Lovesac Co 10-K

Item 9A. Controls and Procedures. 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 29, 2023. 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 29, 2023. 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, management has concluded that the Company’s internal control over financial reporting was effective as of January 29, 2023.The effectiveness of our internal control over financial reporting as of January 29, 2023 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their attestation report, included in Part IV of this Annual Report on Form 10-K. Remediation of Previously Identified Material Weaknesses As previously disclosed in Part II, "Item 9A - Controls and Procedures" of our Annual Report on Form 10-K for the year ended January 30, 2022, we identified a material weakness in our internal control over financial reporting 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. During the year ended January 29, 2023, we undertook a series of activities to remediate the material weakness, with the following actions designed to strengthen the information technology control environment: • Evaluating and implementing enhanced process controls around user access management to key information systems which may impact our financial reporting; • Expanding management and governance over user access and system controls; • Enhancing our information technology compliance and accounting functions with additional experienced hires including a new Chief Information Officer. We completed our testing of both the design and operating effectiveness of the informational technology general controls, and have concluded that the material weakness has been remediated as of January 29, 2023. 39 Table of Contents Changes in our Internal Control over Financial Reporting Other than as described above in connection with our implementation of the remediation actions discussed above, there were no changes in our internal control over financial reporting that occurred during the quarter ended January 29, 2023 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. Item 9B. Other Information. Shawn Nelson Amended and Restated Employment Agreement On March 23, 2023, the Compensation Committee of the Board of Directors (the “Committee”) of the Company approved, and the Company and Shawn Nelson entered into, an Amended and Restated Employment Agreement (the “A&R Employment Agreement”), which replaces and supersedes in its entirety the prior employment agreement between the Company and Mr. Nelson, dated October 26, 2017, as amended October 2, 2019, and March 24, 2022 (the “Prior Agreement”). The A&R Employment Agreement extends Mr. Nelson’s non-competition and non-solicitation covenants from 18 months to 24 months following the termination of his employment and, in connection with this, correspondingly increases the period during which Mr. Nelson will be entitled to severance compensation and benefits upon a termination of his employment without Cause or for Good Reason (in each case, as defined in Mr. Nelson’s A&R Employment Agreement) from 18 months to 24 months. The other material terms and conditions of the A&R Employment Agreement generally remain unchanged from those set forth in the Prior Agreements. The foregoing description of the A&R Employment Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the A&R Employment Agreement, filed herewith as Exhibit 10.16 of this Form 10-K and is incorporated herein by reference. Shawn Nelson One-Time Performance and Retention Long-Term Incentive Grant On March 23, 2023, the Committee approved a one-time performance and retention long-term incentive grant of 235,000 Restricted Stock Units (the “RSU Grant”) for Mr. Nelson pursuant to the Lovesac Company Second Amended and Restated 2017 Equity Incentive Plan (the “Plan”) and Mr. Nelson’s Restricted Stock Units Agreement and Grant Notice (the “RSU Agreement”). The RSU Grant vests on the later to occur of (i) the fifth anniversary of the date of grant so long as, (x) on or prior to such date (subject to certain limited extensions), the Company has achieved a specified level of performance with respect to share price and net sales, and (y) Mr. Nelson remains in continuous service with the Company as Chief Executive Officer through such date; or (ii) if the specified level of performance with respect to net sales is not achieved on or prior to the fifth anniversary of the date of grant, but the other conditions in subclause (i) are achieved, the first date that such specified level of performance with respect to net sales is achieved, so long as it is achieved on or prior to the seventh anniversary of the date of grant and so long as Mr. Nelson remains in continuous service with the Company through such date. Except as described in the following paragraph, the RSU Grant will be settled in shares of common stock of the Company on the first anniversary of the applicable vesting date. If Mr. Nelson’s service with the Company is terminated (a) by the Company without Cause after the fifth anniversary of the date of grant, or (b) by the Company without Cause or by Mr. Nelson for Good Reason following a Change in Control (as defined in the Plan), the RSU Grant will vest in full as of the date of Mr. Nelson’s termination of service and will be settled on the first anniversary of such vesting date, except that if such termination of service occurs within two years following a Change in Control, the RSU Grant will be settled immediately upon such vesting date. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 40 Table of Contents PART III. Item 10. 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 46 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. Mr. Nelson is the lead designer of the Company's patented products and leads sourcing, creative, design, public relations, investor relations and culture. In 2005, Mr. Nelson won Richard Branson's "The Rebel Billionaire" on Fox and continues to participate in ongoing TV appearances. Mr. 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. Mr. Nelson is also fluent in Mandarin. Mary Fox 50 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 2023, Ms. Fox is a director of AF Ventures, a venture capital fund investing in high growth consumer products. She 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, from 2021 to 2023. She also served on the Board of Directors of The Lovesac Company from February 2020 to November 2021. Ms. Fox graduated from Coventry University in the United Kingdom and holds a degree in manufacturing engineering and business studies. 41 Table of Contents Jack Krause 60 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. Mr. Krause also held the position of General Manager of Sunglass Hut North America from 2008 to 2010 along with other executive positions at Luxottica. Mr. 