 $ 31,413 ‎ 54 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements Other information related to leases were as follows: January 29, 2023 January 30, 2022 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Financing cash flows from finance leases $ 2,701 $ 2,559 Operating cash flows from finance leases $ 1,822 $ 1,932 Operating cash flows from operating leases $ 18,477 $ 15,792 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 25,297 $ 15,230 Weighted-average remaining lease term (in years): Finance leases 11 12 Operating leases 8 9 Weighted-average discount rate: Finance leases 4.4 % 4.4 % Operating leases 4.1 % 4.1 % Future minimum lease payments under the non-cancellable leases are as follows as of January 29, 2023 : Finance Operating Fiscal year Leases Leases (in thousands) 2023 $ 4,551 $ 20,553 2024 4,736 20,176 2025 5,099 19,509 2026 3,993 18,653 2027 3,993 17,400 Thereafter 29,231 60,905 Total future minimum lease payments $ 51,603 $ 157,196 Less - Discount 11,336 24,259 Lease liability $ 40,267 $ 132,937 Total rent expense under non-cancellable leases was $ 20.0 million and $ 17.6 million for fiscal 2022 and fiscal 2021, respectively. 55 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements 4. DEBT AND CREDIT AGREEMENT Debt consists of the following: January 29, 2023 January 30, 2022 (in thousands) TRI Senior Secured Note $ 23,181 $ 23,801 TRI Note 3,500 3,500 $ 26,681 $ 27,301 Less: current maturities 768 693 TRI Long-term debt $ 25,913 $ 26,608 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 provided 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. 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 ratio. 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 originally matured on May 14, 2026 and provided for borrowings of up to $ 150.0 million that were 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 was 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 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. On July 8, 2022, the Company entered into the First Amendment to the New Credit Agreement (the “First Amendment”), which was treated as a modification for accounting purposes. The First Amendment amends the New Credit Agreement in order to (i) increase the revolving commitment from $ 150.0 million to $ 200.0 million; (ii) extend the maturity date from May 14, 2026 to July 8, 2027; (iii) amend the pricing index to replace BSBY with the Term Secured Overnight Financing Rate; and (iv) to reduce the commitment fee in some instances. As of January 29, 2023, and for the fiscal year then ended, the Company was in compliance with all financial and non-financial covenants in the New Credit Agreement. 56 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements Future principal maturities of all TRI debt, excluding unamortized financing fees of $ 1.2 million associated with the TRI debt are as follows as of January 29, 2023: Fiscal year (in thousands) 2023 $ 768 2024 847 2025 931 2026 1,020 2027 1,114 Thereafter 23,158 $ 27,838 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: January 29, 2023 January 30, 2022 (in thousands) Salaries and benefits $ 2,404 $ 11,773 Deferred revenue 10,249 10,791 Freight 7,193 8,942 Product returns 5,168 5,439 Unpaid purchases of property & equipment 6,271 794 Accrued advertising 2,020 600 Other 7,510 9,165 Total accrued expenses and other current liabilities $ 40,815 $ 47,504 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 29, 2023 and January 30, 2022. 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. ‎ 57 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 29, 2023 and January 30, 2022. January 29, 2023 January 30, 2022 (in thousands) Cash $ 20 $ 21 Property and equipment, net 23,612 24,180 Total assets $ 23,632 $ 24,201 Other current liabilities $ 161 $ 52 Current maturities of TRI long-term debt 768 693 TRI long-term debt 25,913 26,608 Noncontrolling interest in VIE ( 3,210 ) ( 3,152 ) Total liabilities and shareholders' equity $ 23,632 $ 24,201 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. The reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation is as follows: Fiscal Year Ended January 29, 2023 January 30, 2022 (in thousands, except per share data) Numerator - net income attributable to controlling interest $ 2,304 $ 29,702 Denominator - weighted average shares (Class A and Class B) Basic 32,772 32,618 Dilutive shares 219 233 Diluted 32,991 32,851 Earnings per share (Class A and Class B) Basic $ 0.07 $ 0.91 Diluted $ 0.07 $ 0.90 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 fulfillment 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 29, 2023 January 30, 2022 (in thousands) Direct-to-consumer $ 412,123 $ 438,464 Stores 241,184 260,120 $ 653,307 $ 698,584 58 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 29, 2023 January 30, 2022 (in thousands) Contract assets $ 2,373 $ 2,235 Contract liabilities $ 10,249 $ 10,791 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 29, 2023 January 30, 2022 (in thousands) Balance as of Beginning of Period $ 10,791 $ 9,788 Gift cards sold 17,330 18,901 Gift cards redeemed ( 16,265 ) ( 16,047 ) Gift