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 42 Table of Contents 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 February 4, 2024. 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 Rules 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 February 4, 2024. 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 February 4, 2024. The effectiveness of our internal control over financial reporting as of February 4, 2024 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their attestation report, included within this Item 9A 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 fiscal 2023 Annual Report on Form 10-K, as amended by Amendment No. 1 and Amendment No. 2 on Form 10-K/A filed on November 2, 2023 and November 30, 2023, respectively (the "2023 Form 10-K/A"), we identified material weaknesses in our internal control over financial reporting relating to an ineffective control environment. The Company lacked a sufficient number of professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately, and did not maintain appropriate oversight and monitoring activities over accounting processes related to certain accruals and estimates. During the year ended February 4, 2024, we undertook a series of activities to remediate the material weakness, with the following actions designed to improve the financial reporting control environment and control activities: • Enhanced the accounting and financial reporting functions with additional experienced hires with public company experience to expand the knowledge of GAAP and SEC accounting rules and regulations. This included a new Executive Vice President and Chief Financial Officer. The Company updated its accounting and financial reporting structure, establishing clear lines of authority and communication protocols, and has made changes to align the skills and competencies of accounting and financial reporting personnel to be commensurate with their roles and responsibilities. The Company also provided relevant training on internal controls over financial reporting to control owners and control preparers. • Developed and maintained appropriate oversight and monitoring activities over accounting processes that resulted in adding and revising control activities. The Company added layers of review in accounting processes and increased the use of workflow automation, both of which reduce the reliance on manual processes and risk of errors. Changes at the control activity level specifically addressed enhancements to our policy on recording manual journal entries, including clarification of review and approval of authorization matrices, as well as enhancing, designing and implementing controls over the transportation accrual and estimation process. The enhanced control activities have operated for a sufficient period of time in order for us to conclude, through testing, that the controls are designed and are operating effectively. As such, we concluded that the previously reported material weaknesses have been remediated as of February 4, 2024. 43 Table of Contents Changes in our Internal Control over Financial Reporting Other than as described above in connection with the remediation to the material weakness, there were no changes in our internal control over financial reporting that occurred during the fourth fiscal quarter of the fiscal year ended February 4, 2024 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. 44 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 February 4, 2024, 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 respects, effective internal control over financial reporting as of February 4, 2024, 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 February 4, 2024, of the Company and our report dated April 11, 2024, 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 Annual Report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit 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 April 11, 2024 45 Table of Contents Item 9B. Other Information. Trading Arrangements On December 12, 2023 , Shawn D. Nelson , CEO , adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to 42,000 shares of the Company’s common stock. Mr. Nelson's plan will expire on December 11, 2024, subject to early termination for certain specified events set forth in the plan. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 46 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 as of April 11, 2024: Name Age Present Position Business Experience Shawn Nelson 47 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 51 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. Keith Siegner 49 Executive Vice President and Chief Financial Officer Keith Siegner is Executive Vice President and Chief Financial Officer of The Lovesac Company. From April 2021 to February 2023, he served as Chief Financial Officer of Vindex, LLC, a leading global esports technology and infrastructure company that was sold to Savvy Games Group in February 2023. In this role, Keith led global finance operations for Vindex and its subsidiaries, which included Esports Engine, Vindex Intelligence and Belong Gaming Arenas. Prior to joining Vindex he served as the Vice President, Investor Relations, Mergers & Acquisitions, and Treasurer at Yum! Brands (NYSE: YUM), which included leading the capital markets, global cash management, and risk finance teams, as well as several years in corporate strategy. Before YUM, Keith was a senior banking executive in equity research for over 15 years at UBS Securities, where he was Executive Director, and at Credit Suisse before that. He began his career at Arthur Andersen in the International Tax Consulting Division. Keith received Bachelor’s and Master’s accounting degrees from Wake Forest University, and is a Certified Financial Analyst Charterholder and a Certified Public Accountant (inactive). 47 Table of Contents We will file with the SEC a definitive proxy statement (the “2024 Proxy Statement”) pursuant to Regulation 14A for our 2024 annual meeting of stockholders within 120 days of the fiscal year ended February 4, 2024. The additional information required by this Item will appear in the 2024 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 2024 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 February 4, 2024, 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”). (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) 1,567,306 $ 38.10 996,749 Equity compensation plans not approved by shareholders — — — Total 1,567,306 $ 38.10 996,749 (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. In fiscal 2024, the 2017 Equity Plan was amended and restated to increase the shares of our common stock authorized and reserved for issuance by 225,000 shares, which increased the number of shares of common stock reserved for issuance under the 2017 Equity Plan to 2,879,889 shares of common stock. The remaining information required by this Item will appear in the 2024 Proxy Statement and is incorporated by reference herein. 