Amortization expense associated with intangible assets subject to amortization is included in depreciation and amortization expense on the accompanying condensed consolidated statements of operations. Amortization expense on other intangible assets was $67,665 and $59,930 and $65,311$191,335 and $138,266 for the thirteen weeks and $138,266 and $177,942 for the thirty-nine weeks ended November 3, 2019 and November 4, 2018 and October 29, 2017, respectively.

As of November 4, 2018,3, 2019, estimated future amortization expense associated with intangible assets subject to amortization is as follows:

NoteNOTE 4 – Income Taxes- INCOME TAXES

The Company continues to provide a full valuation allowance against its net deferred tax assets due to the uncertainty as to when business conditions will improve sufficiently to enable it to utilize its deferred tax assets. As a result, the Company did not record a federal or state tax benefit on its operating losses for the thirteen and thirty-nine weeks ended November 3, 2019 and November 4, 2018 and October 29, 2017.2018.

During the quarter ended November 4, 2019, the Company received a favorable ruling from the IRS regarding it’s NOL’s which had been considered an uncertain tax position in the amount of approximately $10.8 million as disclosed in the February 2, 2019 10-K. Since there is a full valuation reserve against the NOL’s, this resolution has no impact on the Company’s financial position or financial results. The Company does not anticipate any material adjustments relating to unrecognized tax benefits within the next twelve months; however, the ultimate outcome of tax matters is uncertain and unforeseen results can occur. We had no material interest or penalties during the thirteen and thirty-nine weeks ended November 3, 2019 and November 4, 2018, and October 29, 2017, respectively, and we do not anticipate any such items during the next twelve months. Our policy is to record interest and penalties directly related to uncertain tax positions as income tax expense in the condensed consolidated statements of operations.

NoteNOTE 5 – Basic and Diluted Net Loss Per Common Share- BASIC AND DILUTED NET LOSS PER COMMON SHARE

The following table presents the calculation of loss per share for the thirteen and thirty-nine weeks ended November 3, 2019 and November 4, 2018 and October 29,2017:2018:

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

As of November 3, 2019, there were 1,729,331 of potentially dilutive shares which may be issued in the future, including 194,845 shares of common stock related to restricted stock units, 495,366 stock options and warrants to purchase 1,039,120 shares of common stock. As of November 4, 2018, there were 1,513,627 of potentially dilutive shares which may be issued in the future, including 432,902 shares of common stock related to restricted stock units of 432,902 and warrants of 1,080,725. As of October 29, 2017, there were no potentially dilutive shares relating to restricted stock units or warrants.and warrants to purchase 1,080,725 shares of common stock. These were excluded from the diluted loss per share calculation because the effect of including these potentially dilutive shares was antidilutive.

NoteNOTE 6 – Commitments, Contingency And Related Parties- COMMITMENTS, CONTINGENCY AND RELATED PARTIES

Operating Lease Commitments

OPERATING LEASE COMMITMENTS

The Company leases its office, warehouse facilities and retail showrooms under operating lease agreements which expire at various dates through November 2027.2029. Monthly payments related to these leases range from $2,500 to $24,600.$45,600.

Expected future annual minimum rental payments under these leases follow:

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 consolidated financial position, results of operations or cash flows.