card breakage ( 1,607 ) ( 1,851 ) Balance as of End of Period $ 10,249 $ 10,791 9. INCOME TAXES The components of income tax expense were as follows: Fiscal Year Ended January 29, 2023 January 30, 2022 (in thousands) Current: Federal $ 1,158 $ 12,678 State 953 2,690 2,111 15,368 Deferred: Federal ( 884 ) ( 4,945 ) State ( 519 ) ( 536 ) ( 1,403 ) ( 5,481 ) Total income tax expense $ 708 $ 9,887 The tax effects of unrealized gains and losses on securities are components of other comprehensive income and therefore excluded from deferred tax expense. Realization of the deferred tax asset over time is dependent upon the Company generating sufficient taxable earnings in future periods. In making the determination that the realization of the deferred tax was more likely than not, the Company considered several factors including its recent earnings history, its expected earnings in the future, and appropriate tax planning strategies. The Company believes it will be able to fully utilize its established deferred tax assets and therefore no valuation allowance has been established as of January 29, 2023 and January 30, 2022 . 59 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements The reconciliation of income tax expense to the amount computed at the federal statutory rate was as follows: Fiscal Year Ended January 29, 2023 January 30, 2022 (in thousands) Federal taxes at statutory rate $ 633 21.0 % $ 8,314 21.0 % State and local income taxes, net of federal benefit 144 4.8 % 1,692 4.3 % Research and development tax credits ( 296 ) ( 9.8 ) % ( 226 ) ( 0.6 ) % Nondeductible Compensation 182 6.0 % 258 0.7 % Other 45 1.5 % ( 151 ) ( 0.4 ) % Total income tax expense $ 708 23.5 % $ 9,887 25.0 % 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 29, 2023 January 30, 2022 (in thousands) Deferred tax assets: Returns allowance $ 1,304 $ 1,367 Uniform inventory capitalization 3,735 3,042 Unrealized loss on investment 50 — State credit 38 — Lease liability 54,648 50,735 Accruals 303 2,361 Stock-based compensation 341 303 Advance payments 751 689 Unrecognized tax benefits 7 4 Charitable contributions 87 — Research and development 1,288 — State NOL 4 — Total deferred tax assets 62,556 58,501 Deferred tax liabilities: Property and equipment 8,439 8,815 Unrealized gain on investment — 164 Prepaid expenses 822 927 Right-of-use asset 54,475 51,395 Goodwill and intangibles 69 67 Total deferred tax liabilities 63,805 61,368 Net deferred tax liabilities $ 1,249 $ 2,867 Uncertain Tax Positions A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: January 29, 2023 January 30, 2022 (in thousands) Balance beginning of year $ 297 $ 259 Additions for tax positions in prior years ( 2 ) 5 Additions for tax positions in current year 11 72 Statute of limitations ( 19 ) ( 39 ) Balance at end of year $ 287 $ 297 If recognized, $ 0.3 million of the Company’s unrecognized tax benefits as of January 29, 2023, 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 60 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements 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 material amounts recorded as tax expense for interest or penalties for the years ended January 29, 2032. The Company files income tax returns in the United States federal jurisdiction and in various state jurisdictions. Federal tax returns for tax year 2019 , and state tax returns for tax year 2018 , are open for examination. 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, 2022. The Company’s total expenses under the Plan were $ 2.3 million and $ 2.1 million for fiscal 2022 and fiscal 2021, 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. 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 2022 and 2021, $ 9.2 million and $ 4.4 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, respectively, and $ 3.6 million and $ 1.8 million of related amortization costs are included in Selling, general and administrative expenses on the Company’s Consolidated Statement of Operations, respectively. Recently Issued Accounting Pronouncements Not Yet Adopted Financial Instruments – Credit Losses – Measurement of Credit Losses on Financial Instruments 61 Table of Contents DULUTH HOLDINGS INC. Notes to Consolidated Financial Statements 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 adopted 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 not expect this standard to have a material impact on the Company’s consolidated financial statements. 62 Table of Contents DULUTH HOLDINGS INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS For the Years Ended January 29, 2023 and January 30, 2022 (Amounts in thousands) Charged to Charged to Beginning Cost and Other Ending Balance Expenses Accounts Deductions Balance Inventory reserve Year ended January 29, 2023 $ 2,372 $ — $ — $ ( 535 ) $ 1,837 Year ended January 30, 2022 1,600 $ 772 $ — $ — $ 2,372 Product returns reserve Year ended January 29, 2023 $ 5,439 $ — $ — $ ( 271 ) $ 5,168 Year ended January 30, 2022 5,304 $ 135 $ — $ — $ 5,439 See accompanying Report of Independent Registered Public Accounting Firm. ‎ 63 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None .