48 Table of Contents Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this Item will appear in the 2024 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 2024 Proxy Statement and is incorporated by reference herein. 49 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- 5 Balance Sheets – As of February 4, 2024 and January 29, 2023 F- 7 Statements of Operations – Years Ended February 4, 2024, January 29, 2023, and January 30, 2022 F- 8 Statements of Changes in Stockholders’ Equity - Years Ended February 4, 2024, January 29, 2023, and January 30, 2022 F- 9 Statements of Cash Flows - Years Ended February 4, 2024, January 29, 2023, and January 30, 2022 F- 10 Notes to Financial Statements F- 11 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. 50 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 8-K 3.2 12/1/2023 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 Equity Incentive Plan 10-Q 10.1 6/8/2022 10.4± Amendment No. 1 to Second Amended and Restated 2017 Equity Incentive Plan 8-K 10.1 6/2/2023 10.5± Form of Restricted Stock Units Agreement S-1/A 10.3 5/23/2018 10.6 Amended and Restated Registration Rights Agreement S-1 10.5 4/20/2018 10.7± Employment Agreement dated October 26, 2017, by and between The Lovesac Company and Shawn Nelson S-1 10.6 4/20/2018 10.8± Employment Agreement dated October 26, 2017, by and between The Lovesac Company and Jack Krause S-1 10.7 4/20/2018 10.9± Employment Agreement dated October 26, 2017, by and between The Lovesac Company and Donna Dellomo S-1 10.8 4/20/2018 10.10± 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 10.11± 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 10.12± 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 10.13± 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 10.14± Employment Agreement between The Lovesac Company and Mary Fox, dated September 30, 2021 8-K 10.1 11/12/2021 10.15± Second Amendment to Employment Agreement dated March 24, 2022, by and between The Lovesac Company and Shawn Nelson 10-K 10.14 3/30/2022 10.16± Second Amendment to Employment Agreement dated March 24, 2022, by and between The Lovesac Company and Donna Dellomo 10-K 10.15 3/30/2022 10.17± Amended and Restated Employment Agreement dated March 23, 2023, by and between The Lovesac Company and Shawn Nelson 10-K 10.16 3/29/2023 10.18± Offer Letter between The Lovesac Company and Mary Fox, dated September 30, 2021 8-K 10.3 11/12/2021 10.19± Mary Fox Resignation Letter from Board of Directors, dated November 9, 2021 8-K 10.4 11/12/2021 51 Table of Contents Exhibit Number Description of Exhibit Filed / Incorporated by Reference from Form ** Incorporated by Reference from Exhibit Number Dated Filed 10.20± Form of Stock Option Award Agreement 10-K 10.11 4/14/2021 10.21± The Lovesac Company Annual Incentive Compensation Plan 10-Q 10.1 12/9/2021 10.22± The Lovesac Company Director Compensation Policy 10-K 10.21 3/29/2023 10.23† Amendment No. 7 to Credit Agreement between The Lovesac Company and Wells Fargo Bank, N.A. 10-K 10.22 3/29/2023 10.24± Employment Agreement between the Company and Keith Siegner, dated June 1, 2023 Filed herewith. 10.25± Offer Letter between the Company and Keith Siegner, dated May 12, 2023 Filed herewith. 10.26± Senior Strategic Advisor Agreement between the Company and Donna Dellomo, dated June 30, 2023 10-Q 10.4 11/03/2023 10.27 Retailer Program Agreement between Synchrony Bank (formerly GE Capital Retail Bank) and the Company (formerly SAC Acquisition LLC), dated April 1, 2013 Filed herewith. 10.28 First Amendment to R etailer Program Agreement between Synchrony Bank (formerly GE Capital Retail Bank) and the Company (formerly SAC Acquisition LLC) , dated September 1, 2014 Filed herewith. 10.29 Second Amendment to Retailer Program Agreement between Synchrony Bank (formerly SAC Acquisition LLC), dated M ay 11, 2018, and effective as of January 1, 2018 Filed herewith. 10.30 Third Amendment to Retailer Program Agreement between Synchrony Bank and the Company (formerly SAC Acquisition LLC), dated March 24, 2023 , and effective as of January 1, 20 23 Filed herewith. 21.1 List of Subsidiaries 10-K 21.1 4/14/2021 23.1 Consent of Deloitte & 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. 97.1* The L ovesac Dodd-Frank Clawback Policy Filed herewith. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 52 Table of Contents Exhibit Number Description of Exhibit Filed / Incorporated by Reference from Form ** Incorporated by Reference from Exhibit Number Dated Filed 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. 53 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. The Lovesac Company By: /s/ Shawn Nelson Shawn Nelson Date: April 11, 2024 Chief Executive Officer (Principal Executive Officer) By: /s/ Keith Siegner Keith Siegner Date: April 11, 2024 Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 54 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 Keith Siegner, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Shawn Nelson April 11, 2024 Shawn Nelson Chief Executive Officer and Director (Principal Executive Officer) /s/ Keith Siegner April 11, 2024 Keith Siegner Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ Andrew Heyer April 11, 2024 Andrew Heyer Chairman and Director /s/ Walter McLallen April 11, 2024 Walter McLallen Director /s/ Sharon M. Leite April 11, 2024 Sharon M. Leite Director /s/ Shirley Romig April 11, 2024 Shirley Romig Director /s/ John Grafer April 11, 2024 John Grafer Director /s/ Jack Krause April 11, 2024 Jack Krause Director /s/ Vineet Mehra April 11, 2024 Vineet Mehra Director 55 Table of Contents THE LOVESAC COMPANY FINANCIAL STATEMENTS AS OF FEBRUARY 4, 2024 AND JANUARY 29, 2023 AND FOR THE YEARS ENDED FEBRUARY 4, 2024, JANUARY 29, 2023, AND JANUARY 30, 2022 F-1 Table of Contents THE LOVESAC COMPANY CONTENTS Report of Independent Registered Public Accounting Firm as of and for the years ended February 4, 2024 and January 29, 2023 (PCAOB ID 34 ) F- 3 Report of Independent Registered Public Accounting Firm as of and for the year ended January 30, 2022 (PCAOB ID 688 ) F- 5 Financial Statements Balance Sheets F- 7 Statements of Operations F- 8 Statements of Changes in