What changed in this filing

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Item 9A. Controls and Procedures

2022-03-30 compared with 2021-04-14 · 772 added, 998 removed, 309 unchanged (85% of the section changed)

1 unchanged sentence

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our

Chief Executive Officer (our principal executive officer) and Chief Financial Officer (principal financial officer), has evaluated the

effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the

end of the period covered by this Annual Report.

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their

evaluation, that our disclosure controls and procedures were effective as of January 31, 2021.

Management Report on Internal Control over

Financial Reporting

Our management is responsible for establishing

and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act.

The Company’s internal control over financial reporting is 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 in the United States of America.

The Company’s internal control over financial reporting includes those policies and

procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions

and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit

preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and

that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the

and (iii) 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.

Management assessed the effectiveness of the Company’s

internal control over financial reporting as of January 31, 2021.

In making this assessment, management used the criteria set forth in

2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework.”

Based on management’s assessment using the COSO criteria, management has concluded that the Company’s internal control over

financial reporting was effective as of January 31, 2021.

This Annual Report on Form 10-K does not include

an attestation report of the Company’s registered public accounting firm.

Our independent registered public accounting firm will

not be required to formally attest to the effectiveness of our internal control over financial reporting as long as we are an “emerging

growth company” pursuant to the provisions of the JOBS Act.

Changes in our Internal Control over Financial

There were no changes in our internal control

over financial reporting that occurred during the quarter ended January 31, 2021 that have materially affected, or are reasonably likely

to materially affect, our internal control over financial reporting.

Our management, with the participation of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report.

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation, that our disclosure controls and procedures were not effective as of January 30, 2022 due to a material weakness related to information technology general controls, as discussed below in Management's Annual Report on Internal Control over Financial Reporting.

Management's Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act.

The Company’s internal control over financial reporting is 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 in the United States of America.

The Company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company;

and (iii) 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.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of January 30, 2022.

In making this assessment, management used the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Tread way Commission (COSO) in “Internal Control-Integrated Framework.” Based on management’s assessment using the COSO criteria, due to the material weaknesses described below, management has concluded that the Company’s internal control over financial reporting was not effective as of January 30, 2022.

Marcum LLP, the Company’s independent registered public accounting firm, is appointed by the Company’s Board of Directors and ratified by the Company’s stockholders.

They were engaged to render an opinion regarding the fair presentation of the Company’s consolidated financial statements as well as conducting an audit of internal control over financial reporting.

Their reports included in Item 8 of this Form 10-K are based upon audits conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Our management concluded that a material weakness existed as of January 30, 2022 relating to ineffective information technology general controls in the areas of user access and segregation of duties related to certain information technology systems that support our financial reporting process.

Notwithstanding the material weakness described above, our management has concluded that our consolidated financial statements for the periods covered by and included in this Annual Report on Form 10-K are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and fairly present, in all material respects, our financial position, results of operations and cash flows for each of the periods presented herein.

Remediation of Material Weaknesses

Our management, under the oversight of our Audit Committee and in consultation with outside advisors, has begun evaluating and implementing measures designed to ensure that the control deficiencies contributing to the material weakness are remediated.

These remediation measures include, but are not limited to:

(i) evaluating and implementing enhanced process controls around user access management to key information systems which may impact our financial reporting;

(ii) expanding the management and governance over user access and system controls and (iii) enhancing our information technology compliance and accounting functions with additional experienced hires including a new Chief Information Officer.

We believe the above actions will be effective in remediating the material weakness described above and we will continue to devote time and attention to these remedial efforts.

However, as we continue to evaluate and take actions to improve our internal control over financial reporting, we may take additional actions to address control deficiencies or modify certain of the remediation measures described above.

Our remediation efforts will not be considered complete until the applicable controls operate for a sufficient period of time and our management has concluded, through testing, that these controls are operating effectively.

Our independent registered public accounting firm, Marcum LLP, has issued an adverse attestation report on the effectiveness of our internal control over financial reporting as of January 30, 2022, as stated in their report which is included in the Financial Statements of this Annual Report on Form 10-K.

Marcum LLP has also audited our consolidated financial statements at January 30, 2022 and January 31, 2021, and for each of the three years in the period ended January 30, 2022, and its report dated March 30, 2022, expressed an unqualified opinion on our consolidated financial statements.

Changes in our Internal Control over Financial Reporting

Other than as described above, there were no changes in our internal control over financial reporting that occurred during the quarter ended January 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive

Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or the Company’s

internal controls over financial reporting will prevent all errors and all fraud.

A control system, no matter how well conceived and operated,

can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Further, the design of a control

system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control

issues and instances of fraud, if any, within the Company have been detected.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls over financial reporting will prevent all errors and all fraud.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Other Information.

Directors, Executive Officers and

Corporate Governance.

The following is a list of the names, ages and backgrounds of our current

executive officers:

Present Position

Business Experience

Donna Dellomo

Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Executive Vice President and Chief Financial Officer, Treasurer and Secretary of the Company since 2017;

previously, Vice-President and Chief Financial Officer of Perfumania Holdings, Inc., from 1998 to 2017 ;

Internal Audit Manager, Accounting Manager and Corporate Controller at Cybex International, Inc.

from 1988 to 1997;

Certified Public Accountant, member of the Board of Trustees of Molloy College and Chairperson of Molloy’s Fiscal Affairs Committee.

President and Chief Operating Officer

President and Chief Operating Officer of the Company since 2015;

previously, President of Vitamin World, from 2012 to 2015;

Senior Vice President of Watch Station Global Retail and Skagen, from 2011 to 2013;

General Manager and in various executive positions at Sunglass Hut (Luxottica) from 2008 to 2010.

Various roles of increasing responsibility at Bath and Body Works, including Senior Vice-President of Brand Development, from 2004 to 2006;

prior to that, 10 years in brand management at Jergens and Marion Consumer Products;

Bachelor of Science in Business Administration from Miami University.

Chief Executive Officer and Director

Founded Lovesac in 1998 and is currently serving as our Chief Executive Officer and as a member of the board of directors.

Nelson is the lead designer of the Company’s patented products and directly oversees design, sourcing, public relations, investor relations and culture.

On March 25, 2022, we amended our existing credit agreement providing for an asset-based revolving credit facility with the lenders party thereto, and Wells Fargo Bank, National Association, as administrative agent.

The maturity date of our credit agreement was extended to February 6, 2024, and among other things, the maximum revolver commitment was increased from $25.0 million to $40.0 million, subject to borrowing base and availability restrictions.

Our credit agreement includes a $1,000,000 sublimit for the issuance of letters of credit and a $4,000,000 sublimit for swing line loans.

There were no outstanding borrowings under our credit facility as of March 30, 2022.

The credit facility is secured by a first lien on substantially all of our assets.

No other subsidiary of the Company guaranteed the obligations under the credit facility or granted security interests in their assets to secure such obligations.

Availability under the credit facility is based on eligible accounts receivable and inventory.

Our credit facility contains a financial covenant that requires us to maintain undrawn availability under the credit facility of at least 10% of the lesser of (i) the aggregate commitments in the amount of $40.0 million and (ii) the amounts available under the credit facility based on eligible accounts receivable and inventory.

We are required to pay a commitment fee of 0.30% based on the daily unused portion of the credit facility.

Amounts outstanding under the credit facility, at our option, bear interest at either a base rate or a term SOFR based rate, plus, in either case, a margin determined by reference to our quarterly average excess availability under the credit facility and ranging from 0.50% to 0.75% for borrowings accruing interest at a base rate and from 1.625% to 1.850% for borrowings accruing interest at term SOFR.

Swing line loans will at all times accrue interest at a base rate plus the applicable margin.

The lower margins described above will apply initially and will adjust thereafter from time to time based on the quarterly average excess availability under the credit facility.

Directors, Executive Officers and Corporate Governance.

The following is a list of the names, ages and backgrounds of our current executive officers:

Name Age Present Position Business Experience

Shawn Nelson 45 Chief Executive Officer and Director Shawn Nelson founded Lovesac in 1998 and is currently serving as Chief Executive Officer of the Company and as a member of the Board of Directors.

Nelson is the lead designer of the Company's patented products and leads sourcing, creative, design, public relations, investor relations and culture.

Nelson won Richard Branson's "The Rebel Billionaire" on Fox and continues to participate in ongoing TV appearances.

Nelson has a Master’s Degree in Strategic Design and Management and is a graduate-level instructor at Parsons, The New School for Design in New York City.

Nelson is also fluent in Chinese with a BA in Mandarin from the University of Utah.

We will file with the

SEC a definitive proxy statement (the “2021 Proxy Statement”) pursuant to Regulation 14A for our 2021 annual meeting of stockholders

within 120 days of the fiscal year ended January 31, 2021.

The additional information required by this Item will appear in the 2021 Proxy

Statement and is incorporated by reference herein.

Our board of directors

has adopted a Code of Business Conduct and Ethics applicable to all officers, directors and associates, which is available on our website

(https://investor.lovesac.com) under "Governance." We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding

amendment to, or waiver from, a provision of our Code of Conduct by posting such information on the website address and location specified

Nelson has a Master's Degree in Strategic Design and Management and is a former graduate-level instructor at Parsons, The New School for Design in New York City.

Nelson is also fluent in Mandarin.

Mary Fox 49 President and Chief Operating Officer Mary Fox is the President and Chief Operating Officer of Lovesac since November 2021.

Previously, she served as General Manager for North America Consumer Products at BIC from 2018 to November 2021.

Prior to joining BIC, she spent six years at L’Oréal in various roles within Ecommerce, New Business Development, and Business Transformation in the United States.

Before L’Oréal, Ms.

Fox held several senior leadership positions at Walmart in both the United States and International divisions.

During her time as SVP Global Sourcing at Walmart, Ms.

Fox co-founded the Sustainable Apparel Coalition in 2009 with Patagonia, which is now the leading global apparel, footwear, and textile coalition focused on sustainable production.

Since 2021, Ms.

Fox has also served as a director of AF Acquisition Corp., a special purpose acquisition company targeting the better-for-you food and beverage, health and wellness, beauty, personal care and pet industries.

She also served on the Board of Directors of The Lovesac Company from February 2020 to November 2021.

Fox graduated from Coventry University in the United Kingdom and holds a degree in manufacturing engineering and business studies.

Jack Krause 59 Chief Strategy Officer, Director Jack Krause is the Chief Strategy Officer of The Lovesac Company and a member of the Board of Directors.

Previously, he served as President and Chief Operating Officer of Lovesac from 2015 until November 2021.

Prior to Lovesac, Mr.

Krause served as President of Vitamin World, a division of NBTY.

He also served as Senior Vice-President of Watch Station Global Retail and Skagen from 2011 to 2013.

Krause also held the position of General Manager of Sunglass Hut North America from 2008 to 2010 along with other executive positions at Luxottica.

Krause worked for 11 years at Bath and Body Works in roles of increasing responsibility leading to Senior Vice-President of Brand Development from 2004 to 2006.

Prior to that he spent 10 years in brand management at Jergens and Marion Consumer Products.

Krause has a Bachelor of Science in Business Administration from Miami University.

Donna Dellomo 57 Executive Vice President and Chief Financial Officer, Treasurer and Secretary of the Company Donna Dellomo is Executive Vice President, Chief Financial Officer, Treasurer and Secretary of The Lovesac Company.

Prior to joining The Lovesac Company, Ms.

Dellomo was Vice-President and Chief Financial Officer of Perfumania Holdings, a $540 million publicly traded company with over 290 retail locations, owned and licensed brands and a wholesale distribution network from January 1998 to January 2017.

She also held progressive positions from October 1988 to December 1997 as Internal Audit Manager, Accounting Manager and Corporate Controller at Cybex International, Inc., a $125 million publicly traded company that manufactured and distributed fitness, rehabilitative and health care equipment.

Dellomo is a Certified Public Accountant with initial focus on audit and tax and is also a Member of the Board of Trustees of Molloy College and Chair of their Fiscal Affairs Committee.

We will file with the SEC a definitive proxy statement (the “2022 Proxy Statement”) pursuant to Regulation 14A for our 2022 annual meeting of stockholders within 120 days of the fiscal year ended January 30, 2022.

The additional information required by this Item will appear in the 2022 Proxy Statement and is incorporated by reference herein.

Our board of directors has adopted a Code of Business Conduct and Ethics applicable to all officers, directors and associates, which is available on our website (https://investor.lovesac.com) under "Governance." We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Conduct by posting such information on the website address and location specified above.

Executive Compensation.

The information required by this Item will appear

in the 2021 Proxy Statement and is incorporated by reference herein.

Security Ownership of Certain Beneficial

Owners and Management and Related Stockholder Matters.

Authorized for Issuance under Equity Compensation Plans

following table provides information as of January 31, 2021, about the securities which are either already issued, or authorized for future

issuance, under our Amended and Restated 2017 Equity Incentive Plan (the “2017 Equity Plan”).

Plan Category

Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights

Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights (1 )

The information required by this Item will appear in the 2022 Proxy Statement and is incorporated by reference herein.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information as of January 30, 2022, about the securities which are either already issued, or authorized for future issuance, under our Amended and Restated 2017 Equity Incentive Plan (the “2017 Equity Plan”).

Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights (1)

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))

Equity compensation plans approved by shareholders (2)(3)

1,058,876 $ 38.10 371,943

Equity compensation plans not approved by shareholders — — —

(1) The weighted average exercise price is calculated based solely

on outstanding stock options.

It does not take into account the shares of our common stock underlying restricted stock units or performance

units, which have no exercise price.

Total 1,058,876 $ 38.10 371,943

(1) The weighted average exercise price is calculated based solely on outstanding stock options.

It does not take into account the shares of our common stock underlying restricted stock units or performance units, which have no exercise price.

(2) Calculations based on 2017 Equity Plan.

(3) Awards of equity are made pursuant to our 2017 Equity Plan which

was approved by our Board of Directors and our stockholders on August 26, 2017.

In 2018, the 2017 Equity Plan was amended to increase

the shares of our common stock authorized and reserved for issuance to 615,066 shares.

In 2019, the 2017 Equity Plan was amended and

restated to, among other things, increase the shares of our common stock authorized and reserved for issuance to 1,414,889 shares.

In 2020, the 2017 Equity Plan was amended and restated to increase the shares of our common stock authorized and reserved for issuance

by 690,000 shares.

The remaining information required by this Item

will appear in the 2021 Proxy Statement and is incorporated by reference herein.

Certain Relationships and Related

Transactions, and Director Independence.

The information required by this Item will appear

in the 2021 Proxy Statement and is incorporated by reference herein.

(3) Awards of equity are made pursuant to our 2017 Equity Plan which was approved by our Board of Directors and our stockholders on August 26, 2017.

In fiscal 2019, the 2017 Equity Plan was amended to increase the shares of our common stock authorized and reserved for issuance to 615,066 shares.

In fiscal 2020, the 2017 Equity Plan was amended and restated to, among other things, increase the shares of our common stock authorized and reserved for issuance to 1,414,889 shares.