Related Parties

Mistral aCapital Management, LLC (“Mistral”), an affiliate of the largest stockholder of the Company, performs management services for the Company under a contractual agreement. Management fees totaled approximately $100,000 and $300,000 for the thirteen and thirty-nine weeks ended November 3, 2019 and November 4, 2018 respectively, and $100,000 and $300,000 for the thirteen and thirty-nine weeks ended October 29, 2017 respectively, and are included in selling, general and administrative expenses. TransactionThere were $11,494 and $0 amounts payable to Mistral as of November 3, 2019 and February 3, 2019, respectively. In addition, the Company reimbursed Mistral for expenses incurred in the amount of $55,113 and $0 for out of pocket expenses for the thirty-nine weeks ended November 3, 2019 and November 4, 2018, respectively. The Company reimbursed Mistral for out of pocket expenses incurred in the amount of $16,113 and $0 during the thirteen weeks ended November 3, 2019 and November 4, 2018, respectively. Management fees related to the IPO were $0 and $500,000 for the thirteen and thirty-nine weeks ended November 4, 2018 respectively, and are included in selling, general and administrative expenses. No transactionThere were no such management fees were incurred during the thirteen and thirty-nine weeks ended October 29, 2017. Amounts payable to Mistral as of November 4, 2018 and February 4, 2018 were $30,145 and $121,103, respectively, and are included in accounts payable in the accompanying condensed consolidated balance sheets.

During the second half of fiscal 2017, the Company engaged Blueport Commerce (“Blueport”), a company in which investment vehicles affiliated with Mistral own equity, to evaluate a transition plan to convertrelated to the Blueport Commerce platform. The Company launched the Blueport Platform in February 2018. There were $262,349 and $813,892 of fees incurred with Blueport on the conversion of and sales transacted through the Commerce platform duringIPO for the thirteen and thirty-nine weeks ended November 4, 2018, respectively. Transition plan fees of $0 and $82,500 were incurred with Blueport during the thirteen and thirty-nine weeks ended October 29, 2017. Amounts payable to Blueport as of November 4, 2018 and February 4, 2018 were $84,407 and $15,235, respectively, and are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.3, 2019.

Satori Capital, LLC (“Satori”), a stockholderan affiliate of two stockholders of the Company since April 2017, performs management services for the Company under a contractual agreement. Management fees totaled approximately $25,000 and $75,000 for the thirteen and thirty-nine weeks respectively, for the period ended November 3, 2019 and November 4, 2018 respectively, and $25,000are included in selling, general and $59,000 for the thirteenadministrative expenses. There were no amounts payable to Satori as of November 3, 2019 and thirty-nine weeks ended October 29, 2017, respectively. TransactionFebruary 3, 2019. Management fees related to the IPO were $0 and $125,000 for the thirteen and thirty-nine weeks ended November 4, 2018 respectively, and there were no structuring fees in the prior year’s periods. A one-time stock bonus of 50,000 shares of common stock at $14.83, or $741,500, is included in equity-based compensation on the accompanying condensed consolidated statement of cashflows and issued on June 22, 2018. The bonus was issued to Satori in three installments; two equal installments of 5,000 shares of common stock in August 2018 and September 2018 and the remainder of the shares were issued in October 2018. All fees and the stock bonus are included in selling, general and administrative expenses. There were no such management fees for the thirteen and thirty-nine weeks ended November 3, 2019.

The Company engaged Blueport Commerce (“Blueport”), a company owned in part by investment vehicles affiliated with Mistral and an affiliate of Schottenstein Stores Corporation, an indirect investor in SAC Acquisition LLC, our largest shareholder, to evaluate a transition plan to convert to the Blueport platform. Certain directors are members and principals of Mistral or employees of Schottenstein Stores Corporation. The Company launched the Blueport platform in February 2018. There were $435,000 and $262,349 of fees incurred with Blueport sales transacted through the Commerce platform and on the conversion of the Commerce platform during the thirteen weeks ended November 3, 2019 and November 4, 2018 and $1,202,831 and $813,892 during the thirty-nine weeks ended November 3, 2019 and November 4, 2018, respectively. Amounts payable to Blueport as of November 3, 2019 and February 3, 2019 were $137,500 and $93,210, respectively, and are included in accrued expenses in the accompanying condensed consolidated statements of operations. There were no amounts payable to Satori as of November 4, 2018 and February 4, 2018, respectively.balance sheets.

