Nature of Business - Kirkland’s, Inc. (the “Company”) is a specialty retailer of home décor in the United States operating 381 stores in 35 states as of October 31, 2020, as well as an e-commerce website, www.kirklands.com.

Principles of consolidation - The condensed consolidated financial statements of the Company include the accounts of Kirkland’s, Inc. and its wholly-owned subsidiaries, Kirkland’s Stores, Inc., Kirkland’s DC, Inc., and Kirkland’s Texas, LLC. Significant intercompany accounts and transactions have been eliminated.

Basis of presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and are presented in accordance with the requirements of Form 10-Q and pursuant to the reporting and disclosure rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on April 10, 2020.

Novel coronavirus (“COVID-19”) - The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility which has negatively affected the Company’s business operations. As a result, if the pandemic persists or worsens, accounting estimates and assumptions could be impacted in subsequent interim reports and upon final determination at year-end, and it is reasonably possible such changes could be significant, although the potential effects cannot be estimated at this time.

On March 19, 2020, the Company closed all of its retail store locations in response to the COVID-19 pandemic. The Company took a number of actions to mitigate the impact of the decreased sales due to the COVID-19 related store closures including:

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carry backs to offset 100% of taxable income for taxable years beginning before 2021. The CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company received $12.3 million in federal tax refunds under the CARES Act for previous year filings during the 13-week period ended August 1, 2020. The CARES Act also provides for an employee retention payroll tax credit for employers subject to closures due to COVID-19. In addition, the CARES Act permits delayed payment of the employer-portion of social security taxes. The delay applies to social security taxes due on wages paid between the date of enactment of the CARES Act and January 1, 2021 with half of the delayed payroll taxes due by December 31, 2021 and the other half due by December 31, 2022. The Company pursued all relevant measures under the CARES Act during the 13 and 39-week periods ended October 31, 2020, including net operating loss carry backs, wage credits and payroll tax deferrals in order to improve liquidity. We will continue to assess our treatment of the CARES Act to the extent additional guidance and regulations are issued.

During the 13-week period ended August 1, 2020, the Company repaid the $40 million that was borrowed under the revolving credit facility, and the Company’s stores started offering contactless curbside pickup and then reopened to in-store customer traffic throughout the second period consistent with applicable federal, state and local regulations and restrictions. Stores initially reopened with restricted operating hours and limited staffing with store merchandise deliveries from the distribution centers gradually resuming. During the 13-week period ended October 31, 2020, the Company’s sales improved with increased e-commerce demand, and stores generally increased their operating hours, staffing and merchandise deliveries. The increased sales combined with the reduced merchandise receipts led to inventory shortages in key categories.

The extent of the impact of COVID-19 on our business and financial results will depend on future developments, including the duration and spread of the outbreak within the markets in which we operate and the related impact on customer confidence and spending, all of which remain highly uncertain.

Seasonality - The results of the Company’s operations for the 13 and 39-week periods ended October 31, 2020 are not indicative of the results to be expected for any other interim period or for the entire fiscal year due to seasonality factors.

Fiscal year - The Company’s fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. Accordingly, fiscal 2020 represents the 52 weeks ending on January 30, 2021 and fiscal 2019 represented the 52 weeks ended on February 1, 2020.

Use of estimates - The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from the estimates and assumptions used. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than those at fiscal year-end.

Changes in estimates are recognized in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include, but are not limited to, impairment assessments of long-lived assets, inventory reserves, self-insurance reserves and income taxes.

Gift cards - The Company uses the redemption recognition method to account for breakage for unused gift card amounts where breakage is recognized as gift cards are redeemed for the purchase of goods based upon a historical breakage rate. In these circumstances, to the extent the Company determines there is no requirement for remitting card balances to government agencies under unclaimed property laws, such amounts are recognized in the condensed consolidated statements of operations as a component of net sales.

The table below sets forth selected gift card liability information (in thousands) included in accrued expenses in the condensed consolidated balance sheets for the periods indicated:

		October 31, 2020				February 1, 2020				November 2, 2019
Gift card liability, net of estimated breakage		$	11,915			$	13,128			$	11,187

The table below sets forth selected gift card breakage and redemption information (in thousands) for the periods indicated:

	13-Week Period Ended				39-Week Period Ended
	October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019
Gift card breakage revenue	$	208	$	243	$	555	$	774
Gift card redemptions recognized in the current period related to amounts included in the gift card contract liability balance as of the prior period		1,724		1,814		4,220		5,349