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. Mr. Krause has a Bachelor of Science in Business Administration from Miami University. Donna Dellomo 58 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. Ms. Dellomo is a Certified Public Accountant with initial focus on audit and tax and is also a former Member of the Board of Trustees of Molloy University and Chair of their Fiscal Affairs Committee. We will file with the SEC a definitive proxy statement (the “2023 Proxy Statement”) pursuant to Regulation 14A for our 2023 annual meeting of stockholders within 120 days of the fiscal year ended January 29, 2023. The additional information required by this Item will appear in the 2023 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. Item 11. Executive Compensation. The information required by this Item will appear in the 2023 Proxy Statement and is incorporated by reference herein. Item 12. 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 29, 2023, about the securities which are either already issued, or authorized for future issuance, under our Second Amended and Restated 2017 Equity Incentive Plan (the “2017 Equity Plan”). 42 Table of Contents (a) (b) (c) 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) 1,167,044 $ 38.10 741,649 Equity compensation plans not approved by shareholders — — — Total 1,167,044 $ 38.10 741,649 (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 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. In fiscal 2023, the 2017 Equity Plan was amended and restated to, among other things, increase the shares of our common stock authorized and reserved for issuance by 550,000 shares. The remaining information required by this Item will appear in the 2023 Proxy Statement and is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this Item will appear in the 2023 Proxy Statement and is incorporated by reference herein. Item 14. Principal Accounting Fees and Services. The information required by this Item will appear in the 2023 Proxy Statement and is incorporated by reference herein. 43 Table of Contents PART IV. Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as part of this report: 1. Financial Statements (see Part II, Item 8. Financial Statements and Supplementary Data ) Reports of Independent Registered Public Accounting Firm (PCAOB ID 34 ) F- 3 Reports of Independent Registered Public Accounting Firm (PCAOB ID 688 ) F- 6 Balance Sheets – As of January 29, 2023 and January 30, 2022 F- 8 Statements of Operations – Years Ended January 29, 2023, January 30, 2022, and January 31, 2021 F- 9 Statements of Changes in Stockholders’ Equity - Years Ended January 29, 2023, January 30, 2022 , and January 31, 2021 F- 10 Statements of Cash Flows - Years Ended January 29, 2023, January 30, 2022 , and January 31, 2021 F- 11 Notes to Financial Statements F- 12 2. 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. 3. Exhibits See the Exhibit Index. Item 16. Form 10-K Summary. Optional disclosure not included in this Annual Report on Form 10-K. 44 Table of Contents EXHIBIT INDEX Exhibit 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 3.1 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 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 Filed herewith. 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. 10-K 10.2 3/30/2022 10.3± Second Amended and Restated 2017 Equit y Incentive Plan 10-Q 10.1 6/8/2022 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 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 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. Krause 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 10-K 10.14 03/30/2022 10.15± Second Amendment to Employment Agreement dated March 24, 2022, by and between The Lovesac Company and Donna Dellomo 10-K 10.15 03/30/2022 45 Table of Contents Exhibit Number Description of Exhibit Filed / Incorporated by Reference from Form ** Incorporated by Reference from Exhibit Number Dated Filed 10.16± Amended and Restated Employment Agreement dated March 23, 2023, by and between The Lovesac Company and Shawn Nelson Filed herewith. 10.17± Offer Letter between The Lovesac Company and Mary Fox, dated September 30, 2021 8-K 10.3 11/12/2021 10.18± Mary Fox Resignation Letter from Board of Directors, dated November 9, 2021 8-K 10.4 11/12/2021 10.19± Form of Stock Option Award Agreement 10-K 10.11 4/14/2021 10.20± The Lovesac Company Annual Incentive Compensation Plan 10-Q 10.1 12/9/2021 10.21± The Lovesac Company Director Compensation Policy Filed herewith. 10.22† Amendment No. 7 to Credit Agreement between The Lovesac Company and Wells Fargo Bank, N.A. Filed herewith. 21.1 List of Subsidiaries 10-K 21.1 4/14/2021 23.1 Consent of D eloitte & Touche LLP Filed herewith. 23.2 Consent of Marcum LLP Filed herewith. 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended Filed herewith. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended Filed herewith. 32.1* Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended Filed herewith. 32.2* Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended Filed herewith. 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. 46 Table of Contents SIGNATURES 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 29, 2023. THE LOVESAC COMPANY By: /s/ Shawn Nelson Shawn Nelson Chief Executive Officer (Principal Executive Officer) 47 Table of Contents 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 March 29, 2023 Shawn Nelson Chief Executive Officer and Director (Principal Executive Officer) /s/ Donna Dellomo March 29, 2023 Donna Dellomo Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ Andrew Heyer March 29, 2023 Andrew Heyer Chairman and Director /s/ Walter McLallen March 29, 2023 Walter McLallen Director /s/ Sharon M. Leite March 29, 2023 Sharon M. Leite Director /s/ Shirley Romig March 29, 2023 Shirley Romig Director /s/ John Grafer March 29, 2023 John Grafer Director /s/ Jack Krause March 29, 2023 Jack Krause Director /s/ Vineet Mehra March 29, 2023 Vineet Mehra Director 48 Table of Contents THE LOVESAC COMPANY FINANCIAL STATEMENTS AS OF JANUARY 29, 2023 AND JANUARY 30, 2022 AND FOR THE YEARS ENDED JANUARY 29, 2023, JANUARY 30, 2022, AND JANUARY 31, 2021 F-1 Table of Contents THE LOVESAC COMPANY CONTENTS Report of Independent Registered Public Accounting Firm as of and for the year ended January 29, 2023 (PCAOB ID 34 ) F- 3 Report of Independent Registered Public Accounting Firm as of and for the year s ended January 30, 2022 and January 31 , 2021 (PCAOB ID 688 ) F-5 Financial Statements Balance Sheets F- 8 Statements of Operations F- 9 Statements of Changes in Stockholders’ Equity F- 10 S tatements of Cash Flows F- 11 Notes to the Financial Statements F- 12 F-2 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of The Lovesac Company Opinion on the Financial Statements We have audited the accompanying balance sheet of The Lovesac Company (the “Company”) as of January 29, 2023, the related statements of operations, changes in stockholders’ equity, and cash flows for the year ended January 29, 2023, 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 29, 2023, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2023, 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 29, 2023, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 29, 2023, expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the 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. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Barter Arrangements — Refer to Note 1 to the financial statements Critical Audit Matter Description The Company has a bartering arrangement with a third-party vendor, in which the Company sells returned open-box inventory in exchange for media credits. Barter sale transactions with commercial substance are recorded at a transaction price based on the estimated fair value of the non-cash consideration of the media credits to be received and the revenue is recognized when control of inventory is transferred, which is when the inventory is picked up from the Company’s warehouse. Fair value is estimated using various considerations including the cost of similar media advertising if transacted directly, the expected sales price of product given up in exchange for the media credits, and the expected usage of media credits prior to expiration based on a marketing spend forecast. For the year ended January 29, 2023, the Company recognized $ 21.3 million of barter sales in exchange for media credits. The Company recognizes an asset for media credits which is subsequently evaluated for impairment at each reporting period for any changes in circumstances. As of January 29, 2023, the Company had $ 25.2 million of unused media credits and did not recognize any impairment. F-3 Table of Contents We identified the barter arrangement as a critical audit matter because of the significant estimate and assumptions management makes to determine the transaction price based on the estimated fair value of the non-cash consideration received in exchange for the media credits. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimate of the fair value of the sale transaction price. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to barter arrangement included the following, among others: • We tested the effectiveness of controls over the determination of the transaction price • We read the underlying barter transaction agreement • For a sample of barter sale transactions, we tested that the sale occurred and the estimated fair value of the sale transaction price, as follows: ◦ Obtained shipping documents that evidenced the transfer of control of the related inventory ◦ Compared management’s independent estimate of advertising costs to the actual advertising costs incurred under the barter arrangement from the third-party vendor ◦ Compared the transaction price of the inventory sold through the bartering agreement to the transaction price of like inventory sold to other third-party customers ◦ Tested the underlying assumptions to management’s analysis to determine their ability to utilize media credits by 1) making inquiries of management related to their projected advertising and media spend, 2) performing a lookback analysis of total marketing spend and specific marketing spend with the third-party vendor, and 3) comparing the forecasts to the amounts included in the overall business forecast as communicated to the Board of Directors /s/ Deloitte & Touche LLP Stamford, Connecticut March 29, 2023 We have served as the Company’s auditor since fiscal 2023. F-4 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of The Lovesac Company Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of The Lovesac Company (the “Company”) as of January 29, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material aspects, effective internal control over financial reporting as of January 29, 2023 based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO . We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the financial statements as of and for the year ended January 29, 2023, of the Company and our report dated March 29, 2023, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/Deloitte & Touche LLP Stamford, Connecticut March 29, 2023 F-5 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of The Lovesac Company Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of The Lovesac Company (the “Company”) as of January 30, 2022, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two 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 the results of its operations and its cash flows for each of the two 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 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. 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. F-6 Table of Contents 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 from 2017 to 2022. Hartford, CT March 30, 2022 F-7 Table of Contents THE LOVESAC COMPANY BALANCE SHEETS JANUARY 29, 2023 AND JANUARY 30, 2022 (amounts in thousands, except share and per share amounts) 2023 2022 Assets Current Assets Cash and cash equivalents $ 43,533 $ 92,392 Trade accounts receivable 9,469 8,547 Merchandise inventories, net 119,962 108,493 Prepaid expenses and other current assets 21,077 15,726 Total Current Assets 194,041 225,158 Property and equipment, net 52,904 34,137 Operating lease right-of-use assets 138,271 100,891 Other Assets Goodwill 144 144 Intangible assets, net 1,411 1,413 Deferred tax asset 9,420 9,836 Other assets 21,863 — Total Other Assets 32,838 11,393 Total Assets $ 418,054 $ 371,579 Liabilities and Stockholders’ Equity Current Liabilities Accounts payable $ 24,576 $ 33,247 Accrued expenses 23,392 40,497 Payroll payable 6,783 9,978 Customer deposits 6,760 13,316 Current operating lease liabilities 21,898 16,382 Sales taxes payable 5,430 5,359 Total Current Liabilities 88,839 118,779 Operating Lease Liabilities, long term 135,955 96,574 Line of Credit — — Total Liabilities $ 224,794 $ 215,353 Commitments and Contingencies (see Note 8) Stockholders’ Equity Preferred Stock $ 0.00001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of Jan 29, 2023 and Jan 30, 2022. — — Common Stock $ 0.00001 par value, 40,000,000 shares authorized, 15,195,698 shares issued and outstanding as of Jan 29, 2023 and 15,123,338 shares issued and outstanding as of Jan 30, 2022. — — Additional paid-in capital 182,554 173,762 Accumulated income (deficit) 10,706 ( 17,536 ) Stockholders’ Equity 193,260 156,226 Total Liabilities and Stockholders’ Equity $ 418,054 $ 371,579 The accompanying notes are an integral part of these financial statements F-8 Table of Contents THE LOVESAC COMPANY STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JANUARY 29, 2023, JANUARY 30, 2022, AND JANUARY 31, 2021 (amounts in thousands, except per share data and share amounts) 2023 2022 2021 Net sales $ 651,545 $ 498,239 $ 320,738 Cost of merchandise sold 305,719 224,894 145,966 Gross profit 345,826 273,345 174,772 Operating expenses Selling, general and administration expenses 216,103 161,967 111,354 Advertising and marketing 79,864 65,078 41,925 Depreciation and amortization 10,842 7,859 6,613 Total operating expenses 306,809 234,904 159,892 Operating income 39,017 38,441 14,880 Interest expense, net ( 117 ) ( 179 ) ( 67 ) Net income before taxes 38,900 38,262 14,813 (Provision for) benefit from income taxes ( 10,658 ) 7,638 ( 86 ) Net income $ 28,242 $ 45,900 $ 14,727 Net income per common share: Basic $ 1.86 $ 3.04 $ 1.01 Diluted $ 1.77 $ 2.86 $ 0.96 Weighted average number of common shares outstanding: Basic 15,198,754 15,107,958 14,610,617 Diluted 15,955,668 16,058,111 15,332,998 The accompanying notes are an integral part of these financial statements F-9 Table of Contents THE LOVESAC COMPANY STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED JANUARY 29, 2023, JANUARY 30, 2022, AND JANUARY 31, 2021 Common Additional Paid-in Accumulated (Deficit) (amounts in thousands, except