NoteNOTE 7 – Financing Arrangements

Note Payable

The Company had a one year Note Payable arrangement for $500,000 with American Express Merchant Financing (Amex) that bore interest at 3.5%. Principal and interest payments on this note were made by Amex withholding 6% of the Company’s Amex credit card remittances. The note expired on June 29, 2017 and was paid in full in fiscal 2018.

Credit Line- FINANCING ARRANGEMENTS

The Company had a line of credit with Siena Lending Group, LLC to borrow up to $7.0 million, which matured on May 14, 2018. Borrowings were limited to the lesser of 75% of inventory or 85% of the net orderly liquidation value of inventory and may be reduced by certain liabilities of the Company. All amounts outstanding bore interest at the base rate, defined as the greatest of (i) Prime Rate published by The Wall Street Journal, (ii) Federal Funds Rate plus 0.5% or (iii) 3.25%, plus 3% (7.00% at February 4, 2018). The line was subject to a monthly unused line fee of .75%0.75%. The agreement was secured by the first lien on substantially all assets of the Company. In February 2018, the Company paid the outstanding loan balance of $405, an early termination fee of $70,000 and fully amortized the remaining deferred financing fees of $48,149 on its line of credit with Siena Lending Group, LLC.

Note 7 – Financing Arrangements (Continued)

Credit Line (Continued)

On February 6, 2018, the Company established a line of credit with Wells Fargo Bank, National Association (“Wells”). The line of credit with Wells allows the Company to borrow up to $25.0 million and will mature in February 2023. Borrowings are limited to 90% of eligible credit card receivables plus 85% of eligible wholesale receivables plus 85% of the net recovery percentage for the eligible inventory multiplied by the value of such eligible inventory of the Company for the period from December 16 of each year until October 14 of the immediately following year, with a seasonal increase to 90% of the net recovery percentage for the period from October 15 of each year until December 15 of such year, seasonal advance rate, minus applicable reserves established by Wells. As of November 3, 2019, and November 4, 2018, the Company’s borrowing availability under the line of credit with Wells Fargo was $13.5 million and $11.3 million.million, respectively. As of November 4, 2018,3, 2019, there were no borrowings outstanding on this line of credit.

TheUnder the line of credit with Wells, the Company may elect that revolving loans bear interest at a rate per annum equal to the base rate plus the applicable margin or the LIBOR rate plus the applicable margin. The applicable margin is based on tier’s relating to the quarterly average excess availability. The tiers range from 2.00% to 2.25%. The loan agreement calls for certain covenants including a timing of the financial statementsstatement's threshold and a minimum excess availability threshold. On May 3, 2018, the Company elected a one-month revolving loan with a maturity date of June 4, 2018, that bears interest at the LIBOR rate plus the applicable margin for an all-in-rate of 3.1875%. The one-month revolving loan matured and was paid in full on June 4, 2018.

NoteNOTE 8 – Stockholders’ Equity

Preferred Stock- STOCKHOLDERS’ EQUITY

In fiscal 2018, the Company completed financing transactions with funds and investment vehicles advised by Mistral, Satori, executive management and third-party investors. As part of the transactions, the Company received $21,139,845 in cash (net of issuance costs of $1,325,156) in exchange for a total of 2,247 Series A, A-1 and A-2 Preferred Units (preferred stock equivalent of 2,247,000) and warrants to purchase 798,975 shares of common stock, subject to adjustments in the exercise price. The preferred stock carried an annual dividend of 8% compounded and conversion rights dependent upon certain events occurring. The adjustment to exercise price and conversion rights are explained in detail in the Company’s final prospectus (the “Prospectus”), dated June 26, 2018 and filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”).