In fiscal 2021, the 2017 Equity Plan was amended and restated to increase the shares of our common stock authorized and reserved for issuance by 690,000 shares.

The remaining information required by this Item will appear in the 2022 Proxy Statement and is incorporated by reference herein.

Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item will appear in the 2022 Proxy Statement and is incorporated by reference herein.

Principal Accounting Fees and Services.

The information required by this Item will appear

in the 2021 Proxy Statement and is incorporated by reference herein.

The information required by this Item will appear in the 2022 Proxy Statement and is incorporated by reference herein.

Exhibits, Financial Statement Schedules.

(a) The following documents are filed as part of this report:

Statements (see Part II, Item 8 – Consolidated Financial Statements and Supplementary Data)

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets – As of January 31, 2021 and February 2, 2020

Consolidated Statements of Operations – Years Ended January 31, 2021 and February 2, 2020

Consolidated Statements of Changes in Stockholders’ Equity - Years Ended January 31, 2021 and February 2, 2020

Consolidated Statements of Cash Flows - Years Ended January 31, 2021 and February 2, 2020

Consolidated Notes to Financial Statements - Years Ended January 31, 2021 and February 2, 2020

Statement Schedules

Schedules have been omitted

because they are not required or are not applicable or because the information required to be set forth therein either is not material

or is included in the financial statements or notes thereto.

Financial Statements (see Part II, Item 8 – Consolidated Financial Statements and Supplementary Data)

Reports of Independent Registered Public Accounting Firm (PCAOB ID 688 )

Consolidated Balance Sheets – As of January 30, 2022 and January 31, 2021

Consolidated Statements of Operations – Years Ended January 3 0 , 202 2 , January 31, 2021 and February 2, 2020

Consolidated Statements of Changes in Stockholders’ Equity - Years Ended January 3 0 , 202 2 , January 31, 2021 and February 2, 2020

Consolidated Statements of Cash Flows - Years Ended January 3 0 , 202 2 , January 31, 2021 and February 2, 2020

Consolidated Notes to Financial Statements

Financial Statement Schedules

Schedules have been omitted because they are not required or are not applicable or because the information required to be set forth therein either is not material or is included in the financial statements or notes thereto.

See the Exhibit Index.

Form 10-K Summary.

Optional disclosure not included in this Annual

Report on Form 10-K.

Optional disclosure not included in this Annual Report on Form 10-K.

EXHIBIT INDEX

Description of Exhibit

Filed / Incorporated by Reference from Form **

Incorporated by Reference from Exhibit Number

Number Description of Exhibit Filed / Incorporated by Reference from Form ** Incorporated by Reference from Exhibit Number Dated Filed

2.1 Assignment and Assumption Agreement

S-1 2.1 4/20/2018

3.1 Amended and Restated Certificate of Incorporation

8-K 3.3 6/7/2021

3.2 Amended and Restated Bylaws

S-1/A 3.2 6/8/2018

4.1 Form of Amended and Restated Series A Warrant Agreement

S-1/A 4.2 5/23/2018

4.2 Form of Amended and Restated Series A-1 Warrant Agreement

S-1/A 4.3 5/23/2018

4.3 Form of Amended and Restated Series A -2 Warrant Agreement

Form of Representative’s Warrant l

S-1/A 4.4 5/23/2018

4.4 Form of Representative’s Warrant

S-1/A 4.4 6/25/2018

4.5 Description of the Company’s securities registered pursuant to Section 12 of the Exchange Act of 1934

1 unchanged sentence

10.1† Wells Fargo Credit Agreement

S-1 10.1 4/20/2018

10.2† Amendment No.

6 to Credit Agreement between The Lovesac Company and Wells Fargo Bank, N.A.

Filed herewith.

10.3± 2017 Amended and Restated Equity Incentive Plan

S-8 4.1 9/11/2020

10.4± Form of Restricted Stock Units Agreement

S-1/A 10.3 5/23/2018

10.5 Amended and Restated Registration Rights Agreement

S-1 10.5 4/20/2018

10.6± Employment Agreement dated October 26, 2017, by and between The Lovesac Company and Shawn Nelson

S-1 10.6 4/20/2018

10.7± Employment Agreement dated October 26, 2017, by and between The Lovesac Company and Jack Krause

S-1 10.7 4/20/2018

10.8± Employment Agreement dated October 26, 2017, by and between The Lovesac Company and Donna Dellomo

S-1 10.8 4/20/2018

10.9± First Amendment to Employment Agreement dated October 2, 2019, by and between The Lovesac Company and Shawn Nelson

Filed herewith.

10-K 10.8 4/14/2021

10.10± First Amendment to Employment Agreement dated October 2, 2019, by and between The Lovesac Company and Jack Krause

Filed herewith.

10-K 10.9 4/14/2021

10.11± First Amendment to Employment Agreement dated October 2, 2019, by and between The Lovesac Company and Donna Dellomo

10-K 10.1 4/14/2021

10.12± Second Amendment to Employment Agreement dated November 9, 2021, by and between The Lovesac Company and Jack A.

8-K 10.2 11/12/2021

10.13± Employment Agreement between The Lovesac Company and Mary Fox, dated September 30, 2021

8-K 10.1 11/12/2021

10.14± Second Amendment to Employment Agreement dated March 24, 2022, by and between The Lovesac Company and Shawn Nelson

Filed herewith.

Form of Stock Option Award Agreement

10.15± Second Amendment to Employment Agreement dated March 24, 2022, by and between The Lovesac Company and Donna Dellomo

Filed herewith.

10.16± Offer Letter between The Lovesac Company and Mary Fox, dated September 30, 2021

8-K 10.3 11/12/2021

Number Description of Exhibit Filed / Incorporated by Reference from Form ** Incorporated by Reference from Exhibit Number Dated Filed

10.17± Mary Fox Resignation Letter from Board of Directors, dated November 9, 2021

8-K 10.4 11/12/2021

10.18± Form of Stock Option Award Agreement

10-K 10.11 4/14/2021

10.19± The Lovesac Company Annual Incentive Compensation Plan

10-Q 10.1 12/9/2021

10.20± The Lovesac Company Director Compensation Policy

10-Q 10.2 12/9/2021

21.1 List of Subsidiaries

Filed herewith.

10-K 21.1 4/14/2021

23.1 Consent of Marcum LLP

6 unchanged sentences

Filed herewith.

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended

32.2* Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended

Filed herewith.

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

XBRL Taxonomy Extension Label Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

± Indicates a management

contract or compensatory plan.

* This certification is deemed not filed

for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of

that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange

Pursuant to the requirements of the Securities

Exchange Act of 1934, as amended (the “Exchange Act”), the registrant has duly caused this Report to be signed on its behalf

by the undersigned, thereunto duly authorized on April 14, 2021.

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

± Indicates a management contract or compensatory plan.

† Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K.

The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon its request.

* This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 2022.

THE LOVESAC COMPANY

3 unchanged sentences

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE

PRESENTS, that each person whose signature appears below constitutes and appoints Shawn Nelson and Donna Dellomo, and each of them, as

his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his

or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file

the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting

unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite

and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby

ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes,

may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Exchange Act,

this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ Shawn Nelson

April 14, 2021

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Shawn Nelson and Donna Dellomo, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ Shawn Nelson March 30, 2022

Chief Executive Officer and Director

(Principal Executive Officer)

/s/ Donna Dellomo

April 14, 2021

/s/ Donna Dellomo March 30, 2022

Donna Dellomo

3 unchanged sentences

Principal Accounting Officer)

/s/ Jack Krause

April 14, 2021

President and Chief Operating Officer

/s/ Andrew Heyer

April 14, 2021

/s/ Andrew Heyer March 30, 2022

Chairman and Director

/s/ Walter McLallen

April 14, 2021

/s/ Walter McLallen March 30, 2022

Walter McLallen

/s/ William Phoenix

April 14, 2021

William Phoenix

April 14, 2021

/s/ Shirley Romig

April 14, 2021

/s/ Sharon M.

Leite March 30, 2022

/s/ Shirley Romig March 30, 2022

Shirley Romig

/s/ John Grafer

April 14, 2021

/s/ John Grafer March 30, 2022

/s/ Jack Krause March 30, 2022

THE LOVESAC COMPANY

CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

AS OF JANUARY 30, 2022 AND JANUARY 31, 2021 AND FOR THE YEARS ENDED JANUARY 30, 2022, JANUARY 31, 2021 AND FEBRUARY 2, 2020

THE LOVESAC COMPANY

Report of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firm (PCAOB ID 688)

Consolidated Financial Statements

4 unchanged sentences

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of

1 unchanged sentence

Opinion on the Financial Statements

We have audited the accompanying consolidated

balance sheets of The Lovesac Company (the “Company”) as of January 31, 2021 and February 2, 2020, and the related consolidated

statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended January 31,

2021, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements

present fairly, in all material respects, the financial position of the Company as of January 31, 2021 and February 2, 2020, and the results

of its operations and its cash flows for each of the two years in the period ended January 31, 2021, in conformity with accounting principles

generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets of The Lovesac Company (the “Company”) as of January 30, 2022 and January 31, 2021, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended January 30, 2022, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 30, 2022 and January 31, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 30, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of January 30, 2022, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 30, 2022, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of a material weakness.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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 audits to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond

to those risks.

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating

the overall presentation of the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accounting for leases in accordance with ASC 842

Description of the matter

As described in Note 1 to the financial statements, the Company changed its method of accounting for leases in 2021 due to the adoption of Accounting Standards Update (ASU) No.

2016-02, Leases (ASC 842), and the related amendments.

The adoption of ASC 842 resulted in the recognition of right-of-use operating lease assets of $90 million and operating lease liabilities of approximately $97 million, and the reclassification of deferred rent of $6.7 million as a reduction of the right-of-use assets as of February 1, 2022.

There was no cumulative effect of adopting the standard to retained earnings.

Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term discounted using the incremental borrowing rate.

Auditing the Company’s adoption of ASC 842 was complex and involved subjective auditor judgment because the Company is a party to a significant number of lease contracts and certain aspects of adopting ASC 842 required management to exercise judgment in applying the new standard to its portfolio of lease contracts.

In particular, the estimates of the incremental borrowing rate were complex due to the significant management estimates required to determine the appropriate incremental borrowing rate and the resulting impact on the financial statements.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s accounting for the adoption of ASC 842.

This included testing controls over management’s review of the incremental borrowing rate and models used to estimate the fair value of the right-of-use asset, including the related data and assumption.

To test the adoption of ASC 842, we performed audit procedures that included, among others, selecting a sample of lease contracts from the overall population to evaluate the completeness, accuracy, and proper application of the accounting standard, testing the accuracy of lease terms within the lease IT system by comparison of the data for a sample of leases to the underlying lease contract, and testing the accuracy of the Company’s system calculations of initial operating lease right-of use-assets and operating lease liabilities.

Additionally, we evaluated management’s methodology and model for developing the incremental borrowing rate by performing comparative independent calculations.

/s/ Marcum LLP

We have served as the Company’s auditor since 2017.

April 14, 2021

March 30, 2022

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

WITH A MATERIAL WEAKNESS

To the Stockholders and the Board of Directors of

The Lovesac Company

Adverse Opinion on Internal Control over Financial Reporting

We have audited The Lovesac Company’s (the “Company”) internal control over financial reporting as of January 30, 2022, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, because of the effect of the material weakness described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of January 30, 2022 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

The following material weakness has been identified and included in “Management's Annual Report on Internal Control over Financial Reporting”:

the Company has not established an effective control environment due to the ineffective design and implementation of information technology and related activity level controls covering all significant accounts.

This ineffectiveness was due, in part, to inadequate information technology general controls ("ITGC") relating to certain information technology systems.

The ITGC deficiencies affected, among other things, the integrity of the data used to support the related activity level controls.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the financial statements as of and for the year ended January 30, 2022, of the Company, and this report does not affect our report on such financial statements.

This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the consolidated financial statements for the year ended January 30, 2022 and this report does not affect our report dated March 30, 2022 on those consolidated financial statements.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of January 30, 2022 and January 31, 2021 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows and the related notes for each of the three years in the period ended January 30, 2022, and our report dated March 30, 2022 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 the 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 degree of compliance with the policies or procedures may deteriorate.

/s/Marcum LLP

Hartford, Connecticut

March 30, 2022

THE LOVESAC COMPANY

CONSOLIDATED BALANCE SHEETS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

JANUARY 30, 2022 AND JANUARY 31, 2021

(amounts in thousands, except share and per share amounts)

Current Assets

5 unchanged sentences

Property and equipment, net 34,137 25,868

Operating lease right-of-use assets 100,891 —

Goodwill 144 144

Intangible assets, net 1,413 1,517

Deferred financing costs, net — 91

Deferred tax asset 9,836 —

Total Other Assets 11,393 1,752

$ 171,018,871

$ 125,663,767

Total Assets $ 371,579 $ 171,019

Liabilities and Stockholders’ Equity

4 unchanged sentences

Customer deposits 13,316 5,993

Current operating lease liabilities 16,382 —

Sales taxes payable 5,359 2,471

1 unchanged sentence

Deferred Rent — 6,749

Operating Lease Liabilities, long term 96,574 —

Line of Credit — —

2 unchanged sentences

Stockholders’ Equity

Preferred Stock $ 0.00001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of January 31, 2021 and February 2, 2020.

Common Stock $ .00001 par value, 40,000,000 shares authorized, 15,011,556 shares issued and outstanding as of January 31, 2021 and 14,472,611 shares issued and outstanding as of February 2, 2020.

Preferred Stock $ 0.00001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of Jan 30, 2022 and Jan 31, 2021.

Common Stock $ 0.00001 par value, 40,000,000 shares authorized, 15,123,338 shares issued and outstanding as of Jan 30, 2022 and 15,011,556 shares issued and outstanding as of Jan 31, 2021.