share amounts) Shares Amount Capital Income Total Balance - February 2, 2020 14,472,611 $ — $ 168,318 $ ( 78,163 ) $ 90,155 Net income — — — 14,727 14,727 Equity-based compensation — — 4,681 — 4,681 Issuance of common stock for restricted stock 99,498 — — — — Taxes paid for net share settlement of equity awards — — ( 1,717 ) — ( 1,717 ) Exercise of warrants 439,447 — 100 — 100 Balance - January 31, 2021 15,011,556 — 171,382 ( 63,436 ) 107,946 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 Net income — — — 28,242 28,242 Equity-based compensation — — 10,450 — 10,450 Issuance of common stock for restricted stock 72,360 — — — — Taxes paid for net share settlement of equity awards — — ( 1,658 ) — ( 1,658 ) Balance - January 29, 2023 15,195,698 $ — $ 182,554 $ 10,706 $ 193,260 The accompanying notes are an integral part of these financial statements F-10 Table of Contents THE LOVESAC COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JANUARY 29, 2023, JANUARY 30, 2022, AND JANUARY 31, 2021 (amounts in thousands) 2023 2022 2021 Cash Flows from Operating Activities Net income $ 28,242 $ 45,900 $ 14,727 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization of property and equipment 10,454 7,154 6,100 Amortization of intangible assets 388 705 513 Amortization of deferred financing fees 164 91 88 Net loss on disposal of property and equipment 45 464 5 Impairment of long-lived assets — 554 245 Equity-based compensation 10,450 5,859 4,681 Deferred rent — — 3,641 Non-cash lease expense 19,265 14,953 — Deferred income taxes 416 ( 9,836 ) — Gain on recovery of insurance proceeds - lost profit margin — ( 632 ) — Changes in operating assets and liabilities: Trade accounts receivable ( 921 ) ( 4,034 ) 2,675 Merchandise inventories ( 11,470 ) ( 56,819 ) ( 14,017 ) Prepaid expenses and other current assets 890 ( 2,459 ) ( 2,060 ) Other assets ( 21,459 ) — — Accounts payable and accrued expenses ( 33,002 ) 39,195 19,584 Operating lease liabilities ( 18,281 ) ( 14,400 ) — Customer deposits ( 6,556 ) 7,323 4,339 Net Cash (Used in) Provided by Operating Activities ( 21,375 ) 34,018 40,521 Cash Flows from Investing Activities Purchase of property and equipment ( 25,242 ) ( 15,887 ) ( 8,374 ) Payments for patents and trademarks ( 307 ) ( 601 ) ( 678 ) Net Cash Used in Investing Activities ( 25,549 ) ( 16,488 ) ( 9,052 ) Cash Flows from Financing Activities Taxes paid for net share settlement of equity awards ( 1,658 ) ( 3,583 ) ( 1,717 ) Proceeds from the exercise of warrants — 104 100 Payment of deferred financing costs ( 277 ) — ( 50 ) Net Cash Used in Financing Activities ( 1,935 ) ( 3,479 ) ( 1,667 ) Net Change in Cash and Cash Equivalents ( 48,859 ) 14,051 29,802 Cash and Cash Equivalents - Beginning 92,392 78,341 48,539 Cash and Cash Equivalents - End $ 43,533 $ 92,392 $ 78,341 Supplemental Cash Flow Disclosures Cash paid for taxes $ 10,670 $ 1,121 $ 86 Cash paid for interest $ 192 $ 95 $ 85 Non-cash investing activities: Asset acquisitions not yet paid for at end of year $ 4,103 $ — $ — The accompanying notes are an integral part of these financial statements F-11 Table of Contents THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS Note 1. Basis of Presentation, and Summary of Significant Accounting Policies Nature of Operations The Lovesac Company (the “Company”, “we”, “us” or “our”)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 29, 2023, the Company operated 195 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. Basis of Presentation The financial statements of the Company as of January 29, 2023 and January 30, 2022 and for the years ended January 29, 2023, January 30, 2022 and January 31, 2021 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission. Fiscal Year The Company’s fiscal year is determined on a 52/53 week basis ending on the Sunday closest to February 1. Hereinafter, fiscal years ended January 29, 2023, January 30, 2022 and January 31, 2021 are referred to as fiscal 2023, 2022 and 2021, respectively. Fiscal 2023, 2022 and 2021 were 52-week fiscal years. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The Company evaluates its estimates and judgements on an ongoing basis based on historical experience, expectations of future events and various other factors we believe to be reasonable under the circumstances and revise them when necessary in the period the change is determined. Actual results may differ from the original or revised estimates. Revenue Recognition Our revenue consists substantially of product sales. The Company reports product sales net of discounts and recognized at a point in time when control transfers to the customer, which occurs when products are shipped. The Company excludes from the measurement of the transaction price all taxes assessed by governmental authorities collected from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes). The Company applies the practical expedient for contracts with duration of one year or less and therefore does not consider the effects of the time value of money. Shipping and handling charges billed to customers are included in revenue. The Company recognizes shipping and handling expense as fulfillment activities (rather than 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. Shipping and handling costs incurred are included in cost of merchandise sold and include inbound F-12 Table of Contents THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS freight and tariff costs relative to inventory sold, warehousing, and last mile shipping to our customers. Shipping and handling costs were $ 158.0 million in fiscal 2023, $ 112.8 million in fiscal 2022, and $ 63.1 million in fiscal 2021. Estimated refunds for returns are recorded using our historical return patterns, adjusting for any changes in returns policies and current product performance. 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 return liability on the balance sheet. As of January 29, 2023 and January 30, 2022, we recorded a return liability of $ 4.5 million and $ 2.0 million within accrued expenses, and a corresponding asset for the net realizable value of inventory to be returned for $ 1.0 million and $ 0.4 million, respectively, in merchandise inventories on our Balance Sheet. In some cases, deposits are received before the Company transfers control, resulting in the recognition of contract liabilities, reported as customer deposits on our Balance Sheet. As of January 29, 2023, and January 30, 2022, the Company recorded customer deposit liabilities the amount of $ 6.8 million and $ 13.3 million, respectively. During the years ended January 29, 2023, and January 30, 2022, the Company recognized $ 13.3 million and $ 6.0 million related to customer deposits from fiscal 2022 and 2021. 