Stockholders’ Equity F- 9 S ta tement s of Cash Flows F- 10 Notes to the Financial Statements F- 11 F-2 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of The Lovesac Company Opinion on the Financial Statements We have audited the accompanying balance sheets of The Lovesac Company (the "Company") as of February 4, 2024 and January 29, 2023, the related statements of operations, changes in stockholders' equity, and cash flows, for each of the two years in the period ended February 4, 2024, 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 February 4, 2024 and January 29, 2023, and the results of its operations and its cash flows for each of the two years in the period ended February 4, 2024, in conformity with accounting principles generally accepted in the United States of America. We have also 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 February 4, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 11, 2024, 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 audit 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 repurposes 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 forecasted media spend subject to media credits under the barter arrangement. For the year ended February 4, 2024, the Company recognized $12.3 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 February 4, 2024, the Company had $32.8 million of unused media credits and did not recognize any impairment. 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 F-3 Table of Contents 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 agreements. ◦ 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 estimate of advertising costs to the actual advertising costs incurred for selected promotional campaigns subject to 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 April 11, 2024 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 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-5 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. We have served as the Company’s auditor from 2017-2022 /s/ Marcum LLP Hartford, CT March 30, 2022, except for Note 2 and the revised disclosures in Notes 5, 6, 7 and 8, for which the date is November 2, 2023. F-6 Table of Contents THE LOVESAC COMPANY BALANCE SHEETS (amounts in thousands, except share and per share amounts) February 4, 2024 January 29, 2023 Assets Current Assets Cash and cash equivalents $ 87,036 $ 43,533 Trade accounts receivable, net 13,463 9,103 Merchandise inventories, net 98,440 119,627 Prepaid expenses 11,664 10,379 Other current assets 3,845 5,073 Total Current Assets 214,448 187,715 Property and equipment, net 70,807 52,904 Operating lease right-of-use assets 155,856 135,411 Goodwill 144 144 Intangible assets, net 1,457 1,411 Deferred tax asset 10,803 8,677 Other assets 28,665 22,364 Total Assets $ 482,180 $ 408,626 Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 28,821 $ 24,576 Accrued expenses 38,622 25,417 Payroll payable 6,998 6,783 Customer deposits 8,257 6,760 Current operating lease liabilities 17,628 13,075 Sales taxes payable 6,030 5,430 Total Current Liabilities 106,356 82,041 Operating lease liabilities, long-term 157,876 133,491 Income tax payable, long-term 452 — Line of credit — — Total Liabilities $ 264,684 $ 215,532 Commitments and Contingencies (See Note 7) Stockholders’ Equity Preferred stock $ 0.00001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of February 4, 2024 and January 29, 2023. — — Common stock $ 0.00001 par value, 40,000,000 shares authorized, 15,489,364 shares issued and outstanding as of February 4, 2024 and 15,195,698 shares issued and outstanding as of January 29, 2023. — — Additional paid-in capital 183,095 182,554 Accumulated earnings 34,401 10,540 Stockholders’ Equity 217,496 193,094 Total Liabilities and Stockholders’ Equity $ 482,180 $ 408,626 The accompanying notes are an integral part of these financial statements F-7 Table of Contents THE LOVESAC COMPANY STATEMENTS OF OPERATIONS FOR THE YEARS ENDED FEBRUARY 4, 2024, JANUARY 29, 2023, AND JANUARY 30, 2022 (amounts in thousands, except per share data and share amounts) 2024 2023 2022 Net sales $ 700,265 $ 651,179 $ 498,239 Cost of merchandise sold 299,222 307,528 224,707 Gross profit 401,043 343,651 273,532 Operating expenses: Selling, general and administration expenses 264,314 215,979 160,017 Advertising and marketing 94,050 79,864 65,078 Depreciation and amortization 12,603 10,842 7,859 Total operating expenses 370,967 306,685 232,954 Operating income 30,076 36,966 40,578 Interest income (expense), net 1,747 ( 117 ) ( 179 ) Net income before taxes 31,823 36,849 40,399 (Provision for) benefit from income taxes ( 7,962 ) ( 10,361 ) 7,089 Net income $ 23,861 $ 26,488 $ 47,488 Net income per common share: Basic $ 1.55 $ 1.74 $ 3.14 Diluted $ 1.45 $ 1.66 $ 2.96 Weighted average shares outstanding: Basic 15,427,975 15,198,754 15,107,958 Diluted 16,460,383 15,955,668 16,058,111 The accompanying notes are an integral part of these financial statements F-8 Table of Contents THE LOVESAC COMPANY STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED FEBRUARY 4, 2024, JANUARY 29, 2023, AND JANUARY 30, 2022 Common Additional Paid-in Capital Accumulated (Deficit) Earnings Total Shareholders' Equity (amounts in thousands, except share amounts) Shares Amount Balance - January 31, 2021 15,011,556 $ — $ 171,382 $ ( 63,436 ) $ 107,946 Net income — — — 47,488 47,488 Equity-based compensation — — 5,859 — 5,859 Vested restricted stock units 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 $ ( 15,948 ) $ 157,814 Net income — — — 26,488 26,488 Equity-based compensation — — 10,450 — 10,450 Vested restricted stock units 72,360 — — — — Taxes paid for net share settlement of equity awards — — ( 1,658 ) — ( 1,658 ) Balance - January 29, 2023 15,195,698 $ — $ 182,554 $ 10,540 $ 193,094 Net income — — — 23,861 23,861 Equity-based compensation — — 4,216 — 4,216 Vested restricted stock units 219,074 — — — — Taxes paid for net share settlement of equity awards — — ( 3,675 ) — ( 3,675 ) Exercise of warrants 74,592 — — — — Balance - February 4, 2024 15,489,364 $ — $ 183,095 $ 34,401 $ 217,496 The accompanying notes are an integral part of these financial statements F-9 Table of Contents THE LOVESAC COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED FEBRUARY 4, 2024, JANUARY 29, 2023, AND JANUARY 30, 2022 (amounts in thousands) 2024 2023 2022 Cash Flows from Operating Activities Net income $ 23,861 $ 26,488 $ 47,488 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 12,174 10,454 7,154 Amortization of other intangible assets 429 388 705 Amortization of