love-20221030

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to


Commission File Number: 001-38555

THE LOVESAC COMPANY (Exact name of registrant as specified in its charter)


Delaware						32-0514958
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


Two Landmark Square, Suite 300
Stamford, Connecticut						06901
(Address of principal executive offices)						(Zip Code)

Registrant’s telephone number, including area code: (888) 636-1223

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.00001 par value per share

LOVE

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of December 1, 2022, there were 15,192,442 shares of common stock, $0.00001 par value per share, outstanding.

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THE LOVESAC COMPANY

FORM 10-Q

INDEX TO QUARTERLY REPORT ON FORM 10-Q

October 30, 2022


		Page
PART I. FINANCIAL INFORMATION		1

Item 1.	Unaudited Financial Statements	1

	Condensed Balance Sheets as of October 30, 2022 and January 30, 2022	1

	Condensed Statements of Operations for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021	2

	Condensed Statements of Changes in Stockholders’ Equity for the thirteen a nd thirty-nine weeks ended October 30, 2022 and October 31, 2021	3

	Condensed Statements of Cash Flows for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021	4

	Notes to Condensed Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures	30

Part II. OTHER INFORMATION		31

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	32

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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other legal authority, which statements may involve substantial risk and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions.

You should not place undue reliance on forward looking statements. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur at all or on a specified timeframe. The cautionary statements set forth in this Quarterly Report on Form 10-Q, including in Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere, identify important factors which you should consider in evaluating our forward-looking statements. These factors include, among other things:

•our ability to sustain recent growth rates;

•our ability to sustain the increase in our Internet sales;

•our ability to manage the growth of our operations over time;

•our ability to maintain, grow and enforce our brand and trademark rights;

•our ability to improve our products and develop new products;

•our ability to obtain, grow and enforce intellectual property related to our business and avoid infringement or other violation of the intellectual property rights of others;

•our ability to successfully open and operate new showrooms;

•the impact of any systems interruptions that impair customer access to our sites or other performance failures in our technology infrastructure;

•any decline in consumer spending including due to negative impact from economic conditions;

•our ability to compete and succeed in a highly competitive and evolving industry; and

•the effect and consequences of current economic conditions, including the impact of the novel coronavirus (“COVID-19”) public health crisis, the conflict between Russia and Ukraine, and inflation on our business operations and continuity.

We caution you that the foregoing list may not contain all the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the sections entitled “Risk Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission and in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur at all or on a specified timeline, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

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The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

iii

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE LOVESAC COMPANY

CONDENSED BALANCE SHEETS

(unaudited)


	October 30, 2022		January 30, 2022
(amounts in thousands, except share and per share amounts)
Assets
Current Assets
Cash and cash equivalents	$	3,832	$	92,392
Trade accounts receivable	15,357		8,547
Merchandise inventories	154,481		108,493
Prepaid expenses and other current assets	41,867		15,726
Total Current Assets	215,537		225,158
Property and equipment, net	47,477		34,137
Operating lease right-of-use assets	133,075		100,891
Other Assets
Goodwill	144		144
Intangible assets, net	1,395		1,413
Deferred financing costs, net	73		—
Deferred tax asset	9,695		9,836
Total Other Assets	11,307		11,393
Total Assets	$	407,396	$	371,579
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	47,267	$	33,247
Accrued expenses	33,126		40,497
Payroll payable	7,199		9,978
Customer deposits	5,861		13,316
Current operating lease liabilities	20,774		16,382
Sales taxes payable	4,770		5,359
Total Current Liabilities	118,997		118,779
Operating Lease Liabilities, long-term	130,229		96,574
Line of Credit	—		—
Total Liabilities	249,226		215,353
Commitments and Contingencies (see Note 6)
Stockholders’ Equity
Preferred Stock $0.00001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of October 30, 2022 and January 30, 2022.	—		—
Common Stock $.00001 par value, 40,000,000 shares authorized, 15,192,134 shares issued and outstanding as of October 30, 2022 and 15,123,338 shares issued and outstanding as of January 30, 2022.	—		—
Additional paid-in capital	175,108		173,762
Accumulated deficit	(16,938)		(17,536)
Stockholders’ Equity	158,170		156,226
Total Liabilities and Stockholders’ Equity	$	407,396	$	371,579

The accompanying notes are an integral part of these condensed financial statements.

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THE LOVESAC COMPANY

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)


	Thirteen weeks ended				Thirty-nine weeks ended
(amounts in thousands, except per share data and share amounts)	October 30, 2022		October 31, 2021		October 30, 2022		October 31, 2021
Net sales	$	134,784	$	116,678	$	412,698	$	302,041
Cost of merchandise sold	71,212		58,062		202,092		138,317
Gross profit	63,572		58,616		210,606		163,724
Operating expenses
Selling, general and administration expenses	53,658		38,087		147,425		104,191
Advertising and marketing	19,050		15,832		54,039		39,548
Depreciation and amortization	2,459		1,726		8,196		5,748
Total operating expenses	75,167		55,645		209,660		149,487

Operating (loss) income	(11,595)		2,971		946		14,237
Interest expense, net	(69)		(45)		(101)		(135)
Net (loss) income before taxes	(11,664)		2,926		845		14,102
Benefit from (Provision for) income taxes	3,245		(174)		(247)		(842)
Net (loss) income	$	(8,419)	$	2,752	$	598	$	13,260

Net (loss) income per common share:
Basic	$	(0.55)	$	0.18	$	0.04	$	0.88
Diluted	$	(0.55)	$	0.17	$	0.04	$	0.83

Weighted average number of common shares outstanding:
Basic	15,220,593		15,146,890		15,190,079		15,092,844
Diluted	15,220,593		16,069,729		16,067,066		16,015,683

The accompanying notes are an integral part of these condensed financial statements.

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THE LOVESAC COMPANY

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 30, 2022 AND OCTOBER 31, 2021

(unaudited)


	Common			Additional Paid-in Capital		Accumulated Deficit		Total
(amounts in thousands, except share amounts)	Shares	Amount
Balance - January 31, 2021	15,011,556	$	—	$	171,382	$	(63,436)	$	107,946
Net income	—	—		—		2,061		2,061
Equity based compensation	—	—		654		—		654
Issuance of common stock for restricted stock	4,868	—		—		—		—
Exercise of warrants	2,106	—		20		—		20
Balance - May 2, 2021	15,018,530	—		172,056		(61,375)		110,681

Net income	—	—		—		8,448		8,448
Equity based compensation	—	—		1,085		—		1,085
Issuance of common stock for restricted stock	78,446	—		—		—		—
Exercise of Warrants	8,850	—		84		—		84
Taxes paid for net share settlement of equity awards	—	—		(3,370)				(3,370)
Balance - August 1, 2021	15,105,826	—		169,855		(52,927)		116,928

Net income	—	—		—		2,752		2,752
Equity based compensation	—	—		1,110		—		1,110
Issuance of common stock for restricted stock	17,056	—		—		—		—
Taxes paid for net share settlement of equity awards	—	—		(193)				(193)
Balance - October 31, 2021	15,122,882	—		170,772		(50,175)		120,597

Balance - January 30, 2022	15,123,338	—		173,762		(17,536)		156,226
Net income	—	—		—		1,895		1,895
Equity based compensation	—	—		1,163		—		1,163
Issuance of common stock for restricted stock	1,704	—		—		—		—
Taxes paid for net share settlement of equity awards	—	—		(47)		—		(47)
Balance - May 1, 2022	15,125,042	$	—	$	174,878	$	(15,641)	$	159,237

Net income	—	—		—		7,122		7,122
Equity based compensation	—	—		1,034		—		1,034
Issuance of common stock for restricted stock	58,235	—		—		—		—
Taxes paid for net share settlement of equity awards	—	—		(1,402)		—		(1,402)
Balance - July 31, 2022	15,183,277	—		174,510		(8,519)		165,991

Net loss	—	—		—		(8,419)		(8,419)
Equity based compensation	—	—		732		—		732
Issuance of common stock for restricted stock	8,857	—		—		—		—
Taxes paid for net share settlement of equity awards	—	—		(134)		—		(134)
Balance - October 30, 2022	15,192,134	$	—	$	175,108	$	(16,938)	$	158,170

The accompanying notes are an integral part of these condensed financial statements.

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THE LOVESAC COMPANY

CONDENSED STATEMENT OF CASH FLOWS

(unaudited)


	Thirty-nine weeks ended
(amounts in thousands)	October 30, 2022		October 31, 2021
Cash Flows from Operating Activities
Net income	$	598	$	13,260
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of property and equipment	7,911		5,121
Amortization of other intangible assets	285		627
Amortization of deferred financing fees	117		68
Net loss on disposal of property and equipment	41		—
Equity based compensation	2,929		2,850
Non-cash operating lease cost	13,582		11,003
Impairment of right of use lease asset	—		554
Deferred income taxes	141		—
Changes in operating assets and liabilities:
Trade accounts receivable	(6,810)		(5,281)
Merchandise inventories	(45,988)		(44,127)
Prepaid expenses and other current assets	(20,547)		1,166
Accounts payable and accrued expenses	3,281		9,265
Operating lease liabilities	(13,227)		(10,396)
Customer deposits	(7,455)		711
Net Cash Used in Operating Activities	(65,142)		(15,179)
Cash Flows from Investing Activities
Purchase of property and equipment	(21,292)		(11,386)
Payments for patents and trademarks	(267)		(455)
Net Cash Used in Investing Activities	(21,559)		(11,841)
Cash Flows from Financing Activities
Payment of deferred financing costs	(276)		—
Taxes paid for net share settlement of equity awards	(1,583)		(3,563)

Proceeds from the exercise of warrants	—		104
Net Cash Used in Financing Activities	(1,859)		(3,459)
Net Change in Cash and Cash Equivalents	(88,560)		(30,479)
Cash and Cash Equivalents - Beginning	92,392		78,341
Cash and Cash Equivalents - Ending	$	3,832	$	47,862
Supplemental Cash Flow Disclosures
Cash paid for taxes	$	9,811	$	775
Cash paid for interest	$	65	$	80

The accompanying notes are an integral part of these condensed financial statements.