In order to eliminate all outstanding preferred stock upon completion of the IPO, on April 19, 2018, the Company and the majority holders of each of the Series A Preferred Stock, the Series A-1 Preferred Stock and the Series A-2 Preferred Stock agreed to amend and restate each series of preferred stock to, among other things, revise the conversion features of the preferred stock to provide that, immediately prior to the closing of an initial public offering, the preferred stock:

All outstanding preferred stock totaling $25,645,000, including the additional year of dividends of $2,037,200 and accumulated dividends at 8% through June 29, 2018 of $2,495,704 was converted into 3,287,441 shares of common stock upon completion of the Company’s IPO on June 29, 2018. The preferred stock converted to common stock at $9.13 per share resulting in a deemed dividend of $22,601,161 related to the conversion.

Common Stock Warrants

In fiscal 2018, as noted above, the Company completed financing transactions with funds and investment vehicles advised by Mistral, Satori, and executive management in which the Company originally issued 930,054 warrants to purchase an aggregate total of 15,979,500 shares of common stock subject to adjustments in the exercise price as defined below. See specific details in the Company’s Prospectus.

Note 8 – Stockholders’ Equity (Continued)

Common Stock Warrants (Continued)

In consideration for agreeing to amend the outstanding preferred stock to automatically convert immediately prior to the completion of the IPO, on April 19, 2018, the Company and a majority of the holders of the warrants issued along with the preferred stock, agreed to amend and restate the warrants to replace the aggregate dollar value of each warrant with a fixed number of warrant shares. In order to prevent dilution of the purchase rights granted under the warrants, the exercise price shall bewas calculated as follows:based on certain factors described in the amendment.

As a result of the modification, onOn April 19, 2018, the above warrants were modified, and the Company updated the fair value of the warrants using the assumptions detailed below using a probability-weighted expected return. As the total fair value of the modified warrants was less than the total fair value of the original warrants, there was no financial statement impact duringon April 19, 2018. The modification resulted in the thirteen weeks ended May 6, 2018. cancellation of the 930,054 warrants and the reissuance of 798,975 warrants.

On June 29, 2018, the Company completed a Qualified IPO and the exercise price was adjusted to equal the purchase price per share of common stock of $16.00. The Company computed the value of the warrants with the updated assumptions using the Black-Scholes Model, as described below, and recorded the difference between the fair value of the new warrants compared to the old warrants as a deemed dividend of $1,498,079.

There were 281,750 warrants, with a five-year term, issued to Roth Capital Partners, LLC as part of the underwriting agreement in connection with the Company’s IPO. These warrants were valued using the Black-Scholes model.model, and remain outstanding as of November 3, 2019.

In the third quarter of fiscal 2019, the Company amended and restated warrants totaling 56,077 with a three-year term, valued using the Black-Scholes model. The Company recorded the difference between the fair value of the new warrants compared to the old warrants as a deemed dividend of $408,919.

Note 8 – Stockholders’ Equity (Continued)

Common Stock Warrants (Continued) These warrants were exercised in September 2018.

In fiscal 2020, the Company issued 18,166 warrants to a third party in connection with previous equity raise. These warrants were valued using the Black-Scholes model, with similar assumptions to the June 2018 warrants. The warrants had a fair value of approximately $130,000. Of these warrants, 17,396 were exercised on May 14, 2019.

The warrants may be exercised at any time following the date of issuance during the period prior to their expiration date. The fair value of each warrant is estimated on the date of grant using the Black-Scholes model. Expected volatilities are based on comparable Companies’ historical volatility, with consideration of the Company’s volatility, which management believes represents the most accurate basis for estimating expected future volatility under the current circumstances. The risk-free rate is based on the U.S. treasury yield in effect at the time of the grant. The Black-Scholes model assumptions are noted in the following table:

Total warrants outstanding as ofThe following represents warrant activity during the thirty-nine weeks ended November 3, 2019 and November 4, 2018, were as follows:2018:

The majority of the 46,521 warrants exercised in fiscal 2020 were cashless, whereby the holders received less shares of common stock in lieu of a cash payment the Company, early adopted ASU 2017-11, which addresses the accounting for warrants with down round features that resultresulted in the strike price being reduced on the basisissuance of the pricing of future equity offerings, which allowed the Company to account for the warrants issued along with the preferred raise in fiscal 2018 as equity versus a liability.27,246 common shares.