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: (in thousands) 2023 2022 2021 Showrooms $ 398,550 $ 298,989 $ 146,150 Internet 176,519 150,622 151,065 Other 76,476 48,628 23,523 Total net sales $ 651,545 $ 498,239 $ 320,738 The Company has no foreign operations and its sales to foreign countries was less than .01 % of total net sales in fiscal 2023, 2022, and 2021. The Company had no customers in fiscal 2023, 2022, or 2021 that comprise more than 10% of total net sales. See Note 11. Segment Information for net sales disaggregated by product . Barter Arrangements The Company has a bartering arrangement with a third-party vendor. The Company repurposes returned open-box inventory in exchange for media credits, which are being used to support our advertising initiatives to create brand awareness and drive net sales growth. Barter transactions with commercial substance are recorded at a transaction price based on the estimated fair value of the non-cash consideration of the media credits to be received and the revenue is recognized when control of inventory is transferred, which is when the inventory is picked up in our warehouse. Fair value is estimated using various considerations, including the cost of similar media advertising if transacted directly, the expected sales price of product given up in exchange for the media credits, and the expected usage of media credits prior to expiration based on a marketing spend forecast. The Company recognizes an asset for media credits which is subsequently evaluated for impairment at each reporting period for any changes in circumstances. As the barter credits are expected to be utilized at various dates through their expiration dates, the Company will classify the amount expected to be utilized in the next fiscal year as current, which is included in Prepaid and Other Current Assets, with the remaining balance included as part of Other Assets on the balance sheet. For the year ended January 29, 2023, and January 30, 2022, the Company recognized $ 21.3 million and $ 3.5 million, respectively, of barter sales in exchange for media credits. The Company had $ 25.2 million and $ 3.4 million of unused F-13 Table of Contents THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS media credits as of January 29, 2023, and January 30, 2022, respectively, and did not recognize any impairment. The difference between the opening and closing balances of the Company's prepaid barter credit primarily results from the inventory exchanged for media credits during the period, offset by utilization of those credits. 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. 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, net Trade accounts receivable are stated at their estimated realizable amount and do not bear interest for which collectability is reasonably assured. 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 receivables are evaluated for collectability on a regular basis and an allowance is recorded, if necessary. 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 two wholesale customers. The Company recognized $ 0.4 million related to bad debt write-offs for fiscal 2023, and 2022, and recognized $ 0.8 million for fiscal 2021, respectively. Breakdown of trade accounts receivable is as follows: (in thousands) As of January 29, 2023 As of January 30, 2022 Credit card receivables $ 5,069 $ 3,186 Wholesale receivables 4,400 5,361 Total trade receivable, net $ 9,469 $ 8,547 The Company had two wholesale customers that comprised 100 % of wholesale receivables at January 29, 2023 and January 30, 2022, 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, deposits, prepaid rent, prepaid inventory, and other costs. Merchandise Inventories, net 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 prices. In addition, the Company includes capitalized freight and warehousing costs in inventory relative to the finished goods in inventory. 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 F-14 Table of Contents THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS and merchandise credits. The Company did not recognize any breakage revenue in fiscal 2023, fiscal 2022 or fiscal 2021 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. The disposals generally relate to the decommissioning of aged assets, remodeled showrooms, and fixtures used during pop-up-shops. Expenditures for major betterments that extend the useful lives of property and equipment are capitalized. Goodwill 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. There were no impairments during fiscal 2023, 2022, or 2021. Intangible Assets, net 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 of 10 years, 3 years, and 5 years, respectively. 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. There were no impairments during fiscal 2023, 2022, or 2021. Impairment of Long Lived Assets Our long-lived assets consist of property and equipment and right-of-use assets from leases. Property and equipment includes leasehold improvements, and other tangible 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. We evaluate 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, we 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 is measured as the excess of the carrying value over its fair value. We estimate fair value based on future discounted cash flow based on our historical operations of the showroom and estimates of future showroom profitability and economic conditions. These estimates include factors such as sales growth, gross margin, employment costs, lease escalation, and overall macroeconomic conditions, and are therefore subject to variability. Actual future results may differ from those estimates. If required, an impairment loss is recorded for that portion of the assets' carrying value in excess of fair value. In fiscal 2023, the Company did not recognize any impairment charges associated with showroom-level right of use lease assets. Durin g fiscals 2022 and 2021, the Company recorded impairment charges of $ 0.6 million and $ 0.2 million, respectively, associated with the assets of an underperforming retail locations. The impairments were recorded in selling, general and administrative in the Company’s Statements of Operations. F-15 Table of Contents THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS 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, without any reserve adjustments, was approximately $ 0.7 million, $ 0.5 million, and $ 0.7 million in fiscal 2023, 2022, and 2021. The increase in fiscal 2023 is related to an increase in warranty claims related to an increase in net sales. Warranty reserve was $ 0.7 million as of January 29, 2023 and January 30, 2022. Leases The Company adopted Accounting Standards Update (ASU) No.2016-02, Leases (ASC 842) during fiscal 2022. The Company leases its office, warehouse facilities and retail showrooms under operating lease agreements which expire at various dates through January 2034. Leases with an initial term of twelve months or less are not recorded on the balance sheet and are expensed on a straight-line basis over the lease term in the Statements of Operations. 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. Operating right-of-use assets represents 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, both of which are recognized based on the present value of future minimum lease payments over the lease term at the commencement date, Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. We combine lease and non-lease components for our showroom real estate leases in determining the lease payments subject to the initial present value calculation. The lease payments are discounted at the Company's incremental borrowing rate as the implicit rate in the lease is not readily determinable for most of the Company's leases, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We determine incremental borrowing rates as of the first day of each fiscal year and analyze changes in interest rates and the Company's credit profile to determine if the rates need to be updated during the fiscal year. 