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THE LOVESAC COMPANY

CONDENSED NOTES TO FINANCIAL STATEMENTS

FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 30, 2022 AND OCTOBER 31, 2021

NOTE 1 - BASIS OF PRESENTATION AND OPERATIONS

The balance sheet of The Lovesac Company (the “Company”, “we”, “us” or “our”) as of January 30, 2022, which has been derived from our audited financial statements as of and for the 52-week year ended January 30, 2022, and the accompanying interim unaudited condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. Certain information and note disclosures normally included in annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), have been condensed or omitted pursuant to those rules and regulations. The financial information presented herein, which is not necessarily indicative of results to be expected for the full current fiscal year, reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the interim unaudited condensed financial statements. Such adjustments are of a normal, recurring nature. These condensed financial statements should be read in conjunction with the Company’s financial statements filed in its Annual Report on Form 10-K for the fiscal year ended January 30, 2022.

Due to the seasonality of the Company’s business, with the majority of our activity occurring in the fourth quarter of each fiscal year, the results of operations for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021 are not necessarily indicative of results to be expected for the full fiscal year.

Nature of Operations

The Company is a technology driven company that designs, manufactures and sells unique, high quality furniture derived through its proprietary “Designed for Life” approach which results in products that are built to last a lifetime and designed to evolve as our customers’ lives do. The Company markets and sells its products through modern and efficient showrooms and, increasingly, through online sales directly at www.lovesac.com, supported by direct-to-consumer touch-feel points in the form of our own showrooms, which include our newly created mobile concierge and kiosks, as well as through shop-in-shops and online pop-up-shops with third party retailers. 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, the predecessor entity to the Company.

COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic and, in the following weeks, the U.S. federal, state and local governments issued lockdown orders and related safety measures impacting the operations of our showrooms and consumer demand. Although there has been a general improvement in conditions, there continues to be significant uncertainties around the scope and severity of the pandemic, its impact on the global economy, including supply chains, and other business disruptions that may impact our operating results and financial condition. We continue to follow the guidance issued by federal, state and local governments and health organizations and have taken measures to protect the safety of our associates and customers.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

The Company has considered recently issued accounting pronouncements and they were considered to be not applicable or the adoption of such pronouncements will not have a material impact on its condensed financial statements.

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NOTE 3 – INTANGIBLE ASSETS, NET

A summary of intangible assets follows:


		October 30, 2022
(amounts in thousands)	Estimated Life	Gross Carrying Amount		Accumulated Amortization		Net carrying amount
Patents	10 years	$	3,017	$	(1,796)	$	1,221
Trademarks	3 years	1,478		(1,304)		174
Other intangibles	5 years	840		(840)		—
Total		$	5,335	$	(3,940)	$	1,395


		January 30, 2022
(amounts in thousands)	Estimated Life	Gross Carrying Amount		Accumulated Amortization		Net carrying amount
Patents	10 years	$	2,838	$	(1,626)	$	1,212
Trademarks	3 years	1,390		(1,189)		201
Other intangibles	5 years	840		(840)		—
Total		$	5,068	$	(3,655)	$	1,413

Amortization expense associated with intangible assets subject to amortization is included in depreciation and amortization expense on the accompanying condensed statements of operations. Amortization expense on other intangible assets was $0.1 million and $0.1 million and $0.3 million and $0.6 million for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021, respectively.

As of October 30, 2022, estimated future amortization expense associated with intangible assets subject to amortization is as follows:


(amounts in thousands)
Remainder of Fiscal 2023	$	96
2024	297
2025	276
2026	214
2027	171
2028	129
Thereafter	212
	$	1,395

NOTE 4 – INCOME TAXES

The Company recorded an income tax benefit and income tax expense of $3.2 million and $0.2 million, for the thirteen and thirty-nine weeks ended October 30, 2022, respectively and income tax expense of $0.2 million and $0.8 million for the thirteen and thirty-nine weeks ended October 31, 2021, respectively. The effective tax rate was 27.8% and 29.2% for the thirteen and thirty-nine weeks ended October 30, 2022 as compared with 5.9% and 6.0% for the thirteen and thirty-nine weeks ended October 31, 2021. The effective tax rate varies from the 21% federal statutory tax rate for the thirteen and thirty-nine weeks ended October 30, 2022 primarily due to state taxes. Comparatively, the effective tax rate for the thirteen and thirty-nine weeks ended October 31, 2021 was lower than the 21% federal statutory tax rate primarily due to the release of a full valuation allowance on the Company’s net deferred tax assets. The valuation allowance was fully released as of the end of fiscal year 2022.

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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. The Company had no material interest or penalties during the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021, respectively, and does not anticipate any such items during the next twelve months. The Company's policy is to record interest and penalties directly related to uncertain tax positions as income tax expense in the condensed statements of operations.

NOTE 5 – BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE

Basic net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding and common stock equivalents outstanding during the period. Diluted net (loss) income per common share includes, in periods in which they are dilutive, the effect of those potentially dilutive securities where the average market price of the common stock exceeds the exercise prices for the respective periods.

For the thirteen weeks ended October 30, 2022, the effects of 657,515 shares of common stock related to restricted stock units, 495,366 shares of common stock underlying stock options of potentially dilutive shares which may be issued in the future and warrants to purchase 281,750 shares of common stock were excluded from the diluted net (loss) income per share calculation because the effect of including these potentially dilutive shares was antidilutive. For the thirty-nine weeks ended October 30, 2022, the effects of 657,515 shares of common stock related to restricted stock units, 495,366 shares of common stock underlying stock options and warrants to purchase 281,750 shares of common stock were included in the diluted share calculation and there were no anti-dilutive awards during this period.

For the thirteen and thirty-nine weeks ended October 31, 2021, the effects of 518,262 shares of common stock related to restricted stock units, 495,366 shares of common stock underlying stock options and warrants to purchase 281,750 shares of common stock were included in the diluted share calculation.

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its office, warehouse facilities and retail showrooms under operating lease agreements which expire at various dates through January 2033. The Company determines if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of the economic benefits from the use of that identified asset. Certain operating leases have renewal options and rent escalation clauses. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement.

Lease right-of-use assets represent the right to use an underlying asset pursuant to the lease for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Lease right-of-use assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease right-of-use asset, unless an implicit rate is readily determinable. We combine lease and certain non-lease components for our showroom real estate leases in determining the lease payments subject to the initial present value calculation. Lease right-of-use assets include upfront lease payments and exclude lease incentives, where applicable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.

Lease expense for operating leases consists of both fixed and variable components. Expense related to fixed lease payments are recognized on a straight-line basis over the lease term. Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. Leases with an initial term of twelve months or less are not recorded on the balance sheet. In addition, certain of our equipment lease agreements include variable lease payments, which are based on the usage of the underlying asset. The variable portion of payments are not included in the initial measurement of the asset or lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred.

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ASC 842 requires companies to use the rate implicit in the lease whenever that rate is readily determinable and if the interest rate is not readily determinable, then a lessee may use its incremental borrowing rate. Our leases do not have an interest rate implicit in the lease. As a result, for purposes of measuring our ROU asset and lease liability, we determined our incremental borrowing rate by computing the rate of interest that we would have to pay to (i) borrow on a collateralized basis (ii) over a similar term (iii) at an amount equal to the total lease payments and (iv) in a similar economic environment. We 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. The lease term for all of our lease arrangements include the noncancelable period of the lease plus, if applicable, any additional periods covered by an option to extend the lease that is reasonably certain to be exercised by the Company. Our leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. Some of our leases contain variable lease payments based on a Consumer Price Index or percentage of sales, which are excluded from the measurement of the lease liability.

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


	October 30, 2022
Weighted average remaining lease term (in years)
Operating Leases	7.5

Weighted average discount rate
Operating Leases	4.07	%

During the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021, the Company recognized operating lease expense of $6.3 million and $4.9 million and $17.5 million and $13.9 million, respectively. In addition, during the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021, we recognized $4.3 million and $2.9 million and $10.9 million and $7.3 million, respectively, for index-based changes in rent, maintenance, real estate taxes, insurance and other charges included in the lease as well as rental expenses related to short term leases.

We did not recognize any impairment charges associated with showroom-level ROU assets during the thirteen and thirty-nine weeks ended October 30, 2022. During the thirteen and thirty-nine weeks ended October 31, 2021, we recognized impairment charges totaling $0.6 million associated with showroom-level ROU assets that are included as part of selling, general and administrative expenses.