Equity Incentive PlanPlans

In October 2017, theThe Company adopted the 2017 Equity Incentive Plan (the “Plan”) which provides for Awards in the form of Options, Stock Appreciation rights, Restricted Stock Awards, Restricted Stock Units, Performance shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards. All awards shall be granted within 10 years from the effective date of the Plan.

In April 2018, the board of directors of the Company approved an increase in shares of common stock reserved for issuance under the Plan from 420,000 to 604,612 shares of common stock.

On May 10, 2018, the Board of Directors approved an increase in shares of common stock reserved for issuance under the Plan from 604,612 to 615,066 shares of common stock.

All awards shall be granted within 10 years fromOn June 5, 2019, the effective dateshareholders approved an amendment and restatement of the Plan. Other thanPlan that among other things increased the activity disclosed below relating to Restricted Stock Units, there was no other activitynumber of shares of common stock reserved for issuance under the Plan for the thirteen weeks ended November 4, 2018 and October 29, 2017.from 615,066 to 1,414,889 share of common stock.

Note 8 – Stockholders’ Equity (Continued)

Equity Incentive Plan (Continued)

In October 2017,June 2019, the Company granted 258,000 Restricted495,366 Non statutory Stock Unitsoptions to certain officers of the Company with a fair valuean option price of $2,792,849. As of November 4, 2018, there were 193,500 unvested units outstanding related to this grant. The unit vesting was based on both time and performance. The time vesting units vest twenty-five percent on January 31, 2018, and twenty-five percent on each$38.10 per share. 100% of the next three anniversaries of that initialstock options are subject to vesting date. The performance vesting units vest annually uponon the achievement of certain benchmarks. There were no Restricted Stock Units cancelled, forfeited, or expired duringfirst trading day after the thirteen and thirty-nine weeks ended November 4, 2018 related to these grants.

In March 2018,date on which the Company granted 52,504 Restricted Stock Units to certain executive employeesclosing price of the Company withCompany’s stock price has been at least $75 for 60 consecutive trading days so long as this goal has been attained by June 5, 2022 or the options will terminate. These options were valued using a fair value of $568,356. As of November 4, 2018, there were 39,378 unvested units outstanding relatedMonte Carlo simulation model to this grant. The unit vesting was based on both timeaccount for the path dependent market conditions that stipulate when and performance. The time vesting units vest twenty-five percent on May 1, 2018, and twenty-five percent on January 31^st ofwhether or not the following three years. The performance vesting units vest annually upon the achievement of certain benchmarks. There were no Restricted Stock Units cancelled, forfeited, or expired during the thirteen and thirty-nine weeks ended November 4, 2018 related to these grants.

On May 10, 2018, the Company granted 188,917 Restricted Stock Units to certain officers of the Company with a fair value of $2,800,695. As of November 4, 2018, there were 141,688 unvested units outstanding related to this grant. The vesting of the restricted stock units is based on both time and performance. The time vesting units vest twenty-five percent on the closing of the offering, and twenty-five percent on January 31, 2019, 2020 and 2021. The performance vesting units vest annually upon the achievement of certain benchmarks. There were no Restricted Stock Units cancelled, forfeited, or expired during the thirteen and thirty-nine weeks ended November 4, 2018 related to these grants.

On June 20, 2018, the Company granted to certain executive and non-executive employees of the Company an aggregate of 68,378 Restricted Stock Units, with a fair value of $1,014,046 of which between fifteen and twenty-five percent of the total grant or 14,625 Restricted Stock Units, immediately vested. The vesting of the unvested Restricted Stock Units is based on both time and performance. The time and performance vesting units will vest twenty-five percent on July 1, 2019, and July 2020 and between twenty-five to thirty-five percent on July 1, 2021. The performance vesting units will only vest upon the achievement of certain benchmarks. As of November 4, 2018, there were 50,461 unvested units outstanding related to this grant. There were 3,292 and 3,569 units forfeited from this grant during the thirteen and thirty-nine weeks ended November 4, 2018.