Additional paid-in capital 173,762 171,382

Accumulated deficit ( 17,536 ) ( 63,436 )

( 63,435,681 )

( 78,162,828 )

Stockholders’ Equity 156,226 107,946

Total Liabilities and Stockholders’ Equity $ 371,579 $ 171,019

$ 171,018,871

$ 125,663,767

The accompanying notes are an integral part

of these consolidated financial statements

The accompanying notes are an integral part of these consolidated financial statements

THE LOVESAC COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JANUARY 31, 2021 AND FEBRUARY

$ 320,737,750

$ 233,377,379

FOR THE YEARS ENDED JANUARY 30, 2022, JANUARY 31, 2021, AND FEBRUARY 2, 2020

(amounts in thousands, except per share data and share amounts) January 30, 2022 January 31, 2021 February 2, 2020

Net sales $ 498,239 $ 320,738 $ 233,377

Cost of merchandise sold 224,894 145,966 116,687

Gross profit 273,345 174,772 116,690

Operating expenses

4 unchanged sentences

Operating income (loss) 38,441 14,880 ( 15,809 )

( 15,808,551 )

Interest (expense) income, net ( 179 ) ( 67 ) 647

Net income (loss) before taxes 38,262 14,813 ( 15,162 )

( 15,161,707 )

Provision for income taxes

Benefit from (provision for) income taxes 7,638 ( 86 ) ( 43 )

Net income (loss) $ 45,900 $ 14,727 $ ( 15,205 )

$ ( 15,205,019 )

Net income (loss) per common share:

Basic $ 3.04 $ 1.01 $ ( 1.07 )

Diluted $ 2.86 $ 0.96 $ ( 1.07 )

Weighted average number of common shares outstanding:

The accompanying notes are an integral part

of these consolidated financial statements

Basic 15,107,958 14,610,617 14,260,395

Diluted 16,058,111 15,332,998 14,260,395

The accompanying notes are an integral part of these consolidated financial statements

THE LOVESAC COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

FOR THE YEARS ENDED JANUARY 31, 2021 AND FEBRUARY

Additional Paid-in

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED JANUARY 30, 2022, JANUARY 31, 2021, AND FEBRUARY 2, 2020

Common Additional Paid-in Accumulated

(amounts in thousands, except share amounts) Shares Amount Capital Deficit Total

Balance - February 3, 2019 13,588,568 $ — $ 141,728 $ ( 62,958 ) $ 78,770

$ ( 62,957,809 )

( 15,205,019 )

Equitybased compensation

Net loss — — — ( 15,205 ) ( 15,205 )

Equity-based compensation 101,883 — 5,246 — 5,246

Issuance of common shares, net 750,000 — 25,610 — 25,610

Vested restricted stock units

Issuance of common stock for restricted stock 180,304 — — — —

Taxes paid for net share settlement of equity awards — — ( 4,278 ) — ( 4,278 )

( 4,278,176 )

Exercise of warrants 27,246 — 12 — 12

1 unchanged sentence

Balance - February 2, 2020 14,472,611 — 168,318 ( 78,163 ) 90,155

( 78,162,828 )

Net income — — — 14,727 14,727

Equity-based compensation — — 4,681 — 4,681

Vested restricted stock units

Issuance of common stock for restricted stock 99,498 — — — —

Taxes paid for net share settlement of equity awards — — ( 1,717 ) — ( 1,717 )

( 1,716,516 )

Exercise of warrants 439,447 — 100 — 100

Balance - January 31, 2021 15,011,556 — 171,382 ( 63,436 ) 107,946

( 63,435,681 )

The accompanying notes are an integral part

of these consolidated financial statements

Net income — — — 45,900 45,900

Equity-based compensation — — 5,859 — 5,859

Issuance of common stock for restricted stock 100,826 — — — —

Taxes paid for net share settlement of equity awards — — ( 3,583 ) — ( 3,583 )

Exercise of warrants 10,956 — 104 — 104

Balance - January 30, 2022 15,123,338 $ — $ 173,762 $ ( 17,536 ) $ 156,226

The accompanying notes are an integral part of these consolidated financial statements

THE LOVESAC COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JANUARY 31, 2021 AND FEBRUARY

FOR THE YEARS ENDED JANUARY 30, 2022, JANUARY 31, 2021, AND FEBRUARY 2, 2020

(amounts in thousands) January 30, 2022 January 31, 2021 February 2, 2020

Cash Flows from Operating Activities

Net income (loss) $ 45,900 $ 14,727 $ ( 15,205 )

$ ( 15,205,019 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

3 unchanged sentences

Net loss (gain) on disposal of property and equipment 464 5 ( 167 )

Impairment of property and equipment

Impairment of long-lived assets 554 245 —

Equity-based compensation 5,859 4,681 5,246

Deferred rent — 3,641 1,514

Non-cash operating lease cost 14,953 — —

Deferred income taxes ( 9,836 ) — —

Gain on recovery of insurance proceeds - lost profit margin ( 632 ) — —

Changes in operating assets and liabilities:

Accounts receivable

( 3,233,801 )

Trade accounts receivable ( 4,034 ) 2,675 ( 3,234 )

Merchandise inventories ( 56,819 ) ( 14,017 ) ( 10,246 )

( 14,016,850 )

( 10,245,548 )

Prepaid expenses and other current assets ( 2,459 ) ( 2,060 ) ( 2,116 )

( 2,060,585 )

( 2,116,250 )

Accounts payable and accrued expenses 39,195 19,584 7,189

Operating lease liabilities ( 14,400 ) — —

Customer deposits 7,323 4,339 594

Net Cash Provided by (Used in) Operating Activities 34,018 40,521 ( 11,194 )

( 11,194,367 )

Cash Flows from Investing Activities

Purchase of property and equipment ( 15,887 ) ( 8,374 ) ( 10,277 )

( 8,373,655 )

( 10,276,537 )

Payments for patents and trademarks ( 601 ) ( 678 ) ( 674 )

1 unchanged sentence

Net Cash Used in Investing Activities ( 16,488 ) ( 9,052 ) ( 10,651 )

( 9,051,723 )

( 10,650,209 )

Cash Flows from Financing Activities

1 unchanged sentence

Taxes paid for net share settlement of equity awards ( 3,583 ) ( 1,717 ) ( 4,278 )

( 1,716,516 )

( 4,278,176 )

Proceeds from the issuance of warrants, net

Paydowns of proceeds from line of credit

Payments of deferred financing costs

Proceeds from the exercise of warrants 104 100 12

Paydown of proceeds from line of credit — — ( 31 )

Payment of deferred financing costs — ( 50 ) —

Net Cash (used in) Provided by Financing Activities ( 3,479 ) ( 1,667 ) 21,313

( 1,666,516 )

Net Change in Cash and Cash Equivalents 14,051 29,802 ( 532 )

4 unchanged sentences

Cash paid for interest $ 95 $ 85 $ 63

The accompanying notes are an integral part

of these consolidated financial statements

The accompanying notes are an integral part of these consolidated financial statements

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING

NATURE OF OPERATIONS AND LIQUIDITY

The Company is a technology driven

company that designs, manufactures and sells unique, high quality furniture derived through its proprietary Designed for Life approach

which results in products that are built to last a lifetime and designed to evolve as our customers’ lives do.

The Company markets

and sells its products through modern and efficient showrooms and, increasingly, through online sales primarily online directly at www.lovesac.com,

supported by direct-to-consumer touch-feel points in the form of our own showrooms as well as through shop-in-shops and pop-up-shops with

third party retailers.

As of January 31, 2021, the Company operated 108 showrooms located throughout the United States.

The Company was

formed as a Delaware corporation on January 3, 2017, in connection with a corporate reorganization with SAC Acquisition LLC, a Delaware

limited liability company (“SAC LLC”), the predecessor entity to the Company.

Prior to fiscal 2021, the Company has

incurred significant operating losses and used cash in its operating activities since inception.

Operating losses have resulted from inadequate

sales levels for the cost structure and expenses as a result of expanding into new markets, opening new showrooms, investments into marketing

and infrastructure to support increase in revenues.

The Company continues to enter into new retail showrooms in larger markets to increase

sales levels and invest in marketing initiatives to increase brand awareness.

Of course, there can be no assurance that the anticipated

sales levels will be achieved.

The Company believes that based on its current sales and expense levels, cash generated from operating

activities during fiscal 2021, projections for the next twelve months, and the credit facility with Wells, see Note 9, the

Company will have sufficient working capital to cover operating cash needs through the twelve-month period from the financial statement

issuance date.

NOTE 1 - BASIS OF PRESENTATION, OPERATIONS AND LIQUIDITY, AND SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of The Lovesac Company (the “Company”, “we”, “us” or “our”) as of January 30, 2022 and January 31, 2021 and for the years ended January 30, 2022, January 31, 2021 and February 2, 2020 have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission.

Certain amounts in the prior period financial statements have been reclassified to conform to the current presentation.

NATURE OF OPERATIONS

The Company is a technology driven company that designs, manufactures and sells unique, high quality furniture derived through its proprietary Designed for Life approach which results in products that are built to last a lifetime and designed to evolve as our customers’ lives do.

The Company markets and sells its products through modern and efficient showrooms and, increasingly, through online sales directly at www.lovesac.com, supported by direct-to-consumer touch-feel points in the form of our own showrooms, which include our newly created mobile concierge and kiosks, as well as through shop-in-shops and online pop-up-shops with third party retailers.

As of January 30, 2022, the Company operated 146 showrooms including kiosks and mobile concierges located throughout the United States.

The Company was formed as a Delaware corporation on January 3, 2017, in connection with a corporate reorganization with SAC Acquisition LLC, a Delaware limited liability company (“SAC LLC”), the predecessor entity to the Company.

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic and, in the following weeks, the U.S.

federal, state and local governments issued lockdown orders and related safety measures impacting the operations of our showrooms and consumer demand.

Although there has been improvement in conditions, there continues to be uncertainty around the scope and severity of the pandemic, its impact on the global economy, including supply chains, and other business disruptions that may impact our operating results and financial condition.

We continue to follow the guidance issued by federal, state and local governments and health organizations and have taken measures to protect the safety of our associates and customers.

OPERATIONS AND LIQUIDITY

Prior to fiscal 2022 and fiscal 2021, the Company had incurred significant operating losses and used cash in its operating activities from inception through fiscal 2020.

Operating losses resulted from inadequate sales levels for the cost structure and expenses as a result of impact of tariffs on inventory, expanding into new markets, opening new showrooms, and investments into advertising, marketing and infrastructure to support increases in revenues.

The Company plans to continue to open new retail showrooms in larger markets and increase its shop-in-shop relationships to increase sales levels, invest in advertising and marketing initiatives to increase brand awareness, and invest in infrastructure to support growth of the Company.

There can be no assurance that anticipated sales levels will be achieved.

The Company believes that based on its current sales and expense levels, cash generated from operating activities during fiscal 2022 and fiscal 2021, projections for the next twelve months, and the credit facility with Wells Fargo Bank, N.A.

("Wells"), see Note 10 , the Company will have sufficient working capital to cover operating cash needs through the twelve-month period from the financial statement issuance date.

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements

include the accounts of the Company and its subsidiary.

All significant intercompany accounts and transactions have been eliminated in

consolidation.

The Company’s fiscal year is

determined on a 52/53 week basis ending on the Sunday closest to February 1.

Hereinafter, the periods from February 3, 2020 to January

31, 2021 and February 4, 2019 through February 2, 2020 are referred to as fiscal 2021 and fiscal 2020, respectively.

Both fiscal 2021

and fiscal 2020 were 52-week fiscal years.

The consolidated financial statements include the accounts of the Company and its subsidiary.

All significant intercompany accounts and transactions have been eliminated in consolidation.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company’s fiscal year is determined on a 52/53 week basis ending on the Sunday closest to February 1.

Hereinafter, the fiscal years ended January 30, 2022, January 31, 2021 and February 2, 2020 are referred to as fiscal 2022, 2021 and 2020, respectively.

Fiscal 2022, 2021 and 2020 were 52-week fiscal years.

USE OF ESTIMATES

The preparation of financial statements

in conformity with accounting principles generally accepted in the United States of America (“US 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.

Estimates and assumptions are reviewed periodically and the effects of the revisions are reflected

in the period the change is determined.

The preparation of financial statements in conformity with US 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.

Estimates and assumptions are reviewed periodically and the effects of the revisions are reflected in the period the change is determined.

REVENUE RECOGNITION

The Company implemented ASU 2015-04,

Revenue from Contracts with Customers (Accounting Standards Codification Topic 606, “ASC 606”), in the first quarter of fiscal

2020 using modified retrospective method, which required the company to apply the new guidance retrospectively to revenue transactions

completed on or after the effective date.

Adopting this new standard had no material financial impact on our consolidated financial statements

but did result in enhanced presentation and disclosures.

Our revenue consists substantially

of product sales.

The Company reports product sales net of discounts and recognize them at the point in time when control transfers to

the customer, which occurs when shipment is confirmed.

Estimated refunds for returns and allowances

are recorded using our historical return patterns, adjusting for any changes in returns policies.

The Company records estimated refunds

for net sales returns on a monthly basis as a reduction of net sales and cost of sales on the statement of operations and an increase

in inventory and customers returns liability on the balance sheet.

As of January 31, 2021, there was a returns allowance of $ 2,226,723

which was in accrued expenses and $ 334,896 associated with sales returns in merchandise inventories.

As of February 2, 2020, there was

a returns allowance of $ 2,177,715 which was in accrued expenses and $ 442,390 associated with sales returns in merchandise inventories.

In some cases, deposits are received

before the company transfers control, resulting in contract liabilities.

These contract liabilities are reported as deposits on the Company’s

balance sheet.

As of January 31, 2021, and February 2, 2020, the Company recorded under customer deposit liabilities the amount of $ 5,992,633

and $ 1,653,597 respectively.

During the fiscal year ended January 31, 2021, the Company recognized $ 1,653,597 related to its customer

deposits from fiscal 2020.

During the fiscal year ended February 2, 2020, the Company recognized $ 1,059,957 related to its customer deposits

from fiscal 2019.

The Company implemented Accounting Standards Update ("ASU") 2015-04, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606, “ASC 606”), in the first quarter of fiscal 2020 using modified retrospective method, which required the Company to apply the new guidance retrospectively to revenue transactions completed on or after the effective date.

Adopting this new standard had no material financial impact on our consolidated financial statements but did result in enhanced presentation and disclosures.

Our revenue consists substantially of product sales.

The Company reports product sales net of discounts and recognize them at the point in time when control transfers to the customer, which occurs when shipment is confirmed.

Estimated refunds for returns and allowances are recorded using our historical return patterns, adjusting for any changes in returns policies.

The Company records estimated refunds for net sales returns on a monthly basis as a reduction of net sales and cost of sales on the statement of operations and an increase in inventory and customers returns liability on the balance sheet.

As of January 30, 2022, there was a returns allowance of $ 2.0 million which was in accrued expenses and $ 0.4 million associated with sales returns in merchandise inventories.

As of January 31, 2021, there was a returns allowance of $ 2.2 million which was in accrued expenses and $ 0.3 million associated with sales returns in merchandise inventories.

In some cases, deposits are received before the Company transfers control, resulting in contract liabilities.

These contract liabilities are reported as deposits on the Company’s balance sheet.

As of January 30, 2022 and January 31, 2021, the Company recorded under customer deposit liabilities the amount of $ 13.3 million and $ 6.0 million, respectively.

During the fiscal year ended January 30, 2022, the Company recognized $ 6.0 million related to its customer deposits from fiscal 2021.

During the fiscal year ended January 31, 2021, the Company recognized $ 1.7 million from fiscal 2020.

During the fiscal year ended February 2, 2020, the Company recognized $ 1.1 million from fiscal 2019.

Under ASC 606, the Company has elected the following accounting policies and practical expedients:

The Company recognizes shipping and handling expense as fulfillment activities (rather than as a promised good or service) when the activities are performed.

Accordingly, the Company records the expenses for shipping and handling activities at the same time the Company recognizes revenue.

The Company excludes from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes).

The Company does not adjust revenue for the effects of any financing components if the contract has a duration of one year or less, as the Company receives payment from the customer within one year from when it transferred control of the related goods.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

Under ASC 606, the Company has elected

the following accounting policies and practical expedients:

The Company recognizes shipping and

handling expense as fulfilment activities (rather than as a promised good or service) when the activities are performed even if those

activities are performed after the control of the good has been transferred.