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


(amounts in thousands)	Balance sheet location	October 30, 2022
Assets
Operating leases	Operating lease right-of-use assets (non-current)	$	133,075

Liabilities
Current:
Operating leases	Current operating lease liabilities	$	20,774

Noncurrent:
Operating leases	Operating lease liability, long term	130,229

Total lease liabilities		$	151,003

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


(amounts in thousands)
Remainder 2023	$	6,600
2024	26,537
2025	25,415
2026	23,204
2027	20,806
Thereafter	74,588
Total undiscounted future minimum lease payments	177,150
Less: imputed interest	(26,147)
Total present value of lease obligations	151,003
Less: current operating lease liability	(20,774)
Operating lease liability- long term	$	130,229

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


(amounts in thousands)	For the Thirty-nine weeks ended October 30, 2022		For the Thirty-nine weeks ended October 31, 2021
Operating cash flow information:
Amounts paid on operating lease liabilities	$	13,227	$	10,396
Non-cash activities
Right-of-use assets obtained in exchange for lease obligations	$	44,934	$	106,415

Severance Contingency

The Company has various employment agreements with its senior level executives. A number of these agreements have severance provisions, ranging from 12 to 18 months of salary, in the event those employees are terminated without cause. The total amount of exposure to the Company under these agreements was $4.9 million at October 30, 2022 if all executives with employment agreements were terminated without cause and the full amount of severance was payable.

Legal Contingency

The Company is involved in various legal proceedings in the ordinary course of business. Management cannot presently predict the outcome of these matters, although management believes, based in part on the advice of counsel, that the ultimate resolution of these matters will not have a materially adverse effect on the Company’s condensed financial position, results of operations or cash flows.

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NOTE 7 – FINANCING ARRANGEMENTS

The Company has a line of credit with Wells Fargo Bank, National Association (“Wells”). On March 25, 2022, the line of credit with Wells was amended and increased from $25.0 million to allow the Company to borrow up to $40.0 million, subject to borrowing base and availability restrictions, and will mature in March 2024. Borrowings are limited to 85% of eligible credit card receivables plus 90% of eligible wholesale receivables plus 89% of the net recovery percentage for the eligible inventory multiplied by the value of such eligible inventory of the Company for the period from December 16 of each year until October 14 of the immediately following year, with a seasonal increase to 90% of the net recovery percentage for the period from October 15 of each year until December 15 of such year, seasonal advance rate, minus applicable reserves established by Wells. 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. As of October 30, 2022 and January 30, 2022, the Company’s borrowing availability under the line of credit with Wells was $36.0 million and $22.5 million, respectively. As of October 30, 2022 and January 30, 2022, there were no borrowings outstanding on this line of credit.

Under the amended line of credit with Wells, the Company may elect that revolving loans bear interest at either a base rate or a term Secured Overnight Funds Rate ("SOFR") based rate, plus, in either case, a margin determined by reference to our quarterly average excess availability under the line of credit and ranging from 0.50% to 0.75% for borrowings accruing interest at a base rate and from 1.625% to 1.850% for borrowings accruing interest at term SOFR. Swing line loans will at all times accrue interest at a base rate plus the applicable margin. The lower margins described above will apply initially and will adjust thereafter from time to time based on the quarterly average excess availability under the line of credit.

NOTE 8 – STOCKHOLDERS’ EQUITY

Common Stock Warrants

The following represents warrant activity during the thirty-nine weeks ended October 30, 2022 and October 31, 2021:


	Average exercise price		Number of warrants	Weighted average remaining contractual life (in years)
Warrants Outstanding at January 31, 2021	$	19.07	293,973	2.57
Warrants issued	—		—	0
Expired and canceled	9.83		(98)	0
Exercised	16.00		(12,125)	0.09
Outstanding at October 31, 2021	$	19.20	281,750	1.66

Warrants Outstanding at January 30, 2022	$	19.20	281,750	1.41
Warrants issued	—		—	0
Expired and canceled	—		—	0
Exercised	—		—	0
Outstanding at October 30, 2022	$	19.20	281,750	0.66

In the thirty-nine weeks ended October 31, 2021, a total of 5,625 warrants were exercised on a cashless basis, whereby the holders received fewer shares of common stock in lieu of a cash payment to the Company. Warrants exercised in the thirty-nine weeks ended October 31, 2021, resulted in the issuance of 10,956 common shares. There were 98 warrants that expired in the thirty-nine weeks ended October 31, 2021.

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Equity Incentive Plan

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. On June 2, 2022, the stockholders of the Company approved of the Second Amended and Restated 2017 Equity Incentive Plan (the "Amended 2017 Equity Plan") that increased the number of shares of common stock reserved for issuance thereunder by 550,000 shares of common stock. The number of shares of common stock reserved for issuance under the Amended 2017 Equity Plan was 2,654,889 at October 30, 2022.

Stock Options

In June 2019, the Company granted 495,366 non-statutory stock options to certain officers of the Company with an option price of $38.10 per share. 100% of the stock options are subject to vesting on the 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 condition and the market condition must be satisfied no later than June 5, 2024 or the options will terminate. These options were valued using a Monte Carlo simulation model to account for the path dependent market conditions that stipulate when and whether or not the options shall vest. The 495,366 stock options were modified 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.

A summary of the status of our stock options as of October 30, 2022 and October 31, 2021, and the changes during the thirty-nine weeks ended October 30, 2022 and October 31, 2021 is presented below:


	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	—
Exercised	—	—
Expired and canceled	—	—
Outstanding at October 31, 2021	495,366	$	38.10	2.6	$	27.08
Exercisable at the end of the period	—	—		—	—

	Number of options	Weighted average exercise price		Weighted average remaining contractual life (in years)	Average intrinsic value
Outstanding at January 30, 2022	495,366	$	38.10	2.35	$	28.68
Granted	—	—		0	0
Canceled and forfeited	—	—		0	0
Outstanding at October 30, 2022	495,366	$	38.10	1.6	$	5.45
Exercisable at the end of the period	495,366	$	38.10	1.6	$	5.45

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Restricted Stock Units

A summary of the status of our unvested restricted stock units as of October 30, 2022 and October 31, 2021, and changes during the thirty-nine weeks then ended, is presented below:


	Number of shares	Weighted average grant date fair value
Unvested at January 31, 2021	655,558	$	18.86
Granted	75,656	76.91
Forfeited	(39,503)	20.52
Vested	(173,449)	19.54
Unvested at October 31, 2021	518,262	$	26.57


	Number of shares	Weighted average grant date fair value
Unvested at January 30, 2022	533,333	$	28.94
Granted	289,625	45.58
Forfeited	(50,638)	29.47
Vested	(114,805)	33.94
Unvested at October 30, 2022	657,515	$	35.07

Equity based compensation expense was approximately $0.7 million and $1.1 million and $2.9 million and $2.9 million for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021, respectively.

The total unrecognized equity-based compensation cost related to unvested restricted unit awards was approximately $4.9 million as of October 30, 2022 and will be recognized in operations over a weighted average period of 2.12 years.

NOTE 9 – EMPLOYEE BENEFIT PLAN

In February 2017, the Company established the TLC 401(k) Plan (the “401(k) Plan”) with Elective Deferrals beginning May 1, 2017. The 401(k) Plan calls for Elective Deferral Contributions, Safe Harbor Matching Contributions and Profit-Sharing Contributions. All associates of the Company will be eligible to participate in the 401(k) Plan as of the day of the month which is coincident with or next follows the date on which they attain age 21 and complete one month of service. Participants will be able to contribute up to 100% of their eligible compensation to the 401(k) Plan subject to limitations with the IRS. The Company's contributions to the 401(k) Plan were $0.3 million and $0.2 million and $1.0 million and $0.6 million for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021, respectively.

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NOTE 10 – SEGMENT INFORMATION

The Company has determined that the Company operates within a single reporting segment. The chief operating decision makers of the Company are the Chief Executive Officer, and President and Chief Operating Officer. The Company’s operating segments are aggregated for financial reporting purposes because they are similar in each of the following areas including economic characteristics, class of consumer, nature of products and distribution method and products are a singular group of products which make up over 95% of net sales.

The following represents net sales by product offering for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021, respectively:


	Thirteen weeks ended				Thirty-nine weeks ended
	October 30, 2022		October 31, 2021		October 30, 2022		October 31, 2021
(amounts in thousands)
Sactionals	$	119,355	$	100,374	$	370,870	$	263,558
Sacs	12,550		14,195		34,385		33,053
Other	2,879		2,109		7,443		5,430
	$	134,784	$	116,678	$	412,698	$	302,041

NOTE 11 – BARTER ARRANGEMENTS

The Company has a bartering arrangement with a third-party vendor, whereby the Company will provide inventory in exchange for media credits. The Company exchanged $1.4 million and $5.3 million of inventory for certain media credits during the thirteen and thirty-nine weeks ending October 30, 2022. The Company exchanged $0.6 million of inventory for certain media credits during the thirteen and thirty-nine weeks ending October 31, 2021.

The contribution to the Company's gross profit from its bartering arrangement was $2.9 million and $11.1 million during the thirteen and thirty-nine weeks ending October 30, 2022. The contribution to the Company's gross profit from its bartering arrangement was $0.5 million during the thirteen and thirty-nine weeks ending October 31, 2021.

The Company had $17.6 million and $3.4 million of unused media credits remaining as of October 30, 2022 and January 30, 2022, respectively, which is included in “Prepaid and other current assets” on the accompanying condensed balance sheet.

NOTE 12 – REVENUE RECOGNITION

The Company’s revenue consists substantially of product sales. The Company reports product 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.