In September 2018, the Company granted a certain executive employee of the Company 10,500 Restricted Stock Units with a fair value of $250,950. As of November 4, 2018, there were 7,875 unvested units outstanding related to this grant. The unit vesting was based on both time and performance. The time vesting units vest twenty-five percent on October 4, 2018, and twenty-five percent on January 31^st of the following three years. The performance vesting units vest annually upon the achievement of certain benchmarks. There were no Restricted Stock Units cancelled, forfeited, or expired during the thirteen and thirty-nine weeks ended November 4, 2018 related to these grants.

Note 8 – Stockholders’ Equity (Continued)

Equity Incentive Plan (Continued)options shall vest.  

A summary of the status of our unvested Restricted Stock Unitsstock options as of November 4, 2018,3, 2019, and the changes during the thirty-nine weeks ended November 3, 2019 is presented below:

A summary of the status of our unvested restricted stock units as of November 3, 2019, and changes during the thirteen and thirty-nine weeks then ended, is presented below:

StockEquity based compensation expense related towas approximately $0.6 million and $4.0 million and for the above Restricted Stock Units was $515,739thirteen and $2,108,342thirty-nine weeks ended November 3, 2019 and $0.5 million and $2.1 million and for the thirteen and thirty-nine weeks ended November 4, 2018, respectively. In the thirteen and is includedthirty-nine weeks ended November 3, 2019, all the unvested restricted stock units for certain senior executives of the Company vested according to the accelerated vesting trigger in selling, generaltheir restricted stock unit agreements. The triggering event was the market capitalization of the Company post IPO, exceeding $300 million for 60 consecutive trading days and administrative expensesthe expiration of the lockup- period. This accelerated vesting resulted in equity-based compensation in the accompanying condensed consolidated statementsamount of operations. There were no Restricted Stock Units granted prior to October 29, 2017.

$2.9 million.

The total unrecognized restricted stock unit compensation cost related to non-vested awards was $2,533,468$4,966,401 as of November 4, 20183, 2019 and will be recognized in operations over a weighted average period of 1.27 years.2.57years.

NoteNOTE 9 – Employee Benefit Plan- EMPLOYEE BENEFIT PLAN

In February 2017, the Company established The Lovesac Companythe TLC 401(k) Plan (the “401(k) Plan”) with Elective Deferrals beginning May 1, 2017. The Plan calls for Elective Deferral Contributions, Safe Harbor Matching Contributions and Profit SharingProfit-Sharing Contributions. All employees of The Lovesac Company (except for union employees and nonresident aliens) 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 employer contributions to the 401(k) Plan were $89,708 and $65,566 for the thirteen weeks ended November 3, 2019 and November 4, 2018 and $280,820 and $215,790 for the thirteen and thirty-nine weeks ended November 3, 2019 and November 4, 2018, respectively, and $53,319 and $83,974 for the thirteen and thirty-nine weeks ended October 29, 2017.respectively.

