The Lovesac Company Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Restatement of Previously Issued Financial Statements

Restatement of Previously Issued Financial Statements

3 Months Ended

Apr. 30, 2023

Accounting Changes and Error Corrections [Abstract]

Restatement of Previously Issued Financial Statements

Note 2. Restatement and Other Corrections of Previously Issued Condensed Financial Statements

The Audit Committee of the Board of Directors of Lovesac completed an independent investigation in August 2023 whereby the Company concluded $2.2 million of last mile shipping expenses relating to the fiscal year ended January 29, 2023 were improperly capitalized during the quarter ended April 30, 2023. Through this investigation, the Company also determined that the methodology used to estimate an accrual of last mile freight expenses at each period end was not accurate because the calculation did not use the correct number of shipments that were accepted by the shipper for delivery, but not yet invoiced to the Company. Management prepared a quantitative and qualitative analysis of these errors, along with certain other immaterial accounting errors, in accordance with the U.S. SEC Staff's Accounting Bulletin Nos. 99 and 108, Materiality, and concluded the aggregate impact of all the errors are material to the Company's previously reported interim, year-to-date, and annual financial statements as of and for the year ended January 29, 2023 and the Company’s previously reported interim financial statements as of and for the three-month period ended April 30, 2023. As a result, the accompanying financial statements as of April 30, 2023, and for the three months ended April 30, 2023 and May 1, 2022, and related notes hereto, have been restated to correct these errors.

A summary of the impacts of the adjustments on the previously reported financial statements are included below:


	For the Thirteen Weeks Ended
	April 30, 2023				May 1, 2022
(in thousands)	As Previously Reported		As Restated		As Previously Reported		As Restated
Net sales	$	141,193	$	141,193	$	129,380	$	129,380
Gross profit	70,704		70,575		66,108		65,974
Operating (loss) income	(5,869)		(5,706)		2,645		2,494
Net (loss) income	$	(4,230)	$	(4,115)	$	1,895	$	1,786


	As of
	April 30, 2023				January 29, 2023
(in thousands)	As Previously Reported		As Restated		As Previously Reported		As Restated
Total current assets	$	187,697	$	181,462	$	194,041	$	187,715
Total non-current assets	240,339		239,747		224,013		220,911
Total assets	$	428,036	$	421,209	$	418,054	$	408,626
Total current liabilities	96,922		89,127		88,839		82,041
Total non-current liabilities	141,868		142,826		135,955		133,491
Total liabilities	238,790		231,953		224,794		215,532
Total equity	189,246		189,256		193,260		193,094

A description of the errors and their impacts on the previously issued financial statements are included below.

Description of Misstatement Adjustments

(a) Last Mile Freight

The Company recorded adjustments to correct misstatements identified from the internal investigation related to last mile freight expenses. The result of the investigation concluded an inappropriately recorded journal entry increased inventory by $2.2 million related to shipping expense pertaining to fiscal 2023, and also concluded the methodology used to estimate last mile freight accrual was incorrect. The correction of these items represent the net impact of the findings from the investigation as noted above.

(b) Leases

The Company recorded adjustments to correct certain misstatements related to its operating leases. In the fiscal year 2022, the Company recorded an incorrect entry that resulted in the double-counting of rent expense associated with operating leases, with a corresponding impact on prepaid rent and lease liabilities as of January 30, 2022. In addition, the Company reversed the out of period correction of an incorrect entry pertaining to incremental borrowing rate that had been corrected for in the Annual Report on Form 10-K/A for the fiscal year ended January 29, 2023. This entry had an impact on prepaid rent, right-of-use assets, and the current and long-term portion of operating lease liabilities, as of and during the fiscal year ended January 29, 2023. The Company also recorded the effects of an embedded lease entered into during the quarter that was previously identified and considered immaterial.

The Company recorded an adjustment to correct certain canceled sales orders related to buyer’s remorse, which related to fiscal 2023 and was incorrectly reflected as an increase to Selling, General and Administrative Expense for the thirteen weeks ended April 30, 2023. The Company defines buyer's remorse as a customer who cancels an order within a short window of time after making a purchase.

(d) Supplier Rebates

During the quarter ended July 31, 2022, the Company received rebates from certain of its suppliers which was incorrectly recorded to cost of goods sold for the entire amount of the rebate received instead of deferring a portion of the rebate to inventory and recognizing the rebate in cost of goods sold as the related inventory was sold. We corrected these misstatements to defer the up-front consideration from suppliers when the retention or receipt of that consideration was to recognize the consideration as a reduction of cost of goods sold over the sell through rate of the inventory.

(e) Balance Sheet Reclassifications

The Company recorded adjustments to correct the classification of certain balance sheet reclassifications between short and long-term assets. These adjustments primarily related to the classification of prepaid expenses and other current assets and the classification of other assets (long-term). In addition, the Company recorded adjustments to correct the classification of tenant improvement allowances which resulted in a reclassification between prepaid expenses and other current assets and short-term lease liabilities.