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 condensed statements of operations and an increase in inventory and customers returns liability on the condensed balance sheets. There was a returns allowance recorded on the condensed balance sheet in the amount of $2.9 million and $2.0 million as of October 30, 2022 and January 30, 2022, respectively, which was included in accrued expenses and $0.7 million and $0.4 million as of October 30, 2022 and January 30, 2022, associated with sales returns 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 deposits on the Company’s condensed balance sheet. As of October 30, 2022 and January 30, 2022, the Company recorded under customer deposit liabilities the amount of $5.9 million and $13.3 million respectively. During the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021, the Company recognized approximately $13.3 million and $6.0 million, respectively, related to our customer deposits.

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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 includes mobile concierge and kiosks, and through the internet. The Other channel predominantly represents sales through the use of online pop-up-shops and shop-in-shops that are staffed with associates trained to demonstrate and sell our product. The following represents net sales disaggregated by channel:


	Thirteen weeks ended				Thirty-nine weeks ended
(amounts in thousands)	October 30, 2022		October 31, 2021		October 30, 2022		October 31, 2021
Showrooms	$	82,957	$	69,694	$	256,637	$	181,274
Internet	33,319		35,542		100,109		90,198
Other	18,508		11,442		55,952		30,569
	$	134,784	$	116,678	$	412,698	$	302,041

The Company has no foreign operations and its sales to foreign countries was less than .01% of total net sales in both fiscal 2023 and 2022.

The Company had no customers in fiscal 2023 or 2022 that comprise more than 10% of total net sales.

See Note 10 for sales disaggregated by product.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended January 30, 2022. As discussed in the section titled “Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified in the Forward-Looking Statements section herein and set forth below and those discussed in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent report on Form 10-K filed with the Securities and Exchange Commission.

We operate on a 52- or 53-week fiscal year that ends on the Sunday closest to February 1. Each fiscal year generally is comprised of four 13-week fiscal quarters, although in the years with 53 weeks, the fourth quarter represents a 14-week period.

Overview

We are a technology driven company that designs, manufactures and sells unique, high quality furniture derived through our 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. Our current product offering is comprised of modular couches called Sactionals, premium foam beanbag chairs called Sacs, and their associated home decor accessories. Innovation is at the center of our design philosophy with all of our core products protected by a robust portfolio of utility patents. We market and sell our products through an omni-channel platform that includes direct-to-consumer touch-feel points in the form of our own showrooms, which include our newly created mobile concierge and kiosks, online directly at www.lovesac.com, and through shop-in-shops and online pop-up-shops with third party retailers. We believe that our ecommerce centric approach, coupled with our ability to deliver our large, upholstered products through express couriers, is unique to the furniture industry.

Impact of COVID-19 and Macro-Economic Factors

There continues to be uncertainties around the COVID-19 pandemic, including the impact of additional waves or resurgences, or new strains or variants of the virus on the global economy and supply chains, and other business disruptions that may impact our operating results and financial condition. We continue to follow the guidance issued by federal, state and local governments and health organizations and have taken measures to protect the safety of our associates and customers.

We continue to serve our customers through our omni-channel platform as our products can be easily configured in touchpoints, shopped online and delivered quickly in a touchless way. We continue to experience growth as our net sales increased $110.7 million, or 36.6% to $412.7 million for the thirty-nine weeks ended October 30, 2022, compared to $302.0 million for the thirty-nine weeks ended October 31, 2021. Retail sales drove an increase of $75.4 million, or 41.6%, to $256.6 millions for the thirty-nine weeks ended October 30, 2022, compared to $181.3 million for the thirty-nine weeks ended October 31, 2021. Our internet sales (sales made directly to customers through our ecommerce channel) also increased $9.9 million or 11.0% to $100.1 million for the thirty-nine weeks ended October 30, 2022, compared to $90.2 million for the thirty-nine weeks ended October 31, 2021. New customers increased by 4.1% for the thirty-nine weeks ended October 30, 2022 as compared to 13.7% for the thirty-nine weeks ended October 31, 2021.

The industry in which we operate is cyclical. Our revenues and results of operations are affected by general economic conditions and certain other macro-economic factors and uncertainties. Purchasers of our products are sensitive to a number of factors that influence the levels of consumer spending, including economic conditions, consumer disposable income, housing market conditions, consumer debt, interest rates, inflation and consumer confidence. We continue to monitor the impact of the pandemic and overall economic and market conditions with respect to our sources and uses of capital.

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Seasonality

Our business is seasonal. As a result, our revenues fluctuate from quarter to quarter, which often affects the comparability of our results between periods. Net sales are historically higher in the fourth fiscal quarter due primarily to the impact of the holiday selling season.

Product Overview

Our products serve as a set of building blocks that can be rearranged, restyled and re-upholstered with any new setting, mitigating constant changes in fashion and style. They are built to last and evolve throughout a customer’s life.

•Sactionals. Our Sactional product line currently represents a majority of our net sales. We believe our Sactionals platform is unlike competing products in its adaptability yet is comparable aesthetically to similarly priced premium couches and sectionals. Our Sactional products include a number of patented features relating to their geometry and modularity, coupling mechanisms and other features. Utilizing only two, standardized pieces, “seats” and “sides,” and approximately 200 high quality, tight-fitting covers that are removable, washable, and changeable, customers can create numerous permutations of a sectional couch with minimal effort. Customization is further enhanced with our specialty-shaped modular offerings, such as our wedge seat and roll arm side. Our custom features and accessories can be added easily and quickly to a Sactional to meet endless design, style, storage and utility preferences, reflecting our Designed for Life philosophy. Sactionals are built to meet the highest durability and structural standards applicable to fixed couches. Sactionals are comprised of standardized units and we guarantee their compatibility over time, which we believe is a major pillar of their value proposition to the consumer. Our Sactionals represented 88.6% and 89.9% of our sales for the thirteen and thirty-nine weeks ended October 30, 2022, respectively.

During October 2021, we introduced the new Sactionals StealthTech Sound + Charge product line. This unique innovation features immersive surround sound by Harman Kardon and convenient wireless charging, all seamlessly embedded and hidden inside the adaptable Sactionals platform. The System includes two Sound + Charge Sides each with embedded front- and rear-firing Harman Kardon speakers, a Subwoofer that easily integrates into a Sactionals Seat Frame and a Center Channel, all working in unison to deliver captivating surround sound that is completely hidden from view.

•Sacs. We believe that our Sacs product line is a category leader in oversized beanbags. The Sac product line offers 6 different sizes ranging from 22 pounds to 95 pounds with capacity to seat 3+ people on the larger model Sacs. Filled with Durafoam, a blend of shredded foam, Sacs provide serene comfort and guaranteed durability. Their removable covers are machine washable and may be easily replaced with a wide selection of cover offerings.

•Other. Our Other product line complements our Sacs and Sactionals by increasing their adaptability to meet evolving consumer demands and preferences. Our current product line offers Sactional-specific drink holders, Footsac blankets, decorative pillows, fitted seat tables and ottomans in varying styles and finishes and our unique Sactionals Power Hub, providing our customers with the flexibility to customize their furnishings with decorative and practical add-ons to meet evolving style preferences.

Sales Channels

We offer our products through an omni-channel platform that provides a seamless and meaningful experience to our customers online and in-store. Our distribution strategy allows us to reach customers through four distinct, brand-enhancing channels.

•Showrooms. We market and sell our products through 189 retail locations at top tier malls, lifestyle centers, mobile concierge, kiosk, and street locations in 40 states in the U.S. We carefully select the best small-footprint retail locations in high-end malls and lifestyle centers for our showrooms. Compared to traditional retailers, our showrooms require significantly less square footage because of our need to have only a few in-store sample configurations for display and our ability to stack our inventory for immediate sale. The architecture and layout of these showrooms is designed to communicate our brand personality and key product features. Our goal is to educate first-time customers, creating an environment where people can touch, feel, read, and understand the technology behind our products. We are updating and remodeling many of our showrooms to reflect our new showroom concept, which emphasizes our unique product platform, and is the standard for new showrooms. Our new showroom concept utilizes technology in more experiential ways to increase traffic and sales. Net sales

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completed through this channel accounted for 61.5% and 62.2% of total net sales for the thirteen and thirty-nine weeks ended October 30, 2022, up from 59.7% and 60.0% of total net sales for the thirteen and thirty-nine weeks ended October 31, 2021.

•Ecommerce. Through our ecommerce channel, we believe we are able to significantly enhance the consumer shopping experience for home furnishings, driving deeper brand engagement and loyalty, while also realizing more favorable margins than our showroom locations. We believe our robust technological capabilities position us well to benefit from the growing consumer preference to transact at home and via mobile devices. With furniture especially suited to ecommerce applications, our net sales completed through this channel accounted for 24.7% and 24.3% of total net sales for the thirteen and thirty-nine weeks ended October 30, 2022, down from 30.5% and 29.9% of total net sales for the thirteen and thirty-nine weeks ended October 31, 2021, respectively.