NoteNOTE 10 – Segment Information- SEGMENT INFORMATION

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

NoteNOTE 11 – Barter Arrangements- BARTER ARRANGEMENTS

In fiscal 2018, theThe Company entered into a bartering arrangement with Icon International, Inc., a vendor, whereas the Company provided inventory in exchange for media credits. During fiscal 2018, the Company exchanged $577,326 of inventory plus the cost of freight for certain media credits. To account for the exchange, the Company recorded the transfer of the inventory asset as a reduction of inventory and an increase to a prepaid media asset of $534,407 which $0 as of November 4, 2018 and $307,417 as of February 4, 2018, remained and is included in “Prepaid and other current assets” on the accompanying condensed consolidated balance sheet. The Company had $307,417 of unused media credits remaining as of February 4, 2018 that were used in full during fiscal 2019. During the thirteen and thirty-nine weeks ending November 3, 2019, the Company exchanged inventory with an estimated fair value of $173,088 and $698,260 plus the cost of freight for certain media credits. To account for the exchange, the Company recorded the transfer of the inventory asset as a reduction of inventory and an increase to a prepaid media asset of $698,260 which is included in “Prepaid and other current assets” on the accompanying condensed consolidated balance sheet. The Company has no$511,617 of unused media credits remaining as of November 4, 2018. There were no such arrangements in the thirteen or thirty-nine weeks ended October 29, 2017.3, 2019.

The Company accounts for barter transactions under ASC Topic No. 845 “Nonmonetary Transactions.” Barter transactions with commercial substance are recorded at the estimated fair value of the products exchanged, unless the products received have a more readily determinable estimated fair value. Revenue associated with barter transactions is recorded at the time of the exchange of the related assets.

TheNOTE 12 - REVENUE RECOGNITION

We implemented ASU 2015-04, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606, “ASC 606”), in the first quarter of fiscal 2020 using modified retrospective method, which required the company to apply the new guidance retrospectively to revenue transactions completed on or after the effective date. Adopting this new standard had no material financial impact on our condensed consolidated financial statements but did result in enhanced presentation and disclosures.

Our revenue consists substantially of product sales. We report product sales net of discounts and recognize them at the point in time when control transfers to the customer, which occurs upon shipment is confirmed.

Estimated refunds for returns and allowances are recorded using our historical return patterns, adjusting for any changes in returns policies. We record estimated refunds for net sales returns on a monthly basis as a reduction of net sales and cost of sales on the statement of operations and an increase in inventory and customers returns liability on the balance sheet. As of November 3, 2019, there was a returns allowance recorded on the balance sheet in the amount $581,109, which was in accrued expenses and $165,052 associated with sales returns in merchandise inventories.

In some cases, deposits are received before the company transfers control, resulting in contract liabilities. These contract’s liabilities are reported as deposits on the Company’s balance sheet. As of November 3, 2019, and February 3, 2019, the Company did not enter into any additional bartering arrangements duringrecorded under customer deposit liabilities the amount of $3,427,184 and $1,059,957 respectively. During the thirty-nine weeks ended November 4, 2018.3, 2019, we recognized $1,059,957 related to our customer deposits from fiscal 2019.

Upon adoption of ASC 606, we have elected the following accounting policies and practical expedients:

We recognize shipping and handling expense as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been transferred. Accordingly, we record the expenses for shipping and handling activities at the same time we recognize revenue.

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

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

The Company offers its products through an inventory lean omni-channel platform that provides a seamless and meaningful experience to its customers in showrooms and through the internet. The other channel predominantly represents sales through the use of pop-up shops that typically average ten days at a time and are staffed with associates trained to demonstrate and sell our product. The following represents sales disaggregated by channel:

See Note 10 for sales disaggregated by product.

Note 12 – Subsequent EventsNOTE 13 - SUBSEQUENT EVENTS

The Company has evaluated events and transactions subsequent to November 4, 20183, 2019 through the date the condensed consolidated condensed financial statements were issued.

On December 18, 2019, in connection with the distribution of the shares of common stock held by SAC Acquisition LLC (“SAC”), certain individuals that held options to acquire common units in SAC, which included officers of the Company, completed an offer to exchange those options for shares the Company’s common stock that SAC held prior to the exchange. As part of this exchange, SAC transferred to the Company 175,390 shares of common stock of the Company, which constituted the shares to be received by the option holders pursuant to the exchange. Subsequently, the Company issued to the former option holders who elected to participate in the exchange those shares and withheld 73,507 shares which will be treated as treasury stock in exchange for the Company paying the former option holders’ payroll taxes associated with the issuance. 