deferred financing fees 159 164 91 Net loss on disposal of property and equipment 235 45 464 Gain on lease termination ( 131 ) — — Impairment of long-lived assets — — 554 Equity based compensation 4,216 10,450 5,859 Non-cash lease expense 22,631 19,265 14,953 Deferred income taxes ( 2,126 ) 1,044 ( 9,721 ) Gain on recovery of insurance proceeds - lost profit margin — — ( 632 ) Change in operating assets and liabilities: Trade accounts receivable ( 4,360 ) ( 555 ) ( 4,034 ) Merchandise inventories 21,187 ( 11,135 ) ( 56,819 ) Prepaid expenses and other current assets ( 164 ) 3,087 968 Other assets ( 6,301 ) ( 20,913 ) ( 1,047 ) Accounts payable and accrued expenses 16,689 ( 31,338 ) 38,187 Operating lease liabilities ( 14,007 ) ( 22,263 ) ( 18,845 ) Customer deposits 1,497 ( 6,556 ) 7,323 Other liabilities 452 — — Net cash provided by (used in) operating activities 76,441 ( 21,375 ) 32,648 Cash Flows from Investing Activities Purchase of property and equipment ( 28,736 ) ( 25,242 ) ( 14,615 ) Payments for patents and trademarks ( 475 ) ( 307 ) ( 503 ) Net cash used in investing activities ( 29,211 ) ( 25,549 ) ( 15,118 ) Cash Flows from Financing Activities Taxes paid for net share settlement of equity awards ( 3,675 ) ( 1,658 ) ( 3,583 ) Proceeds from the line of credit 255 — — Payments on the line of credit ( 255 ) — — Payment of deferred financing costs ( 52 ) ( 277 ) — Proceeds from the exercise of warrants — — 104 Net cash used in financing activities ( 3,727 ) ( 1,935 ) ( 3,479 ) Net change in cash and cash equivalents 43,503 ( 48,859 ) 14,051 Cash and cash equivalents - Beginning 43,533 92,392 78,341 Cash and cash equivalents - Ending $ 87,036 $ 43,533 $ 92,392 Supplemental Cash Flow Data: Cash paid for taxes $ 1,810 $ 10,670 $ 1,121 Cash paid for interest $ 146 $ 192 $ 95 Non-cash investing activities: Asset acquisitions not yet paid for at period end $ 1,576 $ 4,103 $ 1,370 The accompanying notes are an integral part of these financial statements F-10 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 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 February 4, 2024, the Company operated 230 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 February 4, 2024 and January 29, 2023 and for the years ended February 4, 2024, January 29, 2023 and January 30, 2022 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 February 4, 2024, January 29, 2023 and January 30, 2022 are referred to as fiscal 2024, 2023 and 2022, respectively. Fiscal 2024 was a 53-week fiscal year, and 2023 and 2022 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 The Company's revenue consists substantially of product net sales. The Company reports product net sales net of discounts and recognizes them at the point in time when control transfers to the customer, which generally occurs upon our delivery to a third-party carrier. 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 freight and tariff costs relative to inventory sold, warehousing, and last mile shipping to our customers. Shipping and handling costs were $ 133.2 million, $ 159.7 million and $ 112.7 million in fiscal 2024, 2023 and 2022, respectively. Estimated refunds for returns and allowances are recorded using our historical return patterns, adjusting for any changes in returns policies. The Company records estimated refunds for net sales returns on a monthly basis as a reduction of net sales and cost of sales on the statement of operations and an increase in inventory and customers returns liability on the balance sheet. As of February 4, 2024 and January 29, 2023, there was a returns allowance recorded on the balance sheet in the F-11 Table of Contents amount of $ 5.6 million and $ 4.5 million, respectively, which was included in accrued expenses, and sales returns of $ 1.3 million and $ 1.0 million, respectively, included in merchandise inventories. In some cases, deposits are received before the Company transfers control, resulting in contract liabilities. These contract liabilities are reported as customer deposits on the Company's balance sheet. As of February 4, 2024, and January 29, 2023, the Company recorded customer deposit liabilities in the amount of $ 8.3 million and $ 6.8 million, respectively. During fiscal 2024, 2023 and 2022, the Company recognized $ 6.8 million, $ 13.3 million and $ 6.0 million, respectively, related to customer deposits from fiscal 2023, 2022 and 2021, respectively. The Company offers its products through an inventory lean omni-channel platform that provides a seamless and meaningful experience to its customers in showrooms, which include mobile concierge and kiosks, and through the internet. The Other channel predominantly represents net sales through the use of online and in-store pop-up shops, shop-in-shops, and barter inventory transactions. In-store pop-up-shops and shop-in-shops are staffed with associates trained to demonstrate and sell our product. The following represents net sales disaggregated by channel: (in thousands) 2024 2023 2022 Showrooms $ 437,394 $ 398,184 $ 298,989 Internet 199,778 176,519 150,622 Other 63,093 76,476 48,628 Total net sales $ 700,265 $ 651,179 $ 498,239 The Company has no foreign operations and its net sales to foreign countries was less than 0.01 % of total net sales in fiscal 2024, 2023, and 2022. The Company had no customers that comprise more than 10% of total net sales in fiscal 2024, 2023, or 2022. See Note 10. 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 forecasted media spend subject to media credits under the barter arrangement. 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 expenses, with the remaining balance included as part of Other assets on the balance sheet. For fiscal 2024, 2023, and 2022, the Company recognized $ 12.3 million, $ 21.3 million, and $ 3.5 million, respectively, of barter sales in exchange for media credits. As of February 4, 2024, and January 29, 2023, the Company had $ 5.1 million and $ 3.8 million, respectively, of unused media credits expected to be utilized in the next fiscal year classified as current, and the remaining balance of $ 27.7 million and $ 21.4 million, respectively, classified as non-current. The credits expire January 1, 2034 and the Company expects to utilize all credits prior to expiration. The Company did not recognize any impairment for fiscal 2024, 2023, and 2022. 