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 net 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. 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 accounts. 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 F-16 Table of Contents THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS 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. Employee Benefit Plan In February 2017, the Company established the The Lovesac Company 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 employees of the Company will be eligible to participate in the 401(k) Plan in the month following one (1) month of service and the employee is over age 21. Participants are able to contribute up to 100 % of their eligible compensation to the 401(k) Plan subject to limitations with the IRS. Employer contributions to the 401(k) Plan for fiscal 2023, fiscal 2022, and fiscal 2021 were approximately $ 1.3 million, $ 0.8 million, and $ 0.5 million, respectively. Advertising and Marketing Expenses Advertising and marketing expense include digital, social, and traditional advertising and marketing initiatives, that cover all of our business channels. All advertising costs are expensed as incurred, or upon the release of the initial advertisement. Total advertising expenses were $ 79.9 million, $ 65.1 million, and $ 41.9 million in fiscal 2023, fiscal 2022, and fiscal 2021, respectively. 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. Equity-Based Compensation 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. Vesting is typically over a three or four-year period and is contingent upon continued employment with the Company on each vesting date. The fair value of the restricted stock units is determined based on the closing price of the Company's common stock on the grant date and the expense is recognized over the service period. For performance based restricted stock units, the number of units received will depend on the achievement of financial metrics relative to the approved performance targets. For performance based restricted stock units, stock-based compensation expense is recognized based on expected achievement of performance targets. The Company recognizes forfeitures as they occur. Income Taxes 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. F-17 Table of Contents THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS 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. 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 2023, the effects of 640,256 unvested restricted stock units, and 281,750 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 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 were excluded in the diluted net loss per common share calculation as the effects of including theses potentially dilutive shares was antidilutive. Recent Accounting Pronouncements The Company has considered all recent accounting pronouncements issued by the Financial Accounting Standards Board and they were considered to be not applicable or the adoption of such pronouncements will not have a material impact on the financial statements. Note 2. Property and Equipment, net Property and equipment as of January 29, 2023 and January 30, 2022 consists of (in thousands): Estimated Life 2023 2022 Office and store furniture, and equipment 5 Years $ 8,933 $ 6,497 Software 3 Years 3,996 3,625 Leasehold improvements Shorter of estimated useful life or lease term 60,964 40,788 Computers 3 Years 4,032 2,138 Tools, Dies, Molds 5 Years 868 764 Vehicles 5 Years 497 497 Construction in process NA 6,329 2,765 Total 85,619 57,074 Accumulated depreciation and amortization ( 32,715 ) ( 22,937 ) Property and equipment, net $ 52,904 $ 34,137 Depreciation and amortization expense was $ 10.5 million, $ 7.2 million, and $ 6.1 million in fiscal 2023, 2022, and 2021, respectively. F-18 Table of Contents THE LOVESAC COMPANY CONSOLIDATED NOTES TO FINANCIAL STATEMENTS JANUARY 29, 2023 AND JANUARY 30, 2022 Note 3. Intangible Assets, net A summary of other intangible assets follows (in thousands): January 29, 2023 Weighted-Average Remaining Life (in years) Gross Carrying Amount Accumulated Amortization Net carrying amount Patents 7.6 $ 3,091 $ ( 1,864 ) $ 1,227 Trademarks 2.2 1,522 ( 1,338 ) 184 Other intangibles — 840 ( 840 ) — Total $ 5,453 $ ( 4,042 ) $ 1,411 January 30, 2022 Weighted-Average Remaining Life (in years) Gross Carrying Amount Accumulated Amortization Net carrying amount Patents 8.1 $ 2,838 $ ( 1,626 ) $ 1,212 Trademarks 2.2 1,390 ( 1,189 ) 201 Other intangibles — 840 ( 840 ) — Total $ 5,068 $ ( 3,655 ) $ 1,413 Amortization expense was $ 0.4 million, $ 0.7 million, and $ 0.5 million in fiscal 2023, 2022, and 2021, respectively. Expected amortization expense by fiscal year for these other intangible assets follows (in thousands): 2024 $ 356 2025 299 2026 225 2027 178 2028 139 Thereafter 214 $ 1,411 F-19 Table of Contents THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS Note 4. Prepaid Expenses and Other Current Assets A summary of other prepaid and other current assets follows (in thousands): 2023 2022 Tenant allowance receivable $ 6,160 $ 2,781 Barter credits 3,770 3,407 Rebate receivable 2,780 226 Prepaid insurance 2,009 1,667 Prepaid catalog costs and related 1,557 4,794 Prepaid taxes 1,000 — Prepaid software licenses 945 790 Deposits 662 421 Prepaid rent 505 62 Prepaid inventory 49 475 Other 1,640 1,103 $ 21,077 $ 15,726 Note 5. Accrued Expenses A summary of accrued expenses follows (in thousands): 2023 2022 Accrued warehouse expenses $ 5,625 $ 2,671 Customer return liability 4,483 2,026 Accrued professional fees 2,167 2,268 Accrued freight and shipping 2,131 23,683 Accrued occupancy 1,278 1,284 Accrued state income taxes 1,187 1,007 Accrued insurance 1,026 973 Accrued credit card fees 770 542 Accrued advertising fees 739 4,150 Warranty liability 721 689 Other accrued expenses 3,265 1,204 $ 23,392 $ 40,497 F-20 Table of Content s THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS Note 6. Income Taxes The Company is subject to federal, state and local corporate income taxes. The components of the provision for income taxes reflected on the statements of operations are set forth below: 2023 2022 2021 Current taxes: U.S. federal $ 6,990 $ — $ — State and local 3,252 2,198 86 Total current tax expense $ 10,242 $ 2,198 $ 86 Deferred taxes: U.S. federal $ 1,322 $ ( 7,254 ) $ — State and local ( 906 ) ( 2,582 ) — Total deferred tax expense (benefit) 416 ( 9,836 ) — Total tax provision $ 10,658 $ ( 7,638 ) $ 86 A reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows: 2023 2022 2021 Provision (benefit) at federal Statutory rates 21.0 % 21.0 % 21.0 % State tax, net of federal provision (benefit) 4.3 % 4.9 % 3.3 % Non-deductible executive compensation 1.7 % 1.9 % — % Permanent adjustments 0.2 % — % 0.1 % Equity-based compensation 0.1 % ( 4.7 ) % ( 2.8 ) % Federal true-ups 0.1 % ( 0.4 ) % 0.4 % Change in valuation allowance — % ( 