ITEMItem 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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 condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Prospectus.10-Q. As discussed in the section titled “Note About 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 below and those discussed in the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q and in the Prospectus.10-Q.

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, omni-channel company that designs, manufactures and sells unique, high quality furniture comprised of modular couches called Sactionals and premium foam beanbag chairs called Sacs. We market and sell our products through modern and efficient showrooms and, increasingly, through online sales. We believe that our ecommerce centric approach, coupled with our ability to deliver our large upholstered products through nationwide express couriers, areis unique to the furniture industry.

The name “Lovesac” was derived from our original innovative product, a premium foam beanbag chair, the Sac. The Sac was developed in 1995 and provided the foundation for the Company. Sales of this product increased to $21.7 million for the thirty-nine weeks ended November 4, 2018, as compared to $14.8 million for the thirty-nine weeks ended October 29, 2017. We believe that the large size, comfortable foam filling and irreverent branding of our Sacs products have been instrumental in growing a loyal customer base and our positive, fun image. Sales of this product have been increasing on an annual basis, representing $7.8 million and $23.4 million in the thirteen and thirty-nine weeks ended November 3, 2019, as compared to $6.6 million and $21.7 million for the thirteen and thirty-nine weeks ended November 4, 2018. We are currently reviewing our allocation methodology of the application of product discounts to each product segment of our business which we believe will provide a more comparative view of product category growth on a go forward basis.

Our Sactionals product line currently represents a majority of our sales. Sales of this product increased to $77.3 million for the thirty-nine weeks ended November 4, 2018, as compared to $46.8 million for the thirty-nine weeks ended October 29, 2017.  Sactionals are a couch system that consists of two components, “seats”seats and “sides”,sides, which can be arranged, rearranged and expanded into thousands of configurations easily and without tools. Our Sactional products include a number of patented features relating to their geometry and modularity, coupling mechanisms and other features. We believe that these high quality premium priced products enhance our brand image and customer loyalty and expect them to continue to garner a significant share of our sales. Our Sactionals represented 82.8% and 80.9% of our sales for the thirteen and thirty-nine weeks ended November 3, 2019, respectively or $43.1 million and $114.3 million as compared to 81.9% and 76.0% of sales for the thirteen and thirty-nine weeks ended November 4, 2018 or $34.1 million and $77.3 million, respectively. We are currently reviewing our allocation methodology of the application of product discounts to each product segment of our business which we believe will provide a more comparative view of product category growth on a go forward basis.

Sacs and Sactionals come in a wide variety of colors and fabrics that allow consumers to customize their purchases in numerous configurations and styles. We provide lifetime warranties on our Sactionals frames and the proprietary foam used in both product lines, and three-year3-year warranties on our covers. Our Designed for Life trademark reflects our dynamic product line that is built to last and evolve throughout a customer’s life. Customers can continually update their Sacs and Sactionals with new covers, additions and configurations to accommodate the changes in their family and housing situations.

We believe the strength of our brand is reflected in the number of customers who routinely share their purchases of Lovesac products with their friends through social media, often displaying our logos or company name in their posts. Our customers include celebrities and other influencers who support our brand through postings made on an uncompensated and unsolicited basis. As of November 3, 2019, we had approximately 832,000 followers on Facebook and 409,000 followers on Instagram.

We currently market and sell our products through 7784 showrooms at top tier malls, lifestyle centers and street locations in 3032 states in the U.S. Our modern, efficient showrooms are designed to appeal to millennials and other purchasers looking for comfortable, enduring, premium furniture. They showcase the different sizes of our Sacs, the myriad forms into which our Sactionals can be configured, and the large variety of fabrics that can be used to cover our products. Our retail showrooms are technology driven and focused on educating prospective customers about the many benefits of our unique products, enabling us to require just 498 to 1,350 square feet for each showroom.