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. F-12 Table of Contents 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 $ 1.0 million related to bad debt write-offs for fiscal 2024, and recognized $ 0.4 million for fiscal 2023 and 2022, respectively. Breakdown of trade accounts receivable is as follows: (in thousands) February 4, 2024 January 29, 2023 Credit card receivables $ 10,963 $ 4,703 Wholesale receivables 2,500 4,400 Total trade accounts receivable, net $ 13,463 $ 9,103 The Company had two wholesale customers that comprised 100 % of wholesale receivables at February 4, 2024 and January 29, 2023, respectively. Prepaid Expenses The Company recognizes payments made for goods and services to be received in the near future as prepaid expenses. Prepaid expenses consist primarily of barter credits and payments related to income taxes, insurance, rent, credit card fees, marketing, software licenses, and other costs. Other Current Assets Other current assets consist primarily of rebate receivables, deposits, and other receivables. Private Label Credit Card The Company has an agreement with Synchrony Bank (formerly GE Capital Retail Bank) (“Issuer”) to provide clients with private label credit cards (the “Retailer Program Agreement”) which was amended on March 24, 2023 to extend the term of the agreement through March 31, 2026. Each private label credit card bears The Lovesac Company brand logo and can only be used at the Company’s Showroom locations or website. The Issuer is the sole owner of the accounts issued under the private label credit card program and absorbs the losses associated with non-payment by the private label card holders and fraudulent charges with specific requirements. During the term of the Retailer Program Agreement, the Company receives a percentage of private label credit card sales from the Issuer and is also eligible to receive incentive payments for the achievement of certain targets. These funds are recorded within net revenue in the statements of operation. The Company also receives reimbursement funds from the Issuer for certain expenses the Company incurs. These reimbursement funds are used by the Company to fund marketing and other programs associated with the private label credit card and are recorded within net revenue in the statements of operation. 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-13 Table of Contents and merchandise credits. The Company did not recognize any breakage revenue in fiscal 2024, 2023 or 2022 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. The Company did no t recognize any goodwill impairment charges during fiscal 2024, 2023, or 2022. 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 2024, 2023, or 2022. Intangible assets, net as of February 4, 2024 and January 29, 2023 consists of (in thousands): February 4, 2024 January 29, 2023 Weighted-Average Remaining Life (in years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted-Average Remaining Life (in years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Patents 7.5 $ 3,493 $ ( 2,140 ) $ 1,353 7.6 $ 3,091 $ ( 1,864 ) $ 1,227 Trademarks 2.0 1,595 ( 1,491 ) 104 2.2 1,522 ( 1,338 ) 184 Other intangibles 0.0 840 ( 840 ) — 0.0 840 ( 840 ) — Total $ 5,928 $ ( 4,471 ) $ 1,457 $ 5,453 $ ( 4,042 ) $ 1,411 Amortization expense was $ 0.4 million, $ 0.4 million, and $ 0.7 million in fiscal 2024, 2023, and 2022, respectively. The following table presents the future expected amortization expense as of February 4, 2024 (in thousands): 2025 $ 375 2026 307 2027 208 2028 198 2029 148 After 221 $ 1,457 F-14 Table of Contents 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 2024 and 2023, the Company did not recognize any impairment charges associated with showroom-level right of use lease assets. Durin g fiscal 2022 , the Company recorded impairment charges of $ 0.6 million, associated with the assets of underperforming retail locations. The impairments were recorded in selling, general and administrative in the Company’s Statements of Operations. 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 $ 2.0 million, $ 0.7 million, and $ 0.5 million in fiscal 2024, 2023, and 2022. The increase in fiscal 2024 is related to an increase in warranty claims related to an increase in net sales. Warranty reserve was $ 1.4 million and $ 0.7 million as of February 4, 2024 and January 29, 2023, respectively. Leases The Company leases its office, warehouse facilities and retail showrooms under operating lease agreements which expire at various dates through January 2035. 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 F-15 Table of Contents 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. Cost of Merchandise Sold Cost of merchandise sold includes the direct cost of sold merchandise; inventory shrinkage; inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost or net realizable value reserves; inbound freight; all freight costs to ship merchandise to our showrooms, and warehousing and all logistics costs associated with shipping product to our customers. Certain of our competitors and other retailers may report gross profit differently than we do, by excluding from gross profit some or all of the costs related to their distribution network and instead including them in selling, general and administrative expenses. As a result, the reporting of our gross profit and profit margin may not be comparable to other companies. The primary drivers of our cost of merchandise sold are raw materials costs, labor costs in the countries where we source our merchandise, and logistics costs. We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise and use product markdowns to efficiently sell these products. The timing and level of markdowns are driven primarily by customer acceptance of our merchandise. Selling, General and Administrative Expenses Selling, general and administrative expenses include all operating costs, other than advertising and marketing expense, not included in cost of merchandise sold. These expenses include all payroll and payroll-related expenses; showroom expenses, including occupancy costs related to showroom operations, such as rent and common area maintenance; occupancy and expenses related to many of our operations at our headquarters, including utilities, equity based compensation, financing related expenses and public company expenses; and credit card transaction fees. Selling, general and administrative expenses as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters because a significant portion of the costs are relatively fixed. Employee Benefit Plan In February 2017, the Company established 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 years 2024, 2023, and 2023 were approximately $ 1.6 million, $ 1.3 million, and $ 0.8 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 and marketing expenses were $ 94.1 million, $ 79.9 million, and $ 65.1 million in fiscal years 2024, 2023, and 2022, 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. F-16 Table of Contents 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 non-current to the extent that the Company anticipates payment (or receipt) of cash beyond one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes. 