Accordingly, the Company records the expenses for shipping

and handling activities at the same time the Company recognizes revenue.

The Company excludes from the measurement of the transaction price

all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including

sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes).

The Company does not adjust revenue

for the effects of any financing components if the contract has a duration of one year or less, as the Company receives payment from the

customer within one year from when it transferred control of the related goods.

The Company offers its products through

an inventory lean omni-channel platform that provides a seamless and meaningful experience to its customers in showrooms and through the

The other channel predominantly represents sales through the use of pop-up-shops that typically average ten days at a time and

are staffed with associates trained to demonstrate and sell our product.

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company offers its products through showrooms and through the Internet.

The other channel predominantly represents sales through the use of online and in store pop-up shops, shop-in-shops, and barter inventory transactions.

In store pop-up-shops are staffed with associates trained to demonstrate and sell our product.

The following represents sales disaggregated by channel:

For the fiscal years ended

January 31, 2021

February 2, 2020

$ 146,150,307

$ 148,003,995

January 30, 2022 January 31, 2021 February 2, 2020

Showrooms $ 298,989 $ 146,150 $ 148,004

Internet 150,622 151,065 55,781

Other 48,628 23,523 29,592

Total net sales $ 498,239 $ 320,738 $ 233,377

$ 320,737,750

$ 233,377,379

The Company has no foreign operations

and its sales to foreign countries was less than .

01 % of total net sales in both fiscal 2021 and 2020.

The Company had no customers in fiscal

2021 or 2020 that comprise more than 10 % of total net sales.

Note 10 for sales disaggregated by product .

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING

POLICIES (CONTINUED)

The Company has no foreign operations and its sales to foreign countries was less than .01 % of total net sales in fiscal 2022, 2021, and 2020.

The Company had no customers in fiscal 2022, 2021, or 2020 that comprise more than 10% of total net sales.

See Note 11 for sales disaggregated by product .

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid

investments with a maturity at purchase of three months or less to be cash equivalents.

The Company has deposits with financial

institutions that maintain Federal Deposit Insurance Corporation “FDIC” deposit insurance up to $ 250,000 per depositor.

portion of the deposit in excess of this limit represents a credit risk to the Company.

Due to the high cash balance maintained by the

Company, the Company does maintain depository balances in excess of the insured amounts.

The Company considers all highly liquid investments with a maturity at purchase of three months or less to be cash equivalents.

The Company has deposits with financial institutions that maintain Federal Deposit Insurance Corporation “FDIC” deposit insurance up to $250,000 per depositor.

The portion of the deposit in excess of this limit represents a credit risk to the Company.

Due to the high cash balance maintained by the Company, the Company does maintain depository balances in excess of the insured amounts.

TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable are carried

at their estimated realizable amount and do not bear interest.

Management determines the allowance for doubtful accounts by regularly

evaluating individual customer accounts, considering the customer’s financial condition, and credit history, and general and industry

current economic conditions.

Trade accounts receivable are carried at their estimated realizable amount and do not bear interest.

Management determines the allowance for doubtful accounts by regularly evaluating individual customer accounts, considering the customer’s financial condition, and credit history, and general and industry current economic conditions.

Trade accounts receivable are reserved for when deemed uncollectible.

Recoveries of amounts previously written

off are recorded when received.

Historically, collection losses have been immaterial as a significant portion of the Company’s receivables

are related to individual credit card transactions and three wholesale customers for which the Company has no history of collection losses.

Management has concluded that an allowance was not necessary at January 31, 2021 and February 2, 2020, respectively.

Breakdown of accounts receivable is

As of January 31, 2021

As of February 2, 2020

Recoveries of amounts previously written off are recorded when received.

Historically, collection losses have been immaterial as a significant portion of the Company’s receivables are related to individual credit card transactions and three wholesale customers for which the Company has no history of collection losses.

Management has concluded that an allowance was not necessary at January 30, 2022 and January 31, 2021, respectively.

Breakdown of accounts receivable is as follows:

As of January 30, 2022 As of As of January 31, 2021

Credit card receivables $ 3,186 $ 2,964

Wholesale receivables 5,361 1,549

Other receivables

The Company had two wholesale customers

that comprised approximately 97 % of wholesale receivables at January 31, 2021 and one wholesale customer that comprised 97 % of wholesale

receivables at February 2, 2020.

PREPAID EXPENSES AND OTHER CURRENT

The Company recognizes payments made

for goods and services to be received in the near future as prepaid expenses and other current assets.

Prepaid expenses and other current

assets consist primarily of payments related to insurance premiums, catalogue costs, barter credits, deposits, prepaid rent, prepaid inventory,

and other costs.

$ 8,547 $ 4,513

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING

POLICIES (CONTINUED)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company had two wholesale customers that comprised 100 % and 97 % of wholesale receivables at January 30, 2022 and January 31, 2021, respectively.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

The Company recognizes payments made for goods and services to be received in the near future as prepaid expenses and other current assets.

Prepaid expenses and other current assets consist primarily of payments related to insurance premiums, catalog costs, barter credits, deposits, prepaid rent, prepaid inventory, and other costs.

MERCHANDISE INVENTORIES

Merchandise inventories are comprised

of finished goods which are carried at the lower of cost or net realizable value.

Merchandise inventories are comprised of finished goods which are carried at the lower of cost or net realizable value.

Cost is determined on a weighted-average method basis.

Merchandise inventories consist primarily of foam filled furniture, sectional couches, and related accessories.

The Company adjusts its

inventory for obsolescence based on historical trends, aging reports, specific identification and its estimates of future retail sales

The Company adjusts its inventory for obsolescence based on historical trends, aging reports, specific identification and its estimates of future retail sales prices.

In addition, the Company includes capitalized freight and warehousing costs in inventory relative to the finished goods in inventory.

GIFT CERTIFICATES AND MERCHANDISE

The Company sells gift certificates

and issues merchandise credits to its customers in the showrooms and through its website.

Revenue associated with gift certificates and

merchandise credits is deferred until redemption of the gift certificate and merchandise credits.

The Company did not recognize any breakage

revenue in fiscal 2021 or fiscal 2020 as the Company continues to honor all outstanding gift certificates.

GIFT CERTIFICATES AND MERCHANDISE CREDITS

The Company sells gift certificates and issues merchandise credits to its customers in the showrooms and through its website.

Revenue associated with gift certificates and merchandise credits is deferred until redemption of the gift certificate and merchandise credits.

The Company did not recognize any breakage revenue in fiscal 2022, fiscal 2021 or fiscal 2020 as the Company continues to honor all outstanding gift certificates.

PROPERTY AND EQUIPMENT, NET

Property and equipment are stated at

cost less accumulated depreciation and amortization.

Office and showroom furniture and equipment, software and vehicles are depreciated

using the straight-line method over their estimated useful lives.

Leasehold improvements are amortized using the straight-line method

over their expected useful lives or lease term, whichever is shorter.

Expenditures for repairs and maintenance

are charged to expense as incurred.

For assets sold or otherwise disposed of, the cost and related accumulated depreciation or amortization

is removed from the accounts, and any resulting gain or loss is reflected in operations for the period.

Expenditures for major betterments

that extend the useful lives of property and equipment are capitalized.

Goodwill represents the excess of the

purchase price over the fair value of the identified net assets of each business acquired.

Goodwill and other indefinite-lived intangible

assets are tested annually for impairment in the fourth fiscal quarter and in interim periods if certain events occur indicating that

the carrying amounts may be impaired.

If a qualitative assessment is used and the Company determines that the fair value of a reporting

unit or indefinite-lived intangible asset is more likely than not (i.e., a likelihood of more than 50 %) less than its carrying amount,

a quantitative impairment test will be performed.

Property and equipment are stated at cost less accumulated depreciation and amortization.

Office and showroom furniture and equipment, software and vehicles are depreciated using the straight-line method over their estimated useful lives.

Leasehold improvements are amortized using the straight-line method over their expected useful lives or lease term, whichever is shorter.

Expenditures for repairs and maintenance are charged to expense as incurred.

For assets sold or otherwise disposed of, the cost and related accumulated depreciation or amortization is removed from the accounts, and any resulting gain or loss is reflected in operations for the period.

Expenditures for major betterments that extend the useful lives of property and equipment are capitalized.

Goodwill represents the excess of the purchase price over the fair value of the identified net assets of each business acquired.

Goodwill and other indefinite-lived intangible assets are tested annually for impairment in the fourth fiscal quarter and in interim periods if certain events occur indicating that the carrying amounts may be impaired.

If a qualitative assessment is used and the Company determines that the fair value of a reporting unit or indefinite-lived intangible asset is more likely than not (i.e., a likelihood of more than 50%) less than its carrying amount, a quantitative impairment test will be performed.

If goodwill is quantitatively assessed for impairment, a two-step approach is applied.

In the first step, the Company compares the fair value of the reporting unit, generally defined as the same level as or one level below an operating segment, to its carrying value.

If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and the Company is not required to perform further testing.

If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the second step of the impairment test must be performed in order to determine the implied fair value of the reporting unit’s goodwill.

If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference would be recorded.

There were no impairments during fiscal 2022, 2021, or 2020.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING

POLICIES (CONTINUED)

GOODWILL (CONTINUED)

In the first step, the Company compares

the fair value of the reporting unit, generally defined as the same level as or one level below an operating segment, to its carrying

If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered

not impaired and the Company is not required to perform further testing.

If the carrying value of the net assets assigned to the reporting

unit exceeds the fair value of the reporting unit, then the second step of the impairment test must be performed in order to determine

the implied fair value of the reporting unit’s goodwill.

If the carrying value of a reporting unit’s goodwill exceeds its

implied fair value, then an impairment loss equal to the difference would be recorded.

There were no impairments during either

fiscal 2021 or 2020.

The fair value of the Company’s

reporting unit is determined by using a discounted cash flow analysis.

The determination of fair value requires assumptions and estimates

of many critical factors, including among others, the nature and history of the Company, financial and economic conditions affecting the

Company, the industry and the general economy, past results, current operations and future prospects, sales of similar businesses or capital

stock of publicly held similar businesses, as well as prices, terms and conditions affecting past sales of similar businesses.

of future operations are based, in part, on operating results and management’s expectations as to future market conditions.

types of analyses contain uncertainties because they require management to make assumptions and to apply judgments to estimate industry

economic factors and the profitability of future business strategies.

However, if actual results are not consistent with the Company’s

estimates and assumptions, there may be exposure to future impairment losses that could be material.

PATENTS AND LICENSES

Patents and licenses are recorded at

cost and amortized on a straight-line basis over the estimated remaining life of the patent or license.

Ongoing maintenance costs are

expensed as incurred.

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The fair value of the Company’s reporting unit is determined by using a discounted cash flow analysis.

The determination of fair value requires assumptions and estimates of many critical factors, including among others, the nature and history of the Company, financial and economic conditions affecting the Company, the industry and the general economy, past results, current operations and future prospects, sales of similar businesses or capital stock of publicly held similar businesses, as well as prices, terms and conditions affecting past sales of similar businesses.

Forecasts of future operations are based, in part, on operating results and management’s expectations as to future market conditions.

These types of analyses contain uncertainties because they require management to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies.

However, if actual results are not consistent with the Company’s estimates and assumptions, there may be exposure to future impairment losses that could be material.

INTANGIBLE ASSETS

Intangible assets with finite useful

lives, including a vendor relationship, and patents and trade names, are being amortized on a straight-line basis over their estimated

Other intangible assets with finite useful lives are reviewed for impairment whenever events or circumstances indicate that the

carrying amount of the asset might not be recovered.

If the estimates of the useful lives

should change, the Company will amortize the remaining book value over the remaining useful life, or if it is deemed to be impaired a

write-down of the value of the asset may be required at such time.

There were no impairments during either

fiscal 2021 or 2020.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING

POLICIES (CONTINUED)

DEFERRED FINANCING COSTS

The Company’s financing costs

are capitalized and amortized over the life of the related financing.

The financing costs are treated as debt discounts with the exception

of revolving lines of credit.

In fiscal 2021, the Company paid $ 50,000 in connection with an increase in its aggregate commitments under

its line of credit.

The Company amortized deferred financing costs to interest expense amounts totaling $ 87,730 in fiscal 2021 and $ 73,024

in fiscal 2020.

Intangible assets with finite useful lives, including patents, trademarks, and other intangible assets are being amortized on a straight-line basis over their estimated lives.

Other intangible assets with finite useful lives are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the asset might not be recovered.

Patents and licenses are recorded at cost and amortized on a straight-line basis over the estimated remaining life of the patent or license.

Ongoing maintenance costs are expensed as incurred.

If the estimates of the useful lives should change, the Company will amortize the remaining book value over the remaining useful life, or if it is deemed to be impaired a write-down of the value of the asset may be required at such time.

There were no impairments during either fiscal 2022, 2021, or 2020.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company’s long-lived assets

consist of property and equipment, which includes leasehold improvements, and other intangible assets.

Long-lived assets are reviewed

for potential impairment at such time that events or changes in circumstances indicate that the carrying amount of an asset might not

be recovered.

The Company evaluates property and equipment for impairment at the individual showroom level, which is the lowest level

at which individual cash flows can be identified.

When evaluating long-lived assets for potential impairment, the Company will first compare

the carrying amount of the assets to the future undiscounted cash flows for the respective long-lived asset.

If the estimated future cash

flows are less than the carrying amounts of the assets, an impairment loss calculation is prepared.

An impairment loss is measured based

upon the excess of the carrying value of the asset over its estimated fair value which is generally based on an estimated future discounted

The Company’s long-lived assets consist of property and equipment and right of use assets from leases.

Property and equipment includes leasehold improvements, and other intangible assets.

Long-lived assets are reviewed for potential impairment at such time that events or changes in circumstances indicate that the carrying amount of an asset might not be recovered.

The Company evaluates for impairment at the individual showroom level, which is the lowest level at which individual cash flows can be identified.

When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the future undiscounted cash flows for the respective long-lived asset.

If the estimated future cash flows are less than the carrying amounts of the assets, an impairment loss calculation is prepared.

An impairment loss is measured based upon the excess of the carrying value of the asset over its estimated fair value which is generally based on an estimated future discounted cash flow.

If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value.

In fiscal 2021, the Company recorded

impairment charges of $0.2 million, associated with the assets of an underperforming retail location.

The impairment charge was calculated

using a discounted cash flow model and was recorded in selling, general and administrative in the Company’s consolidated statement

of operations.

During fiscal 2020, the Company did not record any impairment charges associated with property and equipment.

ADVERTISING AND CATALOG COSTS

The Company capitalizes direct response

advertising costs, which consist primarily of catalog production and mailing costs, and recognizes expense over the related revenue stream

if the following conditions are met (1) the primary purpose of the advertising is to elicit sales to customers who could be shown to have

responded specifically to the advertising, and (2) the direct-response advertising results in probable and estimable future benefits.