42.7 ) % ( 21.4 ) % Income tax provision 27.4 % ( 20.0 ) % 0.6 % F-21 Table of Content s THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS Significant components of the Company's deferred tax assets are as follows (in thousands): 2023 2022 Deferred Income Tax Assets Federal net operating loss carryforward $ — $ 2,082 State net operating loss carryforward 595 1,403 Intangible assets 403 397 Accrued liabilities 2,952 3,243 Equity-based compensation 3,247 2,032 Merchandise inventories 726 689 Charitable Contributions — 12 R&D Capitalization 1,920 — Operating Lease Liabilities 40,814 29,129 Total Deferred Income Tax Assets 50,657 38,987 Deferred Income Tax Liabilities Operating Lease Right of Use Asset ( 36,224 ) ( 26,726 ) Property and equipment ( 5,013 ) ( 2,425 ) Total Deferred Tax Liabilities ( 41,237 ) ( 29,151 ) Net Deferred Income Tax Asset $ 9,420 $ 9,836 At January 29, 2023, the Company did not have any net operating loss carryforwards available for federal income tax purposes. At January 30, 2022, the Company had net operating loss carryforwards available for federal income tax purposes of approximately $ 9.9 million. In addition, the Company has approximately $ 9.4 million and $ 22.2 million of state net operating loss carryforwards as of January 29, 2023 and January 30, 2022, respectively. The state net operating losses expire at various times between 2031 and 2040. The statute of limitations has expired for all tax years prior to 2019 for federal and state tax purposes. However, the net operating losses generated on the Company's federal and state tax returns in prior years may be subject to adjustments by the federal and state tax authorities. Prior to the fiscal 2022 year-end, the Company recorded a full valuation allowance on its net deferred tax assets, as it did not meet the more likely than not threshold required under ASC 740-10-30. For the year ended January 30, 2022, the Company reversed its full valuation allowance of $ 16.4 million, as it assessed and concluded that it met the more likely than not threshold of realizing its net deferred tax assets. The main forms of positive evidence to support the valuation allowance release were the substantial realization of its net operating loss carryforwards and cumulative three years of income. As of January 29, 2023, the Company did not record a valuation allowance against its net deferred tax assets, due to its assessment and conclusion that it is more likely than not that it would realize its net deferred tax assets. As of January 29, 2023 and January 30, 2022, the Company assessed and concluded that it does not have any unrecognized tax benefits. 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 interest or penalties during fiscal years 2023, 2022, and 2021, 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 statements of operations. The IRS is auditing the Company's fiscal 2019 federal income tax return. The Company has been responding to information requests and at this time, the Internal Revenue Service (IRS) has not proposed any adjustments. On August 16, 2022, the Inflation Reduction Act was signed into law. The Inflation Reduction Act includes various tax provisions, which are effective for tax years beginning on or after January 1, 2023. The Company assessed and concluded that the Inflation Reduction Act did not have an impact to the financials as of January 29, 2023, and will continue to monitor the impact of the changes. F-22 Table of Content s THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS For tax years beginning after December 31, 2021, the Tax Cuts & Jobs Act of 2017 eliminated the option to deduct research and development expenditures as incurred and instead required taxpayers to capitalize and amortize them over five or 15 years beginning in 2022. These changes in tax laws did not have a material impact on the Company’s results of operations for the year ended January 30, 2022. For the year ended January 29, 2023 due to the capitalization of research and development expenditures, the Company’s current federal taxable income increased by approximately $ 7.7 million with a corresponding increase in the Company’s deferred tax assets. The Company will continue to monitor the impact of changes in tax legislation. Note 7. Leases During fiscal 2022, the Company adopted ASC No. 2016-02, Leases (Topic 842). Components of lease expense were as follows (in thousands): 2023 2022 Operating lease expense $ 24,173 $ 18,902 Variable lease expense 16,207 12,439 Short term lease expense 721 336 Total lease expense $ 41,101 $ 31,677 Variable lease expense includes index-based changes in rent, maintenance, real estate taxes, insurance and other variable charges included in the lease as well as rental expenses related to short term leases. The Company’s weighted average lease term and weighted average discount rates are as follows: For the year ended 2023 2022 Weighted average remaining lease term (in years) Operating Leases 7.4 6.29 Weighted average discount rate Operating Leases 4.10 % 3.44 % During the fiscal year ended January 29, 2023, we did not recognize any impairment charges associated with showroom-level right-of-use assets. During the fiscal year ended January 30, 2022, we recognized impairment charges totaling $ 0.6 million associated with showroom-level ROU assets that were included as part of selling, general and administrative expenses. We did not recognize any impairment charges with showroom-level right-of-use assets during the fiscal year ended January 31, 2021 as we did not adopt ASC 842 until fiscal year 2022. F-23 Table of Content s THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS Future minimum lease payments under non-cancelable leases as of January 29, 2023 were as follows (in thousands): 2024 $ 27,671 2025 26,759 2026 24,447 2027 22,083 2028 19,747 Thereafter 62,832 Total undiscounted future minimum lease payments 183,539 Less: imputed interest ( 25,686 ) Total present value of lease obligations 157,853 Less: current operating lease liability ( 21,898 ) Operating lease liability- long term $ 135,955 Supplemental cash flow information and non-cash activity related to our operating leases is as follows (in thousands): 2023 2022 Operating cash flow information: Cash paid for operating lease liabilities $ 23,724 $ 14,400 Non-cash activities Net additions to right-of-use assets obtained in exchange for lease obligations $ 56,099 $ 116,048 Note 8. Commitments, Contingencies and Related Parties Legal Contingency The Company is involved in various legal proceedings in the ordinary course of business. Where appropriate, the Company has made accruals with respect to these matters, however, for cases where liability is not probable or the amount cannot be reasonably estimated, accruals have not been made. 