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 per common share is computed by dividing net income by the weighted average number of common shares outstanding plus dilutive potential common shares, including unvested restricted stock units, stock options, and warrants. Diluted net income per common share includes, in periods in which they are dilutive, the effect of those potentially dilutive securities under the treasury stock method, where the average market price of the common stock exceeds the exercise prices for the respective periods. In periods of loss, there are no potentially dilutive common shares to add to the weighted average number of common shares outstanding. 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. Recent Accounting Pronouncements Not Yet Adopted Segment Reporting. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires all public entities to provide enhanced disclosures about significant segment expenses. The amendments in this ASU are to be applied retrospectively and are effective for our annual financial statements starting in fiscal 2025 and interim periods starting in fiscal 2026, with early adoption permitted. The Company expects this ASU to only impact its disclosures with no impacts to its results of operations, cash flows or financial condition. Income Taxes. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid and to improve the effectiveness of income tax disclosures. This accounting standards update will be effective for us for fiscal year 2026 and interim periods beginning in F-17 Table of Contents the first quarter of fiscal 2027, with early adoption permitted. The Company expects this ASU to only impact its disclosures with no impacts to its results of operations, cash flows or financial condition. Climate-Related Disclosures. In March 2024, the SEC passed rule changes that will require registrants to provide certain climate-related information in their registration statements and annual reports. The new rules enhance and standardize climate-related disclosures in an effort to provide investors with more consistent, comparable and reliable information about the impact of climate-related risks on registrants. The rules require disclosure of greenhouse gas (GHG) emissions in annual reports and registration statements Additionally, all registrants would be required to provide numerous climate-related disclosures within their financial statements and elsewhere in their filings. The Company is currently evaluating the impact of the rule changes. This accounting standards update will be effective for us for fiscal year 2027. Note 2. Property and Equipment, net Property and equipment, net as of February 4, 2024 and January 29, 2023 consists of (in thousands): Estimated Life February 4, 2024 January 29, 2023 Office and store furniture, and equipment 5 Years $ 13,089 $ 8,933 Software 5 Years 5,206 3,996 Leasehold improvements Shorter of estimated useful life or lease term 80,501 60,964 Computers 3 Years 5,254 4,032 Tools, Dies, Molds 5 Years 779 868 Vehicles 5 Years 497 497 Construction in process NA 7,826 6,329 Total 113,152 85,619 Accumulated depreciation and amortization ( 42,345 ) ( 32,715 ) Property and equipment, net $ 70,807 $ 52,904 Depreciation and amortization expense was $ 12.2 million, $ 10.5 million, and $ 7.2 million in fiscal 2024, 2023, and 2022, respectively. Note 3. Accrued Expenses The following table presents the components of accrued expenses (in thousands): February 4, 2024 January 29, 2023 Accrued warehouse, freight, and inventory $ 13,348 $ 10,098 Accrued income taxes 7,675 687 Customer return liability 5,606 4,483 Accrued advertising fees 3,373 739 Warranty liability 1,359 721 Accrued professional fees 1,304 2,167 Accrued occupancy 1,094 1,278 Other accrued expenses (1) 4,863 5,244 Total Accrued Expenses $ 38,622 $ 25,417 (1) Other accrued expenses consists primarily of credit card fees, property and equipment, insurance, property taxes, and other operating costs. F-18 Table of Contents Note 4. 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 for fiscal 2024, 2023, and 2022 are set forth below: 2024 2023 2022 Current taxes: U.S. federal $ 6,898 $ 6,127 $ 412 State and local 3,190 3,190 2,220 Total current tax expense $ 10,088 $ 9,317 $ 2,632 Deferred taxes: U.S. federal $ ( 1,238 ) $ 1,767 $ ( 7,222 ) State and local ( 888 ) ( 723 ) ( 2,499 ) Total deferred tax (benefit) expense ( 2,126 ) 1,044 ( 9,721 ) Total tax provision $ 7,962 $ 10,361 $ ( 7,089 ) A reconciliation of income taxes at the federal statutory corporate rate to the effective rate for fiscal 2024, 2023, and 2022 is as follows: 2024 2023 2022 Provision (benefit) at federal Statutory rates 21.0 % 21.0 % 21.0 % State tax, net of federal provision (benefit) 5.1 % 4.9 % 4.9 % Non-deductible executive compensation 0.3 % 1.8 % 1.8 % Permanent adjustments 0.1 % 0.2 % — % Equity-based compensation 0.5 % 0.1 % ( 4.4 ) % Research and development credit ( 3.6 ) % — % — % Other 0.2 % 0.1 % ( 0.4 ) % Uncertain tax benefits 1.4 % — % — % Change in valuation allowance — % — % ( 40.4 ) % Income tax provision 25.0 % 28.1 % ( 17.5 ) % F-19 Table of Contents Significant components of the Company's deferred tax assets are as follows (in thousands): February 4, 2024 January 29, 2023 Deferred Income Tax Assets State net operating loss carryforward $ 342 $ 440 Intangible assets 465 403 Accrued liabilities 2,879 2,952 Equity-based compensation 2,219 3,247 Merchandise inventories 3,848 724 Research and development capitalization 3,687 1,920 Operating lease liabilities 45,220 39,488 Total Deferred Income Tax Assets 58,660 49,174 Deferred Income Tax Liabilities Operating lease right of use asset ( 40,393 ) ( 35,484 ) Property and equipment ( 7,464 ) ( 5,013 ) Total Deferred Tax Liabilities ( 47,857 ) ( 40,497 ) Net Deferred Income Tax Asset $ 10,803 $ 8,677 At February 4, 2024 and January 29, 2023, the Company did no t have any net operating loss carryforwards available for federal income tax purposes. The Company has approximately $ 5.7 million and $ 7.1 million of state net operating loss carryforwards as of February 4, 2024 and January 29, 2023, 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 2020 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 February 4, 2024 and 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. A reconciliation of beginning and ending amounts of unrecognized tax benefits for fiscal 2024, 2023, and 2022 is as follows: 2024 2023 2022 Gross unrecognized tax benefit, beginning of period $ — $ — $ — Additions based on tax positions related to the current year 177 — — Additions related to tax positions in prior year 275 — — Settlements related to tax positions in a prior period — — — Decreases based on tax positions in a prior period — — — Gross unrecognized tax benefit, end of period $ 452 $ — $ — F-20 Table of Contents The Company recognizes only those tax positions that meet the more-likely-than-not recognition threshold and establishes tax reserves for uncertain tax positions that do not meet this threshold. As of February 4, 2024, the Company has unrecognized tax benefits of $ 0.5 million. As of January 29, 2023, the Company assessed and concluded that it did 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 2024, 2023, and 2022. To the extent these unrecognized tax benefits are ultimately recognized, approximately $ 0.5 million will impact the Company’s effective tax rate. Our policy is to record interest and penalties directly related to uncertain tax positions as income tax expense in the statements of operations. The Internal Revenue Service (IRS) has concluded the audit of the Company's fiscal 2019 federal income tax return as of February 4, 2024. The IRS has proposed immaterial adjustments, with the Company in the process of amending federal and state income tax returns for fiscal 2022 and 2023 as a result of the IRS audit settlement. 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 February 4, 2024, and will continue to monitor the impact of the changes. 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. For the years ended February 4, 2024 and January 29, 2023, due to the capitalization of research and development expenditures, the Company’s current federal taxable income increased by approximately $ 9.0 million and $ 7.7 million, respectively, with a corresponding increase in the Company’s deferred tax assets. 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. The Company will continue to monitor the impact of changes in tax legislation. Note 5. Basic and Diluted Net Income Per Common Share The following table sets forth the computation of basic and diluted net income per share for fiscal 2024, 2023, and 2022: (amounts in thousands, except per share data and share amounts) 2024 2023 2022 Net income $ 23,861 $ 26,488 $ 47,488 Weighted-average number of common shares outstanding, basic 15,427,975 15,198,754 15,107,958 Effect of dilutive securities (1) 1,032,408 756,914 950,153 Weighted-average number of common shares outstanding, diluted 16,460,383 15,955,668 16,058,111 Basic net income per share $ 1.55 $ 1.74 $ 3.14 Diluted net income per share $ 1.45 $ 1.66 $ 2.96 (1) The effect of dilutive securities includes unvested restricted stock units, stock options and warrants. During fiscal 2024, all remaining outstanding warrants were exercised. For fiscal 2024 and 2023, the effects of 495,366 stock options outstanding were excluded from the computation of diluted net income per share because their effect would have been anti-dilutive. F-21 Table of Contents Note 6. Leases Components of lease expense were as follows (in thousands): 2024 2023 2022 Operating lease expense $ 30,305 $ 24,173 $ 18,902 Variable lease expense 11,820 16,082 10,489 Short term lease expense 1,470 721 336 Total lease expense $ 43,595 $ 40,976 $ 29,727 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. During fiscal 2024 and 2023, we did not recognize any impairment charges associated with showroom-level right-of-use assets. During fiscal 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. Future minimum lease payments under non-cancelable leases as of February 4, 2024 were as follows (in thousands): 2025 $ 25,897 2026 31,304 2027 29,134 2028 26,958 2029 24,397 Thereafter 76,790 Total undiscounted future minimum lease payments 214,480 Less: imputed interest ( 38,976 ) Total present value of lease obligations 175,504 Less: current operating lease liability ( 17,628 ) Operating lease liability- long term $ 157,876 Supplemental cash flow information related to our operating leases is as follows (in thousands): 2024 2023 2022 Operating cash flow information: Amounts paid on operating lease liabilities $ 29,748 $ 23,724 $ 14,400 Non-cash activities Net additions to right-of-use assets obtained in exchange for lease obligations $ 42,064 $ 53,239 $ 116,048 Weighted average remaining lease term - operating leases 7.47 7.40 6.29 Weighted average discount rate - operating leases 4.97 % 4.10 % 3.44 % Note 7. Commitments, Contingencies and Related Parties 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. F-22 Table of Contents Legal Proceedings 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 has voluntarily self-reported to the SEC information concerning the internal investigation of the accounting matters that led to the restatement of its previously issued audited financial statements as of and for the year ended January 29, 2023 and our unaudited condensed financial statements for the quarterly periods ended April 30, 2023, October 30, 2022, July 31, 2022 and May 1, 2022. As a result of self-reporting, the Company is the subject of an ongoing, non-public investigation by the SEC. The Company is cooperating fully with the SEC in its investigation and continues to respond to requests in connection with this matter. The investigation could result in the SEC seeking various penalties and relief including, without limitation, civil injunctive relief and/or civil monetary penalties or administrative relief. The nature of the relief or remedies the SEC may seek with respect to the Company, if any, cannot be predicted at this time. On December 19, 2023, a putative securities class action was filed against the Company and certain of its current and former officers related to the restatement of certain of the Company’s financial statements. The suit, captioned Gutknecht v. The Lovesac Company , No. 3:23-cv-1640, was filed in the United States District Court for the District of Connecticut and alleges that all defendants violated Sections 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by the SEC, and that the individual defendants violated Section 20(a) of the Exchange Act. The complaint generally alleges that the Company made certain misrepresentations or failed to disclose certain accounting errors related to the restatement of its financial statements and that the Company’s disclosure controls and procedures and internal controls over financial reporting were deficient. The plaintiffs seek, among other things, an unspecified amount of damages and attorneys’ fees, expert fees and other costs. On March 11, 2024, the court appointed Susan Cooke Peña as Lead Plaintiff and The Rosen Law Firm, P.A. as Lead Counsel. The court’s scheduling order provides for Lead Plaintiff to file an Amended Complaint by May 10, 2024. The litigation is in its early stages, and management is unable to assess a likely outcome or the amount or range of potential losses at this time . Note 8. Financing Arrangements Credit Line On February 6, 2018, the Company established a $ 25.0 million line of credit with Wells Fargo Bank. 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 from $ 25.0 million to $ 40.0 million, subject to borrowing base and availability restrictions. Availability is based on eligible accounts receivable and inventory. The amended agreement contains a financial covenant that requires us to maintain undrawn availability under the credit facility of at least 10 % of the lesser of (i) the aggregate commitments in the amount of $ 40.0 million and (ii) the amounts available under the credit facility based on eligible accounts receivable and inventory. Under the amended line of credit, 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. 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. As of February 4, 2024 and January 29, 2023, the Company’s borrowing availability under the line of credit was $ 36.0 million, there were no borrowings outstanding on this line of credit, and the Company was in compliance with required covenants. F-23 Table of Contents 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. 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 2022, 12,125 warrants were exercised, with 5,625 warrants exercised on a cashless basis, which resulted in the issuance of 10,956 common shares. There were 98 warrants that expired as of January 30, 2022. There were no warrants issued, exercised, or expired and canceled in fiscal 2023. In fiscal 2024, Roth Capital Partners, LLC performed a cashless exercise of all 281,750 remaining outstanding warrants resulting in 74,592 net shares issued. As of February 4, 2024, no warrants remain outstanding. The following represents warrant activity during fiscal 2024, 2023, and 2022: Average exercise price Number of warrants Weighted average remaining contractual life (in years) Outstanding at January 31, 2021 $ 19.07 293,973 2.57 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 Issued — — — Expired and canceled — — — Exercised — — — Outstanding at January 29, 2023 19.20 281,750 0.41 Issued — — — Expired and canceled — — — Exercised 19.20 ( 281,750 ) — Outstanding at February 4, 2024 $ — — — Equity Incentive Plans The Company adopted the Amended and Restated 2017 Equity Incentive Plan (the "2017 Equity Plan") which provides for awards in the form of stock 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 fiscal 2024, the 2017 Equity Plan was amended and restated to increase the shares of our common stock authorized and reserved for issuance by 225,000 shares, which increased the number of shares of common stock reserved for issuance under the 2017 Equity Plan to 2,879,889 shares of common stock. Stock Options In June 2019, the Company granted 495,366 non-statutory stock options to certain officers of the Company with an exercise 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 originally 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 495,366 stock options were modified in fiscal 2022 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 with the remaining expense to be recognized over the remaining expected term. The market condition was met on June 5, 2021, which was the date on which the average closing price of the Company’s common stock had been at least $ 75 for 40 consecutive trading days. The options vested and became exercisable on June 5, 2022 as the officers were still employed on that date. F-24 Table of Contents There were no stock options issued, exercised, or expired and canceled during fiscal 2024, 2023, and 2022. The following represents stock option activity during fiscal 2024, 2023, and 2022 : Number of options Weighted average exercise price Weighted average remaining contractual life (in years) Average intrinsic value Outstanding at January 31, 2021 495,366 $ 38.10 3.35 $ 9,135 Issued — — Canceled and forfeited — — Exercised — — Outstanding at January 30, 2022 495,366 38.10 2.35 6,162 Issued — — Canceled and forfeited — — Exercised — — Outstanding at January 29, 2023 495,366 38.10 1.35 — Issued — — Canceled and forfeited — — Exercised — — Outstanding and exercisable at February 4, 2024 495,366 $ 38.10 5.34 $ — Time and Performance Based Restricted Stock Units The following table summarizes the activity for the Company's unvested restricted stock units activity during fiscal 2024, 2023, and 2022: Number of shares Weighted average grant date fair value 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 Granted 836,678 26.50 Forfeited ( 63,298 ) 34.93 Vested ( 381,228 ) 25.24 Unvested at February 4, 2024 1,032,408 $ 31.41 F-25 Table of Contents In March 2023, Shawn Nelson, our Chief Executive Officer, received a one-time performance and retention long-term incentive grant of 235,000 Restricted Stock Units (the “RSU Grant”) pursuant to the 2017 Equity 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 in the event of termination of employment as defined in the 2017 Equity Plan, the RSU Grant will be settled in shares of common stock of the Company on the first anniversary of the applicable vesting date. The RSU grant was 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 grant date fair value of the RSU Grant was $ 4.4 million. The expense will be recognized on a straight-line basis over the longest of the derived, explicit, or implicit service period. Equity-based compensation expense was approximately $ 4.2 million, $ 10.5 million, and $ 5.9 million for fiscal 2024, 2023, and 2022 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 $ 8.5 million as of February 4, 2024 and will be recognized in operations over a weighted average period of 3.76 years. Note 10. 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: 2024 2023 2022 Sactionals $ 637,388 $ 584,449 $ 436,588 Sacs 51,719 55,145 52,478 Other 11,158 11,585 9,173 Total net sales $ 700,265 $ 651,179 $ 498,239 F-26