For fiscal years 2021 and 2020 the

Company did not have any capitalized deferred direct-response television, postcard and catalogue costs.

In fiscal 2022, the Company recognized impairment charges totaling $ 0.6 million associated with showroom-level right of use lease assets.

During fiscal 2021, the Company recorded impairment charges of $ 0.2 million, associated with the assets of an underperforming retail location.

During fiscal 2020 there were no impairment charges.

The impairments in fiscal 2022 and fiscal were 2021 calculated using a discounted cash flow model and were recorded in selling, general and administrative in the Company’s Consolidated Statements of Operations.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING

POLICIES (CONTINUED)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses include all operating costs, other than advertising and marketing expense, not included in cost of merchandise sold.

These expenses include all payroll and payroll-related expenses;

showroom expenses, including occupancy costs related to showroom operations, such as rent and common area maintenance;

occupancy and expenses related to many of our operations at our headquarters, including utilities, equity based compensation, financing related expenses and public company expenses;

and credit card transaction fees.

Selling, general and administrative expenses as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters because a significant portion of the costs are relatively fixed.

ADVERTISING AND CATALOG COSTS

Direct-response advertising costs,

which are included in prepaid expenses and other current assets, are amortized commencing the date the catalogs and post cards are mailed

and the television commercial airs through the estimated period of time for the Company has determined the related advertising impacts

There was no balance as of January 31, 2021 and February 2, 2020.

Advertising costs not associated with

direct-response advertising are expensed as incurred and were $ 41,924,487 in 2021 and $ 29,194,289 in 2020.

SHOWROOM PREOPENING AND CLOSING

Non-capital expenditures incurred in

preparation for opening new retail showrooms are expensed as incurred and included in selling, general and administrative expenses.

The Company continually evaluates the

profitability of its showrooms.

When the Company closes or relocates a showroom, the Company incurs unrecoverable costs, including the

net book value of abandoned fixtures and leasehold improvements, lease termination payments, costs to transfer inventory and usable fixtures

and other costs of vacating the leased location.

Such costs are expensed as incurred and are included in selling, general and administrative

The Company capitalizes direct response advertising costs, which consist primarily of television advertising, postcards, catalogs and their mailing costs, and recognizes expense over the related revenue stream if the following conditions are met (1) the primary purpose of the advertising is to elicit sales to customers who could be shown to have responded specifically to the advertising, and (2) the direct-response advertising results in probable and estimable future benefits.

Direct-response advertising costs, which are included in prepaid expenses and other current assets, are amortized commencing the date the catalogs and post cards are mailed and the television commercial airs through the estimated period of time for the Company has determined the related advertising impacts sales.

There was no balance as of January 30, 2022 and January 31, 2021.

As of January 30, 2022 and January 31, 2021 the Company did not have any capitalized deferred direct-response television, postcard and catalog costs.

Advertising costs not associated with direct-response advertising are expensed as incurred and were $ 65.1 million in fiscal 2022, $ 41.9 million in fiscal 2021, and $ 29.2 million in fiscal 2020.

SHOWROOM PREOPENING AND CLOSING COSTS

Non-capital expenditures incurred in preparation for opening new retail showrooms are expensed as incurred and included in selling, general and administrative expenses.

The Company continually evaluates the profitability of its showrooms.

When the Company closes or relocates a showroom, the Company incurs unrecoverable costs, including the net book value of abandoned fixtures and leasehold improvements, lease termination payments, costs to transfer inventory and usable fixtures and other costs of vacating the leased location.

Such costs are expensed as incurred and are included in selling, general and administrative expenses.

PRODUCT WARRANTY

Depending on the type of merchandise,

the Company offers either a three-year limited warranty or a lifetime warranty.

The Company’s warranties require it to repair or

replace defective products at no cost to the customer.

At the time product revenue is recognized, the Company reserves for estimated future

costs that may be incurred under its warranties based on historical experience.

The Company periodically reviews the adequacy of its recorded

warranty liability.

Product warranty expense was approximately $ 735,000 in fiscal 2021 and $ 933,000 in fiscal 2020.

Warranty reserve was

$ 606,000 as of January 31, 2021 and $ 1,180,000 as of February 2, 2020.

Depending on the type of merchandise, the Company offers either a three-year limited warranty or a lifetime warranty.

The Company’s warranties require it to repair or replace defective products at no cost to the customer.

At the time product revenue is recognized, the Company reserves for estimated future costs that may be incurred under its warranties based on historical experience.

The Company periodically reviews the adequacy of its recorded warranty liability.

Product warranty expense, without any reserve adjustments, was approximately $ 0.5 million in fiscal 2022, $ 0.7 million in fiscal 2021, and $ 0.9 million in fiscal 2020.

The decreases in fiscal 2022 and fiscal 2021 are related to fewer number of warranty claims.

Warranty reserve was $ 0.7 million as of January 30, 2022 and $ 0.6 million as of January 31, 2021.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

OPERATING LEASES

Minimum operating lease expenses are

recognized on a straight-line basis over the terms of the leases.

Tenant allowances are recorded as a receivable when lease is executed.

The corresponding liability is recorded and amortized over the term of the lease.

The amortization of the liability is a reduction of

rent expense over the term of the lease.

Our operating leases contain provisions

for certain incentives.

Incentives are deferred and are amortized over the underlying lease term on a straight-line basis as a reduction

to rent expense.

When the terms or the Company’s leases provide for free rent, concessions and/or escalations, the Company establishes

a deferred rent liability or asset for the difference of the scheduled rent payments and a straight line rent expense.

This liability

or asset increases or decreases depending on where the Company is at any given time in the life of the lease.

Percentage rent is

not subject to straight-line of expense and is expensed as incurred.

During Fiscal 2022, the Company adopted ASU No.

2016-02, Leases (Topic 842), see NEW ACCOUNTING PRONOUNCEMENTS section of Note 1 .

The Company determines if a long-term contractual obligation is a lease at inception.

The majority of our operating leases relate to company showrooms.

We also lease our corporate facilities.

These operating leases expire at various dates through fiscal 2032.

Showroom leases may include options that allow us to extend the lease term beyond the initial base period, subject to terms agreed upon at lease inception.

Some leases also include early termination options, which can be exercised under specific conditions.

Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company records lease liabilities at the present value of the lease payments not yet paid, discounted at the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term.

As the Company's leases do not provide an implicit interest rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

We recognize operating lease cost over the estimated term of the lease, which includes options to extend lease terms that are reasonably certain of being exercised, starting when possession of the property is taken from the landlord, which normally includes a construction period prior to the showroom opening.

When a lease contains a predetermined fixed escalation of the fixed rent, we recognize the related operating lease cost on a straight-line basis over the lease term.

In addition, certain of our lease agreements include variable lease payments, such as payments based on a percentage of sales that are in excess of a predetermined level and/or increases based on a change in the consumer price index or fair market value.

These variable lease payments are excluded from minimum lease payments and are included in the determination of net lease cost when it is probable that the expense has been incurred and the amount can be reasonably estimated.

If an operating lease asset is impaired, the remaining operating lease asset will be amortized on a straight-line basis over the remaining lease term.

See Note 7 of the Notes to Consolidated Financial Statements for related disclosures.

FAIR VALUE MEASUREMENTS

The carrying amount of the Company’s

financial instruments classified as current assets and current liabilities approximate fair values based on the short-term nature of the

The carrying amount of the Company’s financial instruments classified as current assets and current liabilities approximate fair values based on the short-term nature of the accounts.

EQUITY-BASED COMPENSATION

The Company’s 2017 Equity Plan

provides for awards in the form of options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares,

cash-based awards and other stock-based awards.

The plan allows for the issuance of up to 2,104,889 shares at January 31, 2021 and 1,414,889

shares at February 2, 2020.

The Company’s 2017 Equity Plan provides for awards in the form of options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares, cash-based awards and other stock-based awards.

The plan allows for the issuance of up to 2,104,889 shares at January 30, 2022 and January 31, 2021.

All awards shall be granted within 10 years from the effective date of the plan.

The unit vesting was based

on both time and performance.

The unit vesting was based on both time and performance.

See Note 8 for additional disclosure.

SHIPPING AND HANDLING

Shipping and handling charges billed

to customers are included in revenue.

Shipping and handling costs incurred are included in cost of merchandise sold.

Shipping and handling

costs were $ 63,098,657 in fiscal 2021 and $ 47,148,918 in fiscal 2020.

Shipping and handling charges billed to customers are included in revenue.

Shipping and handling costs incurred are included in cost of merchandise sold and include inbound freight and tariff costs relative to inventory sold, warehousing, and last mile shipping to our customers.

Shipping and handling costs were $ 112.8 million in fiscal 2022, $ 63.1 million in fiscal 2021, and $ 47.1 million in fiscal 2020.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING

POLICIES (CONTINUED)

The Company accounts for uncertainty

in income taxes using a two-step approach to recognize and measure uncertain tax positions.

The first step is to evaluate the tax position

for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be

sustained on audit, including resolution of related appeals or litigation processes, if any.

The second step is to measure the tax benefit

as the largest amount that is more than 50 % likely of being realized upon settlement.

The Company classifies the liability for unrecognized

tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year.

Interest and penalties

related to uncertain tax positions are recognized in the provision for income taxes.

In connection with the 2017 reorganization,

the intent was that the net operating losses (NOLs) of SAC Acquisition, LLC, a limited liability company that had been historically treated

as a C-corporation for federal and state income tax purposes, were to be inherited by the Company.

The Company filed a request for a private

letter ruling requesting additional time to make a check the box election pursuant to Treas.

In PLR-109713-19 dated October

22, 2019 the Company was granted an extension of time of 120 days to file form 8832 “Entity Classification Election.” The

completed Form 8832 was filed with The IRS on November 11, 2019.

The Company has maintained the position that the NOLs were inherited

from SAC Acquisition in the 2017 reorganization and consistently maintained a full valuation allowance against its NOLs as they were part

of deferred income tax assets not likely to be realized.

Accordingly, the resolution of the uncertain tax position regarding the

Company’s NOL carry forward during the year did not have an impact on the Company’s financial position or results of operations.

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company accounts for uncertainty in income taxes using a two-step approach to recognize and measure uncertain tax positions.

The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.

The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year.

Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.

In connection with the 2017 reorganization, the intent was that the net operating losses (NOLs) of SAC Acquisition, LLC, a limited liability company that had been historically treated as a C-corporation for federal and state income tax purposes, were to be inherited by the Company.

The Company filed a request for a private letter ruling requesting additional time to make a check the box election pursuant to Treas.

In PLR-109713-19 dated October 22, 2019 the Company was granted an extension of time of 120 days to file form 8832 “Entity Classification Election.” The completed Form 8832 was filed with The IRS on November 11, 2019.

The Company has maintained the position that the NOLs were inherited from SAC Acquisition in the 2017 reorganization and consistently maintained a full valuation allowance against its NOLs as they were part of deferred income tax assets not likely to be realized prior to fiscal 2022.

During fiscal 2022, the Company recorded a deferred tax asset of $ 9.8 million.

Previous to fiscal 2022, the resolution of the uncertain tax position regarding the Company’s NOL carry forward during the year did not have an impact on the Company’s financial position or results of operations.

As of January 30, 2022, there were no uncertain tax positions.

See Note 6 for additional disclosures.

Deferred income taxes are provided

on temporary differences between the income tax bases of assets and liabilities and the amounts reported in the financial statements and

on net operating loss and tax credit carry forwards.

A valuation allowance is provided for

that portion of deferred income tax assets not likely to be realized.

Deferred income tax assets and liabilities are adjusted for the

effects of changes in tax laws and rates on the date of enactment.

Deferred income taxes are provided on temporary differences between the income tax basis of assets and liabilities and the amounts reported in the financial statements and on net operating loss and tax credit carry forwards.

A valuation allowance is provided for that portion of deferred income tax assets not likely to be realized.

Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common

share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.

net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding

and common stock equivalents outstanding during the period.

Diluted net income (loss) per common share includes, in periods in which they

are dilutive, the effect of those potentially dilutive securities where the average market price of the common stock exceeds the exercise

prices for the respective periods.

In fiscal 2021, the effects of 655,558 unvested restricted stock units and 293,973 common stock warrants

were included in the diluted share calculation.

In fiscal 2021, the effects of 495,366

stock options were excluded from the diluted net income per common share calculation because the effects of including these potentially

dilutive shares was antidilutive.

In fiscal 2020, there were 1,717,539

of potentially dilutive shares which may be issued in the future, including 183,053 unvested restricted stock units, 495,366 stock options

and 1,039,120 common stock warrants.

These shares were excluded in the diluted net loss per common share calculation as the effects of

including theses potentially dilutive shares was antidilutive.

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.

Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding and common stock equivalents outstanding during the period.

Diluted net income (loss) per common share includes, in periods in which they are dilutive, the effect of those potentially dilutive securities where the average market price of the common stock exceeds the exercise prices for the respective periods.

In fiscal 2022, the effects of 533,333 unvested restricted stock units, 495,366 stock options, and 281,750 common stock warrants were included in the diluted share calculation.

In fiscal 2021, the effects of 655,558 unvested restricted stock units and 293,973 common stock warrants were included in the diluted share calculation.

The effects of 495,366 stock options were excluded in the diluted net income per common share calculation because the effects of including theses potentially dilutive shares was antidilutive.

In fiscal 2020, there were 1,717,539 of potentially dilutive shares which may be issued in the future, including 183,053 unvested restricted stock units, 495,366 stock options, and 1,039,120 common stock warrants.

These shares were excluded in the diluted net loss per common share calculation as the effects of including theses potentially dilutive shares was antidilutive.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENTS

Except as described below, the Company

has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have

a material impact on its financial statements.

The Company, as an emerging growth company, has elected to use the extended transition

period for complying with new or revised financial accounting standards.

The following new accounting pronouncements

were adopted in fiscal 2021:

In June 2018, the FASB issued

ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718).

ASU 2018-07 eliminates the separate accounting

model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with

nonemployees in the same way as share-based payment transactions with employees.

The accounting remains different for attribution, which

represents how the equity-based payment cost is recognized over the vesting period, and a contractual term election for valuing nonemployee

equity share options.

ASU 2018-07 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years

beginning after December 15, 2020.

Early adoption is permitted, but no earlier than an entity’s adoption of Topic 606.

adopted the guidance in fiscal 2021 and there was not a material effect on the Company’s consolidated financial position and results

of operations.

The following new accounting pronouncements,

and related impacts on adoption are being evaluated by the Company:

Except as described below, the Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its financial statements.

The following new accounting pronouncements were adopted in fiscal 2022:

In February 2016, FASB issued ASU No.

2016-02, Leases (Topic 842) amending lease guidance to increase transparency and comparability among organizations by recognizing lease

assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

2020-05 extended

the effective date to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December

15, 2022, with early adoption permitted.

The Company will adopt this standard beginning with our fiscal 2022.

Management has evaluated

the impact ASU No.

2016-02 will have on these consolidated financial statements.