•Other touchpoints. We augment our showrooms with other touchpoint strategies including online pop-up-shops, shop-in-shops, and barter inventory transactions. We utilize in store pop-up-shops to increase the number of locations where customers can experience and purchase our products, a low-cost alternative to drive brand awareness, in store sales, and ecommerce sales. These in-store pop-up-shops are staffed similarly to our showrooms with associates trained to demonstrate and sell our products and promote our brand. Unlike the in-store pop-up-shops which are typically 10-day shows, and pop-up locations, shop-in-shops are designed to be in permanent locations carrying the same digital technology of our showrooms and are also staffed with associates trained to demonstrate and sell our products. Shop-in-shops require less capital expenditure to open a productive space to drive brand awareness and touchpoint opportunities for demonstrating and selling our products. We hosted 68 in-store pop-up-shops in the thirteen weeks ended October 30, 2022 and did not host in-store pop-up-shops in the thirteen weeks ended October 31, 2021.

We operated 3 and 8 online pop-up-shops on Costco.com for the thirteen and thirty-nine weeks ended October 30, 2022, and 2 and 6 for the thirteen and thirty-nine weeks ended October 31, 2021, respectively. We operated 22 Best Buy shop-in-shops for the thirteen and thirty-nine weeks ended October 30, 2022, up from 5 in the thirteen and thirty-nine weeks ended October 31, 2021, respectively. Other sales which includes pop-up-shop sales, shop-in-shop sales, and barter inventory transactions accounted for 13.7% and 13.6% of our total sales for the thirteen and thirty-nine weeks ended October 30, 2022, up from 9.8% and 10.1% of our total sales for the thirteen and thirty-nine weeks ended October 31, 2021, respectively.

SELECTED CONDENSED FINANCIAL INFORMATION

The following tables present our summary condensed financial and other data as of and for the periods indicated. The condensed statement of operations data for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021, the condensed statement of cash flow data for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021 and the summary condensed balance sheet data as of October 30, 2022, are derived from our unaudited condensed financial statements included elsewhere in this Quarterly Report filed on Form 10-Q and have been prepared on the same basis as the audited condensed financial statements.

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The summarized financial information presented below is derived from and should be read in conjunction with our audited condensed financial statements including the notes to those financial statements and our unaudited condensed financial statements including the notes to those financial statements both of which are included elsewhere in is Quarterly Report filed on Form 10-Q along with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results.


	Thirteen weeks ended				Thirty-nine weeks ended
(amounts in thousands, except per share data and share amounts)	October 30, 2022		October 31, 2021		July 31, 2022		August 1, 2021
Condensed Statement of Operations Data:
Net sales
Showrooms	$	82,957	$	69,694	$	256,637	$	181,274
Internet	33,319		35,542		100,109		90,198
Other	18,508		11,442		55,952		30,569
Total net sales	134,784		116,678		$	412,698	$	302,041

Cost of merchandise sold	71,212		58,062		202,092		138,317

Gross profit	63,572		58,616		210,606		163,724
Operating expenses
Selling, general and administrative expenses	53,658		38,087		147,425		104,191
Advertising and marketing	19,050		15,832		54,039		39,548
Depreciation and amortization	2,459		1,726		8,196		5,748

Total operating expenses	75,167		55,645		209,660		149,487

Operating (loss) income	(11,595)		2,971		946		14,237

Interest expense, net	(69)		(45)		(101)		(135)

Net (loss) income before taxes	(11,664)		2,926		845		14,102

Benefit from (Provision for) income taxes	3,245		(174)		(247)		(842)

Net (loss) income	$	(8,419)	$	2,752	$	598	$	13,260
Net Income Attributable to Common Stockholders	$	(8,419)	$	2,752	$	598	$	13,260

Net (loss) income per common share:
Basic (1)	$	(0.55)	$	0.18	$	0.04	$	0.88
Diluted (1)	$	(0.55)	$	0.17	$	0.04	$	0.83

Weighted average number of common shares outstanding:
Basic	15,220,593		15,146,890		15,190,079		15,092,844
Diluted	15,220,593		16,069,729		16,067,066		16,015,683

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	Thirteen weeks ended				Thirty-nine weeks ended
(dollars in thousands)	October 30, 2022		October 31, 2021		October 30, 2022		October 31, 2021

EBITDA (2)(3)	(9,136)		4,697		9,142		19,985
Adjusted EBITDA (2)(3)	$	(8,356)	$	5,818	$	12,112	$	23,553


	As of
(amounts in thousands)	October 30, 2022		January 30, 2022

Balance Sheet Data:
Cash and cash equivalents	$	3,832	$	92,392
Working capital	96,540		106,379
Total assets	407,396		371,579
Total liabilities	249,226		215,353
Total stockholders’ equity	158,170		156,226


	Thirty-nine weeks ended
(amounts in thousands)	October 30, 2022		October 31, 2021

Condensed Statement of Cash flow Data:
Net Cash Used in Operating Activities	$	(65,142)	$	(15,179)
Net Cash Used in Investing Activities	(21,559)		(11,841)
Net Cash Used in Financing Activities	(1,859)		(3,459)
Net change in cash and cash equivalents	(88,560)		(30,479)
Cash and cash equivalents at the end of the period	3,832		47,862

(1)For the calculation of basic and diluted net income per share, see Note 5 and Note 8 to our condensed financial statements.

(2)EBITDA and Adjusted EBITDA are “Non-GAAP Measures” that are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We believe that EBITDA and Adjusted EBITDA are useful measures of operating performance, as they eliminate expenses that are not reflective of the underlying business performance, facilitate a comparison of our operating performance on a consistent basis from period-to-period and provide for a more complete understanding of factors and trends affecting our business. Additionally, EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use EBITDA and Adjusted EBITDA, alongside GAAP measures such as gross profit, operating income (loss) and net income (loss), to measure and evaluate our operating performance and we believe these measures are useful to investors in evaluating our operating performance.

These Non-GAAP Measures should not be considered as alternatives to net income (loss) or net income (loss) per share as a measure of financial performance, cash flows from operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP. They should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, our Non-GAAP Measures are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as tax payments and debt service requirements and certain other cash costs that recur in the future. Our Non-GAAP Measures contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In addition, our Non-GAAP Measures exclude certain non-recurring and other charges.

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In the future, we may incur expenses that are the same as or similar to some of the adjustments in our Non-GAAP Measures. Our presentation of our Non-GAAP Measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying primarily on our GAAP results and by using our Non-GAAP Measures as supplemental information. Our Non-GAAP Measures are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

(3)We define “EBITDA” as earnings before interest, taxes, depreciation and amortization. We define “Adjusted EBITDA” as EBITDA adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These items include management fees, equity-based compensation expense, write-offs of property and equipment, deferred rent, financing expenses and certain other charges and gains that we do not believe reflect our underlying business performance.

Reconciliation of Non-GAAP Financial Measures

The following provides a reconciliation of Net income to EBITDA and Adjusted EBITDA for the periods presented:


(amounts in thousands)	Thirteen weeks ended October 30, 2022		Thirteen weeks ended October 31, 2021		Thirty-nine weeks ended October 30, 2022		Thirty-nine weeks ended October 31, 2021
Net (loss) income	$	(8,419)	$	2,752	$	598	$	13,260
Interest expense, net	69		45		101		135
(Benefit) provision for income taxes	(3,245)		174		247		842
Depreciation and amortization	2,459		1,726		8,196		5,748
EBITDA	(9,136)		4,697		9,142		19,985
Equity-based compensation (a)	739		1,121		3,034		3,014
Loss on disposal of property and equipment (b)	41		—		41		—
Other non-recurring expenses (c)	—		—		(105)		—
Impairment of right of use lease asset (d)	—		—		—		554
Adjusted EBITDA	$	(8,356)	$	5,818	$	12,112	$	23,553

(a)Represents expenses, such as stock compensation expense related to the amortization of restricted stock units and stock option awards granted to our associates and our board of directors in addition to the employer taxes related to the vesting and exercise of this equity.

(b)Represents the loss on disposal of fixed assets related to showroom remodels.

(c)There were no other non-recurring expenses in the thirteen weeks ended October 30, 2022 and October 31, 2021, respectively. Other non-recurring expenses in the thirty-nine weeks ended October 30, 2022 represent costs related to a legal settlement. There were no other non-recurring expenses in the thirty-nine weeks ended October 31, 2021.

(d)Represents the impairment of the right of use lease asset for one showroom.

How We Assess the Performance of Our Business

We consider a variety of financial and operating measures, including the following, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

Net Sales

Net sales reflect our sale of merchandise plus shipping and handling revenue less returns and discounts. Sales made at Company operated showrooms, including shop-in-shops and pop-up shops, and via the web are recognized in accordance with the guidance set forth in ASC 606, which is typically at the point of transference of title when the goods are shipped.

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Comparable Showroom Sales

Comparable showroom sales are calculated based on point of sale transactions from showrooms that were open at least fifty-two weeks as of the end of the reporting period. These sales will differ from sales on our income statement which are reported when goods are shipped and title has transferred to the customer. A showroom is not considered a part of the comparable showroom sales base if the square footage of the showroom changed or if the showroom was relocated. If a showroom was closed for any period of time during the measurement period, that showroom is excluded from comparable showroom sales. We made an exception to this calculation in fiscal 2021 when all of our showrooms were temporarily closed due to government regulations in response to the COVID-19 pandemic. For fiscal years 2022 and 2021, 29 and 19 respectively were excluded from comparable showroom sales. Comparable showroom sales allow us to evaluate how our showroom base is performing by measuring the change in period-over-period point of sale transactions in showrooms that have been open for twelve months or more. While we review comparable showroom sales as one measure of our performance, this measure is less relevant to us than it may be to other retailers due to our fully integrated, omni-channel, go-to-market strategy. As a result, measures that analyze a single channel are less indicative of the performance of our business than they might be for other companies that operate their distribution channels as separate businesses. Further, certain of our competitors and other retailers calculate comparable showroom sales (or similar measures) differently than we do. As a result, the reporting of our comparable showroom sales may not be comparable to sales data made available by other companies.