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 financial position, results of operations or cash flows. The Company received management services from Mistral Capital Management, LLC (“Mistral”) 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 2023 or fiscal 2022, and management fees totaled approximately $ 0.4 million in fiscal 2021, and are included in selling, general and administrative expenses. There were no amounts payable to Mistral as of January 29, 2023 or January 30, 2022. There were less than $ 0.1 million in amounts payable to Mistral as of January 31, 2021. The Company also received management services from Satori Capital, LLC (“Satori”) under a contractual agreement that ended on January 31, 2021. One of our directors is a partner at Satori. There were no management fees incurred in fiscal 2023 or fiscal 2022 and management fees totaled approximately $ 0.1 millions in fiscal 2021 and are included in selling, general and administrative expenses. There were no amounts payable to Satori as of January 29, 2023 or 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 balance sheet as of 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 2018. The Company terminated the Blueport contract in fiscal 2021 in F-24 Table of Contents THE LOVESAC COMPANY CONSOLIDATED NOTES TO FINANCIAL STATEMENTS order to launch a new enhanced ecommerce platform. There were no fees incurred in fiscal 2023 or 2022. There was $ 2.1 million of fees incurred with Blueport for sales transacted through the platform and an early termination fee of $ 0.7 million during fiscal 2021. There were no amounts payable as of January 29, 2023, 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 statements of operations as a reduction to cost of goods sold. No other insurance proceeds were received during the periods presented. Note 9. Stockholders' Equity Common Stock Warrants On June 29, 2018, the Company issued 281,750 warrants with a five-year term to Roth Capital Partners, LLC as part of the underwriting agreement in connection with the Company's IPO. The warrants remain outstanding as of January 29, 2023. Warrants may be exercised on a cashless basis, where the holders receive fewer shares of common stock in lieu of a cash payment to the Company. In fiscal 2023, there were no exercises of warrants. In fiscal 2022, 5,625 warrants were exercised, which 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 were exercised on a cashless basis and resulted in the issuance of 439,447 common shares. The following represents warrant activity during fiscal 2023, 2022, and 2021: Average exercise price Number of warrants Weighted average remaining contractual life (in years) Outstanding at February 2, 2020 16.83 1,039,120 1.93 Warrants issued — — — Expired and canceled — — — Exercised 16.00 ( 745,147 ) 0.41 Outstanding at January 31, 2021 19.07 293,973 2.57 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 Warrants issued — — — Expired and canceled — — — Exercised — — — Outstanding at January 29, 2023 $ 19.20 281,750 0.41 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. In June 2020, F-25 Table of Contents THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS 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. In fiscal 2023, the 2017 Equity Plan was amended and restated to, among other things, increase the shares of our common stock authorized and reserved for issuance by 550,000 shares, which increased the number of shares of common stock reserved for issuance under the 2017 Equity Plan to 2,654,889 shares of common stock. Stock Options 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 were required to be satisfied no later than June 5, 2022 or the options would 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 stock options were modified to extend the term of the options through June 5, 2024. 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. 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. The awards vested and became exercisable on June 5, 2022. The following summarizes the activity of our stock options as of January 29, 2023, January 30, 2022, and January 31, 2021 and the changes during fiscal years then ended (in thousands, except share and per share amounts) : Number of options Weighted average exercise price Weighted average remaining contractual life (in years) Aggregate intrinsic value Outstanding at February 2, 2020 495,366 $ 38.10 2.34 $ — Granted — — Canceled and forfeited — — Outstanding at January 31, 2021 495,366 38.10 3.35 9,135 Granted — — Canceled and forfeited — — Outstanding at January 30, 2022 495,366 38.10 2.35 6,162 Granted — — Canceled and forfeited — — Outstanding and exercisable at January 29, 2023 495,366 $ 38.10 1.35 $ — F-26 Table of Contents THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS Restricted Stock Units The following table summarizes the activity for the Company's unvested restricted stock units as of January 29, 2023, January 30, 2022, January 31, 2021, and changes during fiscal years then ended, is presented below: Number of shares Weighted average grant date fair value 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 Granted 94,985 78.53 Forfeited ( 42,516 ) 22.67 Vested ( 174,694 ) 19.57 Unvested at January 30, 2022 533,333 28.41 Granted 289,625 44.20 Forfeited ( 62,186 ) 29.09 Vested ( 120,516 ) 36.03 Unvested at January 29, 2023 640,256 $ 34.50 Equity-based compensation expense was approximately $ 10.5 million, $ 5.9 million, and $ 4.7 million for fiscal 2023, 2022, and 2021 respectively. In fiscal 2023, The Company recognized $ 4.3 million related to performance stock units granted in fiscal 2021 with a three year term, which met the performance target of $ 550 million in net sales and $ 50 million in Adjusted EBITDA for fiscal 2023. The total unrecognized equity based compensation cost related to unvested restricted stock unit awards was approximately $ 4.2 million as of January 29, 2023 and will be recognized in operations over a weighted average period of 1.95 years. Note 10. Financing Arrangements Credit Line On February 6, 2018, the Company established a line of credit with Wells Fargo Bank. The line of credit allowed the Company to borrow up to $ 25.0 million and matured on February 2023. As of January 30, 2022, the Company’s borrowing availability under the line of credit was $ 22.5 million, and there were no borrowings outstanding on this line of credit. 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. F-27 Table of Contents THE LOVESAC COMPANY NOTES TO FINANCIAL STATEMENTS Under the amended line of credit, 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. As of January 29, 2023, the Company’s borrowing availability under the line of credit was $ 36.0 million, no borrowings outstanding, and the Company was in compliance with required covenants. On March 24, 2023, the Company amended the credit agreement to extend the maturity date to September 30, 2024. All other terms of the credit agreement remain unchanged. Note 11. Segment Information Segments are reflective of how the chief operating decision maker ("CODM") reviews operating results for the purpose of allocating resources and assessing performance. The CODM group of the Company are the Chief Executive Officer and the President and Chief Operating Officer. The Company's operating segments are the sales channels, which share similar economic and other qualitative characteristics, and are aggregated together as one reportable segment. The Company’s sales by product which are considered one segment are as follows: 2023 2022 2021 Sactionals $ 584,815 $ 436,588 $ 271,018 Sacs 55,145 52,478 44,975 Other 11,585 9,173 4,745 Total net sales $ 651,545 $ 498,239 $ 320,738 F-28