Based on the initial evaluation, the Company has determined

that adopting this standard will have a material impact on our consolidated balance sheet as the Company has a significant number of operating

While we continue to assess all of

the effects of adoption, we currently believe the most significant effects relate to the recognition of new Right of Use “ROU”

assets and lease liabilities on our balance sheet for our showroom and office real estate leases.

We do not expect a significant change

in our leasing activities between now and adoption.

The Company currently has deferred rent of $ 7 million in long-term liabilities.

adoption, we currently expect to recognize additional liabilities of approximately $ 92 million, of which $ 14 million will be short-term

and $ 78 million will be long-term with corresponding ROU assets of the same amount based on the present value of the remaining minimum

rental payments under current leasing standards for existing operating leases.

The new standard also provides practical expedients for

an entity’s ongoing accounting.

We currently expect to elect the short-term lease recognition exemption for all leases that qualify.

This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU

assets or lease liabilities for existing short-term leases of those assets in transition.

We also currently expect to elect the practical

expedient to not separate lease and non-lease components for all of our leases.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

2016-02, Leases (Topic 842) ("ASC 842") amending lease guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

2020-05 extended the effective date to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2021, with early adoption permitted.

The Company adopted the guidance in fiscal 2022 and there was not a material effect on the Company’s consolidated results of operations.

Adoption of this standard resulted in the recognition of operating lease right-to-use (“ROU”) assets and corresponding lease liabilities of approximately $ 90 million and $ 97 million, respectively, and reclassification of deferred rent of $ 6.7 million as a reduction of the right-of-use assets on the consolidated balance sheet as of February 1, 2021.

The new standard also provides practical expedients for an entity’s ongoing accounting.

The Company elected the short-term lease recognition exemption for all leases that qualify.

This means, for those leases that qualify, The Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.

The Company also elected the practical expedient to not separate lease and non-lease components for all of our leases.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718).

ASU 2018-07 eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees.

The accounting remains different for attribution, which represents how the equity-based payment cost is recognized over the vesting period, and a contractual term election for valuing nonemployee equity share options.

ASU 2018-07 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

The Company adopted the guidance in fiscal 2022 and there was not a material effect on the Company’s consolidated results of operations.

NOTE 2 - PROPERTY AND EQUIPMENT, NET

Property and equipment as of January

31, 2021 and February 2, 2020 consists of:

Property and equipment as of January 30, 2022 and January 31, 2021 consists of:

Estimated Life 2022 2021

Office and store furniture, and equipment

Leasehold improvements

Shorter of estimated useful life or lease term

Tools, Dies, Molds

Construction in process

Accumulated depreciation and amortization

Office and store furniture, and equipment 5 Years $ 6,497 $ 4,803

Software 3 Years 3,625 3,628

Leasehold improvements Shorter of estimated useful life or lease term 40,788 33,828

Computers 3 Years 2,138 2,926

Tools, Dies, Molds 5 Years 764 215

Vehicles 5 Years 497 —

Construction in process NA 2,765 2,098

57,074 47,498

Accumulated depreciation and amortization ( 22,937 ) ( 21,630 )

$ 34,137 $ 25,868

Depreciation expense was $ 6,099,675

in fiscal 2021 and $ 4,894,220 in fiscal 2020.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

Depreciation expense was $ 7.2 million in fiscal 2022, $ 6.1 million in fiscal 2021, and $ 4.9 million in fiscal 2020.

In fiscal 2022, 2021, and 2020 asset disposals resulted in a reduction in gross assets of $ 6.3 million, $ 0.3 million, $ 0.4 million, respectively, and accumulated depreciation of $ 5.8 million, $ 0.3 million, $ 0.3 million, respectively.

The disposals generally relate to the decommissioning of aged assets, remodeled showrooms, and the reduction of fixtures used during pop-up-shops.

NOTE 3 - OTHER INTANGIBLE ASSETS, NET

A summary of other intangible assets

A summary of other intangible assets follows:

January 30, 2022

Estimated Life

Gross Carrying Amount

Accumulated Amortization

Net carrying amount

$ ( 1,128,997 )

Other intangibles

$ ( 2,949,367 )

February 2, 2020

Estimated Life

Gross Carrying Amount

Accumulated Amortization

Net carrying amount

$ ( 846,898 )

Other intangibles

$ ( 2,436,170 )

Amortization expense on other intangible

assets was $ 513,197 in fiscal 2021 and $ 263,842 in fiscal 2020.

Estimated Life Gross Carrying Amount Accumulated Amortization Net carrying amount

Patents 10 Years $ 2,838 $ ( 1,626 ) $ 1,212

Trademarks 3 Years 1,390 ( 1,189 ) 201

Other intangibles 5 Years 840 ( 840 ) —

Total $ 5,068 $ ( 3,655 ) $ 1,413

January 31, 2021

Estimated Life Gross Carrying Amount Accumulated Amortization Net carrying amount

Patents 10 years $ 2,388 $ ( 1,129 ) $ 1,259

Trademarks 3 years 1,239 ( 981 ) 258

Other intangibles 5 years 840 ( 840 ) —

Total $ 4,467 $ ( 2,950 ) $ 1,517

Amortization expense on other intangible assets was $ 0.7 million in fiscal 2022, $ 0.5 million in fiscal 2021, and $ 0.3 million in fiscal 2020.

Expected amortization expense by fiscal year for these other intangible assets follows (in thousands):

Thereafter 446

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 3 - OTHER INTANGIBLE ASSETS, NET (CONTINUED)

Expected amortization expense by fiscal

year for these other intangible assets follows:

NOTE 4 - PREPAID EXPENSES AND OTHER CURRENT ASSETS

A summary of other prepaid and other

current assets follows:

A summary of other prepaid and other current assets follows (in thousands):

Prepaid insurance $ 1,667 $ 1,236

1 unchanged sentence

Barter credits 3,407 2,521

Deposits 421 997

Prepaid rent 62 1,704

Prepaid inventory 475 102

1 unchanged sentence

Tenant allowance receivable 2,781 1,464

Other 1,329 549

$ 15,726 $ 10,128

NOTE 5 - ACCRUED EXPENSES

A summary of accrued expenses follows (in thousands):

Accrued freight and shipping $ 23,683 $ 4,524

Accrued advertising fees 4,150 2,015

Accrued warehouse expenses 2,671 1,288

Accrued professional fees 2,268 1,590

Customer return liability 2,026 2,227

Accrued occupancy 1,284 937

Accrued state income taxes 1,007 7

Accrued insurance 973 541

Warranty liability 689 606

Accrued credit card fees 542 425

Other accrued expenses 1,204 3,027

$ 40,497 $ 17,187

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 6 - INCOME TAXES

On March 27, 2020, the Federal government

of the United States enacted the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) which includes a number of

significant changes to the existing U.S.

tax laws including postponing the filing date of specific federal income tax returns and payments

from April 15, 2020 to July 15, 2020, temporarily increasing the 30% limitation on the interest deduction to 50%, introduction of a capital

investment deduction for Qualified Improvement Property (“QIP”), and change in the use of net operating losses.

The Company’s

federal net operating losses that have been incurred in tax years beginning on or before December 31, 2017 will have a 20-year carryforward

limitation, a two-year carryback period and can offset 100% of future taxable income.

Net operating losses incurred in tax years beginning

after December 31, 2017 and before January 1, 2021 will have an indefinite life, a five-year carryback period and can offset 100% of future

taxable income prior to 2021 and 80% of future taxable income after 2020.

Net operating losses incurred in tax years beginning on or after

January 1, 2021 will have an indefinite life, generally no carryback period and can offset 80% of future taxable income.

State taxes for the fiscal years ended

January 31, 2021 and February 2, 2020, were approximately $ 86,000 and $ 43,000 respectively.

The components of deferred income taxes

On March 27, 2020, the Federal government of the United States enacted the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) which includes a number of significant changes to the existing U.S.

tax laws including postponing the filing date of specific federal income tax returns and payments from April 15, 2020 to July 15, 2020, temporarily increasing the 30% limitation on the interest deduction to 50%, introduction of a capital investment deduction for Qualified Improvement Property (“QIP”), and change in the use of net operating losses.

The Company’s federal net operating losses that have been incurred in tax years beginning on or before December 31, 2017 will have a 20-year carryforward limitation, a two-year carryback period and can offset 100% of future taxable income.

Net operating losses incurred in tax years beginning after December 31, 2017 and before January 1, 2021 will have an indefinite life, a five-year carryback period and can offset 100% of future taxable income prior to 2021 and 80% of future taxable income after 2020.

Net operating losses incurred in tax years beginning on or after January 1, 2021 will have an indefinite life, generally no carryback period and can offset 80% of future taxable income.

State taxes for the fiscal years ended January 30, 2022, January 31, 2021 and February 2, 2020, were approximately $ 2.2 million, $ 0.1 million and less than $ 0.1 million respectively.

The Company does not anticipate any material adjustments relating to unrecognized tax benefits within the next twelve months;

however, the ultimate outcome of tax matters is uncertain and unforeseen results can occur.

We had no material interest or penalties during the fiscal years 2022, 2021, and 2020, and we do not anticipate any such items during the next twelve months.

Our policy is to record interest and penalties directly related to uncertain tax positions as income tax expense in the consolidated statements of operations.

The components of deferred income taxes follow:

Deferred Income Tax Assets

8 unchanged sentences

Total Deferred Income Tax Assets 12,261 16,353

Deferred Income Tax Liabilities

Property and equipment ( 2,425 ) —

Valuation Allowance — ( 16,353 )

( 16,352,790 )

( 19,523,741 )

Net Deferred Income Tax Asset $ 9,836 $ —

The income tax provision differs from

the amount obtained by applying the statutory Federal income tax rate to pre-tax income as follows:

Provision (benefit) at Federal Statutory rates

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

The income tax provision differs from the amount obtained by applying the statutory Federal income tax rate to pre-tax income as follows:

2022 2021 2020

Provision (benefit) at Federal Statutory rates $ 8,035 $ 3,111 $ ( 3,184 )

Permanent adjustments ( 1,039 ) ( 411 ) ( 848 )

State tax, net of Federal provision (benefit) 1,737 496 ( 582 )

Change in state deferred tax 146 — —

Federal True-ups ( 164 ) 61 ( 394 )

Uncertain tax positions- NOLS — — ( 10,753 )

( 10,753,384 )

Change in valuation allowance ( 16,353 ) ( 3,171 ) 15,804

Income (benefit) tax provision $ ( 7,638 ) $ 86 $ 43

The Company is subject to federal, state and local corporate income taxes.

The components of the provision for income taxes reflected on the consolidated statements of operations are set forth below:

2022 2021 2020

Income tax provision

The Company is subject to federal,

state and local corporate income taxes.

The components of the provision for income taxes reflected on the consolidated statements of operations

are set forth below:

Current taxes:

federal $ — $ — $ —

State and local 2,198 86 43

1 unchanged sentence

Deferred taxes:

federal $ ( 7,254 ) $ — $ —

State and local ( 2,582 ) — —

1 unchanged sentence

Total tax provision $ ( 7,638 ) $ 86 $ 43

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 5 - INCOME TAXES (CONTINUED)

Differences in terms of percentages

are as follows:

Differences in terms of percentages are as follows:

2022 2021 2020

Provision (benefit) at Federal Statutory rates 21.0 % 21.0 % ( 21.0 ) %

1 unchanged sentence

State tax, net of Federal provision (benefit) 4.5 % 3.4 % ( 3.8 ) %

Change in state deferreds 0.4 % — % — %

Federal True-ups ( 0.4 ) % 0.4 % ( 2.6 ) %

2 unchanged sentences

Income tax provision ( 20.0 ) % 0.6 % 0.3 %

At January 31, 2021 and February 2,

2020, the Company has net operating loss carryforwards available for federal income tax purposes of approximately $ 36,966,000 and $ 59,311,000 ,

respectively, which are scheduled to expire in varying amounts from fiscal 2027 to fiscal 2037 .

In addition, the Company has approximately

$ 30,399,000 and $ 42,618,000 of state net operating loss carryforwards as of January 31, 2021 and February 2, 2020, respectively.

2020 a reserve had been released that was previously recorded against the net operating losses in accordance with ASC 740-10 due to a

Private Letter Ruling (“PLR”) that was issued by the IRS.

The PLR approved the late filing of Form 8832, “Entity Classification

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

At January 30, 2022 and January 31, 2021, the Company has net operating loss carryforwards available for federal income tax purposes of approximately $ 9.9 million and $ 37.0 million, respectively, which are scheduled to expire in varying amounts from fiscal 2027 to fiscal 2037.

In addition, the Company has approximately $ 22.2 million and $ 30.4 million of state net operating loss carryforwards as of January 30, 2022 and January 31, 2021, respectively.

In fiscal 2021 a reserve had been released that was previously recorded against the net operating losses in accordance with ASC 740-10 due to a Private Letter Ruling (“PLR”) that was issued by the IRS.

The PLR approved the late filing of Form 8832, “Entity Classification Election”.

Due to the filing of this form, the Company believes that the Federal and State NOLs will be available for future utilization.

As defined in Section 382 of the Internal

Revenue Code, certain ownership changes limit the annual utilization of federal net operating losses.

As a result of issuance, sales and

other transactions involving the Company’s stock, the Company experienced an ownership change during fiscal years ended January

31, 2011, February 3, 2019, and January 31, 2021 which have caused such federal net operating losses to be subject to limitation under

The annual base limitation from 2011, 2019, and 2021 are approximately $ 302,000 , $ 5,888,000 , and $ 7,665,000 respectively.

The Company is entitled to additional limitation based on the net unrealized built-in gain computation, which results in additional limitation

of approximately $ 40,000,000 over the next 5 years.

There is no impact on the overall provision since the Company has a full valuation

allowance against its deferred tax assets.

During fiscal year ending January 31,

2021 and February 2, 2020, the Company increased/(decreased) the valuation allowance by approximately ($ 3,171,000 ) and $ 15,804,000 respectively.

The changes in the amount of unrecognized

tax benefits in the fiscal years ending January 31, 2021 and February 2, 2020 were as follows:

As defined in Section 382 of the Internal Revenue Code, certain ownership changes limit the annual utilization of federal net operating losses.

As a result of issuance, sales and other transactions involving the Company’s stock, the Company experienced an ownership change during fiscal years ended January 31, 2011, February 2, 2020, and January 30, 2022 which have caused such federal net operating losses to be subject to limitation under Section 382.

The annual base limitation from 2011, 2019, and 2022 are approximately $ 0.3 million, $ 5.9 million, and $ 7.7 million respectively.

The Company is entitled to additional limitation based on the net unrealized built-in gain computation, which results in additional limitation of approximately $ 40.0 million over the next 5 years.

During fiscal years ending January 30, 2022, January 31, 2021, and February 2, 2020, the Company increased/(decreased) the valuation allowance by approximately $( 16.4 ) million, $( 3.2 ) million, and $ 15.8 million, respectively.

The Company reversed its valuation allowance during the fiscal year ended January 30, 2022 since it is more likely than not that the remaining net deferred tax assets will be realized.

As of January 30, 2022, the Company does not have a valuation allowance against its net deferred tax assets.