(f) Income Taxes

The Company recorded adjustments to recognize the net impact on current and deferred income taxes associated with all the misstatements described herein. The adjustments to income taxes were recorded in the period corresponding with the respective misstatements. The correction of this error resulted in a decrease in benefit from income taxes for less than $0.1 million for the period ended April 30, 2023.

(g) Inventory and Cost of Goods Sold

The Company recorded adjustments to correct for a misstatement of an accrual related to a duplicate recording of a vendor invoice for freight charges. The Company recorded another adjustment to correct for the misstatement of inventory related to partial returned goods.

(h) Equity Based Compensation Expense

The Company recorded an adjustment to recognize equity based compensation expense in the period ended April 30, 2023 related to a one-time performance and retention long-term incentive award granted to our Chief Executive Officer in March 2023.

Description of Restatement Tables

Below, we have presented a reconciliation from the as previously reported to the restated values for our condensed financial statements for the quarterly period ended April 30, 2023. The values as previously reported were derived from our Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2023 filed on June 9, 2023.

THE LOVESAC COMPANY

CONDENSED BALANCE SHEET

(unaudited)


	April 30, 2023
	As Previously Reported		Corrections		Reference	As Restated
Assets
Current Assets


Merchandise inventories, net	106,819		(2,361)		(a)(g)	104,458
Prepaid expenses and other current assets	17,306		(3,874)		(a)(b)(e)(f)	13,432
Total Current Assets	187,697		(6,235)			181,462

Operating lease right-of-use assets	142,463		1,146		(b)	143,609
Other Assets



Deferred tax asset	10,750		(791)		(f)	9,959
Other assets	26,318		(947)		(e)	25,371
Total Other Assets	38,657		(1,738)			36,919
Total Assets	$	428,036	$	(6,827)		$	421,209
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$	32,165	$	(2,068)	(b)	$	30,097
Accrued expenses	16,765		(500)		(a)(f)	16,265


Current operating lease liabilities	22,160		(5,227)		(b)(e)	16,933

Total Current Liabilities	96,922		(7,795)			89,127
Operating Lease Liability, long-term	141,868		958		(b)	142,826

Total Liabilities	238,790		(6,837)			231,953
Stockholders’ Equity


Additional paid-in capital	182,770		61		(h)	182,831
Accumulated earnings (deficit)	6,476		(51)		(a)(b)(f)(g)(h)	6,425
Stockholders' Equity	189,246		10			189,256
Total Liabilities and Stockholders' Equity	$	428,036	$	(6,827)		$	421,209

The description of each error is described above. The impact of each error for the corresponding period in the above table is described below:

(a) Last Mile Freight - The correction of these misstatements resulted in a decrease to merchandise inventories, net of $2.2 million, an increase to prepaid expenses and other current assets of $0.6 million, a decrease to accrued expenses of less than $0.1 million, and a decrease to accumulated earnings of $1.6 million at April 30, 2023.

(b) Leases - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of less than $0.1 million, an increase to operating lease right-of-use assets of $1.1 million, a decrease to accounts payable of

$2.1 million, an increase to current operating lease liabilities of $0.2 million, an increase to operating lease liability, long-term of $1.0 million, and an increase to accumulated earnings of $2.1 million at April 30, 2023.

(e) Balance Sheet Reclassifications - The correction of these misstatements resulted in a decrease to prepaid expenses and other current assets of $4.5 million, a decrease to current operating lease liabilities of $5.5 million and a decrease to other assets of $1.0 million at April 30, 2023.

(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to prepaid expenses and other current assets of less than $0.1 million, a decrease to deferred tax asset of $0.8 million, a decrease to accrued expenses of $0.5 million, and a decrease to accumulated earnings of $0.3 million at April 30, 2023.

(g) Inventory and Cost of Goods Sold - The correction of these misstatements resulted in a decrease to merchandise inventories, net of $0.1 million and a decrease to accumulated earnings of $0.1 million at April 30, 2023.

(h) Equity Based Compensation Expense - The correction of these misstatements resulted in an increase to additional paid-in capital of $0.1 million and decrease in accumulated earnings of $0.1 million at April 30, 2023.

THE LOVESAC COMPANY

CONDENSED STATEMENT OF OPERATIONS

(unaudited)


	For the Thirteen Weeks Ended April 30, 2023
	As Previously Reported		Corrections		Reference	As Restated

Cost of merchandise sold	70,489		129		(a)(g)	70,618
Gross profit	70,704		(129)			70,575
Operating expenses
Selling, general and administration expenses	56,838		(292)		(b)(c)(h)	56,546


Total operating expenses	76,573		(292)			76,281

Operating (loss) income	(5,869)		163			(5,706)

Net (loss) income before taxes	(5,528)		163			(5,365)
Benefit from (provision for) income taxes	1,298		(48)		(f)	1,250
Net (loss) income	$	(4,230)	$	115		$	(4,115)

Net (loss) income per common share:
Basic	$	(0.28)	$	0.01		$	(0.27)
Diluted	$	(0.28)	$	0.01		$	(0.27)

The description of each error is described above. The impact of each error for the corresponding period in the above table is described below:

(a) Last Mile Freight - The correction of these misstatements resulted in an increase to cost of merchandise sold of $0.3 million for the thirteen weeks ended April 30, 2023.

(b) Leases - The correction of these misstatements resulted in an increase to selling, general and administrative expenses of less than $0.1 million for the thirteen weeks ended April 30, 2023.

(c) Buyer’s Remorse - The correction of these misstatements resulted in a decrease to selling, general and administrative expenses of $0.4 million for the thirteen weeks ended April 30, 2023.

(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to benefit from income taxes of less than $0.1 million for the thirteen weeks ended April 30, 2023.

(g) Inventory and Cost of Goods Sold - The correction of these misstatements resulted in a decrease to cost of merchandise sold of $0.2 million for the thirteen weeks ended April 30, 2023.

(h) Equity Based Compensation Expense - The correction of these misstatements resulted in an increase to selling, general and administrative expenses of $0.1 million for the thirteen weeks ended April 30, 2023.

THE LOVESAC COMPANY

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THIRTEEN WEEKS ENDED APRIL 30, 2023

(unaudited)


		Common
(amounts in thousands, except share amounts)	Restatement Reference	Shares	Amount		Additional paid-in capital		Accumulated earnings (deficit)		Total Shareholders' Equity
As Previously Reported
Balance - January 29, 2023		15,195,698	$	—	$	182,554	$	10,706	$	193,260
Net loss		—	—		—		(4,230)		(4,230)
Equity-based compensation		—	—		686		—		686



Balance - April 30, 2023		15,217,120	$	—	$	182,770	$	6,476	$	189,246
Restatement Impacts
Balance - January 29, 2023	(a)(b)(c)(f)(g)	—	$	—	$	—	$	(166)	$	(166)
Net income	(a)(b)(c)(f)(g)(h)	—	—		—		115		115
Equity-based compensation	(h)	—	—		61		—		61



Balance - April 30, 2023		—	$	—	$	61	$	(51)	$	10
As Restated
Balance - January 29, 2023		15,195,698	$	—	$	182,554	$	10,540	$	193,094
Net loss		—	—		—		(4,115)		(4,115)
Equity-based compensation		—	—		747		—		747



Balance - April 30, 2023		15,217,120	$	—	$	182,831	$	6,425	$	189,256

See descriptions of the net (loss) income impacts in the statement of operations for the thirteen weeks ended April 30, 2023 section above.

THE LOVESAC COMPANY

CONDENSED STATEMENT OF CASH FLOWS

(unaudited)



	For the Thirteen Weeks Ended April 30, 2023
	As Previously Reported		Corrections		Reference	As Restated
Cash Flows from Operating Activities
Net (loss) income	$	(4,230)	$	115	(a)(b)(c)(f)(g)(h)	$	(4,115)
Adjustments to reconcile net (loss) income to cash provided by operating activities:





Equity based compensation	686		61		(h)	747
Non-cash operating lease cost	5,308		7		(b)	5,315
Deferred income taxes	(1,330)		48		(f)	(1,282)

Change in operating assets and liabilities:
Trade accounts receivable	(8,978)		(366)		(c)	(9,344)
Merchandise inventories	13,143		2,026		(a)(g)	15,169
Prepaid expenses and other current assets	5,971		(1,750)		(a)(b)(e)(f)	4,221
Other assets	(4,455)		1,448		(e)	(3,007)
Accounts payable and accrued expenses	(5,785)		(4,593)		(a)(b)(f)	(10,378)
Operating lease liabilities	(5,515)		3,004		(b)(e)	(2,511)

Net cash provided by operating activities	6,291		—			6,291
Cash Flows from Investing Activities


Net cash used in investing activities	(4,177)		—			(4,177)
Cash Flows from Financing Activities




Net cash used in financing activities	(522)		—			(522)
Net change in cash and cash equivalents	1,592		—			1,592
Cash and cash equivalents - Beginning	43,533					43,533
Cash and cash equivalents - Ending	$	45,125	$	—		$	45,125

See descriptions of the net (loss) income impacts in the statement of operations for the thirteen weeks ended April 30, 2023 section above.

No other misstatements impacted the classifications between net operating, net investing, or net financing cash flow activities for the thirteen weeks ended April 30, 2023.