New Customer

We define a customer as new when the customer has completed a transaction at Lovesac either at a showroom or internet channel only for the first time or if an existing customer completes another purchase at least 2 years since their last purchase.

Retail Sales Per Selling Square Foot

Retail sales per selling square foot is calculated by dividing the total point of sales transactions for all comparable showrooms, by the average selling square footage for the period. Selling square footage is retail space at our showrooms used to sell our products. Selling square footage excludes backrooms at showrooms used for storage, office space or similar matters.

Gross Profit

Gross profit is equal to our net sales less cost of merchandise sold. Gross profit as a percentage of our net sales is referred to as gross margin. In September 2018, the Office of the U.S. Trade Representative began imposing a 10 percent ad valorem duty on a subset of products imported from China, inclusive of various furniture product categories. In September 2019, the Office of U.S. Trade Representative imposed an additional 15 percent ad valorem duty on products imported from China.

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 expense; 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.

Our recent revenue growth has been accompanied by increased selling, general and administrative expenses. The most significant components of these increases are payroll and rent costs. We expect these expenses, as well as rent expense associated with the opening of new showrooms, to increase as we grow our business. We expect to leverage total selling, general and administrative expenses as a percentage of sales as sales volumes continue to grow. We expect to continue to invest in infrastructure to support the Company’s growth. These investments will lessen the impact of expense leveraging during the period of investment with the greater impact of expense leveraging happening after the period of investment. However, total selling, general and administrative expenses generally will leverage during the periods of investments with the most deleverage occurring in the first three quarters of the fiscal year, and the greatest leverage occurring in the fourth quarter.

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Advertising and Marketing Expense

Advertising and marketing expense include digital, social, and traditional advertising and marketing initiatives that cover all of our business channels. Advertising and marketing expense is expected to continue to increase as a percentage to sales as we continue to invest in advertising and marketing which has accelerated sales growth.

Basis of Presentation and Results of Operations

The following table sets forth, for the periods presented, our condensed statement of operations data as a percentage of total revenues:


	Thirteen weeks ended				Thirty-nine weeks ended
	October 30, 2022		October 31, 2021		October 30, 2022		October 31, 2021
Statement of Operations Data:
Net sales	100	%	100	%	100	%	100	%
Cost of merchandise sold	53	%	50	%	49	%	46	%
Gross profit	47	%	50	%	51	%	54	%
Selling, general and administration expenses	40	%	33	%	36	%	34	%
Advertising and marketing	14	%	14	%	13	%	13	%
Depreciation and amortization	2	%	1	%	2	%	2	%
Operating (loss) income	-9	%	2	%	—	%	5	%
Interest expense, net	0	%	0	%	0	%	0	%
Net (loss) income before taxes	-9	%	2	%	0	%	5	%
Benefit from (Provision for) income taxes	2	%	0	%	0	%	0	%
Net (loss) income	-7	%	2	%	—	%	5	%

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Thirteen weeks ended October 30, 2022 Compared to the thirteen weeks ended October 31, 2021

Net sales

Net sales increased $18.1 million, or 15.5%, to $134.8 million in the thirteen weeks ended October 30, 2022 as compared to $116.7 million in the thirteen weeks ended October 31, 2021. The increase in overall net sales was driven by growth in retail and other channels, partially offset by decline in internet channel. New showroom customers increased by 4.6% in the thirteen weeks ended October 30, 2022 as compared to 37.8% in the thirteen weeks ended October 31, 2021 driven by promotional activity and new showroom openings. We had 189 and 135 total showrooms including kiosks and mobile concierges as of October 30, 2022 and October 31, 2021, respectively. We opened 16 additional showrooms, closed 1 and remodeled 3 showrooms in the thirteen weeks ended October 30, 2022. In comparison, we opened 9 showrooms, 2 mobile concierges, 1 kiosk, remodeled 1 showroom and did not close any showrooms in the thirteen weeks ended October 31, 2021. Showroom net sales increased $13.3 million, or 19.0%, to $83.0 million in the thirteen weeks ended October 30, 2022 as compared to $69.7 million in the thirteen weeks ended October 31, 2021. This increase was due in large part to comparable net sales increase of $10.4 million, or 18.5%, to $66.4 million in the thirteen weeks ended October 30, 2022, compared to $56.1 million in the thirteen weeks ended October 31, 2021, related to higher point of sales transactions driven by strong promotional campaigns with higher promotional discounting and the addition of 41 new showrooms and 13 new kiosks since the prior year period. Point of sales transactions represent orders placed through our showrooms which does not always reflect the point at which control transfers to the customer, which occurs upon shipment being confirmed. See Note 12 to the condensed financial statements. We believe point of sales transactions is a more accurate way to measure showroom performance and how our showroom associates are incentivized. Retail sales per selling square foot decreased $21, or 3.7%, to $543 in the thirteen weeks ended October 30, 2022 as compared to $564 in the thirteen weeks ended October 31, 2021 related to timing of new showroom openings. Total number of units sold at point of transaction decreased by approximately 8.7% driven by higher mix of new showrooms sales also related to the timing of new showroom openings. The increase in comparable sales is the result of strong promotional campaigns. Other net sales, which include pop-up-shop sales, shop-in-shop sales, and barter inventory transactions increased $7.1 million, or 61.8%, to $18.5 million in the thirteen weeks ended October 30, 2022 as compared to $11.4 million in the thirteen weeks ended October 31, 2021. This increase was driven by higher barter inventory transactions, reintroducing Costco physical pop-up-shops, and our addition of 17 new Best Buy shop-in-shops. We now operate 22 Best Buy shop-in-shop locations. Internet net sales (sales made directly to customers through our ecommerce channel) decreased $2.2 million, or 6.3%, to $33.3 million in the thirteen weeks ended October 30, 2022 as compared to $35.5 million in the thirteen weeks ended October 31, 2021 compared to prior year as we continue to see some shifts back to in person shopping.

Gross profit

Gross profit increased $5.0 million, or 8.5%, to $63.6 million in the thirteen weeks ended October 30, 2022 from $58.6 million in the thirteen weeks ended October 31, 2021. Gross margin decreased to 47.2% of net sales in the thirteen weeks ended October 30, 2022 from 50.2% of net sales in the thirteen weeks ended October 31, 2021. The decrease in gross margin percentage of 300 basis points was primarily driven by an increase of approximately 160 basis points in total distribution and related tariff expenses and a decline of 140 basis points in product margin. The increase in total distribution and related tariff expenses over prior year is principally related to the negative impact of 320 basis points due to volume deleverage in warehouse and higher outbound transportation cost, partially offset by 160 basis points decrease in inbound transportation costs principally due to lower container rates. The product margin rate decline is due to higher promotional discounting to support net sales growth.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $15.6 million, or 40.9%, to $53.7 million in the thirteen weeks ended October 30, 2022 as compared to $38.1 million in the prior year period. The increase in selling, general and administrative expenses was primarily related to an increase in employment costs, overhead expenses, rent, and selling related expenses. Employment costs increased by $7.6 million driven by an increase in new hires and variable compensation. Overhead expenses increased $3.2 million consisting of an increase of $2.8 million in infrastructure investments, an increase of $0.4 million in insurance expense related to the growth of the company, and an increase of $0.3 million in travel expenses, partially offset by $0.3 million in lower equity-based compensation. Rent increased by $2.8 million with $1.9 million rent expense primarily coming from our net addition of 54 showrooms along with $0.9 million in higher percentage rent from the increase in Showroom sales. Selling related expenses increased $2.0 million principally due to credit card fees related to the increase in sales.

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Selling, general and administrative expenses were 39.8% of net sales in the thirteen weeks ended October 30, 2022 as compared to 32.6% of net sales in the thirteen weeks ended October 31, 2021. The increase in selling, general and administrative expenses of 720 basis points was primarily due to deleveraging employment costs, infrastructure investments, rent, selling related expenses, travel, and insurance, partially offset by higher leverage in equity-based compensation. The deleverage in certain expenses relate to the continuous investments we are making into the business to support our ongoing growth.

Advertising and Marketing

Advertising and marketing expenses increased $3.2 million, or 20.3%, to $19.1 million for the thirteen weeks ended October 30, 2022 as compared to $15.8 million in the thirteen weeks ended October 31, 2021. The majority of the increase in advertising and marketing dollars relates to the ongoing investments in marketing spends to support our sales growth and continuing strengthening of brand health. The investment by quarter may vary greatly. Advertising and marketing expenses were 14.1% of net sales in the thirteen weeks ended October 30, 2022 as compared to 13.6% of net sales in the thirteen weeks ended October 31, 2021. The increase in advertising and marketing as a percent of net sales is primarily due to an increase in media spends to support our third quarter net sales growth.

Depreciation and amortization expenses

Depreciation and amortization expenses increased $0.7 million, or 42.5%, to $2.5 million in the thirteen weeks ended October 30, 2022 as compared to $1.7 million in the thirteen weeks ended October 31, 2021. The increase in depreciation and amortization expense principally relates to capital investments for new and remodeled showrooms.

Interest expense, net

Interest expense, net which is less than $0.1 million for the thirteen weeks ended October 30, 2022 principally relates to interest expense related to unused line fees and amortization of deferred financing fees on the asset-based loan with an offset of interest earned on the Company's cash and cash equivalents balances. Interest expense, net which is less than $0.1 million for the thirteen weeks ended October 31, 2021, principally relates to the interest expense related to unused line fees and amortization of deferred financing fees on the asset-based loan with an offset of interest earned on the Company’s cash and cash equivalents balances.

Provision for income taxes

The Company recorded an income tax benefit of $3.2 million and an income tax provision of $0.2 million for the thirteen weeks ended October 30, 2022 and October 31, 2021, respectively. Our effective tax rate varies from the 21% federal statutory tax rate primarily due to state taxes. The increase in the effective tax rate from 5.9% for the thirteen weeks ended October 31, 2021 to 27.8% for the thirteen weeks ended October 30, 2022 was primarily due to fiscal 2022 having the benefit from the release of the valuation allowance on the Company’s net deferred tax assets. The valuation allowance was fully released as of the end of fiscal year 2022.

Thirty-nine weeks ended October 30, 2022 Compared to the Thirty-nine weeks ended October 31, 2021

Net sales

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Net sales increased $110.6 million, or 36.6%, to $412.7 million in the thirty-nine weeks ended October 30, 2022 as compared to $302.0 million in the thirty-nine weeks ended October 31, 2021. The increase in overall net sales was driven by growth across all channels. New showroom customers increased by 12.9% in the thirty-nine weeks ended October 30, 2022 as compared to 102.3% in the thirty-nine weeks ended October 31, 2021. The prior year's new showroom customers metric was impacted by the success of our Hero's campaign. We had 189 and 135 total showrooms as of October 30, 2022 and October 31, 2021, respectively. We opened 38 additional showrooms, 6 kiosks, remodeled 3 showrooms, and closed 1 showroom the thirty-nine weeks ended October 30, 2022. In comparison, we opened 25 additional showrooms, 2 mobile concierges, 1 kiosk, and remodeled 1 showroom and did not close any showrooms in the thirty-nine weeks ended October 31, 2021. Showroom net sales increased $75.4 million, or 41.6%, to $256.6 million in the thirty-nine weeks ended October 30, 2022 as compared to $181.3 million in the thirty-nine weeks ended October 31, 2021. This increase was due in large part to comparable net sales increase of $52.2 million, or 34.5%, to $203.7 million in the thirty-nine weeks ended October 30, 2022, compared to $151.5 million in the thirty-nine weeks ended October 31, 2021, related to higher point of sales transactions driven by strong promotional campaigns with slightly higher promotional discounting and the addition of 41 new showrooms and 13 kiosks. Point of sales transactions represent orders placed through our showrooms which does not always reflect the point at which control transfers to the customer, which occurs upon shipment being confirmed. See Note 12 to the condensed financial statements. We believe point of sales transactions is a more accurate way to measure showroom performance and how our showroom associates are incentivized. Retail sales per selling square foot increased $138, or 8.1%, to $1,839 in the thirty-nine weeks ended October 30, 2022 as compared to $1,701 in the thirty-nine weeks ended October 31, 2021. Total number of units sold at point of transaction increased by approximately 0.9% primarily driven by higher comparable sales. The increase in comparable sales, retail sales per selling square foot and total number of units sold over prior years is the result of strong promotional campaigns. Internet net sales (sales made directly to customers through our ecommerce channel) increased $9.9 million, or 11.0%, to $100.1 million in the thirty-nine weeks ended October 30, 2022 as compared to $90.2 million in the thirty-nine weeks ended October 31, 2021 also driven by strong promotional campaigns. Other net sales, which include pop-up-shop sales, shop-in-shop sales, and barter inventory transactions increased $25.4 million, or 83.0%, to $56.0 million in the thirty-nine weeks ended October 30, 2022 as compared to $30.6 million in the thirty-nine weeks ended October 31, 2021. This increase was driven by higher barter inventory transactions, our additional 17 new Best Buy shop-in-shops, and reintroducing Costco physical pop-up-shops. We now operate 22 Best Buy shop-in-shop locations.

Gross profit

Gross profit increased $46.9 million, or 28.6%, to $210.6 million in the thirty-nine weeks ended October 30, 2022 from $163.7 million in the thirty-nine weeks ended October 31, 2021. Gross margin decreased to 51.0% of net sales in the thirty-nine weeks ended October 30, 2022 from 54.2% of net sales in the thirty-nine weeks ended October 31, 2021. The decrease in gross margin percentage of 320 basis points was primarily driven by an increase of approximately 360 basis points in total distribution and related tariff expenses, partially offset by an improvement of 40 basis points in product margin. The increase in total distribution and related tariff expenses over prior year is principally related to the negative impact of 290 basis points increase in inbound transportation costs and an increase of 70 basis points due to volume deleverage in warehouse and higher outbound transportation cost. The product margin rate improvement is due to continued vendor negotiations to assist with the mitigation of tariffs and additional one-time US dollar denominated rebates related to currency impact and slightly lower promotional discounting.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $43.2 million, or 41.5%, to $147.4 million in the thirty-nine weeks ended October 30, 2022 as compared to $104.2 million in the prior year period. The increase in selling, general and administrative expenses was primarily related to an increase in employment costs, overhead expenses, rent, and selling related expenses. Employment costs increased by $22.5 million driven by an increase in new hires and variable compensation. Overhead expenses increased $8.1 million consisting of an increase of $6.1 million in infrastructure investments, an increase of $1.3 million in travel expenses, an increase of $0.6 million in insurance expense, and an increase of $0.1 million in equity-based compensation. Rent increased by $7.2 million with $4.2 million primarily coming from our net addition of 54 showrooms along with $3.0 million in higher percentage rent from the increase in Showroom sales. Selling related expenses increased $5.4 million principally due to credit card fees related to the increase in sales.

Selling, general and administrative expenses were 35.7% of net sales in the thirty-nine weeks ended October 30, 2022 as compared to 34.5% of net sales in the thirty-nine weeks ended October 31, 2021. The increase in selling, general and administrative expenses of 120 basis points was primarily due to deleveraging employment costs, travel, and selling related expenses, partially offset by higher leverage in infrastructure investments, equity-based compensation, and rent. The deleverage in certain expenses relate to the continuous investments we are making into the business to support our ongoing growth.

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Advertising and Marketing

Advertising and marketing expenses increased $14.5 million, or 36.6%, to $54.0 million for the thirty-nine weeks ended October 30, 2022 as compared to $39.5 million in the thirty-nine weeks ended October 31, 2021. The majority of the increase in advertising and marketing dollars relates to the ongoing investments in marketing spends to support our sales growth. The investment by quarter may vary greatly. Advertising and marketing expenses were 13.1% of net sales in both the thirty-nine weeks ended October 30, 2022 and October 31, 2021.

Depreciation and amortization expenses

Depreciation and amortization expenses increased $2.4 million, or 42.6%, to $8.2 million in the thirty-nine weeks ended October 30, 2022 as compared to $5.7 million in the thirty-nine weeks ended October 31, 2021. The increase in depreciation and amortization expense principally relates to capital investments for new and remodeled showrooms.

Interest expense, net

Interest expense, net which is less than $0.1 million for the thirty-nine weeks ended October 30, 2022 and October 31, 2021, principally relates to the interest expense related to unused line fees and amortization of deferred financing fees on the asset-based loan with an offset of interest earned on the Company’s cash and cash equivalents balances.

Provision for income taxes

The provision for income taxes was $0.2 million and $0.8 million, for the thirty-nine weeks ended October 30, 2022 and October 31, 2021, respectively. Our effective tax rate varies from the 21% federal statutory tax rate primarily due to state taxes. The increase in the effective tax rate from 6.0% for the thirty-nine weeks ended October 31, 2021 to 29.2% for the thirty-nine weeks ended October 30, 2022 was primarily due to fiscal 2022 having the benefit from the release of the valuation allowance on the Company’s net deferred tax assets. The valuation allowance was fully released as of the end of fiscal year 2022.

Liquidity and Capital Resources

General

Our business primarily relies on cash flows from operations, supplemented as needed by our revolving line of credit (see “Revolving Line of Credit” below), as our primary sources of liquidity. Our primary cash needs are for advertising and marketing, inventory, payroll, showroom rent, capital expenditures associated with opening new showrooms and updating existing showrooms, as well as infrastructure and information technology. The most significant components of our working capital are cash and cash equivalents, inventory, accounts receivable, accounts payable and other current liabilities and customer deposits. Borrowings generally increase in our third fiscal quarter as we prepare for the holiday selling season, which is in our fourth fiscal quarter. We believe that cash expected to be generated from operations, the availability under our revolving line of credit and our existing cash balances are sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.

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Cash Flow Analysis

A summary of operating, investing, and financing activities during the periods indicated are shown in the following table:


	Thirty-nine weeks ended
(amounts in thousands)	October 30, 2022		October 31, 2021
Condensed Statement of Cash flow Data:
Net Cash Used in Operating Activities	$	(65,142)	$	(15,179)
Net Cash Used in Investing Activities	(21,559)		(11,841)
Net Cash Used in Financing Activities	(1,859)		(3,459)
Net change in cash and cash equivalents	(88,560)		(30,479)
Cash and cash equivalents at the end of the period	3,832		47,862

Net Cash Used in Operating Activities

Cash from operating activities consists primarily of net income adjusted for certain non-cash items, including depreciation and amortization, equity-based compensation, non-cash operating lease cost, and deferred income taxes and the effect of changes in working capital and other activities.

In the thirty-nine weeks ended October 30, 2022, net cash used in operating activities was $65.1 million and consisted of changes in operating assets and liabilities of $90.7 million, net income of $0.6 million, and adjustments to reconcile net income to cash provided by operating activities of $25.0 million. Working capital and other activities consisted primarily of increases in merchandise inventories of $46.0 million, trade accounts receivable of $6.8 million, prepaid expenses and other current assets of $20.5 million, and accounts payable and accrued expenses of $3.3 million, along with decreases in operating lease liabilities of $13.2 million, and customer deposits of $7.5 million.

In the thirty-nine weeks ended October 31, 2021, net cash used in operating activities was $15.2 million and consisted of changes in operating assets and liabilities of $48.6 million,net income of $13.3 million , and adjustments to reconcile net income to cash used in operating activities of $20.2 million. Working capital and other activities consisted primarily of increases in merchandise inventories of $44.1 million, trade accounts receivable of $5.3 million, customer deposits of $0.7 million, accounts payable and accrued expenses of $9.3 million, partially offset by decreases in prepaid expenses and other current assets of $1.2 million and operating lease liabilities of $10.4 million.

Net Cash Used In Investing Activities

Investing activities consist primarily of investments related to capital expenditures for new showroom openings, the remodeling of existing showrooms, and the acquisition of intangible assets.

For the thirty-nine weeks ended October 30, 2022, capital expenditures were $21.6 million as a result of investments in new and remodeled showrooms and intangibles such as patents and trademarks.

For the thirty-nine weeks ended October 31, 2021, capital expenditures were $11.8 million as a result of investments in new and remodeled showrooms and intangibles such as patents and trademarks.

Net Cash Used In Financing Activities

Financing activities consist primarily of the taxes paid for the net settlement of equity awards.

For the thirty-nine weeks ended October 30, 2022, net cash used in financing activities was $1.9 million, due mostly to taxes paid for the net share settlement of equity awards and payments of deferred financing costs. For the thirty-nine weeks ended October 31, 2021, net cash used in financing activities was $3.5 million, due mostly to taxes paid for the net share settlement of equity awards.

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Revolving Line of Credit

On March 25, 2022, we amended our existing credit agreement providing for an asset-based revolving credit facility with the lenders party thereto, and Wells Fargo Bank, National Association, as administrative agent. The maturity date of our credit agreement was extended to March 25, 2024 and, among other things, the maximum revolver commitment was increased from $25.0 million to $40.0 million, subject to borrowing base and availability restrictions. Our credit agreement includes a $1,000,000 sublimit for the issuance of letters of credit and a $4,000,000 sublimit for swing line loans. As of October 30, 2022, the Company’s borrowing availability under the line of credit was $36.0 million. As of October 30, 2022, there were no borrowings outstanding on this line of credit.

We are required to pay a commitment fee of 0.30% based on the daily unused portion of the credit facility. Amounts outstanding under the credit facility, at our option, bear interest at either a base rate or a term SOFR based rate, plus, in either case, a margin determined by reference to our quarterly average excess availability under the credit facility and ranging from 0.50% to 0.75% for borrowings accruing interest at base rate and from 1.625% to 1.850% for borrowings accruing interest at term SOFR. Swing line loans will at all times accrue interest at a base rate plus the applicable margin. The lower margins described above will apply initially and will adjust thereafter from time to time based on the quarterly average excess availability under the credit facility. For additional information regarding our line of credit with Wells, see Note 7 to our condensed financial statements.

Leases

We lease our office, warehouse facilities and retail showrooms under operating lease agreements. Certain operating leases have renewal options and rent escalation clauses. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement. Refer to Note 6, Commitments and Contingencies--Leases, in our Condensed Notes to Financial Statements for further information on our operating leases, including the lease terms, rates and costs and minimum lease payments.

Severance Contingency

The Company has various employment agreements with its senior level executives. A number of these agreements have severance provisions, ranging from 12 to 18 months of salary, in the event those associates are terminated without cause. The total amount of exposure to the Company under these agreements was $4.9 million at October 30, 2022 if all executives with employment agreements were terminated without cause and the full amount of severance was payable.

Off Balance Sheet Arrangements

We have no material off balance sheet arrangements as of October 30, 2022, except for employment agreements entered in the ordinary course of business.

Critical Accounting Policies and Estimates

The discussion and analysis of financial condition and results of operations is based upon our condensed financial statements, which have been prepared in conformity with GAAP. Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Please see Note 1 to our financial statements included in the Annual Report on Form 10-K filed on March 30, 2022 for a complete description of our significant accounting policies. There have been no material changes to the significant accounting policies during the thirteen weeks ended October 30, 2022.

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Recent Accounting Pronouncements

Refer to Note 2, Recent Accounting Pronouncements, contained in the Condensed Notes to Financial Statements in Item 1 of Part 1 of this Quarterly Report on Form 10-Q for a full description of the recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial condition.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

In the normal course of business, we are exposed to a variety of risks, including fluctuations in interest rates, that could affect our financial position and results of operations.

Interest Rate Risk

Debt

Interest rate risk exists primarily through our borrowing activities. We use U.S. dollar denominated borrowings to fund our working capital and investment needs. The Federal Reserve has increased short-term interest rates in the first three quarters of calendar 2022, compared to the historically low levels in 2021. It is anticipated that the fair market value of any future debt under the line of credit will continue to be immaterially affected by fluctuations in interest rates and we do not believe that the value of such debt would be significantly impacted by current market events. Amounts outstanding under the credit facility, at our option, bear interest at either a base rate or a term SOFR based rate, plus, in either case, a margin determined by reference to our quarterly average excess availability under the credit facility and ranging from 0.50% to 0.75% for borrowings accruing interest at base rate and from 1.625% to 1.850% for borrowings accruing interest at term SOFR. Swing line loans will at all times accrue interest at a base rate plus the applicable margin. The lower margins described above will apply initially and will adjust thereafter from time to time based on the quarterly average excess availability under the credit facility. We currently do not engage in any interest rate hedging activity and we have no intention of doing so in the foreseeable future. A hypothetical 100 basis point change (up or down) in the one-month SOFR rate would not have a material effect on our condensed results of operations. As of October 30, 2022, there were no borrowings outstanding under the line of credit. To the extent that we incur additional indebtedness, we may increase our exposure to risk from interest rate fluctuations.

LIBOR Transition

Beginning December 31, 2021, banks stopped reporting information used to set LIBOR as their reporting obligations ceased. The cessation of certain LIBOR tenures beginning as of December 31, 2021 and future cessation of other tenures, including the one-month LIBOR, effectively ended the usefulness of LIBOR and its publication. On March 25, 2022, we amended our existing credit agreement which provides for interest rate calculations based on the use of SOFR. The replacement of LIBOR with SOFR may result in interest payments that are higher than expected or that do not otherwise correlate over time with the payments that would have been made on such indebtedness for the interest periods if the applicable LIBOR rate was available in its current form.

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Item 4. 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 (our 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As described below in Changes in Internal Control over Financial Reporting, we previously identified a material weakness in our internal control over financial reporting due to the ineffective design and implementation of information technology and related activity level controls covering all significant accounts. This ineffectiveness was due, in part, to inadequate information technology general controls ("ITGC") relating to certain information technology systems. The ITGC deficiencies affected, among other things, the integrity of the data used to support the related activity level controls. Solely as a result of this material weakness, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of October 30, 2022 due to the material weakness in our internal control over financial reporting described below.

Changes in Internal Control Over Financial Reporting

During the thirty-nine weeks ended October 30, 2022, the Company successfully implemented a remediation plan to address the material weakness in its internal control over financial reporting identified during our review of our audited financial statements for the fiscal year ended January 30, 2022. The material weakness was related to ineffective ITGC controls in the areas of user access and segregation of duties related to certain information technology systems that support our financial reporting process. Additional details on the material weakness are set forth under Item 9A "Controls and Procedures" in the Company's Annual Report on Form 10-K for the year ending January 30, 2022 and filed with the Commission on March 30, 2022. The implemented remediation plan consisted of, among other things, (i) evaluating and implementing enhanced process controls around user access management to key information systems which may impact our financial reporting (ii) expanding the management and governance over user access and system controls and (iii) enhancing our information technology compliance and accounting function with additional experienced hires including a new Chief Information Officer.

Except as discussed above with respect to the implementation of our remediation plan, there were no changes in our internal control over financial reporting during the thirteen weeks ended October 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding our legal proceedings, see Note 6. Commitments and Contingencies--Legal Contingency, included in Part I, Item 1, Unaudited Condensed Financial Statements, of this Quarterly Report on Form 10-Q, which is incorporated into this item by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits

Exhibit
Number

Description of Exhibit

Filed / Incorporated
by Reference
from Form **

Incorporated by
Reference from
Exhibit Number

Dated Filed

10.1+

The Lovesac Company Director Compensation Policy

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

Filed herewith.

101.INS

XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

+ Indicates a management contract or compensatory plan.

*This certification is deemed not filed for purposes of section 18 of the 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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, 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: December 8, 2022		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Donna Dellomo
		Donna Dellomo
Date: December 8, 2022		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)