2022 2021 2020

Beginning balance $ — $ — $ 10,753

2 unchanged sentences

Tax positions of prior years:

( 10,753,384 )

Payments — — —

Settlements — — —

Release — — ( 10,753 )

Ending balance $ — $ — $ —

The Company adopted FAS Accounting

Standard 2013-11.

The pronouncement requires the Company to offset its uncertain tax positions against certain deferred tax assets in

the same jurisdiction.

NOTE 7 - COMMITMENTS, CONTINGENCIES AND RELATED PARTIES

The Company leases its office, warehouse facilities and retail showrooms under operating lease agreements which expire at various dates through January 2032.

The Company determines if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of the economic benefits from the use of that identified asset.

Certain operating leases have renewal options and rent escalation clauses.

We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors.

Any options that meet these criteria are included in the lease term at lease commencement.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 6 - COMMITMENTS, CONTINGENCIES AND RELATED

OPERATING LEASE COMMITMENTS

The Company leases its office, warehouse

facilities and retail showrooms under operating lease agreements which expire at various dates through November 2027.

Monthly payments

related to these leases range from $ 2,500 to $ 45,600 .

Total rent expense including common area maintenance charges sales percentage rent

and deferred rent expense was $ 21,380,844 in fiscal 2021 and $ 19,676,958 in fiscal 2020.

Expected future annual minimum rental

payments under these leases follow:

The above disclosure includes lease

extensions for various retail showrooms the Company entered into after year end.

NOTE 7 - COMMITMENTS, CONTINGENCIES AND RELATED PARTIES (CONTINUED)

Lease right-of-use assets represent the right to use an underlying asset pursuant to the lease for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease.

Lease right-of-use assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists.

These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease right-of-use asset, unless an implicit rate is readily determinable.

We combine lease and certain non-lease components for our showroom real estate leases in determining the lease payments subject to the initial present value calculation.

Lease right-of-use assets include upfront lease payments and exclude lease incentives, where applicable.

Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.

Lease expense for operating leases consists of both fixed and variable components.

Expense related to fixed lease payments are recognized on a straight-line basis over the lease term.

Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease.

Leases with an initial term of twelve months or less are not recorded on the balance sheet.

In addition, certain of our equipment lease agreements include variable lease payments, which are based on the usage of the underlying asset.

The variable portion of payments are not included in the initial measurement of the asset or lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred.

ASC 842 requires companies to use the rate implicit in the lease whenever that rate is readily determinable and if the interest rate is not readily determinable, then a lessee may use its incremental borrowing rate.

Most of our leases do not have an interest rate implicit in the lease.

As a result, for purposes of measuring our ROU asset and lease liability, we determined our incremental borrowing rate by computing the rate of interest that we would have to pay to (i) borrow on a collateralized basis (ii) over a similar term (iii) at an amount equal to the total lease payments and (iv) in a similar economic environment.

We used the incremental borrowing rates we determined as of February 1, 2021 for operating leases that commenced prior to that date.

In the case an interest rate is implicit in a lease we will use that rate as the discount rate for that lease.

The lease term for all of our lease arrangements include the noncancelable period of the lease plus, if applicable, any additional periods covered by an option to extend the lease that is reasonably certain to be exercised by the Company.

Our leases generally do not include termination options for either party to the lease or restrictive financial or other covenants.

Some of our leases contain variable lease payments based on a Consumer Price Index or percentage of sales, which are excluded from the measurement of the lease liability.

The Company’s lease terms and rates are as follows:

January 30, 2022

Weighted average remaining lease term (in years)

Operating Leases 6.29

Weighted average discount rate 3.44 %

Operating Leases

During the fiscal year ended January 30, 2022, we recognized operating lease expense of $ 18.9 million.

In addition, during the fiscal year ended January 30, 2022, we recognized $ 12.8 million, for index-based changes in rent, maintenance, real estate taxes, insurance and other charges included in the lease as well as rental expenses related to short term leases.

During the fiscal year ended January 30, 2022, we recognized impairment charges totaling $ 0.6 million associated with showroom-level ROU assets that are included as part of selling, general and administrative expenses.

We did not recognize any impairment charges associated with showroom-level ROU assets during the fiscal year ended January 31, 2021 as we did not adopt the guidance in ASC 842 until fiscal year 2022.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

NOTE 7 - COMMITMENTS, CONTINGENCIES AND RELATED PARTIES (CONTINUED)

The following table discloses the location and amount of our operating lease costs within our consolidated balance sheets:

(amounts in thousands) Balance sheet location January 30, 2022

Operating leases Operating lease right-of-use assets (non-current) $ 100,891

Operating leases Current operating lease liabilities $ 16,382

Operating leases Operating lease liability, long term $ 96,574

Total lease liabilities $ 112,956

The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable leases with terms of more than one year to the total lease liabilities recognized on the consolidated balance sheet as of January 30, 2022 in thousands:

(amounts in thousands)

2023 $ 20,493

Thereafter 40,329

Total undiscounted future minimum lease payments 130,961

imputed interest ( 18,005 )

Total present value of lease obligations 112,956

current operating lease liability ( 16,382 )

Operating lease liability- long term $ 96,574

Supplemental Cash Flow information and non-cash activity related to our operating leases is as follows (in thousands):

(amounts in thousands) For the year ended January 30, 2022

Operating cash flow information:

Amounts paid on operating lease liabilities $ 14,400

Non-cash activities

Right-of-use assets obtained in exchange for lease obligations $ 116,048

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

NOTE 7 - COMMITMENTS, CONTINGENCIES AND RELATED PARTIES (CONTINUED)

SEVERANCE CONTINGENCY

The Company has various employment agreements with its senior level

A number of these agreements have severance provisions, ranging from 12 to 18 months of salary, in the event those associates

are terminated without cause.

The total amount of exposure to the Company under these agreements was $4,009,943 at January 31, 2021 if

all executives with employment agreements were terminated without cause and the full amount of severance was payable.

The Company has various employment agreements with its senior level executives.

A number of these agreements have severance provisions, ranging from 12 to 18 months of salary, in the event those executives are terminated without cause or resign for good reason.

The total amount of exposure to the Company under these agreements was $ 5.5 million at January 30, 2022 if all executives with employment agreements were terminated without cause or were to resign for good reason and the full amount of severance was payable.

LEGAL CONTINGENCY

The Company is involved in various legal proceedings in the ordinary course of business.

Management cannot presently predict the outcome of these matters, although management believes, based in part on the advice of counsel, that the ultimate resolution of these matters will not have a materially adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

RELATED PARTIES

Our equity sponsor Mistral Capital

Management, LLC (“Mistral”) performs management services for the Company under a contractual agreement.

Certain of our directors

are members and principals of Mistral.

Management fees incurred were approximately $ 400,000 in both fiscal 2021 and 2020 and are included

in selling, general and administrative expenses.

There was $ 0 payable to Mistral as of January 31, 2021 and $ 2,000 payable to Mistral

as of February 2, 2020.

The amount payable to Mistral as of February 2, 2020 is included in accrued liabilities in the accompanying consolidated

balance sheet.

In addition, the Company reimbursed Mistral for expenses incurred in the amount of $ 1,959 and $ 44,140 for out-of-pocket

expenses for fiscal 2021 and 2020, respectively.

The Company’s contractual agreement with Mistral ended on January 31, 2021.

Our equity sponsor Satori Capital,

LLC (“Satori”) performs management services for the Company under a contractual agreement.

Management fees totaled approximately

$ 100,000 in both fiscal 2021 and 2020 and are included in selling, general and administrative expenses.

Amounts payable to Satori as of

January 31, 2021 were $ 8,333 consisting of management fees which were included in accounts payable in the accompanying consolidated balance

sheet as of January 31, 2021.

Amounts payable to Satori as of February 2, 2020 were $ 95,000 consisting of $ 25,000 in management fees and

$ 70,000 of reimbursable expenses which were included in accounts payable and accrued liabilities in the accompanying consolidated balance

In addition, the Company reimbursed Satori for expenses incurred in the amount of $ 51,614 and $ 70,000 for out-of-pocket expenses

for fiscal 2021 and 2020, respectively.

The Company’s contractual agreement with Satori ended on January 31, 2021.

The Company engaged Blueport Commerce

(“Blueport”), a company owned in part by investment vehicles affiliated with Mistral, as an ecommerce platform in February

One of our directors is also a director of Blueport.

There were $ 2,143,392 and $ 1,833,154 of fees incurred with Blueport that were

related to sales transacted through the Blueport platform during fiscal 2021 and 2020, respectively.

There was an additional $ 663,572

of fees incurred with Blueport during fiscal 2021 related to Lovesac’s early termination of our contract in order to launch a new

enhanced ecommerce platform.

There no amounts payable as of January 31, 2021.

Amount payable to Blueport as of February 2, 2020 was $ 150,508

and is included in accounts payable in the accompanying consolidated balance sheets.

Our equity sponsor Mistral Capital Management, LLC (“Mistral”) performed management services for the Company under a contractual agreement that ended on January 31, 2021.

One of our directors is a member and principal of Mistral.

There were no management fees incurred in fiscal 2022.

Management fees totaled approximately $ 0.4 million in both fiscal 2021 and 2020 and are included in selling, general and administrative expenses.

There were no amounts payable to Mistral as of January 30, 2022.

There were less than $ 0.1 million in amounts payable to Mistral as of January 31, 2021.

In addition, the Company reimbursed Mistral for expenses incurred for less than $ 0.1 million for out-of-pocket expenses for fiscal 2021 and 2020.

There were no such reimbursements in fiscal 2022.

Our equity sponsor Satori Capital, LLC (“Satori”) performed management services for the Company under a contractual agreement that ended on January 31, 2021.

There were no management fees incurred in fiscal 2022.

Management fees totaled approximately $ 0.1 millions in both fiscal 2021 and 2020 and are included in selling, general and administrative expenses.

There were no amounts payable to Satori as of January 30, 2022.

Amounts payable to Satori as of January 31, 2021 were less than $ 0.1 million consisting of management fees which were included in accounts payable in the accompanying consolidated balance sheet as of January 31, 2021.

In addition, the Company reimbursed Satori for expenses incurred for less than $ 0.1 million for out-of-pocket expenses in both fiscal 2021 and 2020.

There were no such reimbursements during fiscal 2022.

The Company engaged Blueport Commerce (“Blueport”), a company owned in part by investment vehicles affiliated with Mistral, as an ecommerce platform in February 2018.

The Company terminated the Blueport contract in fiscal 2021 in order to launch a new enhanced ecommerce platform.

There were no fees incurred in fiscal 2022.

There were $ 2.1 million and $ 1.8 million of fees incurred with Blueport that were related to sales transacted through the Blueport platform during fiscal 2021 and 2020, respectively.

There was an additional $ 0.7 million of fees incurred with Blueport during fiscal 2021 related to Lovesac’s early termination of our contract.

There were no amounts payable as of January 30, 2022 or January 31, 2021.

RECOVERY OF INSURANCE PROCEEDS

During fiscal year 2022, a warehouse the Company had inventory in was damaged by fire and qualified for a loss recovery claim.

The Company disposed of inventory of approximately $ 0.6 million.

The Company reached an agreement with its insurance carrier and the Company received a cash insurance recovery of approximately $ 1.2 million for the reimbursement of lost inventory and profit margin.

Accordingly, the Company recognized a gain of approximately $ 0.6 million related to the recovery of lost profit margin and is included in the accompanying consolidated statements of operations as a reduction to cost of goods sold.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 8 - STOCKHOLDERS’ EQUITY

COMMON STOCK WARRANTS

In fiscal 2020, the Company issued

18,166 warrants to a third party in connection with previous equity raise.

These warrants were valued using the Black-Scholes model, with

similar assumptions to the June 2018 warrants.

The warrants had a fair value of approximately $ 130,000 .

Of these warrants, 17,396 were

exercised on May 14, 2019.

The warrants may be exercised at any

time following the date of issuance during the period prior to their expiration date.

The fair value of each warrant is estimated on the

date of grant using the Black-Scholes model.

Expected volatilities are based on the Company’s historical volatility and comparable

Companies’ historical volatility for periods when there is not sufficient historical pricing to base the estimate of volatility,

which management believes represents the most accurate basis for estimating expected future volatility under the current circumstances.

The risk-free rate is based on the U.S.

treasury yield in effect at the time of the grant.

Expected volatility

Expected dividend yield

Expected term (in years)

Risk-free interest rate

Exercise price

Calculated fair value of warrant

The following represents warrant activity during fiscal

2021 and 2020:

Average exercise price

Number of warrants

Weighted average remaining contractual life (in years)

Warrants Outstanding at February 3, 2019

In fiscal 2022, a total of 5,625 warrants were exercised on a cashless basis, whereby the holders received fewer shares of common stock in lieu of a cash payment to the Company.

Warrants exercised in fiscal 2022 resulted in the issuance of 10,956 common shares.

There were 98 warrants that expired as of January 30, 2022.

In fiscal 2021, 738,897 warrants exercised were cashless, whereby the holders received fewer shares of common stock in lieu of a cash payment to the Company.

Warrants exercised in fiscal 2021 resulted in the issuance of 439,447 common shares.

Warrants exercised in fiscal 2020 resulted in the issuance of 27,246 common shares.

The following represents warrant activity during fiscal 2022 and 2021:

Average exercise price Number of warrants Weighted average remaining contractual life (in years)

Outstanding at February 3, 2019 16.83 1,067,475 2.93

Warrants issued 16.00 18,166 2.40

Expired and canceled — — —

Warrants outstanding at February 2, 2020

Exercised 16.00 ( 46,521 ) 2.15

Outstanding at February 2, 2020 16.83 1,039,120 1.93

Warrants issued — — —

Expired and canceled — 0 —

Exercised 16.00 ( 745,147 ) 0.41

Outstanding at January 31, 2021 19.07 293,973 2.57

In fiscal 2021, 738,897 warrants exercised

were cashless, whereby the holders received fewer shares of common stock in lieu of a cash payment to the Company.

Warrants exercised

in fiscal 2021resulted in the issuance of 439,447 common shares.

Warrants exercised in fiscal 2020 resulted in the issuance of 27,246

common shares.

Warrants issued — — —

Expired and canceled 9.83 ( 98 ) —

Exercised 16.00 ( 12,125 ) 0.09

Outstanding at January 30, 2022 $ 19.20 281,750 1.41

EQUITY INCENTIVE PLANS

The Company adopted the 2017 Equity Plan which provides for awards in the form of options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares, performance units, cash-based awards and other stock-based awards.

All awards shall be granted within 10 years from the effective date of the 2017 Equity Plan.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 8 - STOCKHOLDERS’ EQUITY (CONTINUED)

EQUITY INCENTIVE PLANS

The Company adopted the 2017 Equity

Plan which provides for Awards in the form of Options, Stock Appreciation rights, Restricted Stock Awards, Restricted Stock Units, Performance

shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards.

All awards shall be granted within 10 years from the effective

date of the Plan.

On June 5, 2019, the stockholders approved

an amendment and restatement of the 2017 Equity Plan that among other things increased the number of shares of common stock reserved for

issuance from 615,066 to 1,414,889 share of common stock.

In June 2019, the Company granted 495,366

Non statutory Stock options to certain officers of the Company with an option price of $ 38.10 per share.

100 % of the stock options are

subject to vesting on the first trading day after the date on which the closing price of the Company’s stock price has been at least

$ 75 for 60 consecutive trading days so long as this goal has been attained by June 5, 2022 or the options will terminate.

These options

were valued using a Monte Carlo simulation model to account for the path dependent market conditions that stipulate when and whether or

not the options shall vest.

In June 2019, the Company granted 495,366 nonstatutory Stock options to certain officers of the Company with an option price of $ 38.10 per share.

100 % of the stock options are subject to vesting on the third anniversary of the date of grant if the officers are still employed by the Company and the average closing price of the Company’s common stock for the prior 40 consecutive trading days has been at least $ 75 by the third anniversary of the grant.

Both the employment and the market condition must be satisfied no later than June 5, 2024 or the options will terminate.

These options were valued using a Monte Carlo simulation model to account for the path dependent market conditions that stipulate when and whether or not the options shall vest.

The 495,366 stock options were modified to extend the term of the options through June 5, 2024.

resulted in additional compensation of approximately $ 874,000 , of which, $ 315,000 was recorded upon modification and the remaining expense

was recognized over the remaining expected term.

In December 2019, SAC LLC distributed

the shares of the Company’s common stock it held.

In connection with the distribution officers of the Company agreed to exchange

and modify options that were held at SAC LLC for shares of vested common stock of the Company.

Pursuant to the exchange SAC LLC transferred

175,478 shares of common stock to the Company and the Company immediately cancelled these shares.

The Company then issued to the former

option holders the number of those shares pursuant to the 2017 Equity Plan and withheld 73,507 shares to satisfy taxes associated with

the issuance.

In June 2020, the stockholders of the Company approved an amendment

to the 2017 Equity Plan that increased the number of shares of common stock reserved for issuance under the 2017 Equity Plan by 690,000

shares of common stock.

The number of shares of common stock reserved for issuance under the 2017 Equity Plan increased from 1,414,889

to 2,104,889 shares of common stock.

A summary of the status of our

stock options as of January 31, 2021 and February 2, 2020, and changes during fiscal years then ended, is presented below:

For the years ended January 31, 2021 and February

Number of options

Weighted average exercise price

Weighted average remaining contractual life (in years)

Average intrinsic value

This resulted in additional compensation of approximately $ 0.9 million, of which, $ 0.3 million was recorded upon modification and the remaining expense was recognized over the remaining expected term.

The market condition was met on June 5, 2021, which was the date on which the average closing price of the Company’s common stock had been at least $ 75 for 40 consecutive trading days.

The options will vest and become exercisable on June 5, 2022 as long as the officers are still employed on that date.

As a result of the market condition being met, the Company accelerated the amortization and recognized additional stock-based compensation expense during fiscal year 2022 of approximately $ 0.9 million.

In June 2020, the stockholders of the Company approved an amendment to the 2017 Equity Plan that increased the number of shares of common stock reserved for issuance under the 2017 Equity Plan by 690,000 shares of common stock.

The number of shares of common stock reserved for issuance under the 2017 Equity Plan increased from 1,414,889 to 2,104,889 shares of common stock.

A summary of the status of our stock options as of January 30, 2022, January 31, 2021, and February 2, 2020 and the changes during fiscal years then ended, is presented below:

For the years ended January 30, 2022, January 31, 2021, and February 2, 2020

Number of options Weighted average exercise price Weighted average remaining contractual life (in years) Average intrinsic value

Outstanding at February 3, 2019 — $ — 0 —

Expired and canceled

Granted 495,366 38.10

Canceled and forfeited — $ —

Outstanding at February 2, 2020 495,366 $ 38.10 2.34 —

Expired and canceled

Canceled and forfeited — —

Outstanding at January 31, 2021 495,366 $ 38.10 3.35 —

Granted — $ —

Canceled and forfeited — —

Outstanding at January 30, 2022 495,366 $ 38.10 2.35 $ 28.68

Exercisable at the end of the period — — — —

1 unchanged sentence

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 8 - STOCKHOLDERS’ EQUITY (CONTINUED)

EQUITY INCENTIVE PLANS (CONTINUED)

A summary of the status of our unvested

restricted stock units as of January 31, 2021 and February 2, 2020, and changes during fiscal years then ended, is presented below:

Number of shares

Weighted average grant date fair value

A summary of the status of our unvested restricted stock units as of January 30, 2022, January 31, 2021, February 2, 2020, and and changes during fiscal years then ended, is presented below:

Number of shares Weighted average grant date fair value

Unvested at February 3, 2019 377,286 $ 11.16

Granted 130,898 23.63

Forfeited ( 20,470 ) 16.21

Vested ( 304,661 ) 12.75

Unvested at February 2, 2020 183,053 $ 21.34

Granted 627,940 16.94

Forfeited ( 5,701 ) 11.86

Vested ( 149,734 ) 16.24

Unvested at January 31, 2021 655,558 18.86

Equity-based compensation expense was approximately $ 4.7 and $ 4.9 million

for fiscal 2021 and 2020, respectively.

In fiscal 2020, all the unvested restricted stock units for certain senior executives of the Company

that were granted prior to the accelerated vesting trigger, vested according to the accelerated vesting trigger in their restricted

stock unit agreements.

The triggering event was the market capitalization of the Company post-IPO, exceeding $300 million for 60 consecutive

trading days and the expiration of the lock-up period.

This accelerated vesting resulted in equity based compensation in the amount of

$2.9 million.

In December 2019, the exchange and modification of options that were held at SAC LLC resulted in approximately $ 313,000

of equity-based compensation expense.

The total unrecognized equity based compensation cost related to unvested

stock option and restricted unit awards was approximately $ 5.3 million as of January 31, 2021 and will be recognized in operations over

a weighted average period of 2.65 years.

Granted 94,985 78.53

Forfeited ( 42,516 ) 22.67

Vested ( 174,694 ) 19.57

Unvested at January 30, 2022 533,333 $ 28.41

Equity-based compensation expense was approximately $ 5.9 million, $ 4.7 million, and $ 4.9 million for fiscal 2022, 2021, and 2020 respectively.

In fiscal 2020, all the unvested restricted stock units for certain senior executives of the Company that were granted prior to the accelerated vesting trigger, vested according to the accelerated vesting trigger in their restricted stock unit agreements.

The triggering event was the market capitalization of the Company post-IPO, exceeding $ 300 million for 60 consecutive trading days and the expiration of the lock-up period.

This accelerated vesting resulted in equity based compensation in the amount of $ 2.9 million.

In December 2019, the exchange and modification of options that were held at SAC LLC resulted in approximately $ 313,000 of equity-based compensation expense.

The total unrecognized equity based compensation cost related to unvested stock option and restricted unit awards was approximately $ 4.8 million as of January 30, 2022 and will be recognized in operations over a weighted average period of 2.11 years.

NOTE 9 - EMPLOYEE BENEFIT PLAN

In February 2017, the Company established the TLC 401(k) Plan (the “401(k) Plan”) with Elective Deferrals beginning May 1, 2017.

The 401(k) Plan calls for Elective Deferral Contributions, Safe Harbor Matching Contributions and Profit Sharing Contributions.

All associates of the Company will be eligible to participate in the 401(k) Plan as of the day of the month which is coincident with or next follows the date on which they attain age 21 and complete 1 month of service.

Participants will be able to contribute up to 100 % of their eligible Compensation to the 401(k) Plan subject to limitations with the IRS.

The employer contributions to the 401(k) Plan for fiscal 2022, fiscal 2021, and fiscal 2020 were approximately $ 0.8 million, $ 0.5 million, and $ 0.4 million, respectively.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 8 - EMPLOYEE BENEFIT PLAN

In February 2017, the Company established the TLC 401(k) Plan (the

“401(k) Plan”) with Elective Deferrals beginning May 1, 2017.

The 401(k) Plan calls for Elective Deferral Contributions, Safe

Harbor Matching Contributions and Profit Sharing Contributions.

All associates of the Company will be eligible to participate in the 401(k)

Plan as of the day of the month which is coincident with or next follows the date on which they attain age 21 and complete 1 month of

Participants will be able to contribute up to 100 % of their eligible Compensation to the 401(k) Plan subject to limitations with

The employer contributions to the 401(k) Plan for fiscal 2021 and 2020 were approximately $ 482,000 and $ 406,000 , respectively.

NOTE 10 - FINANCING ARRANGEMENTS

On February 6, 2018, the Company established

a line of credit with Wells.

On February 6, 2018, the Company established a line of credit with Wells.

The line of credit with Wells allows the Company to borrow up to $ 25.0 million and will mature in February 2023.

Borrowings are limited to 90 % of eligible credit card receivables plus 85 % of eligible wholesale receivables plus 85 % of the net

recovery percentage for the eligible inventory multiplied by the value of such eligible inventory of the Company for the period from December

16 of each year until October 14 of the immediately following year, with a seasonal increase to 90 % of the net recovery percentage for

the period from October 15 of each year until December 15 of such year, seasonal advance rate, minus applicable reserves established by

As of January 31, 2021, the Company’s borrowing availability under the line of credit with Wells Fargo was $ 15.9 million.

As of January 31, 2021, there was no outstanding balance on this line of credit.

Under the line of credit with Wells, the Company may elect that revolving

loans bear interest at a rate per annum equal to the base rate plus the applicable margin or the LIBOR rate plus the applicable margin.

Borrowings are limited to 90 % of eligible credit card receivables plus 85 % of eligible wholesale receivables plus 85 % of the net recovery percentage for the eligible inventory multiplied by the value of such eligible inventory of the Company for the period from December 16 of each year until October 14 of the immediately following year, with a seasonal increase to 90 % of the net recovery percentage for the period from October 15 of each year until December 15 of such year, seasonal advance rate, minus applicable reserves established by Wells.

As of January 30, 2022 and January 31, 2021, the Company’s borrowing availability under the line of credit with Wells was $ 22.5 million and $ 15.9 million respectively.

As of January 30, 2022 and January 31, 2021, there were no borrowings outstanding on this line of credit.

Under the line of credit, the Company may elect that the revolving loans bear interest at a rate per annum equal to the base rate plus the applicable margin or the LIBOR rate plus the applicable margin.

The applicable margin is based on tier’s relating to the quarterly average excess availability.

The tiers range from 2.00 % to 2.25 %.

The loan agreement calls for certain covenants including a timing of the financial statements threshold and a minimum excess availability

On March 25, 2022, the Company amended the credit agreement to extend the maturity date to March 25, 2024, and among other things, increase the maximum revolver commitment to $ 40.0 million, subject to borrowing base and availability restrictions.

Availability is based on eligible accounts receivable and inventory.

The amended agreement contains a financial covenant that requires us to maintain undrawn availability under the credit facility of at least 10 % of the lesser of (i) the aggregate commitments in the amount of $ 40.0 million and (ii) the amounts available under the credit facility based on eligible accounts receivable and inventory.

Under the amended line of credit with Wells, the Company may elect that revolving loans bear interest at either a base rate or a term SOFR based rate, plus, in either case, a margin determined by reference to our quarterly average excess availability under the line of credit and ranging from 0.50 % to 0.75 % for borrowings accruing interest at a base rate and from 1.625 % to 1.850 % for borrowings accruing interest at term SOFR.

Swing line loans will at all times accrue interest at a base rate plus the applicable margin.

The lower margins described above will apply initially and will adjust thereafter from time to time based on the quarterly average excess availability under the line of credit.

NOTE 11 - SEGMENT INFORMATION

The Company has determined that the Company operates within a single reporting segment.

The chief operating decision makers of the Company are the Chief Executive Officer and the President.

The Company’s operating segments are aggregated for financial reporting purposes because they are similar in each of the following areas including economic characteristics, class of consumer, nature of products and distribution method and products are a singular group of products which make up over 95 % of total sales.

THE LOVESAC COMPANY

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2021 AND FEBRUARY 2, 2020

NOTE 10 - SEGMENT INFORMATION

The Company operates within a single

reporting segment.

The chief operating decision makers of the Company are the Chief Executive Officer and President.

The Company’s

operating segments are aggregated for financial reporting purposes because they are similar in each of the following areas including economic

characteristics, class of consumer, nature of products and distribution method and products are a singular group of products which make

up over 95% of total sales.

The Company’s sales by product

which are considered one segment are as follows:

The Company’s sales by product which are considered one segment are as follows:

Fiscal year ending

January 31, 2021

February 2, 2020

$ 271,018,545

$ 188,436,976

$ 320,737,750

January 30, 2022 January 31, 2021 February 2, 2020

Sactionals $ 436,588 $ 271,018 $ 188,436

Sacs 52,478 44,975 39,641

Other 9,173 4,745 5,300

$ 498,239 $ 320,738 $ 233,377

NOTE 12 - BARTER ARRANGEMENTS

The Company has a bartering arrangement with Icon International, Inc.,

or “Icon”, a vendor, whereby the Company will provide inventory in exchange for media credits.

During fiscal 2020, the Company

exchanged $ 1,097,488 of inventory plus the cost of freight for certain media credits.

To account for the exchange, the Company recorded

the transfer of the inventory asset as a reduction of inventory and an increase to a prepaid media asset of $ 1,055,185 which is included

in “Prepaid and other current assets” on the accompanying consolidated balance sheet.

The barter credits in amount of $ 1,055,185

were used in full during fiscal 2021.

During fiscal 2021, the Company exchanged $ 3,169,825 of inventory plus the cost of freight for certain

media credits.

To account for the exchange, the Company recorded the transfer of the inventory asset as a reduction of inventory and an

increase to a prepaid media asset account of $ 2,937,035 which is included in “Prepaid and other current assets” on the accompanying

consolidated balance sheet.

The Company had $ 2,521,271 of unused media credits remaining as of January 31, 2021.

The Company accounts for barter transactions

under ASC Topic No.

845 “Nonmonetary Transactions.” Barter transactions with commercial substance are recorded at the estimated

fair value of the products exchanged, unless the products received have a more readily determinable estimated fair value.

Revenue associated

with barter transactions is recorded at the time of the exchange of the related assets.

The Company has a bartering arrangement with a third-party vendor, whereby the Company will provide inventory in exchange for media credits.

The Company exchanged $ 1.5 million, $ 3.2 million, and $ 1.1 million of inventory plus the cost of freight for certain media credits during fiscal 2022, fiscal 2021, and fiscal 2020, respectively.

The Company had $ 3.4 million and $ 2.5 million of unused media credits remaining as of January 30, 2022 and January 31, 2021, respectively, which is included in “Prepaid and other current assets” on the accompanying condensed consolidated balance sheet.

The Company accounts for barter transactions under ASC Topic No.

845 “Nonmonetary Transactions.” Barter transactions with commercial substance are recorded at the estimated fair value of the products exchanged, unless the products received have a more readily determinable estimated fair value.

Revenue associated with barter transactions is recorded at the time of the exchange of the related assets.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures